'e-OPEC' agrees 9.7mbpd cut extension by a month

We here again, albeit via webcam! As widely anticipated, oil producers' group OPEC has agreed to recommend a roll over its existing 9.7 million barrels per day (bpd) production cut at its latest meeting. Here's a glimpse of the new e-OPEC (click to enlarge). 

Two sources said all members were onboard, with one respondent emphatically declaring there "will be a 9.7 million bpd not ifs or buts." However, the was precious little word on the so-called cheaters. Within OPEC that would be Iraq and Nigeria, and beyond it Kazakhstan. There's plenty of doubt over what to do with Mexico's insistence that it cannot reduce its production level. 

However, Russia and Saudi Arabia, who want non-OPEC and OPEC cheaters brought to heel are so far said to be in agreement with a move to extend the cuts - instituted in April in the wake of the coronavirus pandemic - by a month. Non-OPEC countries are only just joining the meeting, so the market will have further word on that at time of stunted demand and expectations of a dire 2020. 

Monitoring is expected to be stepped up with OPEC's monitoring committee or the Joint Ministerial Monitoring Committee (JMMC) opting to meet every month from June 18 onwards. The next OPEC meeting has been scheduled for Nov 30, followed by an OPEC+ meeting on Dec 1. Ultimately, an exit strategy remains missing and that problem will resurface soon rather than later. 

Ahead of the weekend's OPEC+ meeting, oil futures jumped significantly, with the Brent August contract rising well above $40 per barrel, and WTI July contract coming within tantalizing distance of the said level. There's something incredibly premature about this and the said levels - at least in this blogger's opinion - have arrived at least a month early as one noted in recent opinion column. 

Away from the goings-on at OPEC, here are few of the Oilholic's recent Forbes missives on the world of oil and gas equities:

• 3 Oil Stocks That Might Go Bankrupt In 2020, May 15, 2020
• 5 Top Canadian Oil Stocks To Buy In 2020
• How To Interpret Saudi Wealth Fund’s $2 Billion Splurge On Big Oil Stocks

And that's all for the moment folks! Keep reading, keep it 'crude'!

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OPEC agrees output cut of 1.2m bpd to 32.5m bpd

OPEC has agreed to cut production by 1.2 million barrels per day (bpd) to 32.5 million bpd at the conclusion of its 171st meeting of ministers. If carried out from January, this would be its first cut in eight years.

The oil futures market, which registered a slump of 4% overnight, rallied in response registering a rise of over 8%. 

However, the crude reality is that much of the above cut - i.e. 486,000 bpd - will come from the Saudis. As the Oilholic's report for IBTimes UK outlines, others will pitch in too. OPEC also said it would be counting on 600,000 bpd of non-OPEC cuts, bulk of which would come from Russia. That's where the real riddle is. What sort of compliance will we see from Russia? 

Furthermore, what about internal compliance within OPEC?  Mohammed Bin Saleh Al Sada, Qatar's Minister of Energy and Opec President, said a ministerial monitoring committee chaired by Kuwait, along with Venezuela and Algeria would be established to monitor the cuts.

Al Sada also described the decision as "historic" adding that: "We have no regrets about not having cut production in the summer of 2014. Opec has reacted to current oil market realities in taking this decision and delivered on what we agreed in September [at the International Energy Forum in Algiers]. 

More from Vienna shortly folks, once yours truly has digested this crude bit of news! Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2016. Photo: Mohammed Bin Saleh Al Sada (left), Qatar's Minister of Energy and Opec President unveils an oil production cut of 1.2m barrels per day at the conclusion of its 171st meeting of ministers' in Vienna, Austria on 30 November, 2016. © Gaurav Sharma, November 30, 2016.

Ho hum moves for fewer oil drums

In case you have been on another planet and haven’t heard, after weeks of chatter about coordinated oil output cuts by OPEC and non-OPEC producers, we finally had some movement. The Oilholic deploys the word 'movement' here rather cagily.

Three OPEC members led by heavyweight Saudi Arabia, with Qatar and Venezuela in tow, joined hands with the Russians, to announce a production ‘freeze’ at January’s output levels  on Tuesday, provided ‘others’ agree to do likewise. 

The most important others happen to be Iraq and Iran who haven’t exactly come out in support of the said freeze just yet. Even if they do agree, or in fact all OPEC members agree, the freeze would come at production levels deemed to be historical highs for both the Russians and OPEC. In case of the latter, industry surveys and data from aggregators as diverse as Platts and Bloomberg points to all 12 exporting OPEC nations collectively pumping above 32 million barrels per day.

Predictably, the oil futures market treated the news of the 'freeze' with the sort of disdain it deserved. The price remains stuck in the range where it has been and short-term volatility is likely to last; so much of what transpired was, well, exceedingly boring from a market standpoint, excepting that it was the first instance of OPEC and non-OPEC coordinated action in 15 years. 

If OPEC really wants to support prices, an uptick in the region of $7-10 per barrel would require the cartel to introduce a real terms cut of 1.5 million bpd. Even then, the gains would short-term, and the only people benefitting would be North American players. Some of them are the very wildcatters, whose tenacity for surviving when oil is staying ‘lower for longer’, OPEC has so far failed to work out with any strategic coherence. Expect more of the same in a market that's still awash with crude oil. 

Finally, just before one takes your leave, it seems Moody's has placed on review for downgrade the Aa3 ratings of China National Petroleum Corporation (CNPC), Sinopec Group, Sinopec Corp, China National Offshore Oil Corporation (CNOOC Group) and CNOOC Limited.

The ratings agency has also placed on review for downgrade the ratings of the Chinese national oil companies' rated subsidiaries, including Kunlun Energy Company Limited, CNPC Finance (HK) Limited, CNPC Captive Insurance Company Limited, CNOOC Finance Corporation Ltd, and Sinopec Century Bright Capital Investment Limited.

In a statement, Moody’s said global rating actions on many energy companies, reflect its efforts to "recalibrate the ratings in the energy portfolio to align with the fundamental shift in the credit conditions of the global energy sector." Can’t argue with that! That’s all for the moment folks! Keep reading, keep it ‘crude’! 

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© Gaurav Sharma 2016. Photo: Oil exploration site in Russia © LukOil

Crude oil tumbles as OPEC stumbles

Having been to every single OPEC ministers’ summit since 2008, the Oilholic thought he’d seen it all. Not quite it seems; when the 168th meeting of ministers ended – for the very time since yours truly had been here, the oil producers collective failed to mention its production quota. Here’s a link to the communiqué on December 4, that's historic for all the wrong reasons!

In farcical fashion the market was left guessing what OPEC’s actual production is based on previously published data and anecdotal evidence. OPEC itself puts the quota at 30 million barrels per day (bpd). Until recently, while Saudi Arabian production was in overdrive, 31.88 million bpd was the industry consensus, and barely days before the OPEC meeting convened a Bloomberg survey put the figure at 32.1 million bpd.

Bulk of the incremental OPEC barrels are coming from Saudi Arabia and Iraq, with discounting by all 12 members in full swing, as the Oilholic wrote on Forbes. Now Iran, eyeing a meaningful return to the international fold, is also not in favour of production cuts, unlike on previous occasions. It is not just the analyst community that is in uncharted waters, the producers’ group itself appears to be pretty dazed.

OPEC has not published a target oil price since 2004. Then in December 2008, it ceased publication of individual members’ quotas leaving the market to second guess the figure. All we know is that Iraq and Libya are currently not included in the headline quota. Now it seems OPEC will not even reveal what its daily production target is. It is all pretty strange and quite unlike any cartel in the world, if you feel OPEC should be described as such.

No slide rule or calculator was required in working out the stalemate in Vienna would be short-term bearish! There’s just too much oil in the market. In fact, latest surveys suggest we are seeing nearly 2.6 – 2.9 million bpd of surplus oil, double of 1.3 million bpd estimates earlier in the year.

At this rate it would be well into 2016 before supply adjustment occurs, which means that oil price will remain in lacklustre mode. Only saving grace is that a steep decline for Brent below $40 per barrel was not a high probability unless there is a global financial tsunami; even though the global proxy benchmark did briefly fall below the 40-level in intraday trading today.

Expect an uptick next year, but the undeserved oil price heights of Q1 2014 won’t be touched anytime soon. That’s all from Vienna folks. Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2015. Photo: OPEC Secretary General Abdalla Salem El-Badri (right) at the conclusion of the 168th OPEC Ministers Summit in Vienna, Austria on December 4, 2015 © Gaurav Sharma / Oilholics Synonymous Report, December 4, 2015.

Saudis, Iranians not budging - short baby short!

It’s not official yet, but highly likely that an OPEC quota cut is not on cards as the Saudis won’t budge and the Iranians, hoping to return to the international fold, aren’t keen on a cut either. 

That’s unless other non-OPEC producers, most notably the Russians come on board too. It is the latter part that’s the tricky bit. It ain’t happening at the moment, but could it happen at some point 2016? 

Not likely, says our old friend Jason Schenker, President of Prestige Economics. "They might meet and greet, talk on the sidelines. But chatter of a possible joint policy announcement [with Russia] seems pretty far fetched to me."

To The Oilholic, it seems the Saudis want to see how demand goes in the early part of 2016, before possibly backing a cut. Were that to be the case, the good folks in Riyadh reckon they would quite literally get more bang for their bucks.

For the moment, don’t expect much, as yours truly reported for Sharecast. In the interim, here’s the current mantra of OPEC’s Middle Eastern producers, as one wrote for Forbes – i.e. discount the competition to death.

Either way, there appears to quite a bit of intraday short covering going on at moment, which to me suggests the market is bracing for a no change scenario here in Vienna, before an almighty cry of “Short, baby short” once OPEC actually confirms that it will not be cutting. 

That’s all for the moment from Vienna folks, plenty more from here shortly! In the interim, keep reading, keep it ‘crude’!

Update: 1600 CET OPEC Press Conference delayed; ministers have broken up for second session according to sources 

Update: 1630 CET Conference delayed further, expected at 1700 CET now

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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.

OPEC’s hunt for an ‘equitable’ oil price

The OPEC meeting is over, quota stays at 30 million barrels per day, and by the way – it was never a quota but rather a recommendation in Secretary General Abdalla El-Badri’s own words.

From now until December, when OPEC meets next, member nations would be contemplating what constitutes an equitable price (whether or not that’s achievable given the state of the market) and use that as a basis for deliberations next time around. Both benchmarks ended sharply lower on Friday relative to the previous week’s closing price after OPEC’s decision. Brent shed 3.51% on its May 29 closing price while the WTI lost 2.32%. OPEC’s daily basket price came in at US$59.67 a barrel, right before it reached its latest decision.

In fact, OPEC’s average monthly basket price tells its own story. A graph drawn by the Oilholic (see above left, click to enlarge) based on OPEC data, shows the price falling from an average of $107.89 in June 2014 to $62.24 in May; a decline of 42.31% in that time. It went down a cliff between June and January, before recovering to where we are at the moment.

This blogger firmly believes we are stuck here or hereabouts for a while, as probably do most oil producers (OPEC or non-OPEC). While most would want as high a price as possible, what would they deem as equitable? The figure varies, but when asked about the current price level, Saudi oil minister Ali Al-Naimi quipped: “You can see that I am not stressed, I am happy.”

Of course, the price threshold point ensuring Al-Naimi’s happiness would be a lot lower than regional rivals Iran or Iraq. The Iranians expressed a desire for $75, the uppermost and highly unlikely top range of the Oilholic’s short-term forecast.

Angola, Nigeria, Ecuador and Venezuela said $80 was their equitable price. One suspects, Venezuela – in the midst of an economic crisis – needs a three-figure price but cast its lot with those quoting the highest, even if its $20 short of what it is after.

When quizzed about the oil price, El-Badri said, “OPEC does not have a so-called oil price target; we leave that to the market.

“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.”

The rich ones – Saudi Arabia, United Arab Emirates, Qatar and Kuwait – met well before the OPEC seminar and the subsequent minister's summit, and agreed on keeping the production ceiling where it was at 30 million bpd.

OPEC's production actually came in at 30.93 million bpd in April, and could unofficially be anywhere between 31.5 to 32 million bpd depending on which recent industry survey you choose to rely on. It’s probably why El-Badri downgraded OPEC’s “quota” into a “members’ recommendation”. The Oilholic though couldn’t help noticing there was quiet satisfaction within OPEC about the market not getting materially worse between its meetings with little prospect of prices getting entrenched below $40.

One does not see it coming either. As we enter the latter half of the year, focus will shift towards global economic growth and how it supports demand for crude oil. OPEC noted the global economic recovery had stabilised, albeit with growth at moderate levels.

In the current year, global GDP growth is projected at 3.3%, and expected to be at a slightly higher level of 3.5% for 2016. As a consequence, OPEC expects world oil demand to increase in the second half of 2015 and in 2016, with growth driven by non-OECD countries.

Of course, the said growth levels wont see the oil price shoot up given more than adequate supplies, but will probably see 8 out of 12 OPEC members pretty content, whether they get what they say is their equitable price or not. That’s that from the 167th OPEC meet; time to head back to London town. Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2015. Graph: Monthly average OPEC Basket Price (June 2014 to May 2015) © Gaurav Sharma / Data Source: OPEC.

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

OPEC just about gets the basics right

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Internal wrangles see OPEC quota left at 30mbpd

Some wanted a production quota cut; others didn’t and in the end it all bottled down to what the Saudis wanted – a rollover of the level set at 30 million barrels per day (bpd) since December 2011. So as the 166th meeting of OPEC ministers ended, Al-Naimi departed Helferstorferstrasse 17 - OPEC's HQ in Vienna, Austria having got his wish.

Had a cut been enforced and the Saudis not respected the agreement, it would have been meaningless. So the announcement did not come as much of surprise to many analysts, yours truly including.

For a spot report, you are welcome to read the Oilholic’s take on Forbes and the ‘longstanding’ Secretary General Abdalla Salem El-Badri’s jovial press conference explaining why the cartel acted as it did in the interests of “market equilibrium and global wellbeing”.

Rather calmly, OPEC has also suggested it would hold its next meeting in June as normal and extended El-Badri’s term until December 2015. But the Oilholic suspects a US$60 per barrel floor would be tested sooner than most expect. Will an extraordinary meeting be called then? Will OPEC let things be until it meets again June? What about Venezuela, Iran and Nigeria who will leave Vienna thoroughly dissatisfied?

It is indeed credible to assume that OPEC will grin and bear the oil price decline in the interest of holding on to its 30% share of the global crude markets for the moment. But for how long as not all are in agreement of the decision taken today?

Barely minutes after El-Badri stopped speaking, Brent shed a dollar. Within the hour it was trading below $73 a barrel while the WTI slid below $70. We’re now formally in the territory where it becomes a game of nerves. For the moment, none of the major oil producing nations, both within and outside OPEC, are willing to cut production even when demand for oil isn’t that great.

Should bearish trends continue, will someone blink first? Will finances dictate a production decline for someone? Will some or more of the producers come together and take coordinated action with OPEC?
These are the million barrel questions!

The latter option was attempted in Vienna bringing the Russians and Mexicans to the table, but the Saudis ensured it didn't succeed. The next four months ought to be interesting. On that note, it's good night from OPEC HQ. Analysis and a post mortem to follow over the coming days, but that’s all for the moment folks! Keep reading, keep it ‘crude’! 

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© Gaurav Sharma 2014. Photo: Abdalla Salem El-Badri speaks at the 166th OPEC Ministers’ meeting in Vienna, Austria © Gaurav Sharma, November 27, 2014

Bears in the crude jungle don’t scare Al-Naimi

Having had enough of briefing scribes and analysts over the past few days and giving little away, Saudi Oil Minister Ali Al-Naimi told all surplus inquirers to bugger off at this morning’s pre-conference OPEC media scrum.

He has stubbornly stuck to the quip that the market has been where it is at the moment before and it will stabilise like it has always done in the past.

The only problem is the current supply scenario is unlike anything we’ve witnessed over the last two decades in the Oilholic’s humble opinion, with plenty of the crude stuff around much lower than anticipated demand.

Contrary to what some might feel here at OPEC HQ, Al-Naimi is not ignoring this profound change but rather tackling it head on for his country first and foremost. It’s an instinct called self-preservation.

Separate discounts on asking price offered to Asian and US buyers by Saudi Aramco, along with anecdotes about the Saudis sending direct feelers on longer term deals with buyers in the Far East are stacking up. If the US is not buying much, China, India, Japan and South Korea are still in the market for and when (not if) there is an uptick demand.

The Saudis do not want to see a return to the 1980s. If that’s the case, what’s afoot at OPEC with Al-Naimi not attaching importance to a cut in output, is collateral damage. Upsetting a few who don’t like you anyway, thereby making a dysfunctional organisation more dysfunctional should matter little in a high stakes game.

Furthermore, Al-Naimi’s soundbites leading up to and at the OPEC meeting seem to suggest he feels the price correction is likely to continue well into 2015. Barely days before the OPEC meeting, Moody’s said on Monday that the steep drop in prices since the middle of this year has led it to lower its pricing assumptions for Brent and WTI by $10 in 2015 and $5 in 2016.

Its revised average spot prices assumption for Brent stand at $80 per barrel for 2015 and to $85 per barrel in 2016, and for WTI at $75 per barrel in 2015 and $80 per barrel in 2016 and thereafter. Steve Wood, managing director at Moody’s says, "Global demand has not kept pace with strong oil production worldwide, leading to the recent drop in oil prices and to our revised price assumptions. We expect that rising demand for crude will put a floor beneath crude prices in 2015 and beyond, limiting further price drops and pointing to a gradual correction.”

As a footnote, Moody's also changed its outlook for the global independent exploration and production sector to negative from positive, for the global oilfield services and drilling sector to negative from stable, and for the global integrated oil and gas sector to stable from positive.

Most non-governmental Middle Eastern commentators known to the Oilholic see the price dropping to as low as $60 per barrel. Agreed, the price might get temporary support from a potential OPEC production cut along with colder chimes that a Northern Hemisphere winter brings with it. Yet, a further drop in price is all but inevitable before supply correction and improving economics provide a floor later on in 2015.

In the meantime some at OPEC will continue to struggle, especially Venezuela, a country that needs a fiscal breakeven of over US$160 per barrel, as will Iran which would need $130 upwards. Fitch Ratings’ Paul Gamble says Ecuador is another OPEC member to keep an eye on if the oil price slide continues. This is in marked contrast to IMF estimates about Saudi Arabia needing an average oil price of $90.70, UAE $73.30, Kuwait $53.30 and Qatar $77.60.

Some at OPEC have a very different problem - that of finding new buyers and diverting the crude stuff originally extracted with the US in mind. That includes Angola and Nigeria.

At a media scrum earlier in the day, Angolan oil minister Jose Maria Botelho de Vasconcelos told the Oilholic that ensuring diversity of the country’s client base was crucial.

Having been on record as being “unhappy” about the current oil price, de Vasconcelos said, “The market suffers ups and downs. As an exporting nation we are looking to diversify our pool of importing partners. This includes the obvious push to Asia and Europe.”

Choosing not to comment about entering into a bidding war with fellow OPEC member and neighbour Nigeria, de Vasconcelos said there was room for everyone and new partners to ensure stability of supply.

Meanwhile, from the standpoint of forex markets, Kit Juckes, Global Head of Forex at Société Générale, says if OPEC fails to deliver any oil price bolstering production cuts this afternoon in Vienna, oil will probably fall further in the months ahead. “That will further anchor bond yields, probably undermine the dollar after a very strong run and support higher-yielding currencies.”

“We'd get a bigger reaction to a successful output reduction, of course than to the lack of change that is now widely expected. If oil prices do continue their fall the winners are more likely to be the emerging markets currencies rather than the G10 ones.” Its 14:30GMT and there’s no agreement yet. That’s all for the moment from Vienna folks! Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2014. Photo 1: Saudi Arabia's Oil Minister Ali Al-Naimi. Photo 2: Angola's Oil Minister Jose Maria Botelho de Vasconcelos speaking at 166th OPEC Ministers Meeting in Vienna, Austria on November 27th, 2014 © Gaurav Sharma

That 1980s feeling, Saudi Oil, Ebola & more

Brent dipped below US$84 per barrel at one point this week while the WTI is holding above the $80 level. It’ll be interesting to note how the December futures contract fares as the Northern Hemisphere winter approaches with bearish headwinds lurking in the background. From here on, much will depend on what happens at the next OPEC meeting on November 27, where a production cut has the potential to partially stem the decline.

By the time of the meeting in Vienna, we’d already be well into the ICE Brent January contract. The mere possibility of a production cut isn’t enough to reverse the slide at the moment given wider market conditions. But as ever, OPEC members are presenting a disunited front diluting any market sentiments aimed at pricing in a potential cut.

The answer lies in an interesting graphic published by The Economist (click here) indicating price levels major producers would be comfortable with. There are no surprises in noting that Iran, Venezuela and Russia are probably the most worried of all exporters. While several OPEC members prefer at least a $100 price floor, in recent weeks Saudi Arabia has quite openly indicated it can tolerate the price falling below $90.

The Saudis also lowered their asking price in a bid to maintain market share. That’s bad news for most of OPEC, excluding Kuwait and UAE. In turn, Iran responded by lowering its asking price as well even though it can't afford to. So the debate has already started, whether in not wanting to repeat the mistakes of the 1980s which left it with a weakened market share; Saudi Arabia might in fact trigger OPEC discord and a slump akin to 1986.

While the Oilholic doubts it, certain OPEC members wouldn’t be the only ones hurt by the Saudi stance which abets existing bearish trends. US shale and Canadian oil sands exploration and production (E&P) enthusiasts will be troubled too. While the oil price is tumbling, the price of extracting the crude stuff isn’t.

Fitch Ratings says Brent could dip to $80 before triggering a self-correcting supply response with shale oil drillers cutting investment in new wells. Anecdotal evidence sent forth by the Oilholic’s contacts in Calgary point to similar sentiments being expressed in relation to the oil sands. 

The steep rate at which production from shale wells declines mean companies have to keep drilling new wells to maintain production. Fitch estimates median full-cycle costs for E&P companies have fallen to about $70 in the US. The marginal barrel, not the median one, balances supply and demand and determines price, so the point at which capex falls will probably be higher.

Over the short-term, Fitch considers a resurgence of supply disruptions and positive action from OPEC as the most likely catalysts for a rebound in prices. “But without these, further declines might be possible, especially if evidence grows of further weakening of global demand or increasing OPEC spare capacity,” the agency adds.

Longer term, an uptick in economic activity in China and India will contribute to a growth in oil demand. However, what we’re dealing with is short-term weakness. IEA demand growth for 2015 has been revised by 300,000 barrels per day (bpd) and 2014’s estimate by 200,00 bpd. The Oilholic suspects Saudi Arabia, Kuwait and UAE are only too aware of this and capable enough to withstand it.

Dorian Lucas, analyst at Inenco, says, “We’re seeing the largest in over two years spurred by accumulating evidence of waning global demand, whilst buoyant supply continues to drown the market. The extent to which supply has buoyed is evident when assessing September 2014 in isolation. Global oil supply rose over 900,000 bpd to total of 93.8 million bpd, this is over 2.5 million bpd higher than the same time last year.”

What happens at OPEC’s next meeting would depend on the Saudis. The Oilholic still rates the chances of a production cut at 40%. One feels that having the capacity to withstand a short-term price shock, Saudi Arabia wouldn’t mind other producers squirming in the interest of self-preservation.

Meanwhile, the industry is also grappling with the unfolding Ebola outbreak which has claimed thousands of lives in West Africa. Unsurprising anecdotal evidence is emerging of companies having difficulty in finding engineering experts, roughnecks or support staff willing to work at West African prospection sites.

In order to get a base case idea, browse job openings at a recruitment site (for example – Rigzone) and you’ll find pay rates for working in West Africa climb above sub-zero winter working rates on offer at Fort McMurray, Alberta, Canada. Three recruitment consultants known to this blogger have expressed similar sentiments.

While most of the drilling is offshore, workers' compounds are onshore in Guinea, Sierra Leone and Liberia. Additionally, local workers return to their homes mingling with the general population at risk of getting infected. The fear is putting off workers, and many companies have internal moratoriums on travel to the region.

Forget workers, even investors are having second thoughts for the moment. Both Reuters and USA Today have reported caginess at ExxonMobil about the commencement of offshore drilling in Liberia at the present moment in time.The company already restricts non essential travel by its employees to the region. Shell and Chevron have similar safeguards in an industry heavily reliant on expat workers.

GlobalData says of the affected African countries only Nigeria is equipped to handle the Ebola outbreak.  GDP of the said countries is likely to take a hit from loss of lives and revenue. International SOS, a Control Risks Group affiliate company which provides integrated medical, clinical, and security services to organisations with international operations, has been constantly updating advice for corporate travel to Guinea, Liberia or Sierra Leone, the current one being to avoidance all non-essential travel to the region.

Fitch Ratings says at present, the Ebola outbreak does not have any credit ratings implications for E&P companies in the region. Alex Griffiths, Head of EMEA, Natural Resources and Commodities, notes: “Our key consideration is how well the companies manage the Ebola risk. From a risk rating standpoint, we’re in early days. Fitch will continue to monitor the situation over the coming months.”

Away from Ebola, here’s the Oilholic’s take via a Forbes post on the future of integrated IOCs. Lastly, news has emerged that Statoil CEO Helge Lund has been appointed CEO of the much beleaguered BG Group with effect from March 2015. The soon to be boss said he was looking forward to working with BG’s people “to develop the company’s full potential.”

The announcement was roundly cheered in the City given the high regard Lund is held in by the wider oil and gas industry. To quote Investec analyst Neill Morton, “BG still faces challenges, but we believe it has a better chance of addressing them with Lund on board.”

We shall see whether Statoil’s loss is indeed BG Group’s gain. That’s all for the moment folks! Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2014. Photo: Vintage Shell Fuel Pump, San Francisco, USA © Gaurav Sharma.

There's something about Mr El-Badri

The predictable materialised yet again as OPEC held its quota at 30 million barrels per day following the conclusion of its 165th meeting of ministers. To be honest that's not what the Oilholic hit town for; quota situation was a done deal in most eyes!

In fact this blogger was wondering if we'll have some movement on the appointment of a new secretary general. Arriving in the Austrian capital last night, one heard whispers that Nigeria's petroleum minister Diezani Kogbeni Alison-Madueke was lobbying really hard for the post. Politics and merits aside, such an appointment – should it have happened – would have seen a welcome female Secretary General at the 12 member oil exporters' club.

As such, it turned out to be hot air, at least for this meeting. Instead, the 74 year-old Libyan industry veteran and current Secretary General Abdalla Salem El-Badri saw his term extended yet again. The latest extension takes him through to June 30, 2015 having been first elevated to the post on January 1, 2007. That's coming up to some record for holding the post.

In fact, by this blogger's calculation, the latest extension makes him the longest serving OPEC Secretary General of all time. The reason for the appointment extension is the same as it was at the last meeting, and the one before and so it goes. There is simply no compromise candidate that the two major camps, led by the Saudis and the Iranians can agree on. She might be lobbying hard for the post, but Alison-Madueke's quip to a newswire journalist about the Secretary General being "appointed by consensus" rings true.

And when there is no consensus, you ring for Mr El-Badri. That's what OPEC has done time and again for this powerful post of late. In more, ways than one, El-Badri is a real trooper and the ultimate compromise candidate. He exudes confidence, has a sense of humour, can tackle or swat down often awkward questions hurled at him by scribes, makes the best of an often bad situation and gets along with most.

The Oilholic remembers from his last outing to OPEC HQ when El-Badri was given an ironic round of applause by journalists to bid him farewell, full well in the knowledge that yet again OPEC had failed to name a successor. However, he maintained his sense of humour and went through the entire press conference without as much as a twitch.

Perhaps in appointing him back in 2007, OPEC raised the bar very high. Prior to his arrival at OPEC, the University of Florida educated El-Badri served as Libya's minister for oil and electricity. This was followed by several ministerial stints including one as deputy prime minister from 2002 to 2004.

After assuming the Secretary General's position, El-Badri handled some real challenges and a term that began with oil price first spiking above US$140 per barrel and then dipping below $40, followed by the worst financial crisis in modern history. That the current Secretary General has acquitted himself with distinction is beyond doubt, but time has come for him to move on.

In its repeated failure to name a successor, OPEC isn't doing itself any good. Meanwhile, the decision to reappoint El-Badri was unanimous. To give the last word to the man himself: "My reappointment as OPEC Secretary General was down to the wisdom of ministers and I have no further comment to make."

And there you have it. That's all for the moment folks! Keep reading, keep it 'crude'!

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© Gaurav Sharma 2014. Photo: OPEC Secretary General Abdalla Salem El-Badri © Gaurav Sharma, June 2014.

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 vibes, a Libyan matter & market chatter

As OPEC prepares to meet for the first time this year, oil ministers of the 12 member nations should feel reasonably content. The hawks always like the oil price to be in three figures and doves usually like a support level above the region of US$85 per barrel using Brent as a benchmark. Needless to say, both camps are sitting comfortably at the moment and will continue to do so for a while.

Macroeconomic permutations and risk froth is keeping the oil price where OPEC wants it, so the Oilholic would be mighty surprised if the ministers decide to budge from the present official quota cap of 30 million barrels per day. Those going long on Brent have already bet on OPEC keeping its output right where it is.

Over the week to May 27, bets on a rising price rose to their highest level since September 2013. ICE's Commitment of Traders report for the week saw all concerned, including hedge funds, increase their net long position in Brent crude by 6% (or 4,692) to 213,364 positions, marking a third successive week of increases. Going the other way, the number of short positions fell by 7,796 to 42,096.

Wires might be saying that "all eyes" are on OPEC, but not many eyes would roll at Helferstorferstrasse 17 once the announcement is made. Futures actually slipped by around 0.5% as dullness and a minor bout of profit taking set in last week at one point. While the quota level is a done deal, what ministers would most likely discuss, when those pesky scribes (and er...bloggers) have been ejected out for the closed door meeting, is how much China would be importing or not.

Several independent forecasters, including the US EIA have predicted that China is likely to become the largest net importer of oil in 2014. By some measures it already is, and OPEC ministers would like to ponder over how much of that Chinese demand would be met by them as US imports continue to decline.

Other matters of course pertain to the appointment of a successor to Secretary General Abdalla Salem El-Badri, and where OPEC stands on the issue of production in his home country of Libya, which is nowhere near the level recorded prior to the civil war.

In order to pick-up the Libyan pulse a little better ahead of the OPEC meet, yours truly headed to IRN/Oliver Kinross 3rd New Libya Conference late last month. The great and good concerned with Libya were all there – IOCs, Libyan NOC, politicians, diplomats and civil servants from UK and Libya alike.

A diverse range of stakeholders agreed that the race to reversing Libyan production back to health would be a long slow marathon rather than a short sprint. Anyone who says otherwise is being naively optimistic.

Forget geopolitics, several commentators were quick to point out that Libya has had no private sector presence in the oil & gas sector. Instead, until recently, it has had 40 years of a controlling Gaddafi fiefdom. Legislative challenges also persist, as one commentator noted: "The road map to a petroleum regime starts first with a constitution."

That's something newly-elected Prime Minister Ahmed Maiteg must ponder over as he tries to bring a fractured country together. Then there is the investment case scenario. Foreign stake-holding in Libyan concerns is only permitted up to 49% despite a risky climate; the Libyan partner must be the majority owner. The oil & gas business has always operated under risk versus reward considerations. But a heightened sense of risk is something not all investors can cope with as noted by Sir Dominic Asquith, former UK ambassador to Iraq, Egypt and Libya, who was among the delegates.

"There is a long term potential with a bright Libyan horizon on the cards. However, getting to it would be a difficult journey, and particularly so for small and medium companies with a lesser propensity to take risk on their balance sheets than major companies," he added.

Meanwhile, a UK Foreign & Commonwealth office spokesperson said the British Government was not changing travel advice to Libya for its citizens any time soon. "We advise against all but essential travel to the country and Benghazi remains off limits. In case of companies wishing to do business in Libya, we strongly urge them to professionally review their own security arrangements."

Combine all of these latent challenges with the ongoing shenanigans and its not hard to figure out why the nation has become one of the smallest producers among its 12 OPEC counterparts and it may be a while yet before investors warm up to it. However, amid the pessimism, there is some optimism too.

Ahmed Ben Halim, CEO of Libya Holdings Group noted that sooner rather than later, the Libyans will sort their affairs out, even though the journey would be pretty volatile. Fares Law Group's Yannil Belbachir pointed out that despite everything all financial institutions were functions normally. That's always a good starting point.

Some uber-optimists also expressed hope of making Libya a "solar power" by tapping sunlight to produce electricity, introduce it back into the grid and send it via subsea cable from Tripoli to Sicily. Noble cause indeed! Being more realistic and looking at the medium term, with onshore prospection and production getting disrupted, offshore Sirte exploration, first realised by Hess Corporation, could provide a minor boost. Everyone from BP to the Libyan NOC is giving it a jolly good try!

Just one footnote, before the Oilholic takes your leave and that's to let you all know that one has also decided to provide insight to Forbes as a contributor on 'crude' matters which can be accessed here; look forward to your continued support on both avenues. That's all from London for the moment folks; more shortly from sunny Vienna at the 165th meeting of OPEC ministers . Keep reading, keep it 'crude'!

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© Gaurav Sharma, 2014. Photo 1: OPEC HQ, Vienna, Austria. © Gaurav Sharma, 2014.