Post OPEC quips & LatAm, Shale outlook

The Oilholic returned from the OPEC+ ministers’ summit in Vienna, Austria to a crazy few weeks of crude chatter and of course umpteen discussions on the Saudi Aramco IPO.

Here are yours truly's thoughts on the final communiqué from OPEC via Forbes, and another take on the Aramco IPO via the same publication plus a ReachX podcast touching on the issue of the company's valuation kerfuffle.  

Away from it all, two pieces of research caught one's eye this month. Starting with the first of two, rating agency Moody's reckons 2020 will be a stable year for the Latin American oil and gas sector. While, global economic environment and trade disputes could become a concern to Latin America's commodity exporters, including those in the business of black gold and natural gas, Moody's opined that many regional players have indeed improved their capital structures. 

"Business conditions will vary in 2020, contributing to stable overall conditions. A shift toward exploration and production favours credit quality for Brazil's national oil company Petrobras, but 2020 production appears stable at best in Mexico as investment stalls," says Moody's Senior Vice President Nymia Almeida.

Mexico investment momentum in oil and gas is negative for 2020 as national oil company PEMEX has limited ability to increase investments and deliver on production and reserves targets, Almeida added. 

Away from Latin America, Rystad Energy predicted that even with potentially lower prices, the production outlook for North American shale "appears robust" in the years ahead.

In Norway-based analysis firm's base-case price scenario - that assumes a WTI price at $55 per barrel in 2019; $54/bbl in 2020; $54/bbl in 2021 and $57/bbl in 2022 - would see North American light tight oil supply will reach 11.6 million barrels per day (bpd) by 2022. 

This implies a compound annual growth rate (CAGR) of 10% from 2019 to 2022. In a price scenario with the WTI oil price remaining flat at $45 per barrel, supply of the same would plateau at 10.1 million bpd towards 2022.

"The flat development of US light tight oil production is also possible in lower price scenarios, but we would likely see an initial period of multi-quarter production decline, with output stabilising at a lower level," said Mladá Passos, product manager of Rystad Energy's Shale Upstream Analysis team. Plenty to ponder about as 2020 approaches, but 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 Forbes click here.

To email: gaurav.sharma@oilholicssynonymous.com

© Gaurav Sharma 2019. Photo: Oil exploration site in Oman © Royal Dutch Shell. 

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’!

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

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

Talking Russia, China, shale 'debt' & more in Texas

The Oilholic finds himself in Houston, Texas for Baker & McKenzie’s 2015 Oil & Gas Institute. When yours truly was last in Texas back in February, the mood was rather sombre as leading oil futures benchmarks were still on a downward slide.

That was then, what we have now is stagnancy in the US$50-75 per barrel price range which probably encompasses both the WTI and Brent. We are not getting away from the said range anytime soon as one noted in a column for Forbes last Friday before flying out here.

Given the nature of such discourse, some delegates here at the Institute agreed and others disagreed with the Oilholic’s take on the short-term direction of the oil markets, especially as a lot is going on in this ‘crude’ world that such industry events are particularly sound in bringing to the fore.

The 2015 instalment of this particular Baker & McKenzie event had a great array of speakers and delegates – from Shell to Citigroup, Cameron International to Chevron. The legal eagles, the macroeconomists, the internationalists, the sector specialists, the industry veterans, and of course the opinionated, who never sit on the fence on matters shaping the direction of the market, were all there in good numbers.

(L to R) Louis J. Davis, Greg McNab, Natalie Regoli, James Donnell and David Hackett of Baker & McKenzie discuss the North American Market in wake of the oil price decline

The situation in Russia propped up fairly early on in proceedings. Alexey Frolov, a legal expert from Baker & McKenzie’s Moscow office, was keen to point out that it was not just the sanctions that were hurting Russia’s oil & gas industry; related macroeconomics of the day was sapping confidence away as well.

But Frolov also pointed to a degree of resilience within Russian confines, and a more flexible domestic taxation regime which was helping sustain high production levels unseen since the collapse of the Soviet Union. It does remain unclear though how long Russia can keep this up.

Meanwhile, Cameron International’s Vice President and Deputy General Counsel Brad Eastman flagged up something rather interesting. “We see Chinese companies continue to back rig building projects, even if they are being mothballed elsewhere in the world given the current market conditions. Chinese companies wish to continue their march in to the rig-building industry.”

Here’s China indulging in something that is really bold, some say unusual. So even if no one is exactly queuing up to buy or lease those Chinese rigs, it is another example that China operates on a whole different level to rest of the natural resources players and participants.

As for US shale, people say there is distressed debt out there and the end might be supposedly nigh for some small players. Well hear this – based on the Oilholic’s direct research here in Texas of looking into 37 independent US players, sometimes known as mom n’ pop oil & gas firms, and another 11 mid-sized companies; a dollar of their debt would fetch between 83 cents to 92 cents if hypothetically sold by their creditors.

That’s hardly distressed debt even at the lower end of the range. On hearing the Oilholic’s findings, Louis J. Davis, Chair of Baker & McKenzie’s North America Oil & Gas Practice, said: “An 8 to 17 cents discount does not constitute as distressed. Rewind the clock back to 2008-09 and you’d be looking at 35 to 40 cents to the dollar on unprofitable plays – that’s distress. This is not.”

Quite simply, creditors and investors are keeping the faith. But to curb the Oilholic’s enthusiasm, alas Davis added the words “for now”.

“You have to remember that many players [both large and small] would be coming off their existing oil price hedges by the end of the current calendar year. That’s when we’ll really know who’s in trouble or not.

“However, blanket assumptions that US shale, and by extension some independents are dead in the water, is a load of nonsense. Usual caveats apply to the Bakken players, but nothing I know from clients large or small in the Eagle Ford suggest otherwise,” Davis concluded.

As with events of this nature, the Oilholic of course wears several hats – most notably for Sharecast / Digital Look and Forbes. Hence, it’s worth flagging up other interesting slants and exclusive soundbites mined for these publications by this blogger.

The subject of oil & gas mergers and acquisitions in the current climate dominated the Institute’s morning session, as one wrote on Forbes earlier today. How to deal with the prospect of Iran’s possible return to the crude oil market also came up. Click here for one’s Sharecast report; treading carefully was the verdict of experts and industry players alike.

Separately, a Pemex official described in some detail how UK-listed oil and gas companies were sizing up potential opportunities in Mexico. Lastly, yours truly also had the pleasure of interviewing Anne Ka Tse Hung, a Tokyo-based partner at Baker & McKenzie, for Sharecast on the subject of the LNG industry facing a buyers’ market.

Hung noted that the market in Asia had completely turned on its head for Japanese utilities, from the panic buying of natural gas at a premium in wake of the Fukushima tragedy in 2011, to currently asking exporters to bid for supply contracts as competition intensifies and prices fall. That’s all for the moment from Houston folks! Keep reading, keep it 'crude'!

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

© Gaurav Sharma 2015. Photo: A panel session at the Baker & McKenzie 2015 Oil & Gas Institute, Houston, Texas, USA © Gaurav Sharma, May 2015.

A seminal moment has arrived for Pemex

For 76 years, Mexico’s state-owned oil and gas company Petroleos Mexicanos (or Pemex) has had a near monopoly over the country’s oil production. However, 2015 would be its 77th and final monopolistic one as Mexico prepares to open up oil exploration and production to foreign and domestic private sector participants.

Declining production levels for the last 10 years seem to have forced the government’s hand to invigorate the sector and shake-up Pemex. Mexico currently produces around 2.5 million barrels per day (bpd), nearly a million less than it did in 2004 when production peaked.

Unlike his predecessors who promised much but delivered little, President Enrique Peña Nieto changed Mexico’s constitution to facilitate private investment in a bid to revive Pemex’s fortune, given that it provides nearly a third of Mexico’s tax revenues. However, desperate to keep the public opinion onside, Peña Nieto vowed that “Pemex itself would never be privatised.”

Some still say the reforms did not go far enough. Yet by Mexican standards, it’ll be one heck of shake-up for a state-owned oil and gas company which has never competed itself to bid for overseas exploration rights (unlike many other state-owned behemoths especially from China and India).  

Pemex will have a new board of directors, procedural overhauls, process streamlining (at least on paper) and for the first time in its history face competition from private sector participants. If all that wasn’t enough, Pemex will allow its petrol stations and forecourts to compete with each other on price at the pump for the first time ever.

However, nothing is ever plain sailing in Mexico. The general public has largely embraced the change so far but some union leaders who carry considerable clout haven’t and are peddling alarmist ideas about an American takeover of Mexico’s precious resource. A negative vote in a referendum on further changes could bring things to a grinding halt. 

While the oil price decline is worrying, commentators say market volatility is not enough to derail things as one noted earlier. As for Pemex, Moody’s seems to suggest it is on the right track. On Friday, it affirmed the ratings of the state-firm and its subsidiaries, including Pemex's A3 and (P)A3 global long-term ratings with a “stable” outlook.

Moody’s notes that despite significant changes arising from the new energy law, Pemex will remain closely linked to the government of Mexico, which will continue to provide strong support, given the company's importance to the government's budget, to the oil sector and to the country's exports.

In the short to medium term, Moody's does not expect any material reduction in Pemex's tax burden and its debt amount is likely to rise to fund higher capital expenditures. “However, its managerial and budgetary autonomy will increase, improving its efficiency,” says Moody’s analyst Nymia Thamara Cortes de Almeida.

While Moody’s reckons Pemex will be able to maintain its production level around 2.5 million bpd level for three years at the very least, the government thinks it’ll be able to do so for the next 15 years! Suitably modest as usual! 

In the so-called “Round Zero” allocation last year, Pemex was still given rights to 83% of all proven and probable reserves in Mexico. But in “Round One”, scheduled to end by September 2015, Peña Nieto administration will put tender 169 blocks covering 28,500 square kilometres open to private participation in (or without) cooperation with Pemex.

A major test will come if an oil major gets drilling without Pemex and it’s not inconceivable given the pace with which things are moving here. The government is seeking oil and gas foreign direct investment in the range of US$50 to 60 billion by 2018.

Over the course of three days, the Oilholic has spoken on and off record to several market participants. Mood here is upbeat to begin with and several commentators also said Pemex had given them direct feedback about wanting to put its house in order. It's early days so lets see how this plays out.

The biggest question in a bearish market, is whether investors, especially foreign investors and IOCs would buy the idea of entering the Mexican oil and gas sector.

The Oilholic intends to explore this in greater detail from Houston and London over the coming weeks and months. However, one thinks it won’t be easy convincing the private sector especially when it comes to bidding for subsequent exploration rights offers. The initial and most lucrative exploration rights were given to Pemex. The next round puts forward exploration rights to areas where there is only a 50% chance of finding and tapping out the crude stuff in an economically viable fashion. In the following round, the probability percentage falls to 10%, and the ultimate round would see potential suitors vie for untested prospects.

If the Oilholic were a bidder, this doesn’t really fill one with confidence from the outset. It’ll all depend on the terms on offer and the jury is still out on that one. One thing is for sure, with Mexico’s proven oil reserves standing falling from 5th to 18th in the global league table, no one is opening that premium tequila bottle just yet. Much will depend on Pemex's capacity to finally embrace change. That’s all from Mexico City folks as an amazing but short trip comes to an end! Next stop, Houston Texas! Keep reading, keep it ‘crude’!

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

© Gaurav Sharma 2015. Photo 1: Pemex Petrol Station in Mexico City, Mexico, May 2015. Photo 2: Pemex Signage © Gaurav Sharma.

Oil price vs. investment: A view from Mexico City

The Oilholic has temporarily swapped London for the quaint charms of Mexico City in order to get a perspective on the current oil market melee and its impact on sector investment here.

On the face of it, there’s no panic in policymakers’ ranks and commentators of all description agree that as a major oil producer Mexico could well do without an oil price decline. President Enrique Peña Nieto’s bid to boost economic activity via oil and gas sector reform legislation announced last year remains on track. It has taken 76-years for Mexico to get where it did last year and people are in a buoyant mood.

In fact, Peña Nieto surprised global markets and Mexicans in equal measure by biffing through his pre-election promise of sector reform in a short space of 18 months. In précis, via the said reform package, Sener (Ministry of Energy) gave state-owned Petroleos Mexicanos (or Pemex) 83% of Mexico’s proven and probable hydrocarbon reserves and 21% of the prospective resources. However, new private sector participants, while expected to explore the remaining 17%, would have access to 79% of prospective reserves in the next round. Many prospects are promising according to seismic data and market evidence. 

The move carries massive changes for Pemex, something which the Oilholic will discuss in greater detail shortly. On paper, we’re still in nascent stages of what the government says it is trying to achieve. So does the current volatility constitute a proverbial spanner in the work? No, say most commentators yours truly has spoken to since arrival.

Benjamín Torres-Barrón, Baker & McKenzie's Energy, Mining & Infrastructure Practice Group leader in Mexico, whom the Oilholic first met at the 20th World Petroleum Congress in Doha back in 2011, says the oil and gas sector is better placed than it has ever been in recent years. 

“Timing of the oil price decline could be described as unfortunate. You could say that we’ve waited 76-years for change and when that change arrives, this happens. However, my argument is that there is never a good or bad time for legislative reform; it’s about seizing opportunities. Imagine if we were stuck in the same place as we were in 2011 [with the Felipe Calderón administration promising much with little to show for it] and the oil price nosedived as it has; you would have found the domestic market in a terrible state. Declining production and archaic legislation would have been a double blow.

"Right now Mexico is sending a positive message albeit in a tough climate. A drive has been set in motion and the dampening effect of oil market volatility on the capacity for reform would be negligible," he adds.

Most of Baker & McKenzie's corporate clients are not necessarily put off by the oil price dip. “Current investment is not about the here and now, but rather about the future. Those waiting for market access could [and should] have a broad range of potential concerns from security to politics, corruption to red tape, but not a single client has told us we’re no longer interested in participation singularly on the basis of oil price fluctuations.”

Torres-Barrón’s colleague Carlos Linares-Garcia, the international law firm’s Principal Economist attached to its Latin America Transfer Pricing practice, underscores why Mexico must carry on regardless.

“Royalties and tax takings from private investors might well be lower in the current climate. Stated production level of 2.5 million barrels per day (bpd) still makes Mexico the world’s sixth-largest oil producer. Yet, people long for the days in the not so distant past when production stood at 3.4 million bpd [3.6 mbpd in boepd] in 2004.” 

The subsequent decline made Pemex a familiar figure of farce as far as bloated state entities go and criticism followed in editorials ranging from local media to The Economist. “There is a determination to shake off that image. In my direct interactions with Pemex since August, I’ve noticed a clear recognition of the challenges and a desire for change. Pemex wants things to change, as much as people in legislative circles and the wider public,” Linares Garcia adds.

In fact, most energy sector reforms in any jurisdiction (e.g. shale exploration framework amendments in various EU markets), is accompanied by protests and rabble-rousing. Just ask the Brits. Yet, in Mexico, bar the odd noise made by labour unions, the Oilholic feels the general public has largely embraced sector reforms potentially moving Pemex away from state protectionism that has plagued it for years.

Right now Mexicans have a lot of things to protest about including socio-political mishaps, but oil and gas sector reform isn't one of them. Furthermore, the reform agenda extends beyond Pemex, something which external commentators often forget to take into account, says Ingrid Castillo, Head of Research at Grupo Bursátil Mexicano (GBM).

“Beyond Pemex, Comisión Federal de Electricidad (or CFE - the state-owned electricity firm) and government agencies are likely to feel the effects. For CFE, improved and viable access to natural gas is crucial, and market reform puts it on the agenda. Mexico has its own ambitions for shale exploration and there is clear recognition of the role played by the private sector in bringing shale gas to market across the border in US.”

Castillo also says industry stakeholders are more pragmatic than many of their European partners about a future windfall from shale and the time it takes to materialise. “We have noted the pitfalls, false starts, challenges, time scale and the ultimate success when it comes to US shale exploration. People are under no illusion about the effort required and the private sector’s role in bringing it about in Mexico.”

An unbundled, improved pipeline infrastructure seen in the US also remains a pipedream according to GBM, Baker & McKenzie and commentators from the big four global advisory firms. “The good thing is we’re finally talking about it more seriously than we used to. The chatter has not cooled off despite turmoil in the oil markets,” says a senior financial adviser.

Castillo’s GBM colleague Olaf Sandoval, a Senior Regional Economist, says the Mexican government has handled the oil price decline well so far. “The government recently introduced austerity measures to the tune of MXN124 billion (US$8.26 billion) with implications for Pemex and CFE. However, what's key here is that most cuts will primarily take place in the shape of ordinary expenses rather than capital expenditure on infrastructure with a 65:35 split in favour of the former.”

While the price decline is not an immediate concern this year, subsequent years could prove challenging if bearish sentiments get entrenched. For the current fiscal year, the Peña Nieto administration has already hedged via seven global financial institutions. The price of oil negotiated was $76.4 barrel, which implied a cost of $773 million in line with previous years. So 2015 would see the government largely protected for the spread between its budgeted price of $79 per barrel and currently chaotic spot markets. 

“Yet, in 2016 and 2017, it could be a very different story. Concerns over volatility could be more pronounced then, which could have implications for capital expenditure on infrastructure much more than it is currently having,” Sandoval adds.

But Mexico is undoubtedly in a much better shape than before. “We’re in the middle of intense economic pressure in Greece and talks of a Venezuelan default. Not that long ago, Mexico would be in that club. That the country is not, suggests things while not perfect, are certainly on the right track,” says Linares-Garcia.

As for the viability of oil and gas projects, Torres-Barrón says some would even be profitable at an oil price as low as $30 per barrel. “Additionally, selected shallow water prospects could cope with even $20. The first contracts are expected to be awarded this year and there is no anecdotal indication of delays or lack of investor appetite. Several IOCs will turn-up, and there’s the inevitable interest from Asian, especially Chinese, state-owned firms.”

The sector remains on the cusp of something important. Market reforms could add as much as 1%-1.5% to headline economic growth by 2018. An increase in gas production could boost the nation’s industrial production and grandiose forecasts of Mexico achieving 6% growth are around should you want to believe them.

“But you shouldn’t; for in Mexico we have had many false dawns. If we exceed 3% in 2015, that would be something to cheer about. Energy sector reform is likely to play a part, but there is no point getting ahead of ourselves,” says Castillo.

Linares-Garcia adds that diversification to other oil and gas export markets would be crucial for future prospects. “If China’s economy is not growing as fast and the US is importing less, we should be [and are] looking other markets. Even so, reliance on the US market persists. The next five years would be critical but Mexico is on the right track towards market diversification.”

A return to 2004 oil production levels by 2018 would be more than welcome. For that, welcoming new participants to town seems to be the mantra as oil price fluctuation dominates headlines.

That’s all for the moment folks, as one leaves you with a view of the Monumento a la Independencia (see above right) built in 1910 to commemorate Mexico's war of Independence. It's now a focal point for everything from celebrating a win of the national football team to political protests! The Oilholic spotted a few protests himself but none were of the 'crude' variety. More from Mexico City soon. Keep reading, keep it ‘crude’!

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

© Gaurav Sharma 2015. Photo 1: Mexican Flag at Palacio Nacional, Mexico City. Photo 2: Monumento a la Independencia, Mexico City, Mexico © Gaurav Sharma, February, 2015

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'!

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