OPEC just about gets the basics right

On occasion, signs around Austrian bars and shops selling souvenirs humorously tell tourists to get one basic fact right – there are no kangaroos in Austria! In more ways than one, last week’s OPEC meeting in Vienna was also about getting its 12 member nations to recognise some basic truths – not so much about the absence of marsupials around but rather about  surplus oil in the market.

Assessing demand, which is tepid in any case at the moment, comes secondary when there is too much of the crude stuff around in the first place. Of late, OPEC has become just a part player, albeit one with a 30% share, in the oil market’s equivalent of supermarket pricing wars on the high street, as the Oilholic discussed on Tip TV. Faced with such a situation, cutting production at the risk of losing market share would have been counterproductive.

Not everyone agreed with the idea of maintaining production quota at 30 million barrels per day (bpd). Some members desperate for a higher oil price were dragged around to the viewpoint kicking and screaming. Ultimately, the Saudis made the correct call in refusing to budge from their position of not wanting a cut in production.

Though ably supported by Kuwait, UAE and Qatar in his stance, Saudi Oil Minister Ali Al-Naimi effectively sealed the outcome of the meeting well ahead of the formal announcement. Had OPEC decided to cut production, its members would have lost out in a buyers’ market. Had it decided on a production cut and the Saudis flouted it, the whole situation would have been farcical.

In any case, what OPEC is producing has remained open to debate since the current level was set in December 2011. The so-called cartel sees members routinely flout set quotas. In the absence of publication of individual members’ quotas, who is producing what is never immediately ascertained.

Let’s not forget that Libya and Iraq don’t have set quotas owing to leeway provided in wake of internal strife. All indications are that OPEC is producing above 30 million bpd, in the region of 600,000 barrels upwards or more. Given the wider dynamic, it's best to take in short term pain, despite reservations expressed by Iran, Venezuela and Nigeria, in order to see what unfolds over the coming months.

After OPEC’s decision, the market response was pretty predictable but a tad exaggerated. In the hours following Secretary General Abdalla Salem El-Badri’s quote that OPEC had maintained production in the interest of “market equilibrium and global wellbeing”, short sellers were all over both oil futures benchmark.

By 21:30 GMT on Friday (the following day), both Brent and WTI had shed in excess of $10 per barrel (see right, click to enlarge). That bearish sentiment prevailed after the decision makes sense, but the market also got a little ahead of itself.

The start of this week has been calmer in part recognition of the latter point. Predictions of $40 per barrel Brent price are slightly exaggerated in the Oilholic’s opinion.

Agreed, emerging markets economic activity remains lacklustre. Even India has of late started to disappoint again after an upshot in economic confidence noted in wake of current Prime Minister Narendra Modi’s emphatic election victory in May. Yet, demand is likely to pick-up gradually. Additionally, a price decline extending over a quarter inevitably triggers exploration and production (E&P) project delays if not cancellations, which in turn trigger forward supply forecast alterations. 

This could kick-in at $60 and provide support to prices. In fact, it could even be at $70 barring, of course, the exception of a severe downturn in which case all bets are off. Much has also been said about OPEC casually declaring it won’t convene again for six months. Part of it fed in to market sentiment last week, but this blogger feels saying anything other than that would have been interpreted as a further sign of panic thereby providing an additional pretext for those going short.

Let’s put it this way - should the oil price fall to $40 there will definitely be another OPEC meeting before June! So why announce one now and create a point of expectation? For the moment, OPEC isn’t suffering alone; many producers are feeling different levels of pain. US independent E&P companies (moderate), Canada (mild), Mexico (moderate) and Russia (severe) - would be this blogger's pain level call for the aforementioned.

The first quarter of 2015 would be critical and one still sees price stabilisation either side of the $70-level. One minor footnote before taking your leave - amidst the OPEC melee last week, a client note from Moody’s arrived into the Oilholic’s inbox saying the agency expects Chinese demand for refined oil products to increase by 3%-5% per annum through 2015. This compares to 5%-10% in 2010-2012.

It also doesn’t expect the benchmark Singapore complex refining margin to weaken substantially below the level of $6 per barrel because lower effective capacity additions and refinery delays will reduce supply, while “the recent easing in oil prices should support product demand.” That’s all for the moment folks! Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2014. Photo: No Kangaroos in Austria plaque Graph: Weekly closing levels of oil benchmark prices since Oct 3, 2014 to date* © Gaurav Sharma.

Geopolitical loving: When Abe met Modi

The Oilholic finds himself roughly 6,000 miles east of London in Tokyo, Japan. While yours truly is here for cultural and ‘crude’ pursuits, another visitor was in town to firm up a crucial strategic tie-up. It was none other than India’s recently elected Prime Minister Narendra Modi, who popped in to see Japanese counterpart Shinzo Abe.

There’s been something of a political loving between these two heads of state. Abe hardly follows anyone on Twitter; Modi being one of the only four people he currently does follow! The Japanese PM was the first among international counterparts to congratulate Modi following his stunning mandate after elections in India. If you think that’s not a big deal, well US President Barack Obama got a welcoming handshake from Abe; NHK footage of Modi’s arrival in Japan shows one heck of a ‘best pal’ Abe-Modi bear hug. Protocol and formality not required between friends seems to be the message.

It is only Modi’s second and most prominent foreign visit since he assumed office this year; no offence to Nepal which was the first destination of his choice. Both leaders lean right, though the Indian PM’s right-wing credentials are stronger in a strictly domestic sense. The Japanese and Indian media went positively ballistic over the visit, atop giving it front-page stuff prominence. It’s extraordinary for all of this to be related to a bilateral meeting between two heads of state, with no priors, unless there was a collaborative attitude behind the scenes.

Any analyst worth his/her weight would note that at the heart of it is a move to counterbalance China, a country that has an uneasy relationship with both India and Japan. As if to underscore the point, Modi, visibly moved with the superb reception he received, criticised the “expansionist” maritime agenda of certain states. Wonder who he could possibly be referring to with the South China Sea so close-by?

Both countries are wary of China, have similar economic problems (cue inflationary concerns) and remain major importers of natural resources. As if for good measure, throw religion into the mix as Japan’s primary faith – Buddhism – was founded in the Indian subcontinent. So finding common ground or the pretext of a common ground is not hard for Abe and Modi.

Now is the Abe-Modi summit a big deal? In the Oilholic’s opinion, the answer is yes. We’ll come to natural resources and ‘crude’ matters shortly, but hear this out first – Japan is to invest US$34 billion spread over the next five years in terms of deal valuation. The trade between the two is insipid at the moment, either side of 1% of the total export pile in each case with the Japanese exporting marginally more than they’re importing from India. That makes the announcement a very positive development.

Japan, according to both men, could turn to India for its rare earth needs, a market led by China. While claims of India becoming a wholesale manufacturing base for Japanese electronics and engineering giants are a bit overblown, to quote the Indian PM: “We see a new era of cooperation in high-end defence technology and equipment.”

As for exchanging views on inflation - India’s, until recently was out of control and has only just been somewhat reigned in with the country's economy starting to gain momentum. Japan's on the other hand, “Abenomics” or not, has not managed to gain momentum (economy has shrunk in annualised terms last quarter by 6.8%). Inflation, thanks to a sales tax rise which came into effect in April, is not under control either with the country’s Consumer Prices Index (CPI) up 3.4% in July. That's well above the Bank of Japan’s target rate of 2%.

Given both countries are major importers of crude oil and natural gas, even a minor price rise has a major knock-on effect right from the point of importation to further down the consumer chain. At the moment, both are benefitting from a two-month decline in oil prices. Both PMs think they can work together towards the procurement of liquefied natural gas, according to an Indian source. The idea of two major importers strategising together sounds good, but concrete details are yet to be released.

If there was one hiccup, the two sides did not reach an agreement over the transfer of nuclear technology to India. Politics aside, Japan for its part is still grappling with the effects of Fukushima on all fronts - legal, natural and physical. Tepco, the company which operated the plant, is still in courts. The latest lawsuit - by workers demanding compensation - is a big one.

But not to digress, how did the men describe the summit themselves? For Modi, it was an “upgrade” in bilateral relations. For Abe, it was “a meeting of minds”. China would, and should, view it very differently. There is one not-so-mute point. Abe did not take any direct or indirect swipes at China, Modi (as mentioned above) was not so restrained. One wonders if in Modi’s quest for geopolitical rebalancing in Asia, would it serve in India well to improve relations with Japan and let them deteriorate with China?

That’s all the contemplation from Tokyo for the moment folks. The Oilholic is heading to Hong Kong, albeit briefly, after a gap of over a decade. Its a sunny day here at Narita Airport as one takes off. More soon, keep reading, keep it ‘crude’!

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© Gaurav Sharma 2014. Photo 1: Tokyo Bay Waterfront. Photo 2: Narita International Aiport, Japan © Gaurav Sharma, September 2014.

A Russian deal, an Indian election, Libya & more

While the Europeans are busy squabbling about how to diversify their natural gas supplies and reduce reliance on Russia, the country's President Vladimir Putin hedged his bets earlier this week and reacted smartly by inking a 30-year supply deal with China.

No financial details were revealed and the two sides have been haggling over price for better parts of the last decade. However, yet again the Russian president has proved more astute than the duds in Brussels! Nevertheless, the Oilholic feels Russia would have had to make substantial compromises on price levels. By default, the Ukraine standoff has undoubtedly benefitted China National Petroleum Corp (CNPC), and Gazprom has a new gas hungry export destination.

Still there is some good news for the Europeans. Moody's believes that unlike in 2008-09, when gas prices spiked in the middle of the winter due to the cessation of Russian gas supplies to Europe via Ukraine, any temporary disruption via Ukraine would have only have a muted impact.

"This opinion factors in a combination of (1) lower reliance on Ukraine as a transit route, owing to alternative supply channels such as the Nord Stream pipeline which became operational in 2011; (2) low seasonal demand in Europe as winter has come to an end; and (3) gas inventories at high levels covering a full month of consumption," the ratings agency noted in a recent investment note.

Meanwhile, a political tsunami in India swept the country's Congress party led government out of power putting an end to years of fractious and economic stunting coalition politics in favour of a right-wing nationalist BJP government. The party's leader Narendra Modi delivered a thumping majority, which would give him the mandate to revive the country's economic fortunes without bothering to accommodate silly whims of coalition partners.

Modi was the chief minister of Gujarat, one of the country's most prosperous provinces and home to the largest in the refinery in the world in the shape of Jamnagar. In many analysts' eyes, regardless of his politics, the Prime Minister elect is a business friendly face.

Moody's analyst Vikas Halan expects that the new BJP-led government will increase natural gas prices, which would benefit upstream oil & gas companies and provide greater long term incentives for investment. Gas prices were originally scheduled to almost double in April, but the previous government put that increase on hold because of the elections.

This delay has meant that India's upstream companies have been losing large amounts of revenue, and a timely increase in gas prices would therefore cushion revenues and help revive interest in offshore exploration.

"A strong majority government would also increase the likelihood of structural reform in India's ailing power sector. Closer co-ordination between the central and state governments on clearances for mega projects and land use, two proposals outlined in the BJP's manifesto, would address investment delays," Halan added.

The Oilholic agrees with Moody's interpretation of the impact of BJP's victory, and with majority of the Indian masses who gave the Congress party a right royal kick. However, one is sad to see an end to the political career of Dr Manmohan Singh, a good man surrounded by rotten eggheads.

Over a distinguished career, Singh served as the governor of the Reserve Bank of India, and latterly as the country's finance minister credited with liberalising and opening up of the economy. From winning the Adam Smith Prize as a Cambridge University man, to finding his place in Time magazine's 100 most influential people in the world, Singh – whose signature appears on an older series of Indian banknotes (see right) – has always been, and will always be held in high regard.

Still seeing this sad end to a glittering career, almost makes yours truly wish Dr Singh had never entered the murky world of mainstream Indian politics in the first place. Also proves another point, that almost all political careers end in tears.

Away from Indian politics, Libyan oilfields of El Sharara, El Feel and Wafa, having a potential output level 500,000 barrels per day, are pumping out the crude stuff once again. However, this blogger is nonplussed because (a) not sure how long this will last before the next flare up and (b) unless Ras Lanuf and Sidra ports see a complete normalisation of crude exports, the market would remain sceptical. We're a long way away from the latter.

A day after the Libyan news emerged on May 14, the Brent forward month futures contract for June due for expiry the next day actually extended gains for a second day to settle 95 cents higher at US$110.19 a barrel, its highest settlement since April 24.

The July Brent contract, which became the forward-month contract on May 16, rose 77 cents to settle at US$109.31 a barrel. That's market scepticism for you right there? Let's face it; we have to contend with the Libyan risk remaining priced in for some time yet.

Just before taking your leave, a couple of very interesting articles to flag-up for you all. First off, here is Alan R. Elliott's brilliant piece in the Investor’s Business Daily comparing and contrasting fortunes of the WTI versus the LLS (Louisiana Light Sweet), and the whole waterborne crude pricing contrast Stateside.

Secondly, Claudia Cattaneo, a business columnist at The National Post, writes about UK political figures' recent visit to Canada and notes that if the Americans aren't increasing their take-up of Canada's energy resources, the British 'maybe' coming. Indeed, watch this space. That's all for the moment folks! Keep reading, keep it 'crude'!

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© Gaurav Sharma 2014. Photo: Pipeline, India © Cairn Energy