What to make of Chevron’s North Sea pullback?

What was widely rumoured is now official – oil major Chevron has commenced the divestment of a number of its oil and gas fields in North Sea.

For some in the UK, the San Ramon, California-based US company's retreat from the mature hydrocarbon exploration prospect is the end of an era. Chevron has had a presence in the region for decades and that about says it all, as the North Sea has been in decline since production peaked in 1998.

The company is by no means alone. Both BP and Royal Dutch Shell have sold assets in the North Sea in recent years, as has Chevron's US rival ConocoPhillips. But scale of the Chevron's assets up for sale is sizeable. In fact, the company has confirmed it would encompass "all of its UK Central North Sea assets."

That includes its Britannia platform and allied infrastructure, along with the Alba, Alder, Captain, Elgin/Franklin, Erskine, and Jade fields as well as the Britannia platform and its satellites. The assets collectively contributed 50,000 barrels per day (bpd) of oil and 155 million cubic feet of natural gas to its headline output. 

Company won't vanish from the North Sea just yet. It is currently considering the development of the Rosebank field west of the Shetland Islands. However, the oil major is now focussed on growing its shale production in the Permian basin in Texas as well as the giant Tengiz field in Kazakhstan.

All things considered, Chevron's moves points to a strategic move away from mature prospects by IOCs to those with a more viable higher production prospect. In the process, they are leaving these mature prospects behind to independent upstarts, or state operators who can maximise the asset's end of life potential. 

Take for instance, BP’s business in the North Sea, which is now centred around its major interests West of Shetland and in the Central North Sea. The company sold its Forties Pipeline system to billionaire Jim Ratcliffe's Ineos last year. 

The move put the 235-mile pipeline system, built in 1975, that links 85 North Sea oil and gas assets, belonging to 21 companies, to the UK mainland and Grangemouth refinery, which Ratcliffe bought from BP in 2005. 

In volume terms, the pipeline's average daily throughput was 445,000 bpd and around 3,500 tonnes of raw gas a day in 2016. The system has a capacity of 575,000 bpd.

The acquisition also made Ineos the only UK player with refinery and petrochemical assets directly integrated into the North Sea.

It is highly likely independents will queue up for Chevron's assets, and of course so will the state operators contingent upon pricing. Nexen, a subsidiary of China's CNOOC, and TAQA already have sizable operations in the North Sea and will be keeping an eye on proceedings. Expect more of the same! That's all for the moment folks! Keep reading, keep it crude! 

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© Gaurav Sharma 2018. Photo: Oil rig in the North Sea © Cairn Energy.

On the Firth of Forth with an ethane tanker

As a mad month of travelling nears its end, the Oilholic was up earlier today in the small hours of the morning sailing on the Firth of Forth, Scotland, observing Panamax tankers load up Forties crude from the North Sea at the Hound Point Terminal at sunrise (see left). 

If you are lucky enough to catch the morning din with the weather holding up, it is quite a sight. However, the main purpose of being anchored in the middle of the Firth of Forth so early was not to see Panamax tankers fill-up, but rather to take a peek at the Ineos Insight; a ship carrying ethane sourced from the Marcellus shale stateside to British waters. Lo and behold she surfaced soon enough too (see below right).

This first consignment of US shale gas to the UK has given yours truly plenty of talking points for better parts of a fortnight. So here’s a take on its geopolitical significance for IBTimes UK, and a chat with Ineos director Tom Pickering. And well here is a spot report of the day’s event too, bagpipes, boat rides, canapes and all. 

However, if the back story is your thing, here it is as described for Forbes, and a more holistic account on this blog. 

With plenty of column inches dedicated to the event by yours truly to it, there’s little more to be done other than to pass on the links above to you and enjoy a view of oil and gas industry history in the making. That’s all from Scotland folks! It’s on to Edinburgh and then back to London. Keep reading, keep it crude!

Update 29/10/16: Furthermore, since this historic shale consignment arrived in Scotland, which has a moratorium on shale exploration, here is the Oilholic's IBTimes UK column touching on the hypocrisy of the Scottish Government’s stance on shale.

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© Gaurav Sharma 2016. Photo 1: Sunrise at Hound Point Terminal, Firth of Forth, Scotland, UK. Photo 2: Ineos Insight arrives in British Waters © Gaurav Sharma, September 2016 

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

Oil prices, OPEC shenanigans & the North Sea

It has been a crude fortnight of ups and downs for oil futures benchmarks. Essentially, supply-side fundamentals have not materially altered. There’s still around 1.3 million barrels per day (bpd) of crude oil hitting the markets in excess of what’s required.

Barrels put in storage are at an all time high, thanks either to those forced to store or those playing contango. US inventories also remain at a record high levels. 

However, the biggest story in the oil market, as well as the wider commodities market, is the strength of the US dollar. All things being equal, the dollar’s strength is currently keeping both Brent and WTI front month futures contracts at cyclical lows. The past five trading days saw quite a few spikes and dives but Friday’s close came in broadly near to the previous week’s close (see graph on the left, click to enlarge).

In the Oilholic’s opinion, a sustained period of oil prices below $60 is not ideal for unconventional exploration. Nonetheless, not all, but a sufficiently large plethora of producers just continue to grin and bear it. While that keeps happening, and the dollar remains strong, oil prices will not find support. We could very well be in the $40-60 range until June at the very least. Unless excess supply falls from 1.3 million bpd to around 750,000 bpd, it is hard to see how the oil price will receive support from supply constriction. 

Additionally, Fitch Ratings reckons should Brent continue to lurk around $55, credit ratings of European, Middle Eastern and African oil companies would take a hit. European companies that went into the slump with stretched credit profiles remain particularly vulnerable.

In a note to clients, Fitch said its downgrade of Total to 'AA-' in February was in part due to weaker current prices, and the weaker environment played a major part in the downgrade and subsequent default of Afren.

"Our investigation into the effect on Western European oil companies' credit profiles with Brent at $55 in 2015 shows that ENI (A+/Negative) and BG Group (A-/Negative) were among those most affected. Both outlooks reflect operational concerns, ENI because of weakness in its downstream and gas and power businesses, BG Group due to historical production delays. Weaker oil prices exacerbate these problems," the agency added.

Of course, Fitch recognises the cyclical nature of oil prices, so the readers need not expect wholesale downgrades in response to a price drop. Additionally, Afren remains an exception rather than the norm, as discussed several times over on this blog.

Moving on, the Oilholic has encountered empirical and anecdotal evidence of private equity money at the ready to take advantage of the oil price slump for scooping up US shale prospects eyeing better times in the future. For one’s Forbes report on the subject click here. The Oilholic has also examined the state of affairs in Mexico in another detailed Forbes report published here.

Elsewhere, a statement earlier this week by a Kuwaiti official claiming that there is no appetite for an OPEC meeting before the scheduled date of June 5, pretty much ends all hopes of the likes of Nigeria and Venezuela in calling an emergency meeting. The official also said OPEC had “no choice” but to continue producing at its current levels or risk losing market share.

In any case, the Oilholic believes chatter put out by Nigeria and Venezuela calling for an OPEC meeting in the interest of self-preservation was a non-starter. Given that we’re little over two months away from the next meeting and the fact that it takes 4-6 weeks to get everyone to agree to a meeting date, current soundbites from the ‘cut production’ brigade don’t make sense.

Meanwhile, the UK Treasury finally acknowledged that taxation of North Sea oil and gas exploration needed a radical overhaul. In his final budget, before the Brits see a General Election on May 7, Chancellor George Osborne cut the country’s Petroleum Revenue Tax from its current level of 50% to 35% largely aimed at supporting investment in maturing offshore prospects.

Furthermore, the country’s supplementary rate of taxation, lowered from 32% to 30% in December, was cut further down to 20% and its collection at a lower rate backdated to January. Altogether, the UK’s total tax levy would fall from 60% to 50%.

Osborne’s move was widely welcomed by the industry. Some are fretting that he’s left it too late. Yet others reckon a case of better late than never could go a long way with the North Sea’s glory days well behind it. That’s all for the moment folks! Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2015. Graph: Tracking Friday oil prices close, year to date 2015 © Gaurav Sharma, March 20, 2015.

The $40-50 range, CAPP on Capex & Afren's woes

The first month of oil trading in 2015 is coming to a much calmer end compared to how it began. The year did begin with a bang with Brent shedding over 11% in the first week of full trading alone. Since then, the only momentary drama took place when both Brent and WTI levelled at US$48.05 per barrel at one point on January 16. Overall, both benchmarks have largely stayed in the $44 to $49 range with an average Brent premium of $3+ for better parts of January.

There is a growing realisation in City circles that short sellers may have gotten ahead of themselves a bit just as those going long did last summer. Agreed, oil is not down to sub-$40 levels seen during the global financial crisis. However, if the price level seen then is adjusted for the strength of the dollar now, then the levels being seen at the moment are actually below those seen six years ago.

The big question right now is not where the oil price is, but rather that should we get used to the $40 to $50 range? The answer is yes for now because between them the US, Russia and Saudi Arabia are pumping well over 30 million barrels per day (bpd) and everyone from troubled Libya to calm Canada is prodding along despite the pain of lower oil prices as producing nations.

The latter actually provides a case in point, for earlier in January the Western Canadian Select did actually fall below $40 and is just about managing to stay above $31. However, the Oilholic has negligible anecdotal evidence of production being lowered in meaningful volumes.

For what it’s worth, it seems the Canadians are mastering the art of spending less yet producing more relative to last year, according to the Canadian Association of Petroleum Producers (CAPP). The lobby group said last week that production in Western Canada, bulk of which is accounted for by Alberta, would grow by 150,000 bpd to reach 3.6 million bpd in 2015. 

That’s despite the cumulative capex tally of major oil and gas companies seeing an expected decline of 33% on an annualised basis. The headline production figure is actually a downward revision from CAPP’s forecast of 3.7 million bpd, with an earlier expectation of 9,555 wells being drilled also lowered by 30% to 7,350 wells. Yet, the overall production projection is comfortably above 2014 levels and the revision is nowhere near enough (yet) to have a meaningful impact on Canada’s contribution to the total global supply pool. 

Coupled with the said global supply glut, Chinese demand has shown no signs of a pick-up. Unless either the supply side alters fundamentally or the demand side perks up, the Oilholic thinks the current price range for Brent and WTI is about right on the money. 

But change it will, as the current levels of production simply cannot be sustained. Someone has to blink, as yours truly said on Tip TV – it’s likely to be the Russians and US independent upstarts. The new Saudi head of state - King Salman is unlikely to change the course set out by his late predecessor King Abdullah. In fact, among the new King’s first acts was to retain the inimitable Ali Al-Naimi as oil minister. 

Greece too is a non-event from an oil market standpoint in a direct sense. The country does not register meaningfully on the list of either major oil importers or exporters. However, its economic malaise and political upheavals might have an indirect bearing via troubles in the Eurozone. The Oilholic sees $1= €1 around the corner as the dollar strengthens against a basket of currencies. A stronger dollar, of course, will reflect in the price of both benchmarks.

In other news, troubles at London-listed Afren continue and the Oilholic has knocked his target price of 120p for the company down to 20p. First, there was bolt out of the blue last August that the company was investigating “receipt of unauthorised payments potentially for the benefit of the CEO and COO.” 

Following that red flag, just recently Afren revised production estimates at its Barda Rash oilfield in the Kurdistan region of Iraq by 190 million barrels of oil equivalent. The movement in reserves was down to the 2014 reprocessing of 3D seismic shot in 2012 and processed in 2013, as well as results from its drilling campaign, Afren said. 

It is presently thinking about utilising a 30-day grace period under its 2016 bonds with respect to $15 million of interest due on 1 February. That’s after the company confirmed a deferral of a $50 million amortisation payment due at the end of January 2015 was being sought. Yesterday, Fitch Ratings downgraded Afren's Long-term Issuer Default Rating (IDR), as well as its senior secured ratings, to 'C' from 'B-'. It reflects the agency’s view that default was imminent.

Meanwhile, S&P has downgraded Russia’s sovereign rating to junk status. The agency now rates Russia down a notch at BB+. “Russia’s monetary-policy flexibility has become more limited and its economic growth prospects have weakened. We also see a heightened risk that external and fiscal buffers will deteriorate due to rising external pressures and increased government support to the economy,” S&P noted.

Away from ratings agencies notes, here is the Oilholic’s take on what the oil price drop means for airlines and passengers in one’s latest Forbes piece. Plus, here’s another Forbes post touching on the North Sea’s response to a possible oil price drop to $40, incorporating BP’s pessimistic view that oil price is likely to lurk around $50 for the next three years.

For the record, this blogger does not think oil prices will average around $50 for the next three years. One suspects that neither does BP; rather it has more to do with prudent forward planning. That’s all for the moment folks! Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2015. Photo: Oil pipeline with Alaska's Brooks Range in the background, USA © Michael S. Quinton / National Geographic

Hedge Funds have been ‘contangoed’

Recent events may have pushed the Brent front month futures contract back towards US$108 per barrel; but there's no denying some have been 'contangoed'! Ukrainian tensions and lower Libyan production are hard to ignore, even if the latter is a bit of a given.

Nonetheless, for a change, the direction of both benchmark prices this month indicates that July did belong to the physical traders with papers traders, most notably Hedge Funds, taking a beating.

It's astonishing (or perhaps not) that many paper traders went long on Brent banking on the premise of "the only way is up" as the Iraqi insurgency escalated last month. The only problem was that Iraqi oil was still getting dispatched from its southern oil hub of Basra despite internal chaos. Furthermore, areas under ISIS control hardly included any major Iraqi oil production zone.

After spiking above $115, the Brent price soon plummeted to under $105 as the reality of the physical market began to bite. It seems European refiners were holding back from buying the expensive crude stuff faced with declining margins. In fact, North Sea shipments, which Brent is largely synced with, were at monthly lows. Let alone bothering to pull out a map of Iraqi oilfields, many paper traders didn't even bother with the ancillary warning signs.

As Fitch Ratings noted earlier this month, the European refining margins are likely to remain weak for at least the next one to two years due to overcapacity, demand and supply imbalances, and competition from overseas. Over the first half of 2014, the northwest European refining margin averaged $3.3 per barrel, down from $4 per barrel in 2013 and $6.8 barrel in 2012.

Many European refineries have been loss-making or only slightly profitable, depending on their complexity, location and efficiency. They are hardly the sort of buyers to purchase consignments by the tanker-load during a mini bull run. The weaker margin scenario itself is nothing new, resulting from factors including a stagnating economy and the bias of domestic consumption towards diesel due to EU energy regulations

"This means that surplus gasoline is exported and the diesel fuel deficit is filled by imports, prompting competition with Middle Eastern, Russian and US refineries, which have access to cheaper feedstock and lower energy costs on average. Mediterranean refiners are additionally hurt by the interruption of oil supplies from Libya, but this situation may improve with the resumption of eastern port exports," explains Fitch analyst Dmitry Marinchenko.

Of course tell that to Hedge Funds managers who still went long in June collectively holding just short of 600 million paper barrels on their books banking on backwardation. But thanks to smart, strategic buying by physical traders eyeing cargoes without firm buyers, contango set in hitting the hedge funds with massive losses.

When supply remains adequate (or shall we say perceived to be adequate) and key buyers are not in a mood to buy in the volumes they normally do down to operational constraints, you know you've been 'contangoed' as forward month delivery will come at a sharp discount to later contracts!

Now the retreat is clear as ICE's latest Commitments of Traders report for the week to July 15 saw Hedge Funds and other speculators cut their long bets by around 25%, reducing their net long futures and options positions in Brent to 151,981 from 201,568. If the window of scrutiny is extended to the last week of June, the Oilholic would say that's a reduction of nearly 40%.

As for the European refiners, competition from overseas is likely to remain high, although Fitch reckons margins may start to recover in the medium term as economic growth gradually improves and overall refining capacity in Europe decreases. For instance, a recent Bloomberg survey indicated that of the 104 refining facilities region wide, 10 will shut permanently by 2020 from France to Italy to the Czech Republic. No surprises there as both OPEC and the IEA see European fuel demand as being largely flat.

Speaking of the IEA, the Oilholic got a chance earlier this month to chat with its Chief Economist Dr Fatih Birol. Despite the latest tension, he sees Russian oil & gas as a key component of the global energy mix (Read all about it in The Oilholic's Forbes post.)

Meanwhile, Moody's sees new US sanctions on Russia as credit negative for Rosneft and Novatek. The latest round of curbs will effectively prohibit Rosneft, Novatek, and other sanctioned entities, including several Russian banks and defence companies, from procuring financing and new debt from US investors, companies and banks.

Rosneft and Novatek will in effect be barred from obtaining future loans with a maturity of more than 90 days or new equity, cutting them off from long-term US capital markets. As both companies' trade activities currently remain unaffected, Moody's is not taking ratings action yet. However, the agency says the sanctions will significantly limit both companies' financing options and could put pressure on development projects, such as Novatek's Yamal LNG.

No one is sure what the aftermath of the MH17 tragedy would be, how the Ukrainian crisis would be resolved, and what implications it has for Russian energy companies and their Western partners. All we can do is wait and see. That's all for the moment folks. Keep reading, keep it 'crude'!

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© Gaurav Sharma 2014. Photo: Oil pipeline © Cairn Energy

Why Dated Brent is no ‘Libor scandal in waiting’

The Oilholic was asked at a recent industry event whether he thought or had heard any anecdotal evidence about Brent being 'crooked' and susceptible to what we saw with financial benchmarks like Libor. Perhaps much to the annoyance of conspiracy theorists, the answer is no! A probe by the European Commission (EC), which included raids on the London offices of several oil companies and Platts last year, and an ongoing CFTC investigation into trading houses stateside, seems to have triggered the recent wave of questions.

Doubts in the minds of regulators and the public are understandable and very valid, but that an offence on an industry-wide scale can be proved beyond reasonable doubt is another matter. The UK's Office of Fair Trading has already investigated and cleared all parties raided by the EC. Furthermore, it stood by its findings as news of the EC raids surfaced.

As far as price assessment mechanisms go, only Platts' Market on Close (MoC) has faced allegations. It is cooperating with the EC and nothing has emerged so far. Competing methods, for instance ones used by Argus Media, another price reporting agency (PRA), were neither part of the investigation nor have been since.

Let's set all of this aside and start with the basics. A monthly cash-settled future is calculated on the difference between the daily assessment price for Dated Brent (the price assigned on a date when North Sea crude will be loaded onto a tanker) and the ICE daily settlement price for Brent 1st Line Future. Unless loaded as cargo, a North Sea oil barrel – or any barrel for that matter – retains the wider trading metaphor of a paper barrel.

Now as far as the Dated Brent component goes, agreed the PRAs are relying on market sources to give them information about bids, offers and supply-side deals. However, the diversity of sources should mitigate any attempt to manipulate prices by a group of individuals submitting false information. In the case of Libor, the BBA, a single body used to collate the information. In Brent's case, there is more than one PRA. None of these act as some sort of a centralised monopolistic data aggregation body. For what it's worth, anybody with even a minute knowledge of oil & gas markets would know the fierce competition between the two main PRAs.

Don't get the Oilholic wrong – collusion is possible in theory whereby traders gang-up and provide the PRAs with false pre-agreed information to skewer the objectivity of the assessment. However, the supply-side dynamic can wobble on the back of a variety of factors ranging from rig maintenance to an accident, a geopolitical event to actions of other market participants. So how many or how few would be required to fix prices and which PRA would be targeted, when and by how much and so on, and so on!

Then hypothetically let's assume all the price-fixers and factors align, given the size of the market – even if rigging did happen – it'd be localised and cannot be anything on the global scale of fixing that we have seen with the Libor revelations to date. Take it all in, and the allegations look silly at best because the 'collusion dynamic', should there be such a thing, cannot possibly be akin to what went on with Libor.

The EC wants to regulate PRAs via a proposed mandatory code and there is nothing wrong with the idea on the face of it. However, one flaw is that in a global market, buyers and sellers are under no obligation to reveal the price to the PRAs. Many already don't in an ultracompetitive crude world where cents per barrel make a difference depending on the size of the cargo.

If the EC compels traders to reveal information, trading would move elsewhere. Dubai for once would welcome them with open arms and other benchmarks would replace European ones. Anyway, enough said and the last bit is not farfetched! Finally, if fixing on the scale of the Libor scandal is discovered in oil markets and the Oilholic is proved wrong, this blogger would be the first to put his hand up!

Coming on to the current Brent forward month futures price, the last 5-day assessment provided plenty of food for thought. Supply disruptions in Libya (down by 100,000 bpd) and Angola (force majeure by BP potentially impacting 180,000 bpd) kept the contract steady either side of US$109 per barrel level, despite tepid US economic data. That said, stateside the WTI remained stubbornly in three figures on the back of supply side issues at Cushing, Oklahoma. The Oilholic reckons that's the fifth successive week of gains.

Meanwhile, the ICE's latest Commitment of Traders report for the week to February 11 notes that hedge funds and other money managers raised their net long position by 29.6% to 109,223; the highest level since the last week of 2013. The Brent price rose by around $4 a barrel over the stated period. By contrast, the previous week's net long position of 84,276 was the lowest since November 2012.

Away from pricing issues to its impact,  Fitch Ratings said in a recent report that production shortfalls and strategy changes to appease equity holders were a greater threat to the ratings of major Western European oil companies than a prolonged downturn in crude prices.

The ratings agency's stress test of the sector indicated that a Brent price of $55 per barrel would put pressure on credit quality, but compensating movements in cost bases and capex would give most companies a fighting chance at preserving rating levels.

Alex Griffiths, head of natural resources and commodities at Fitch, said, "With equity markets increasingly focussed on returns, bond yields near historical lows and oil prices forecast to soften, the chances of companies increasing leverage to benefit equity holders have risen. The European companies that have reported so far this year have generally resisted this pressure – but it may increase as the year goes on."

Separately, the agency also noted that a fall of the rouble would benefit Russian miners more than oil exporters. For both sectors, the currency's limited decline will strengthen earnings and support their credit profile, but ratings upgrades are unlikely without indications that the currency has settled at a new lower level.

To give the readers some context, the rouble has depreciated by 8% against the US dollar since the first trading day of the year and is down 17% from the end of 2012.

Depreciation of a local currency is generally good news for a country's exporters, but the effect on Russian oil exporters is less pronounced due to taxation and hence is less likely to result in positive rating actions in the future, Fitch said.

From Russia to the US, where there are widespread reports of a flood of public comments arriving at door of the State Department with public consultation on Keystone XL underway in full swing. See here's what yours truly does not get – you can have your comments included in the wider narrative, but are not obliged to give your details even under a confidentiality clause. This begs the question – how do you differentiate the genuine input, both for and against the project, from a bunch of spammers on either side?

Meanwhile, the Department of Energy has approved Sempra Energy's proposal to export LNG to the wider market including export destinations that do not have free trade agreement countries with the US. The company, which has already signed Mitsubishi and Mitsui of Japan and GDF Suez of France, could now spread its net further afield from its proposed export hub in Louisiana.

Elsewhere, Total says its capex budget is $26 billion for 2014, and $24 billion for 2015, down from $28 billion in 2013. No major surprises there, and to quote an analyst at SocGen, the French oil major "is sticking to its guns with more downstream restructuring being a dead certainty."

After accusations of not being too ambitious in its divestment programme, Shell said it could sell-off of its Anasuria, Nelson and Sean platforms in the British sector of the North Sea. The three platforms collectively account for 2% of UK production. Cairn Energy has had a fair few problems of late, but actress Sienna Miller and model Kate Moss weren't among them. That's until they took issue with one of the company's oil rigs blotting the sea off their party resort of Ibiza, Spain, according to this BBC report.

Finally, the pace of reforms and general positivity in the Mexican oil and gas sector is rubbing off on PEMEX. Last week, Moody's placed its Baa1 foreign currency and global local currency ratings on review for an upgrade.

In a note to clients, Tom Coleman, senior vice president at Moody's, wrote: "Mexico's energy reform holds out prospects for the most far ranging changes we have seen to date, benefiting both Mexico's and PEMEX's growth profiles in the medium-to-longer term."

And just before yours truly takes your leave, OPEC says world oil demand will increase by 1.09 million bpd, or 1.2%, to 90.98 million bpd from 89.89 million bpd in 2013. That's an upward revision of 1.05 million bpd in 2014. Non-OPEC supply should more than cover it methinks. That's all for the moment folks! Keep reading, keep it 'crude'!

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© Gaurav Sharma 2014. Photo 1: Oil tankers in English Bay, British Columbia, Canada © Gaurav Sharma, April 2012. Photo 2: Oil exploration site © Lukoil.

Crude reality: Time to short as bulls go lethargic?

Most of the Oilholic's contacts in City trading circles had been maintaining in recent months that a US$106 per barrel price would be the psychological floor to the year-end, barring bearish trends induced by a wider and unforeseen macroeconomic tsunami.

To be quite honest, the global economy is probably where it has been for a while – in a bit of a lull. So even though things are neither materially better nor all that worse, the level was still breached this Monday morning. Methinks there is going to be further selling and yet more shorting either side of the Atlantic.

Our old friends the hedge funds – held responsible by many for the assetization of black gold – certainly seem to think so. That's if you believe data published by ICE Futures Europe. It indicates speculative bets that the Brent price will rise (in futures and options combined), outnumbered short positions by 119,451 lots in the week ended October 29.

The London-based exchange says that's a reduction of 21% (or 30,710 contracts) from the previous week and the biggest drop since the week ended June 25. Concurrently, bearish positions on Brent outnumbered bullish wagers by 321,470; a 3.2% decrease in net-short positions from October 22. So there you have it!

On a related note, albeit for different reasons, the WTI also closed at its lowest since June 26. In fact the forward month futures contract for December shed as much as 55 cents to $94.06 at one point in intraday trading on Monday.

The Oilholic believes the prices aren’t plummeting; rather they are hitting a much more realistic level. Such a sentiment was echoed by two new supply-side contacts this blogger had the pleasure of running into at the UK business lobby group CBI's 2013 annual conference.

As 2014 is nearly upon us, Steven Wood, managing director (corporate finance) at Moody's, says oil prices should stay robust through next year. His and Moody's quantification of robustness for Brent, factoring in Chinese demand and tensions in the Middle East, stands at around $95 per barrel, and West Texas Intermediate "for slightly less, in the next one to two years."

"And with the worst behind the US natural gas industry, prices for benchmark Henry Hub will average about $3.75 per thousand cubic feet next year," he adds.

Additionally, the good folks at Moody's reckon the E&P sector's fortunes will continue to rise over the next year, with big capital spending budgets keeping fundamentals strong (also for the oilfield service and drilling sector).

One minor footnote though, even if it is still some way off – what if international sanctions on Iran get eased should relations between the Islamic Republic and the West improve? We could then see the Iran add over 750,000 barrels per day to the global oil output pool. Undoubtedly, this would be bearish for oil markets, especially so for Brent. The recent dialogue between both sides has made contemplating the possibility possible!

Away from price-related issues, if you needed any further proof of renewed vigour in North Sea E&P activity, then Norway's Statoil has announced it will go ahead with a decision to build a new platform at its Snorre field to extract another 300 million barrels of the crude stuff at an expense of £4.2 billion. This would, according to the Norwegian media, extend the project's lifetime to 2040.

Statoil will take a final decision on engineering aspects in the first quarter of 2015 with the platform scheduled to come onstream in the fourth quarter of 2021. The Norwegian firm owns 33.3% of the exploration project licence. Other shareholders include Petoro (30%), ExxonMobil (17.4%), Idemitsu Petroleum (9.6%), RWE (8.6%) and Core Energy (1.1%). That’s all for the moment folks! Keep reading, keep it ‘crude’!

To follow The Oilholic on Twitter click here.

To email: gaurav.sharma@oilholicssynonymous.com

 

© Gaurav Sharma 2013. Photo: North Sea oil rig © Cairn Energy plc

North Sea & the 'crude' mood in Aberdeen

The Oilholic spent the wee hours of this morning counting the number of North Sea operational support ships docked in Aberdeen Harbour. Interestingly enough, of the nine in the harbour, six were on the Norwegian ships register.

Whether you examine offshore oil & gas activity in the Norwegian sector of the North Sea or the British sector, there is a sense here that the industry is enjoying something of a mini revival if not a full blown renaissance. As production peaked in the late 1990s, empirical evidence that oil majors had begun looking elsewhere for better yields started emerging. Some even openly claimed they’d given up.

Over a decade later, with new extraction techniques and enhanced hydrocarbon recovery mechanisms in vogue – a different set of players have arrived in town from Abu Dhabi National Energy Company (TAQA) to Austria's OMV, from Canada's Talisman Energy to China's Sinopec. Oil recovery from mature fields is now the talk of the town.

Even the old hands at BP, Shell and Statoil – who have divested portions of their North Sea holdings – seem to be optimistic. The reason can be found in the three figure price of Brent! Most commentators the Oilholic has spoken to here, including energy economists, taxation experts, financiers and one roughneck [with 27 years of experience under his belt] are firmly of the view that a US$100 per barrel price or above supports the current level of investment in mature fields.

One contact remarks that the ongoing prospection and work on mature fields can even take an oil price dip to around $90-level. "However, anything below that would make a few project directors nervous. Nonetheless, the connect with between Brent price fluctuation and long term planning is not as linear as is the case between investment in Canadian oil sands projects and the Western Canadian Select (WSC) price."      

To put some context, the WSC was trading at a $30 per barrel discount to the WTI last time yours truly checked. Concurrently, Brent's premium to the WTI, though well below historic highs, is just shy of $10 per barrel. Another contact, who retains faith in the revival of the North Sea hypothesis, says it also bottles down to the UK's growing demand for natural gas.

"It's what'll keep West of Shetland prospection hot. Furthermore, and despite concern about capacity constraints, sound infrastructural support is there in the shape of the West of Shetland Pipeline (WOSP) which transports natural gas from three offshore fields in the area to Sullom Voe Terminal [operated by BP]."

While further hydrocarbon discoveries have been made atop what's already onstream, they are not yet in the process of being developed. That's partially down to prohibitive costs and partially down to concerns about WOSP's capacity. However, that's not dampening the enthusiasm in Aberdeen.

Five years ago, many predicted a rig and infrastructure decommissioning bonanza to be a revenue generator and become a thriving industry itself. "But enhanced oil recovery schemes keep pushing this 'bonanza' back for another day. This in itself bears testimony to what's afoot here," says one contact.

UK Chancellor George Osborne also appears to be listening. In his budget speech on March 20, he said that the government would enter into contracts with companies in the sector to provide "certainty" over tax relief measures. That has certainly cheered industry players in Aberdeen as well the lobby group Oil & Gas UK.

"The move by the Chancellor gives companies the certainty they need over the tax treatment of decommissioning. At no cost to the government, it will speed up asset sales and free up capital for companies to use for investment, extending the productive life of the UK Continental Shelf," a spokesperson says, echoing what many here have opined.

Osborne's budget speech also had one 'non-crude' bit of good news for the region. The Chancellor revealed that one of the two bidders for the UK government's £1 billion support programme for Carbon Capture and Storage (CC&S) is the Peterhead Project here in Aberdeenshire. Overall, the industry sounds optimistic, just don't mention the 'R-word'. Scotland is due to hold a referendum on September 18, 2014 on whether it wants to be independent or remain part of the United Kingdom.

Hardly any contact in a position of authority wants to express his/her opinion on record with the description of political 'hot potato' attributed to the referendum issue by many. The response perhaps is understandable. It's an issue that is dividing colleagues and workforces throughout the length and breadth of Scotland.

General consensus among commentators seems to be that the industry would be better off in a 'United' Kingdom. However, even it were to become a 'Disunited' Kingdom come September 2014, industry veterans believe the global nature of the oil & gas business and the craving for hydrocarbons would imply that the sector itself need not be spooked too much about the result. National opinion polls suggest that most Scots currently prefer a United Kingdom, but also that a huge swathe of the population is as yet undecided and could be swayed either way.

In a bid to conduct an unscientific yet spirited opinion poll of unknown people since known ones were unwilling, the Oilholic quizzed three taxi drivers around town and four bus drivers at Union Square. Result – two were in the 'Yes to independence' camp, four were in the 'No' camp and one said he'd just about had enough of the 'ruddy question' being everywhere from newspapers to radio talk shows, to a stranger like yours truly asking him and that he couldn't give a damn!

Moving away from the politics and the projects to the crude oil price itself, where black gold has had quite a fortnight in the wake of a US political stalemate with regard to the country's debt ceiling. Nervousness about the shenanigans on Capitol Hill and the highest level of US crude oil inventories in a while have pushed WTI’s discount to Brent to its widest in nearly three months by this blogger's estimate.

Should the unthinkable happen and the political stalemate over the US debt ceiling not get resolved, it is the Oilholic's considered viewpoint that Brent is likely to receive much more support at $100-level than the WTI, should bearish trends grip the global commodities market. This blogger has maintained for a while that the WTI price still includes undue froth in any case, thereby making it much more vulnerable to bearish sentiment. 

Just one final footnote, before calling it a day and sampling something brewed in Scotland – according to a recent note put out by the Worldwatch Institute, the global commodity 'supercycle' slowed down in 2012. In its latest Vital Signs Online trends report, the institute noted that global commodity prices dropped by 6% in 2012, a marked change from the dizzying growth during the commodities supercycle of 2002-12, when prices surged an average of 9.5% per annum, or 150% over the stated 10-year period.

Worldwatch Institute says that during the supercycle, the financial sector took advantage of the changing landscape, and the commodities market went from being "little more than a banking service as an input to trading" to a full-fledged asset class; an event that some would choose to describe as "assetization of commodities" and that most certainly includes black gold. Supercycle or not, there is no disguising the fact that large investment banks participate in both financial as well as commercial aspects of commodities trading (and will continue to do so).

Worldwatch Institute notes that at the turn of the century, total commodity assets under management came to just over $10 billion. By 2008 that number had increased to $160 billion, although $57 billion of that left the market that year during the global financial crisis. The decline was short-lived, however, and by the end of the third quarter in 2012, the total commodity assets under management had reached a staggering $439 billion.

Oil averaged $105 per barrel last year and a slowdown in overall commodity price growth was indeed notable, but Worldwatch Institute says it is still not clear if the so-called supercycle is completely over. That’s all for the moment folks! Keep reading, keep it ‘crude’!

To follow The Oilholic on Twitter click here.

To email: gaurav.sharma@oilholicssynonymous.com
 

© Gaurav Sharma 2013. Photo 1: North Sea support ships in Aberdeen Harbour. Photo 2: City Plaque near ferry terminal, Aberdeen, Scotland © Gaurav Sharma, October 2013.

UK Oil & Gas Inc. - The Thatcher Years!

The Oilholic has patiently waited for the fans and despisers of former British Prime Minister Margaret Thatcher to quieten down, in wake of her death on April 8, 2013, before giving his humble take on what her premiership did (or in many cases didn’t) for the UK oil and gas Inc. and what she got in return.

 

Her influence on the North Sea exploration and production certainly got a mention in passing in all the tributes and brickbats thrown at the Iron Lady, the longest serving (1979-1990) and only female British Prime Minister. The world’s press ranging from The Economist to the local paper in her former parliamentary constituency – The Hendon & Finchley Times (see covers below) – discussed the legacy of the Iron Lady; that legacy is ‘cruder’ than you think.

 

In the run-up to Thatcher's all-but-in-name state funeral on April 17, the British public was bombarded with flashbacks of her time in the corridors of power. In one of the video runs, yours truly glanced at archived footage of Thatcher at a BP production facility and that said it all. Her impact on the industry and the industry’s impact itself on her premiership were profound to say the least.

 

Academic Peter R. Odell, noted at the time in his book  Oil and World Power (c1986) that, “Countries as diverse as Finland, France, Italy, Austria, Spain, Norway and Britain had all decided to place oil partly, at least, in the public sector.” A later footnote observes, “Britain’s Conservative government, under Mrs. Thatcher, subsequently decided [in 1983] to ‘privatize’ the British National Oil Corporation (BNOC) created by an earlier Labour administration.”

 

The virtue of private free enterprise got instilled into the UK oil and gas industry in general and the North Sea innovators in particular thanks to Thatcher. But to say that the industry somehow owed the Iron Lady a debt of gratitude would be a travesty. Rather, the industry repaid that debt not only in full, but with interest.

 

Just as Thatcher was coming to power, more and more of the crude stuff was being sucked out of the North Sea with UK Continental Shelf (UKCS) being much richer in those days than it certainly is these days. The UK Treasury, under her hawk-eyed watch, was quite simply raking it in. According to the Office for National Statistics (ONS) data, government revenue from the oil and gas industry rose from £565 million in fiscal year 1978-79 to £12.04 billion in 1984-85. That is worth over three times as much in 2012 real-terms value, according to a guesstimate provided by a contact at Barclays Capital.

 

Throughout the 1980s, the Iron Lady made sure that the revenue from the [often up to] 90% tax on North Sea oil and gas exploration and production was used as a funding source to balance the economy and pay the costs of economic reform. Over three decades on from the crude boom of the 1980s, Brits do wish she had examined, some say even adopted, the Norwegian model.

 

That she privatised the BNOC does not irk the Oilholic one bit, but that not even a drop of black gold and its proceeds – let alone a full blown Norwegian styled sovereign fund – was put aside for a rainy day is nothing short of short-termism or short-sightedness; quite possibly both. One agrees that both macroeconomic and demographical differences between Norway and the UK complicate the discussion. This humble blogger doubts if the thought of creating a sovereign fund didn’t cross the Iron Lady’s mind.

 

But unquestionably, as oil and gas revenue was helping in feeding the rising state benefits bill at the time – all Thatcher saw in Brent, Piper and Cormorant fields were Petropounds to balance the books. And, if you thought the ‘crude’ influence ended in the sale of BNOC, privatisation drives or channelling revenue for short-term economic rebalancing, then think again. Crude oil, or rather a distillate called diesel, came to Thatcher’s aid in her biggest battle in domestic politics – the Miners’ Strike of 1984.

 

Pitting her wits against Arthur Scargill, the National Union of Mineworkers’ (NUM) hardline, stubborn, ultra-left leader at the time, she prevailed. In March 1984, the National Coal Board (NCB) proposed to close 20 of the 174 state-owned mines resulting in the loss of 20,000 jobs. Led by Scargill, two-thirds of the country's miners went on strike and so began the face-off.

 

But Thatcher, unlike her predecessors, was ready for a prolonged battle having learnt her lesson in an earlier brief confrontation with the miners and knew their union’s clout full well based on past histories. This time around, the government had stockpiled coal to ensure that power plants faced no shortages as was the case with previous confrontations.

 

Tongue-tied in his vanity, Scargill had not only missed the pulse of the stockpiling drive but also failed to realise that many UK power plants had switched to diesel as a back-up. Adding to the overall idiocy of the man, he decided to launch the strike in the summer of 1984, when power consumption is lower, than in the winter.

 

Furthermore, he refused to hold a ballot on the strike, after losing three previous ballots on a national strike (in January 1982, October 1982 and March 1983). The strike was declared illegal and Thatcher eventually won as the NUM conceded a year later in March 1985 without any sizable concessions but with its member having borne considerable hardships. The world was moving away from coal, to a different kind of fossil fuel and Thatcher grasped it better than most. That the country was a net producer of crude stuff at the time was a bonanza; the Treasury’s to begin with as she saw it.

 

The Iron Lady left office with an ‘ism’ in the shape of 'Thatcherism' and bred 'Thatcherites' espousing free market ideas and by default making capitalism the dominant, though recently beleaguered, economic system of our time. Big Bang, the day [October 27, 1986] the London Stock Exchange's rules changed, following deregulation of the financial markets, became the cornerstone of her economic policy.

 

In this world there are no moral absolutes. So the Oilholic does not accept the rambunctious arguments offered by left wingers that she made ‘greed’ acceptable or that the Big Bang caused the global financial crisis of 2007-08. Weren’t militant British unions who, for their own selfish odds and ends, held the whole country to ransom throughout the 1970s (until Thatcher decimated them), greedy too? If the Big Bang was to blame for a global financial crisis, so was banking deregulation in the UK in 1997 (and elsewhere around that time) when she was not around.

 

Equally silly, are the fawning accolades handed out by the right wingers; many of whom – and not the British public – were actually instrumental in booting her out of office and some of whom were her colleagues at the time. Let the wider debate about her legacy be where it is, but were it not for the UK oil and gas Inc., there would have been no legacy. Luck played its part, as it so often does in the lives of great leaders. As The Economist noted:

 

“She was also often outrageously lucky: lucky that the striking miners were led by Arthur Scargill, a hardline Marxist; lucky that the British left fractured and insisted on choosing unelectable leaders; lucky that [Argentine] General Galtieri decided to invade the Falkland Islands when he did; lucky that she was a tough woman in a system dominated by patrician men (the wets never knew how to cope with her); lucky in the flow of North Sea oil; and above all lucky in her timing. The post-war consensus was ripe for destruction, and a host of new forces, from personal computers to private equity, aided her more rumbustious form of capitalism.”

 

They say that the late Venezuelan president Hugo Chavez stage-managed 'Chavismo' and bred 'Chavistas' from the proceeds of black gold. The Oilholic says 'Thatcherism' and 'Thatcherites' have a ‘crude’ dimension too. Choose whatever evidence you like – statistical, empirical or anecdotal – crude oil bankrolled Thatcherism in its infancy. That is the unassailable truth and that’s all for the moment folks! Keep reading, keep it ‘crude’!

 

To follow The Oilholic on Twitter click here.

 

To email: gaurav.sharma@oilholicssynonymous.com
 

© Gaurav Sharma 2013. Photo 1: Baroness Margaret Thatcher’s funeral cortege with military honours, April 17, 2013 © Gaurav Sharma. Photo 2: Front page of the Hendon & Finchley Times, April 11, 2013. Photo 3: Front cover of the The Economist, April 13, 2013.

‘9-month’ high to a ‘9-month’ low? That's crude!

In early February, we were discussing the Brent forward month futures contract's rise to a nine-month high of US$119.17 per barrel. Fast forward to mid-April and here we are at a nine-month low of US$97.53 – that’s ‘crude’!

The Oilholic forecast a dip and so it has proved to be the case. The market mood is decidedly bearish with the IMF predicting sluggish global growth and all major industry bodies (OPEC, IEA, EIA) lowering their respective global oil demand forecasts.

OPEC and EIA demand forecasts were along predictable lines but from where yours truly read the IEA report, it appeared as if the agency reckons European demand in 2013 would be the lowest since the 1980s. Those who followed market hype and had net long positions may not be all that pleased, but a good few people in India are certainly happy according to Market Watch. As the price of gold – the other Indian addiction – has dipped along with that of crude, some in the subcontinent are enjoying a “respite” it seems. It won’t last forever, but there is no harm in short-term enjoyment.

While the Indians maybe enjoying the dip in crude price, the Iranians clearly aren’t. With Brent below US$100, the country’s oil minister Rostam Qasemi quipped, "An oil price below $100 is not reasonable for anyone." Especially you Sir! The Saudi soundbites suggest that they concur. So, is an OPEC production cut coming next month? Odds are certainly rising one would imagine.

Right now, as Stephen Schork, veteran analyst and editor of The Schork Report, notes: "Oil is in a continued a bear run, but there's still a considerable amount of length from a Wall Street standpoint, so it smells like more of a liquidation selloff."

By the way, it is worth pointing out that at various points during this and the past week, the front-month Brent futures was trading at a discount to the next month even after the May settlement expired on April 15th. The Oilholic counted at least four such instances over the stated period, so read what you will into the contango. Some say now would be a good time to bet on a rebound if you fancy a flutter and “the only way is up” club would certainly have you do that.

North Sea oil production is expected to fall by around 2% in May relative to this month’s production levels, but the Oilholic doubts if that would be enough on a standalone basis to pull the price back above US$100-mark if the macroclimate remains bleak.

Meanwhile, WTI is facing milder bear attacks relative to Brent, whose premium to its American cousin is now tantalisingly down to under US$11; a far cry from October 5, 2011 when it stood at US$26.75. It seems Price Futures Group analyst Phil Flynn’s prediction of a ‘meeting in the middle’ of both benchmarks – with Brent falling and WTI rising – looks to be ever closer.

Away from pricing, the EIA sees US oil production rising to 8 million barrels per day (bpd) and also that the state of Texas would still beat North Dakota in terms of oil production volumes, despite the latter's crude boom. As American companies contemplate a crude boom, one Russian firm – Lukoil could have worrying times ahead, according to Fitch Ratings.

In a note to clients earlier this month, the ratings agency noted that Lukoil’s recent acquisition of a minor Russian oil producer (Samara-Nafta, based in the Volga-Urals region with 2.5 million tons of annual oil production) appeared to be out of step with recent M&A activity, and may indicate that the company is struggling to sustain its domestic oil output.

Lukoil spent nearly US$7.3 billion on M&A between 2009 and 2012 and acquired large stakes in a number of upstream and downstream assets. However, a mere US$452 million of that was spent on Russian upstream acquisitions. But hear this – the Russian firm will pay US$2.05 billion to acquire Samara-Nafta! Unlike Rosneft and TNK-BP which the former has taken over, Lukoil has posted declines in Russian oil production every year since 2010.

“We therefore consider the Samara-Nafta acquisition as a sign that Lukoil is willing to engage in costly acquisitions to halt the fall in oil production...Its falling production in Russia results mainly from the depletion of the company's brownfields in Western Siberia and lower than-expected production potential of the Yuzhno Khylchuyu field in Timan-Pechora,” Fitch Ratings notes.

On a closing note, the Oilholic would like to share a brilliant article on the BBC's website touching on the fallacy of the good biofuels are supposed to do. Citing a Chatham House report, the Beeb notes that the UK's "irrational" use of biofuels will cost motorists around £460 million over the next 12 months. Furthermore, a growing reliance on sustainable liquid fuels will also increase food prices. That’s all for the moment folks. Until next time, keep reading, keep it crude! 

To follow The Oilholic on Twitter click here. 

To email: gaurav.sharma@oilholicssynonymous.com 

© Gaurav Sharma 2013. Photo: Oil Rig © Cairn Energy Plc.

Crude thoughts from 141 West Jackson Blvd

A visit to Chicago would not be complete without setting foot inside 141 West Jackson Boulevard – the Chicago Board of Trade’s (CBOT) iconic abode – and gathering the pulse of the market straight from the world's oldest futures and options exchange. Over 50 different options and futures contracts are traded here, including ‘cruder’ ones, via close to 4000 member traders both electronically and through open outcrys; so plenty to observe and discuss.

There was only one man though whom the Oilholic had in mind – the inimitable Phil Flynn of Price Futures Group, veteran market analyst and the doyen of the business news broadcasters. The man from the “South Side” of Chicago has never been one to sit on the fence in all the years that yours truly has been mapping his market commentary. And he wasted no time in declaring that the WTI could reassert itself in the Battle of the Benchmarks pretty soon.

“First, let’s take the Brent-WTI differential into perspective. It narrowed to US$13 at one point today [March 28] and it will continue to narrow, albeit in fits and starts. We’ll come back to this point. WTI’s claw-back in terms of market stature could be down to simple nuts and bolts stuff! The US could – and I think will – become a treble impact jurisdiction – i.e. one of the world’s largest consumer, producer and exporters of crude oil somewhere between 2015-2018; if you believe the current market projections. So what could be a better way to get a sense of the global energy market than to have all of that rolled into one contract?”

Flynn reckons people were behind the curve in awarding Brent a victory in the Battle of the Benchmarks. “Everyone says these days that Brent is more reflective of global conditions. My take is that they should have reached this conclusion five years ago and it’d have been fine! Yet now when the clamour for Brent being the leading benchmark is growing, market supply and demand dynamics are changing for the better here in the US and for the worse in the North Sea.”

The veteran market commentator says the period of Brent being a global benchmark will be akin to the "rise and fall of the Roman Empire" through no fault of its champions but rather that of "late adopters" who missed the pulse of the market which was ticking differently back in 2007-08 with the rise of Asian crude oil consumption.

“There is a lot of politics in anointing the ‘favoured’ benchmark. As a trader I don’t care about the politics, I go with my gut instinct which tells me the problems associated with the WTI – for instance the Oklahoma glut – are being tackled while Brent’s are just beginning. WTI is liquid, has broad participation and also has the backdrop giving an indication of what supply and demand is. Therein, for me, lies the answer.”

Flynn also feels the technicals tell their own story. In December, he called a WTI low of US$85 and the top at US$97 and was vindicated. “It is flattering to look like some kind of a genius but it was pure technical analysis. I think there was a realisation that oil was undervalued at the end of 2012 (fiscal cliff, dollar-cross). When that went away, WTI had a nice seasonal bounce (add cold weather, improving US economy). It’s all about playing the technicals to a tee!”

Flynn sees the current WTI price as being close to a short-term top. “Now that’s a scary thing to say because we’re going into the refining season. It is so easy to say pop the WTI above US$100. But the more likely scenario is that there would a much greater resistance at about the price level where we are now.”

Were this to happen, both the Oilholic and Flynn were in agreement that there could be a further narrowing between Brent and WTI - a sort of “a meeting in the middle” with WTI price going up and Brent falling.

“The WTI charts look bullish but I still maintain that we are closer to the top. What drives the price up at this time of the year is the summer driving season. Usually, WTI climbs in March/April because the refiners are seen switching to summer time blends and are willing to pay-up for the higher quality crudes so that they can get the switchover done and make money on the margins,” he says.

His team at Price Futures (see right) feels the US seasonal factors are currently all out of whack. “We’ve recently had hurricanes, refinery fires, the Midwest glut, a temporary gas price spike – which means the run-up of gasoline prices that we see before Memorial Day has already happened! Additionally, upward pressure on the WTI contracts that we see in March/April may have already been alleviated because we had part of the refinery maintenance done early. So barring any major disasters we ‘may not’ get above US$100,” he adds.

As for the risk premium both here and across the pond, the CBOT man reckons we can consider it to be broadly neutral on the premise that a US$10 premium has already been priced in and has been for some time now.

“The Iran issue has been around for so long that it’s become a near permanent feature. The price of oil, as far as the risk premium goes, reflects the type of world that we live in; so we have an in-built risk premium every day.”

“Market wizards could, in theory, conjure up a new futures gimmick solely on the “risk premium in oil” – which could range between US$3 to US$20 were we to have a one! Right now we have a US$7 to US$10 premium “near” permanently locked in. So unless we see a major disruption to supply, that risk premium is now closer to 7 rather than 10. That’s not because the risks aren’t there, but because there is more supply back-up in case of an emergency,” he adds.

“Remember, Libya came into the risk picture only because of the perceived short supply of the (light sweet) quality of its crude. That was the last big risk driven volatility that we had. The other was when we were getting ready for the European embargo on Iranian crude exports,” he adds.

With the discussion done, Flynn, with his customary aplomb, remarked, “Let’s show you how trading is done the Chicago way.” That meant a visit down to the trading pit, something which alas has largely disappeared from London, excluding the London Metals Exchange.

While the CBOT was established in 1848, it has been at its 141 West Jackson Boulevard building since 1930 and so has the trading pit. “Just before the Easter break, volumes today [March 28] are predictably lower. I think the exchange record is 454 million contracts set 10 years ago,” says Flynn.

As we stepped into the pit, the din and energy on the floor was infectious. Then there was pin drop silence 10 seconds before the pit traders awaited a report due at 11:00 am sharp...followed by a loud groan.

“No need to look at the monitors – that was bearish all right; a groan would tell you that. With every futures contract, crude including, there would be someone who’s happy and someone who’s not. The next day the roles would be reversed and so it goes. You can take all your computers and all your tablets and all your Blackberries – this is trading as it should be,” says Flynn (standing here on the right with the Oilholic).

In July 2007, the CBOT merged with the Chicago Mercantile Exchange (CME) to form the CME Group, a CME/Chicago Board of Trade Company, making it a bigger market beast than it was. Having last visited a rather docile trading pit in Asia, the Oilholic was truly privileged to have visited this iconic trading pit – the one where many feel it all began in earnest.

They say the Czar’s Russia first realised the value of refining Petroleum from crude oil, the British went about finding oil and making a business of it; but it is the United States of America that created a whole new industry model as we know it today! The inhabitants of this building in Chicago for better parts of 80 years can rightly claim “We’re the money” for that industry.

That’s all from the 141 West Jackson Boulevard folks! It was great being here and this blogger cannot thank Phil Flynn and Price Futures Group enough, not only for their time and hospitality, but for also granting access to observe both their trading room and the CBOT pit. More from Chicago coming up! Keep reading, keep it ‘crude’!

To follow The Oilholic on Twitter click here.

To email: gaurav.sharma@oilholicssynonymous.com

© Gaurav Sharma 2013. Photo 1: The Chicago Board of Trade at West Jackson Boulevard (left) with the Federal Reserve Bank of Chicago (right), Chicago, USA. Photo 2: Phil Flynn (standing in the centre) with his colleagues at Price Futures Group. Photo 3: Phil Flynn (right) with the Oilholic (left) at the CBOT trading floor © Gaurav Sharma 2013.