A rollover and a poem for OPEC

As widely anticipated, OPEC did indeed rollover its ongoing oil production cuts of 1.2 million barrels per day (bpd), set in place with 10 other non-OPEC producers for another nine months to March 2020.

The announcement was accompanied by a "charter of co-operation", even a poem about that charter (see left, click to enlarge), in-house conjecture that US shale production would eventually decline like the North Sea but not much by way of how the cartel intends to exit from its current output cuts strategy. 

Here is the Oilholic's analysis via Forbes. More to follow via other forums and publications. In a nutshell, one's price outlook for crude remains bearish and 2020 could get even more ugly. There is also little on the horizon to ditch $65-70 per barrel average price range for Brent, and $55-60 per barrel price range for WTI, with both likely to be at the lower range rather than the upper range. That's all for the moment folks! Keep reading, keep it 'crude'! 

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© Gaurav Sharma 2019. Photo: Poem released on OPEC's new charter © OPEC, July 2019.

OPEC’s new deal: Fudgy math or fuzzy stats?

The deed is done and not a single Iranian appeared visibly riled in the end. Following the conclusion of OPEC's 174th Ministerial Meeting on Friday here in Vienna, Austria, the cartel announced a 'nominal' production hike of 1 million barrels per day (bpd).

But the futures market expected more and has gone into full bullish mode as the weekend approaches. At 18:32pm BST on Friday, the WTI front-month futures contract was at $68.77, up $3.23 or +4.93% and Brent was at $74.88, up $1.83 or +2.51%.

Both benchmarks more than recovered their overnight declines, as traders who – like the Oilholic – delved into the OPEC statement, encountered some real fudgy math or perhaps fuzzy stats. It seems all what OPEC has done is "insist" on 100% compliance with a 1.2 million barrels per day (bpd) cut it put forward in November 2016. 

The cartel's claim is that some of its members 'overcut' due to their own enthusiasm, or due to circumstances, geopolitics or lack of investment (Latter cases to be read as Libya, Nigeria and Venezuela). 

According to OPEC, this meant that compliance with the cuts touched 152% in May, instead of 100% or 1.824 million bpd. So now all OPEC has asked its members to do is bring compliance down to 100%, or put 624,000 barrels back on to the market and not a million! 

Of course, as has become the norm for over a decade now, OPEC did not reveal which individual member will do what and who is or isn't partaking in the exercise. That's the compromise to keep Iran onside for the moment. Here is one's Forbes piece for a more detailed perspective; but it is a jolly old fudge here at Helferstorferstrasse 17.

And oh, by the way, Congo's request to join OPEC has been accepted. So, if there's an OPEC-Plus or a Super-OPEC, it'll have 25 members to begin with. That's all from Vienna for the moment folks! More tomorrow when OPEC chats to its 10 non-OPEC counterparts.Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2018. Photo: Opec Secretariat, Vienna, Austria © Gaurav Sharma 2018

The oil price rally that wasn’t

We were led to believe that a $100 per barrel oil price was not a case of "if" but "when." Over April, and early on in May both Brent and WTI futures continued their upticks, primarily driven by hedge funds piling into the front end of the futures curve, and OPEC hinting at extending its production cut agreement.

Even six-month dated Brent contract's backwardation streak started to narrow, though it ultimately stayed in backwardation mode, as the Oilholic noted in a recent broadcast. And then it happened – information came out that the Saudis and Russians were no longer keen on extending the existing OPEC/non-OPEC production cut agreement, that has seen 1.8 million barrels per day (bpd) taken out of the global supply pool by 14 OPEC and 10 non-OPEC producers. 

Furthermore, if a Reuters exclusive is to be believed, the US demanded that OPEC production be raised by 1 million bpd. The same story also claimed that President Donald Trump's unilateral slapping of sanctions on Iran only came after the Saudis allegedly promised to raise their output. 

Sidestepping all of this, the Oilholic has always maintained that the barrels OPEC and non-OPEC producers took out of the market to – in their words "balance the market" – had to return to the global supply pool at some point. That was the real "when not if" situation for the market.  

As market sentiment on that happening has gained traction, the predictable result is a visible correction in the futures market with OPEC set to meet on 22 June. Meanwhile, the $100 price remains a pipedream, with both benchmarks still oscillating in a very predictable $60-80 range, only occasionally flattering to deceive with bullish overtones only to slide backwards (see graph above, click to enlarge). 

Away from the crude price, here are one's Forbes posts on US oil producers maintaining their efficiencies drive despite relatively higher oil prices and the UK-France Channel Tunnel operator's latest sustainability initiative of using ozone friendly refrigerants for cooling it landmark tunnel. 

Finally, it's a pleasure to have the Oilholic mentioned and recognised by third parties. These include Feedspot who recently featured this blog in their ‘Top 60 oil and gas blogs to follow’ section. It comes after industry data provider Drillinginfo flagged this blog in its roundup of '10 great oil & gas blogs to follow', as did penny stocks expert Peter Leeds, and US-based Delphian Ballistics. A big thank you to all of the aforementioned. That's all for the moment folks! Keep reading, keep it 'crude'!

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© Gaurav Sharma 2018. Graph: Friday closes of oil prices year to 8 June 2018 © Gaurav Sharma 2018.

Feeling the crude temperature ahead of OPEC 173

The Oilholic has arrived in Vienna, Austria to gauge the crude temperature ahead of the 173rd meeting of OPEC ministers.

Going by the events of the last 24 hours, looks like the Russians, in town leading the 10 non-OPEC producers, seem to be giving the most briefings, and mostly to Russian journalists and analysts.

You could be forgiven for thinking they'd joined OPEC; but the Kremlin's message to analysts and scribes alike seems to be a simple one - the current production cut agreement reached in concert with OPEC producers for taking out 1.8 million barrels per day (bpd) out of the market is valid until March 2018, so why tamper with it now? 

On the other hand the few odd soundbites coming out of OPEC seem to "express hope" the cut agreement, of which the cartel has a lion's share of 1.3 million bpd, is rolled over for a further nine months. With both parties not appearing to be on the same page, oil futures are sliding. 

At 7:45pm GMT, Brent is down 0.53% or 34 cents to $63.27 per barrel, while WTI is down 1.09% or 63 cents to $57.36 per barrel, making it a second successive session of intraday declines extending from European hours to US trading hours.

Expect more of the same, though OPEC's problem is the lack of an exit strategy, which is why some in its ranks want to kick the can down the road even if the Russians aren't keen. Meanwhile, since its been over 10 years of covering OPEC by the Oilholic, here's a look back at the last ten years for IBTimes UK. A whole lot memories, episodes and experiences to narrate. 

Finally, here is one's take on what to expect on IG Markets TV and Core Finance TV. 

And that's all from Vienna, for the moment folks! Plenty more to follow. In the meantime, keep reading, keep it crude!

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© Gaurav Sharma 2017. Photo: OPEC signage outside its secretariat in Vienna, Austria © Gaurav Sharma. 

Of soundbites and buffer crude producers

If sounbites were the sole influencers of the oil market direction, Brent ought to be near $60 per barrel. (see chart on the left, click to enlarge) 

The fact that it isn’t, and couldn’t be any further from that promised level despite OPEC cuts tells you that verbal quips from oil producers matter little when the market is trying to readjust to a new normal; i.e. the impact of a buffer producer in the shape of the US of A.  

When OPEC and 11 non-OPEC producers came together last December to announce a headline production cut of 1.8 million barrels per day (bpd), it was done in the knowledge that inevitably US shale producers would benefit from higher prices too. 

However, the economic paradox of that was additional US barrels replacing barrels taken out by the OPEC and non-OPEC agreement. In March, Saudi Energy Minister Khalid Al-Falih ensured that the OPEC put unravelled by quipping that his country would not subsidise non-OPEC margin plays by supporting an extension of the OPEC and non-OPEC agreement, due to expire in June. 

The result was a near instantaneous drop in both benchmarks as the market factored in the possibility of more OPEC barrels. Soon thereafter, on witnessing the ensuing oil price slide, ministers of several OPEC member nations, including Al-Falih himself, issued soundbites claiming an extension to the cut was in fact possible. However, in the Oilholic’s humble opinion, the damage had already been done by that time. 

This blogger's interaction with the wider market – whether we are talking spot or futures traders – leads one to believe that sentiment is in favour of higher US production, with each OPEC and non-OPEC barrel taken out of the market subsidising an American barrel. Of course, it’s not as linear or simple but the market’s reasoning isn’t flawed.  

All OPEC soundbites in favour of extending the cartel’s cut further are fuelling such sentiment further. Should OPEC extend its cut, the artificial support to the oil price would again be short-lived, as US barrels will continue to flood into the market. 

Finally, the Oilholic believes the market is showing signs of rebalancing unless it is artificially tampered with, and there could be some semblance of normalcy by September-end. So as such neither is an OPEC cut needed nor are the soundbites in its favour. Perhaps the cartel might consider keeping mum for a change! That's all for the moment folks! Keep reading, keep it 'crude'!

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© Gaurav Sharma 2017. Graph: Oil benchmark prices year to date © Gaurav Sharma 2017.

OPEC’s cut is not an oil market panacea

Manic few weeks of travel and speaking engagements meant the Oilholic could not pen his thoughts on the Saudi-Russian agreement over the need to lower oil production, and other OPEC shenanigans sooner. 

Plus the last fortnight has given much food for thought news-wise, with the oil price registering a noticeable uptick (see chart left, click to enlarge).

Forget, the world’s two leading producers, it appears all of unruly OPEC is onboard for a production cut too, going by recent soundbites. But is it? Really?

For starters, while the market has been told there is consensus among the cartel's members about the need to cut oil production; details on how OPEC would go about it would only be provided on 30 November, after the conclusion of it’s next ordinary meeting. 

It implies that until December, everyone within OPEC can keep pumping regardless, ahead of its pledge to limit “production to a range of 32.5m to 33m barrels per day (bpd).” Seeing is believing, as the old saying goes.

Secondly, how is OPEC going to enforce the quota? That's something it has been particularly poor at going by recent form. The market has not been given individual members’ quotas since 2008, and OPEC's latest monthly report acknowledges the prospect of rising production from Libya and Nigeria. 

So assuming Libya, Nigeria, Iraq and Iran would not partake in either cutting or freezing production – will it be left to Gulf oil exporters, led by the Saudis, to cut production? The Oilholic finds that very difficult to believe, but stranger things have happened. 

Thirdly, will the latest attempt succeed and are the Russians really in agreement this time around? That is anybody’s guess, but if it fails – OPEC and Russia will have a serious credibility problem for the future, as it would be the third attempt at capping crude production this year alone to falter. 

For all intents and purposes, it appears both OPEC and Russia are aiming for a $60 per barrel oil price. If that is their aspiration, it would suit North American players just fine, whose pain threshold - in the Oilholic's opinion - happens to be around $30 per barrel. 

Anyway you look at it, non-OPEC production will rise. So such short-term overtures, should they materialise, are bound to reap only short-term rewards. That's all for the moment folks! Keep reading, keep it 'crude'!

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‘Mum’s the word’ for new Saudi oil minister

After a fact finding trip to Houston, Texas, the Oilholic finds himself back in Vienna, Austria for the 169th OPEC Ministers’ meeting. Based on initial soundbites, the 13 member oil producers’ collective is in a rather content mood. Well if you exclude the Venezuelans that is, who are decidedly grumpy by virtue of their own circumstances.

Recent production outages in Canada, Colombia, and OPEC members Venezuela and Nigeria have served to support the oil price which has lurked around the $50 per barrel level for a while now. It is also now manifestly apparent that non-OPEC oil producers are suffering in an era of lower for longer oil prices. 

The Oilholic recently penned his thought on troubles of US shale players – flag bearers of non-OPEC production – in a Forbes piece, and that’s not where the trouble ends. Non-OPEC production as a whole remains in a precarious spot. Nonetheless, interpretation of the market situation differs from OPEC member to member, with the Venezuelans correctly querying where the oil price would go once outages end. 

There’s plenty of chatter here ahead of the meeting, but one man has largely kept mum – that’s none other than Saudi Oil Minister Khalid Al-Falih, who replaced Ali Al-Naimi, one of OPEC’s most colourful characters last month.

It is doubtful that a new minister would alter an old Saudi policy. But the new man in charge has stayed away from the media since his arrival on Tuesday. Much to the disappointment of the world’s scribes, there was no Al-Naimi style power walk on Vienna’s Ring Road by new man either.

As for the analyst community, none of us expect any movement on the production quota front, although the rumour mill suggests OPEC might well be on the verge of finally appointing a new Secretary General. For an OPEC preview, check out the Oilholic’s submission to the International Business Times.

Finally, just before one takes your leave, here are two Forbes posts – on Mexico’s upcoming offshore round and US exports respectively – to keep you busy. That’s all for the moment from Vienna folks, plenty more to follow over the coming days! Keep reading, keep it crude! 

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© Gaurav Sharma 2016. Photo: OPEC flag © Gaurav Sharma.

On non-OPEC distress & the road ahead

Having spent the entire week gauging the oil market mood in Houston, Texas, several key themes seem to be emerging. US shale oil exploration has come to symbolise non-OPEC production rises over the past three years and how it performs over the coming years would go some way towards providing an indication on when the market rebalances and where the oil price goes from here.

In that respect, the Oilholic’s third outing at the Baker & McKenzie Oil & Gas Institute provided some invaluable insight. Delegates at the Institute and various panels over the course of the event invariably touched on the subject, largely opining that many fringe shale players might well be on life support, but the industry as a whole is not dead in the water (see above left).

The problem is the paucity of high-yield debt for the oil & gas sector, where private equity (PE) firms were supposed to step into the breach vacated by big banks, but it is something which is not (currently) being meaningfully reflected in the data. 

One got a sense, both at the Institute and via other meetings across town, that PE firms are not quite having it their own way as buyers, and at the same time from sellers’ perspective there is also a fair bit of denial in a cash-strapped shale industry when it comes to relinquishing asset, acreage or corporate control.

Sooner, rather than later, some struggling players might have little choice and PE firms might get more aggressive in their pursuit of quality assets over the coming months, according to Mona Dajani, partner at Baker & McKenzie.

“You must remember that the PE market is quite cyclical. The way I view it, now would be as good a time as any for a PE firm to size-up and buy a mid-sized exploration and production (E&P) company as the oil price gradually creeps upwards. Jury is mixed on bid/ask differentials narrowing, but from what I see, it is happening already,” she added. 

William Snyder, Principal at Deloitte Transactions and Business Analytics, said, “To an extent hedge positions have protected cashflow. Going forward, PE is the answer right now, for it will be a while before high-yield comes back into the oil & gas market.”

The Deloitte expert has a point; most studies point to massive capital starvation in the lower 48 US states. So those looking to refinance or simply seeking working capital to survive currently have limited options. 

Problem is the PE community is cagey too as it is embarking on a learning curve of its own, according to John Howie, Managing Director of Parallel Resource Partners. “Energy specific funds are spending time working on their own balance sheets, while the generalists are seeking quality assets of the sort that have (so far) not materialised.”

Infrastructure funds could be another option, Dajani noted. “These (infrastructure) funds coming in at the mezzanine level are offering a very attractive cost of debt, and from a legal perspective they are very covenant light.”

Nonetheless, given the level of distress in the sector, the Oilholic got a sense having spoken to selected PE firms that they are eyeing huge opportunities but are not willing to pay barmy valuations some sellers are coming up with. The thinking is just as valid for behemoths like BlackRock PE and KKR, as it is for boutique energy PE specialists from around the US whom Houston is playing host to on a near daily basis these days. 

There are zombie E&P companies walking around that should not really be there, and it is highly unlikely that PE firms will conduct some sort of a false rescue act for them at Chapter 11 stage. Better to wait for the E&P company to go under and then swoop when there is fire-sale of assets and acreage. 

Nonetheless, while we are obsessing over the level of industry distress, one mute point is getting somewhat lost in the ruckus – process efficiencies brought about by E&P players in a era of ‘lower for longer’ oil prices, according to John England, US Oil & Gas Leader at Deloitte (see right, click to enlarge). 

Addressing the Mergermarket Energy Forum 2016, England said, “Of course, capital expenditure cuts have triggered sharp declines in rig counts globally except for the Middle East. However, production decline has not been as steep as some in the industry feared. 

“This has been a tribute to the innovations and efficiencies of scale across North America, and several other non-OPEC oil production centres. A sub-$30 per barrel oil price – which we recently saw in January – drives innovation too; for a lower oil price environment motivates producers to think differently.”

Over nearly twenty meetings spread across legal, accounting, financial and debt advisory circles as well as industry players in Texas, and attendance at three industry events gives one the vibe that many seem to think the worst is over.

Yet, the Oilholic believes things are likely worsen further before they get better. Meanwhile, Houston is trying to keep its chin up as always. That’s all from the oil & gas capital of the world on this trip, as its time for the plane home to London. Keep reading, keep it crude!

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© Gaurav Sharma, 2016. Photo I: Panel at the Baker & McKenzie Oil & Gas Institute 2016 © Lizzy Lozano, Baker & McKenzie. Photo II: John England of Deloitte addresses the Mergermarket Energy Forum 2016 © Gaurav Sharma.

Get used to crude swings & volatility

Oil markets are likely to face further bouts of volatility. When Saudi Arabia and Russia, together with Venezuela and Qatar, offered the false hope of a so-called production freeze packaged in the shape of market support last week, the Oilholic wasn't the only one who did not buy it.

Predictably, oil futures rose by over 7% towards the middle of last week, but rapidly slipped into negative territory as Iran, while welcoming the move, did not say whether it would participate. In any case, the move itself was a farce of international proportions.

The Russians can’t raise their production further, while the Saudis have little exporting to room to justify a further output hike. So for market consumption it was packaged as a freeze, subsequently undermined by both countries who said they had no intentions of cutting production. It might well have been the first joint move on output matters between OPEC and non-OPEC producers, but it virtually came to naught.

Unless a clear pattern of production declines appears on the horizon, market volatility will persist. That sort of clarity won’t arrive at least before June, with swings between $25-40 likely to continue, and yes a drop to $20 is still possible.

OPEC will need to announce a real terms production cut of 1.5 million barrels per day to make any meaningful short-term difference to the oil price by $7-10 per barrel, and even that may not be sustainable with non-OPEC producers likely to be the primary beneficiaries of such a move.

Expect more of the same, and more downgrades of oil and gas companies by ratings agencies of the sort the market has gotten used to in recent months. After Fitch Ratings downgraded Shell last week, Moody’s moved to place another 29 of its rated US exploration and production firms on review for downgrade over the weekend.

Meanwhile, the latter also said continued low oil prices could have an increasingly negative impact on banks across the Gulf Cooperation Council (GCC). This could occur both directly - by a weakening in governments' capacity and willingness to support domestic banks - and indirectly, through a weakening of banks' operating conditions, Moody’s added.

Khalid Howladar, senior credit officer at Moody's, said, "Despite low oil prices and a high dependency on oil revenues across the GCC countries, banks' ratings in the region continue to benefit from their governments' willingness to tap accumulated wealth to support counter-cyclical spending."

But continued oil price declines signal "increasing challenges" to the sustainability of this dynamic, he added.

Finally, some news from the North Sea to end with – Genscape has flagged up the shutdown and restart of BP’s 1.15mn bpd Forties Pipeline System in a note to clients. It caused the April ICE Brent futures contract price to spike before falling slightly on February 12, but nothing to be overtly concerned about.

The system was shut due to an issue at the Kinneil fractionaction terminal, located where the flow from the North Sea on the Forties pipeline system is stabilised for consumption. Elsewhere, North Sea E&P firm First Oil is reportedly filing for involuntary administration, according to the BBC.

Enquest and Cairn Energy will takeover its 15% stake in Kraken field, east of Aberdeen in the British sector of the North Sea. That’s all for the moment folks! Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2016. Photo: Oil rig in the North Sea © BP

Suddenly $20/bbl oil isn't all that implausible

Successive bouts of over 10% week-on-week/five-day price declines have hit the oil market for six and made for a wretched start to 2016. 

Last Friday, Brent ended 12.33% lower to the Friday [Jan 8] before, WTI fell 10.37% and OPEC’s Basket of crude oils was 10.23% lower. (see graph, click to enlarge)

Closing Brent price of that Friday itself was some 10.54% lower, WTI was down 10.48% lower and OPEC Basket Price down 10.94% versus the closing price of December 31. Suddenly, $20 per barrel oil doesn’t sound all that implausible!

However, the Oilholic still maintains that while $20 oil is possible, it won’t stay there as an inevitable supply correction would kick-in. Excluding Gulf production, much of the world’s current oil production is barely being produced at cost, let alone at a marginal profit. As non-OPEC producers’ hedges roll-off, the pain will hit home for we are a long way from the $60 comfort threshold for many. 

As for OPEC, even if the decline continues, the Oilholic feels there is little it can do other than to let the market take its own course. An OPEC cut would only keep rivals in the current game of survival called 'lower for longer'. That’s all for the moment folks! Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2016. Graph: Oil benchmark prices (Friday closes) © Gaurav Sharma / Oilholics Synonymous Report, 2016.

A crude rout & all those downgrades

Both Brent and WTI futures are trading at their lowest levels since 2008 and previous weeks have offered some spectacular declines, if there is such a thing as that!

Biggest of the declines were noted when Brent fell by 12.65% and WTI by 11.90% between Friday, December 4th and Friday, December 11th using 2130 GMT as the cut-off point for 5-day week-on-week assessment. Following that, like January, we had another spread inversion in favour of the WTI, with the US benchmark trading at a premium to global proxy Brent for a good few sessions before slipping lower, as both again got dragged lower in lacklustre post-Christmas trading.

It all points to the year ending just as it began - with a market rout, as yours truly explained in some detail via a recent Forbes post. With nearly 3 million barrels per day of surplus oil hitting the market, the scenario is unavoidable. While the situation cannot and will not last, oversupply will not disappear overnight either. 

The Oilholic reckons it will be at least until the third quarter of 2016 before the glut shows noticeable signs of easing, mostly at the expense of non-OPEC supplies. That said, unless excess flow dips below 1 million bpd, it is doubtful ancillary influences such as geopolitical risk would come into play. 

For the moment, one still maintains an end-2016 Brent forecast near $60 per barrel and would revisit it in the New Year. Much will depend on the relative strength of the dollar in wake of US Federal Reserve’s interest rate hike, but Kit Juckes, Head of Forex at Societe Generale, says quite possibly commodity markets fear even a dovish Fed!

Meanwhile, with the oil market rout in full swing, rating agencies are queuing up predictable downgrades and negative outlooks. Moody’s described the global commodity downturn as “exceptionally severe in its depth and breadth” and expects it to be a substantial factor driving the number of defaults higher on a global basis in 2016.

Collapsing commodity prices have placed a significant strain on credit quality in the oil and gas, metals and mining sectors. These sectors have accounted for a disproportionately large 36% of Moody’s downgrades and 48% of defaults among all corporates globally so far this year. The agency anticipates continued credit deterioration and a spike in defaults in these sectors in 2016.

Over the past four weeks, we’ve had Moody's downgrade several household energy companies, including all ratings for Petrobras and ratings based on the Brazilian oil giant's guarantee, covering the company's senior unsecured debt rating, to Ba3 from Ba2. Concurrently, the company's baseline credit assessment (BCA) was lowered to b3 from b2. 

“These rating actions reflect Petrobras' elevated refinancing risks in the face of deteriorating industry conditions that make it more difficult to raise cash through asset sales; tighter financing conditions for companies in Brazil and in the oil industry, coupled with the magnitude of eventual needs to finance debt maturities; as well as the company's negative free cash flow,” Moody’s explained.

It also downgraded Schlumberger Holdings to A2; with its outlook changed to negative for Holdings and Schlumberger. "The downgrade of Schlumberger Holdings to A2 reflects the expected large increase in debt outstanding related to the adjustment of its capital structure following the Cameron acquisition," commented Pete Speer, Moody's Senior Vice President.

Corporate family rating of EnQuest saw a Moody’s downgrade to B3 from B1 and probability of default ratings to B3-PD from B1-PD. Of course, it’s not just oilfield and oil companies feeling the heat; Moody’s also downgraded the senior unsecured ratings of Anglo American and its subsidiaries to Baa3 from Baa2, its short term ratings to P-3 from P-2, and so it goes in the wider commodities sphere.

In the past week, outlook for Australia’s Woodside Petroleum outlook was changed to negative, while the ratings of seven Canadian and 29 US E&P companies were placed on review for downgrade. And so went the final month of the year. 

Not just that, the ratings agency also cut its oil price assumption for 2016, lowering Brent estimates to average $43 from $53 per barrel in 2016, and WTI to $40 from $48 per barrel. Moody’s said “continued high levels of oil production” by global producers were significantly exceeding demand growth, predicting the supply-demand equilibrium will only be reached by the end of the decade at around $63 per barrel for Brent. 

While, the Oilholic doesn’t quite agree that it would take until the end of the decade for supply-demand balance to be achieved, mass revisions tell you a thing or two about the mood in the market. Meanwhile, at a sovereign level, Fitch Ratings says low oil prices will continue to weigh on the sovereign credit profiles of major exporters in 2016. Of course, the level of vulnerability varies.

“In the last 12 months, we have downgraded five sovereigns where oil revenues accounted for a large proportion of general government and/or current external receipts. Another three - Saudi Arabia, Nigeria, and Republic of Congo - were not downgraded but saw Outlook revisions to Negative from Stable,” the agency said in a pre-Christmas note to clients.

It is now all down to who can manage to stay afloat and maintain production as the oil price stays ‘lower for longer’. Non-OPEC producers will in all likelihood run into financing difficulties, as one said in an OPEC webcast on December 4, with Brent ending 2015 over 35% lower on an annualised basis.

Finally, the Oilholic believes it is highly unlikely a divided OPEC will vote for a unanimous production cut even at its next meeting in June. For what’s it worth, $35 per barrel could be the norm for quite a bit of 2016. So in 12 months’ time, the oil and gas landscape could be very, very different. That’s all for 2015 folks! Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2015. Graph: Oil benchmark Friday closes, Q4 2015 © Gaurav Sharma / Oilholics Synonymous Report, December 2015. Photo: Gaurav Sharma speaking at the 168th OPEC Ministers' Meeting in Vienna, Austria © OPEC Secretariat.

OPEC quota where it was, no figures needed

OPEC decided to roll over its 'previous quota' published at 30 million barrels per day, but declined to put a figure in its official communique issued at the conclusion of its 168th ministers' meeting in Vienna, Austria.

Despite repeated questioning on the quota ceiling, OPEC Secretary General Adalla Salem El-Badri said Indonesia's re-entry into the OPEC fold, additional Iranian barrels entering the market and concerns over economic growth meant putting forward a quota figure needed further consideration.

"OPEC will wait and see how the market develops" over the next six months and saw no need to alter the current production level during a period of market adjustment, he added, having been asked to stay on as "acting" Secretary General until July 2016. 

In wake of the OPEC announcement, at 1656 GMT, WTI was trading at $40.47 per barrel, down 61 cents or 1.48%, while Brent came in at $43.52, down 32 cents or 0.73%. Industry surveys suggest OPEC's production for November was at 32.1m bpd, well in excess of stated levels. More shortly! Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2015. Photo: OPEC logo © Gaurav Sharma.

Oil oversupply has triggered risk premium fatigue

The Oilholic reckons it will take at least another six months in the New Year to ease the current oil oversupply glut. More so, as OPEC is highly likely to maintain its current production level, according to initial conjecture here in Vienna, Austria with the latest oil ministers’ summit currently underway.

That would probably take us to somewhere around June 2016, when we’ll see excess supply falling to somewhere in the region of 1 million barrels per day (bpd). Be that as it may, even such a decline might not be enough to bring the so-called risk or geopolitical premium into play. 

Last week, offered a clear case in point when the Turkish Air Force brought down a Russian fighter jet. Both countries are significant players in the oil and gas world – Turkey, is a custodian of the key shipping artery of the Bosphorus, and Russia, is the world’s leading oil and gas producer.

Yet, an oil futures "rally" in wake of the incident barely lasted two sessions and a few dollars, before oversupply sentiment returned to dictate market direction as per the current norm. Furthermore, both Brent and WTI futures are going sideways in the $40-45 per barrel range, as has been the case of late.

Flashpoints in the oil and gas world haven’t disappeared. Nigeria, Libya, West’s relations with Russia and Iraq are broadly where they were, if not worse. In fact, situation in the wider Middle East is pretty dire. Yet, the risk premium - so prevalent in the oil trade - is more or less nonexistent in a market struggling to park its barrels.

That will remain the case until excess supply falls to around 700,000 to 800,000 bpd. Even beyond the first half of 2016, few expect a dramatic uptick in oil prices, using Brent as a global proxy benchmark. At Fitch Ratings’ recent London Energy Seminar, this blogger found himself in the company of several experts who agreed that $60-level is unlikely to be capped before the end of 2016.

Alex Griffiths, Head of Natural Resources and Commodities at Fitch Ratings, Tim Barker, Head of Credit Research at Old Mutual Global Investors, Julian Mylchreest, Global Head of Energy at Bank of America Merrill Lynch, and Mutlu Guner, Executive Director at Morgan Stanley, all agreed there is little around to instil confidence in favour of a fast uptick above $60 being on cards within 12 months time. 

Moving away from the oil price, Genscape Oil Editor David Arno’s thoughts on the impact of Keystone XL’s rejections by the Obama administration, chimed with yours truly. Rail freight companies would undoubtedly be the biggest beneficiaries. In his blog post following the decision last month, Arno also felt denial of the pipeline provides rail shippers with “at least a year and a half more of comfort that Canadian rail opportunities will be needed.”

Finally, a couple of notes from Moody’s are worth flagging. The agency recently changed Kinder Morgan's outlook to negative from stable. Senior Vice-President Terry Marshall said the negative outlook reflects Kinder Morgan's increased business risk profile and additional pressure on its already high leverage that will result from its agreement to increase ownership in Natural Gas Pipeline Company, a distressed company. 

On November 30, Kinder Morgan announced an agreement to increase its ownership in NGPL of America to 50% from 20% for approximately $136 million. Brookfield Infrastructure Partners will own the remaining 50%. Proportionate consolidation of NGPL's debt will add about $1.5 billion to KMI's consolidated debt. NGPL's trailing twelve month September 30, 2015 EBITDA was $273 million (gross).

Moving on to state-owned crude giants, Moody's also said China National Petroleum Corporation's (CNPC) proposal to sell some of its pipeline assets is credit positive, as profits and proceeds from the sale will partially offset negative impact from low crude oil and gas prices and help preserve its financial profile during the current industry downturn.

However, Moody’s said the sale has no immediate impact on its ratings and outlook as the benefits “are marginal, given CNPC's extremely large revenue and asset size.” Nonetheless, the ratings agency expects sale proceeds to help CNPC fund the gap between its capital expenditure and operating cash flow and therefore lower its reliance on additional debt to fund its growth.

Finally, the rating agency also downgraded Pemex’s global foreign currency and local currency ratings to Baa1 from A3. Simultaneously, Moody's lowered Pemex's baseline credit assessment (BCA), which reflects its standalone credit strength, to ba3 from ba1.

The actions were prompted by Moody's view that the company's current weak credit metrics will "deteriorate further in the near to medium term. The outlook on all ratings was changed to negative." That’s all for the moment folks from Vienna folks, as the Oilholic finds his bearings at yet another OPEC summit. Plenty more from here shortly! In the interim, keep reading, keep it ‘crude’!

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© Gaurav Sharma 2015. Photo: OPEC Signage © Gaurav Sharma / Oilholics Synonymous Report.

Crude take: $60 Brent price is (still) about right

Does the Iranian nuclear settlement make a $60 per barrel Brent price seem too optimistic as a median level for the current year - that's the question on most oil market observers' minds. Even before delving into City chatter, the Oilholic believes the answer to that question in a word is ‘no’.

For starters, the settlement which had been on the cards, has already been priced in to a certain extent despite an element of unpredictability. Secondly, as yours truly noted in a Forbes column - it will take better parts of 12 months for Iran to add anywhere near 400,000 barrels per day (bpd), and some 18 months to ramp up production to 500,000 bpd.

Following news of the agreement, Fitch Ratings noted that details of the condition of Iran's production infrastructure might well be sketchy, but with limited levels of investment, it is likely that only a portion of previous capacity can be brought back onstream without further material reinvestment. 

“We would expect to see some increases in production throughout the course of 2016 but that this would be much less than half of the full 1.4 million bpd that was lost,” said Alex Griffiths, Managing Director at the ratings agency.

“It will require significant investment and expertise - for which Iran is likely to want to partner with international oil companies. These projects typically take many months to agree, as oil companies and governments manoeuvre for the best terms, and often years to implement.”

Thirdly, it is also questionable whether Tehran actually wants to take the self-defeating step of ‘flooding’ the market even if it could. The 40 million or so barrels said to be held in storage by the country are likely to be released gradually to get the maximum value for Tehran’s holdings. Fourthly, the market is betting on an uptick in demand from Asia despite China's recent woes. The potential uptick wont send oil producers' pulses racing but would provide some pricing comfort to the upside.

Finally, IEA and others, while not forecasting a massive decline, are factoring in lower non-OPEC oil production over the fourth quarter of this year. Collectively, all of this is likely to provide support to the upside. The Oilholic’s forward projection is that Brent could flirt with $70 on the right side of Christmas, but the median for 2015 is now likely to come in somewhere between $60-$62.5. 

Yet many don’t agree, despite the oil price returning to largely where it was actually within the same session's trading itself on day of the Iran announcement. For instance, analysts at Bank of America Merrill Lynch still feel Iran could potentially raise production back up by 700,000 bpd over the next 12 months, adding downside pressure on forward oil prices of $5-$10 per barrel. 

On the other hand, analysts at Barclays don't quite view it that way and the Oilholic concurs. Like Fitch, the bank’s team neither see a huge short-term uptick in production volumes nor the oil price moving “markedly lower” from here as a result of the Iranian agreement.

“We believe that the market will begin to adjust, whether through higher demand, or lower non-OPEC supply in the next couple years but only once Iran’s contribution and timing are made clear. For now, OPEC is already producing well above the demand for its crude, and this makes it worse,” Barclays analysts wrote to their clients. 

“We do not expect the Saudis to do anything markedly different. Rather, they will take a wait and see approach.”

One thing is for sure, lower oil prices early on in the third quarter would have as detrimental an effect on the quarterly median, as early January prices did on the first quarter median (see above right, click to enlarge). End result is quite likely to ensure the year-end average would be in the lower $60s. That's all for the moment folks! Keep reading, keep it 'crude'!

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No change at OPEC, 30mbpd is the 'official' quota

It was over in a jiffy – that’s the best explanation one can come up with. So the OPEC ministers arrived at 10am CET, did their customary presser, opening note came in, sandwiches followed (nothing worse than keeping analysts and scribes hungry) and then time slot for the formal quota announcement kept getting revised from 1600CET to 1530CET to 1430CET. Before you knew it – in came Secretary General Abdalla Salem El-Badri at 1400CET to convey what everybody had already factored in, the ‘official quota’ stays at 30 million barrels per day (bpd).

Official quota in inverted commas because we all know OPEC is pumping way more than that. Surveys suggest that between the 12 member, the exporters’ collective led by Saudi Arabia is producing over 31.5 million bpd. Even OPEC’s official monthly report from April put production at 30.93 million bpd. With demand tepid and the oil price neither here not there, but better than January, where was the incentive to change, as one opined last month.

In fact, the Oilholic is getting quite used to filing an end of conference blog post from here titled “no change at OPEC” often followed by “in line with market expectation”. Quite like the 166th meeting, that number 167 followed the recent norm was hardly a surprise. Perhaps they'd had enough of each other at OPEC International Seminar which came before the meeting. 

But as one’s good friend Jason Schenker, President of Prestige Economics, says “Oil has always been a story of demand”; El-Badri & co. saw tepid demand and responded leaving production as it was.

OPEC is indeed forecasting world oil demand to increase in the second half of 2015 and in 2016, with growth driven by non-OECD countries. But nothing quite like what it was in 2014.

There was one rather intriguing development, for according to El-Badri it seems we’ve all got it wrong. The so-called, OPEC production quota, it turns out isn’t a quota at all. "It is not a quota as such, but rather a recommendation given to members which we expect them to take," said the longstanding Secretary General.

He also said OPEC in fact had no target price, when asked if the Iranians' opinion that US$75 per barrel would be adequate was a view he shared.

“OPEC does not have a so-called oil price target. I agree that there are income disparities within OPEC. We have rich oil exporters and poor oil exporters; our decision in November [to hold production] as well as what we have decided today is in the interest of all members.”

On the supply side, non-OPEC growth in 2015 is expected to be just below 700,000 barrels per day, which is only around one-third of the growth witnessed in 2014. That's all from Vienna for the moment folks. Keep reading, keep it ‘crude’! 

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© Gaurav Sharma 2015. OPEC Secretariat, Helferstorferstrasse 17, Vienna, Austria © Gaurav Sharma

The morning so far at Helferstorferstrasse 17

The scribes, the analysts, the bloggers and the camera crews are all bundled into the media briefing room as the 12 OPEC ministers begin their closed door proceedings for the 165th meeting of the OPEC conference. While an announcement on where the quota will be left at is expected at 14:00 CET, here’s what we know so far. Beginning with (who else) Saudi Oil Minister Ali-Al Naimi, the kingmaker opined this morning that the global oil market was ‘balanced’ at a media scrum.

 

Given all the years the Oilholic has been here, including a previous direct natter with the minister himself, that’s a clear indication that the quota will be staying at 30 million barrels per day (bpd). Elsewhere, those in the wider analysts’ community would perhaps like to know that Libya's man at the table is Omar Ali El-Shakmak, according to a last minute communiqué.

 

Finally, it is manifestly obvious here at Helferstorferstrasse 17 that Nigeria’s petroleum minister Diezani Kogbeni Alison-Madueke is trying to muscle in to the Secretary General’s chair long occupied by Libya’s Abdalla Salem El-Badri, as the organisation has failed to agree on a compromise candidate to succeed him so far.

However, Alison-Madueke has strongly denied lobbying for the position. "The Secretary General is appointed by consensus, not lobbying," she said ticking off a few forceful questioners from newswires.

As for the office stuff, El-Shakmak, who is also officiating as president of the present meeting, acknowledged the deceleration seen this year in the emerging and developing economies who are fast becoming the organisation’s biggest clients.

"India has continued to recover from last year's slowdown, but Russia, China and Brazil have experienced slower output for a variety of reasons. World oil demand is expected to grow by 1.1 million bpd to average 91.2 million bpd in 2014. The bulk of this growth is expected to come from non-OECD countries."

Non-OPEC oil supply is also anticipated to rise this year by 1.4 million bpd to reach 55.58 million bpd. "This growth will mainly come from North America and Brazil, while Norway, the UK and Mexico are expected to decline," El-Shakmak explained.

More importantly, the OPEC Reference Basket has remained fairly stable over the last two years or so, with annual averages ranging between roughly US$105 and $110 per barrel.

"In the past half-year, the Basket has averaged above $104 per barrel from January to May. This is a level that is acceptable to both producers and consumers," he concluded. Indeed sir. That's all for the moment folks! Keep reading, keep it 'crude'!

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© Gaurav Sharma 2014. Photo: Media briefing room at the 165th OPEC meeting of ministers © Gaurav Sharma, June 2014.

OPEC holds quota at 30 mbpd, El-Badri stays on

We’ve been here before dear readers, we’ve been here before. Main headline at the conclusion of the 164th OPEC conference here in Vienna is a familiar one. OPEC’s production quota stays at 30 million barrels per day and Secretary General Abdalla Salem El-Badri – long overdue to step down – stays on in his post, as member nations torn between Iranian and Saudi tussles fail to agree on a candidate for the post. So at the end of it all a battle-weary El-Badri, took the stage as usual. Not entirely bereft of a sense of humour, the secretary general had a few quips, the odd joke, brushed off scribes pokes to say that the cartel had considered the global economic outlook which remains “uncertain with the fragility of the Euro-zone remaining a cause for concern.”

 

“We was also noted that, although world oil demand is forecast to increase during the year 2014, this will be more than offset by the projected increase in non-OPEC supply. Nevertheless, in the interest of maintaining market equilibrium, the OPEC decided to maintain the current production level of 30 million bpd.”

 

In taking this decision, OPEC said it had reconfirmed its members’ readiness to swiftly respond to developments which could have an adverse impact on the maintenance of an orderly and balanced oil market.

 

El-Badri's tenure as Secretary General carries on for a period of one year, with effect from January 1, 2014. As the Oilholic noted in an earlier post, OPEC had a chance to send a message but missed a trick here. Despite the threat of incremental non-OPEC barrels, it failed to present a united front leaving El-Badri to carry the can in front of the world’s press and fly the OPEC flag.

 

The man himself though had a thing or two to say or avoid saying. Coming on the latter bit first, El-Badri declined comment on what increasing Iranian production would mean for the overall production quota. He also described incremental non-OPEC supply as "good for global consumers", acknowledged OPEC’s concerns about shale and said he was monitoring the supply side situation.

 

Yet later, he cut short an analyst’s question saying people should not “exaggerate” the impact of incremental or additional project barrels. “You keep going down this track and very soon you will see both prospective and thriving E&P jurisdictions lose their appetite for investing in new fields and enhancing existing facilities.” The Oilholic thinks the Secretary General has a point, albeit the point itself is a bit exaggerated.

 

One key theme to emerge was that OPEC members’ focus for exports was firmly to the East now. Several delegates and El-Badri himself acknowledged that supplies heading to the US – especially from Nigeria, Angola and Venezuela – were being diverted to far Eastern markets. The US it seems “wasn’t a priority” for OPEC in the first place; it’s even less so now. That's your lot from OPEC HQ! Keep reading, keep it ‘crude’!

 

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© Gaurav Sharma 2013. Photo: OPEC Secretary General Abdalla Salem El-Badri at the conclusion of 164th OPEC meeting of ministers in Vienna, Austria © Gaurav Sharma December 4, 2013.

The acknowledgement: OPEC flags-up US output

There should be no shock or horror – it was coming. Ahead of taking a decision on its production quota, president of the 164th OPEC conference Mustafa Jassim Mohammad Al-Shamali, who is also the deputy prime minister and minister of oil of Kuwait, openly acknowledged the uptick in US oil production here in Vienna.

 

“In the six months that have passed since the Conference met here in Vienna in May, we have seen an increasingly stable oil market, which is a reflection of the gradual recovery in the world economy. This positive development stems mainly from a healthy performance in the US, in addition to the Eurozone countries returning to growth,” Al-Shamali told reporters in his opening remarks.

 

It follows on from an acknowledgement by OPEC at its last summit in May about the impact of shale, which up and until then it hadn’t. But the latest statement was more candid and went further. “Non-OPEC oil supply is also expected to rise in 2014 by 1.2 million barrels per day (bpd). This will be mainly due to the anticipated growth in North America and Brazil,” Al-Shamali added.

 

You can add Canada and Russia to that mix as well even though the minister didn’t.

 

Turning to the wider market dynamics, Al-Shamali said that although the market had started to gradually emerge from the tough economic situation of the past few years, the pace of world economic growth remains slow. “Clearly, there are still many challenges to overcome.”

 

Finally, a few footnotes before the Oilholic takes your leave for the moment. Here is the BBC’s take why OPEC is losing control of oil prices due to US fracking – not entirely accurate but largely on the money. Meanwhile, Nigerian oil minister Diezani Alison-Madueke has just told Platts that her country supports OPEC’s current 30 million bpd crude output ceiling, at least for the next few months until the group's next meeting.

 

Alison-Madueke also said she was keen to see how OPEC saw the impact of the US shale oil and gas boom on itself. "We would like to see that we continue with volumes we have held for the last year or so at least between now and the next meeting. I think that would be a good thing. We would like to see a review of the situation referencing the shale oil and gas to see where we are at this stage as OPEC among other things."

 

Earlier, the Saudi oil minister Al-Naimi poured cold water over the idea of a production cut lest some people suggest that. He sounded decidedly cool on the subject at this morning's media scrum. So that’s three of the ministers saying the quota is likely to stay where it was. The Oilholic would say that removes all doubt. That's all from OPEC HQ for the moment folks, more from Vienna later as we gear up for an announcement! Keep reading, keep it ‘crude’! 

 

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© Gaurav Sharma 2013. Photo: OPEC media briefing room, Vienna, Austria © Gaurav Sharma 2013.