Brent’s spike: Bring on that risk premium

Last week, the Brent forward-month futures contract was within touching distance of capping an 11-week high. On May 22, we saw the new July contract touch an intraday level of US$110.58; the highest since March 3. In fact, Brent, WTI as well as the OPEC crude basket prices are currently in 'three figure territory'.

Libyan geopolitical premium that's already priced in, is being supported by the Ukraine situation, and relatively positive PMI data coming out of China. Of these, if the latter is sustained, the Brent price spike instead of being a one-off would lend weight to a new support level. However, the Oilholic is not alone in the City in opining that one set of PMI data from China is not reason enough for upward revisions to the country's demand forecasts.

As for the traders' mindset the week before the recent melee, ICE's Commitments of Traders report for week of May 20 points to a significant amount of Brent buying as long positions were added while short positions were cut, leaving the net equation up by 15% on the week at 200,876. That's a mere 31,000 below the record from August 2013.

Away from crude pricing, S&P Capital IQ reckons private equity acquisitions in both the energy and utilities sectors are "poised for a comeback".

Its research indicates that to date this year, the value of global leveraged buyouts in the combined energy and utilities sectors is approaching $16 billion. The figure exceeds 2013's full-year total of $10 billion. Extrapolating current year energy and utility LBO deal value, 2014 is on pace for the biggest year for such deals since 2007, S&P Capital IQ adds (see table on left, click to enlarge).

Meanwhile, in its verdict on the Russo-Chinese 30-year natural gas supply contract, Fitch Ratings notes that Gazprom can go ahead with exporting eastwards without denting European exports. But since we are talking of 38 billion cubic metres (cm) of natural gas per annum from Gazprom to CNPC, many, including this blogger, have suggested the Kremlin is hedging its bets.

After all, the figure amounts to a quarter of the company's delivery quota to Europe. However, Fitch Ratings views it is as a case of Gazprom expanding its client portfolio, and for a company with vast untapped reserves in eastern Russia its basically good news.

In a recent note to clients, the ratings agency said: "Gazprom's challenge historically has been to find ways to monetise its 23 trillion cm reserves at acceptable prices – and the best scenario for the company is an increase in production. The deal is therefore positive for the company's medium to long term prospects, especially if it opens the door for a further deal to sell gas from its developed western fields to China in due course."

While pricing was not revealed, most industry observers put it at or above $350 per thousand cm. This is only marginally lower than Gazprom's 2013 contract price with its Western European customers penned at $378 per thousand cm. As for upfront investment, President Vladimir Putin announced a capital expenditure drive of $55 billion to boot. That should be enough to be getting on with it.

Just before one takes your leave, here's an interesting Reuters report by Catherine Ngai on why the 'sleepy market' for WTI delivery close to East Houston's refineries is (finally) beginning to wake up. That's all for the moment folks! Keep reading, keep it 'crude'!

To follow The Oilholic on Twitter click here.
To follow The Oilholic on Google+ click here.
To email: gaurav.sharma@oilholicssynonymous.com

© Gaurav Sharma 2014. Table: Global LBOs in the energy & utilities sector © S&P Capital IQ, May 2014.

Crude Price Seen Factoring In Survey Data

Crude oil futures rose over 3% on average in week over week terms and for a change that is not chiefly down to a stand-alone argument that black gold is higher because the commodity is cheaper in U.S. Dollar terms.

To be fair, the 5-day cycle I examine began with the usual market conjecture over the position of the dollar. However, survey evidence indicates that manufacturing activity is picking-up. This morning, the Philadelphia Federal Reserve said its index of manufacturing activity rose to 17.6 in February from 15.2 in January; a sixth consecutive monthly rise. Across the pond, UK’s Society of Motor Manufacturers and Traders (SMMT) reported its biggest monthly increase in auto production in year over year terms since May 1976. It said 101,190 cars were produced in January, up from 85,316 in December.

Trawling back the economic calendar, manufacturing purchasing managers’ indices (PMI) on either side of the pond are positive, especially the Eurozone PMI released on February 1st. It came in at 52.4 for January, versus 51.6 at the end of 2009; the highest level in two years. Admittedly, difference between the zone’s healthiest and weakest economies is widening, but overall picture is improving. Furthermore, Indian and Chinese economic activity remains buoyant. Yet, market commentators correctly opine that global economy is not quite out of the woods yet. From a British standpoint, Kate Barker, a member of the Bank of England’s rate setting monetary policy committee, summed up the City of London’s fears best in an interview with the Belfast Newsletter.

“Do I think that it’s possible we (in the UK) will have another quarter of negative production at some point? I do think it’s possible and I think the recovery will be quite hesitant but I wouldn’t necessarily describe that as a double dip,” Baker said.

That argument could be used for a number of OECD economies which have emerged from the recession over the last two quarters. Not to mention that Spain is yet to come out of a recession. David Moore, Chief Commodities Strategist at Commonwealth Bank of Australia, sees a gradual rebound in economic activity as the recovery takes hold which would then reflect in crude oil consumption patterns supporting crude prices to the upside.

Energy markets have always had to contend with volatility and that will not change. As Greece’s debt weighs on the Euro, the Dollar is seen strengthening which would in turn have a bearing upon crude prices. Moore opines that had the Dollar not strengthened against the Euro, crude oil price seen this week would have been even higher than current levels.

U.S. Energy Information Administration (EIA) and American Petroleum Institute (API) data did not really temper this morning’s climb. A few hours ago, the EIA said U.S. crude inventories rose by 3.1 million barrels over the week ending February 12, while the API said late on Wednesday that crude supplies declined by 63,000 barrels last week. However, it also reported that gasoline stocks rose by 1.4 million barrels over the corresponding period.

Following the EIA data, NYMEX crude contract for March settlement stood at $78.15 up 84 cents or 1.09% at 17:00 GMT, trading in the circa of 76.32 to 78.71. Across the pond, London Brent Crude’s April settlement contract stood at $76.03 up 66 cents or 0.87% trading in the circa of $75.27 to $77.65. The Dollar’s strength remains a factor, but there are others to consider too.

© Gaurav Sharma 2010. Photo Courtesy © BP Plc