The WTI rally, hubris, hedge funds & speculators

The 24-7 world of oil futures trading saw Brent and WTI benchmarks draw level this weekend. In fact, the latter even traded at a premium of more than a few cents for better parts of an hour at one point.

After having traded at a discount to Brent for three years, with the spread reaching an all time high of around US$30 at one point (in September 2011), the WTI’s turnaround is noteworthy. However, the commentary that has followed from some quarters is anything but!

Some opined, more out of hubris than expertise, that the WTI had reclaimed its status as the world’s leading benchmark back from Brent. Others cooed that the sread’s shrinkage to zilch, was America’s way of sticking up two fingers to OPEC. The Oilholic has never heard so much [hedge funds and speculative trading inspired] tosh on the airwaves and the internet for a long time.

Sticking the proverbial two fingers up to OPEC from an American standpoint, should involve a lower WTI price, one that is price positive for domestic consumers! Instead we have an inflated three-figure one which mirrors geopolitically sensitive, supply-shock spooked international benchmarks and makes speculators uncork champagne.

Furthermore, if reclaiming 'world status' for a benchmark brings with it higher prices at the pump – is it really worth it? One would rather have a decoupled benchmark reflective of conditions in the backyard. An uptick in US oil production, near resolution of the Cushing glut and the chalking of a path to medium term energy independence should lead the benchmark lower! And that’s when you stick two fingers up to foreign oil imports.

So maybe mainstream commentators stateside ought to take stock and ask whether what’s transpired over the weekend is really something to shout about and not let commentary inspired by speculators gain traction.

Looking at last Friday’s instalment of CFTC data, it is quite clear that hedge funds have been betting with a near possessed vigour on the WTI rally continuing. Were the holdings to be converted into physical barrels, we’d be looking roughly around 350 million barrels of crude oil! That’s above the peak level of contracts placed during the Libyan crisis. You can take a wild guess the delivery won’t be in The Hamptons, because a delivery was never the objective. And don’t worry, shorting will begin shortly; we’re already down to US$106-107.

The Oilholic asked seven traders this morning whether they thought the WTI would extend gains – not one opined that it would. The forward month contract remains technically overbought and we know courtesy of whom. When yours truly visited the CBOT earlier this year and had a chat at length with veteran commentator Phil Flynn of Price Futures, we both agreed that the WTI’s star is on the rise.

But for that to happen, followed by a coming together of the benchmarks – there would need to be a "meeting in the middle" according to Flynn. Meaning, the relative constraints and fundamentals would drive Brent lower and WTI higher over the course of 2013. What has appened of late is nothing of the sort.

Analysts can point to four specific developments as being behind the move - namely Longhorn pipeline flows (from the Permian Basin in West Texas to the USGC, bypassing Cushing which will be ramping up from 75 kbpd in Q2 to the full 225 kbpd in Q3), Permian Express pipeline Phase I start-up (which will add another 90 kbpd of capacity, again bypassing Cushing), re-start of a key crude unit at the BP Whiting refinery (on July 1 which allows, mainly WTI sweet, runs to increase to full levels of 410 kbpd) and finally shutdowns associated with the recent flooding in Alberta, Canada. 

But as Mike Wittner, global head of oil research at Société Générale, notes: "Everything except the Alberta flooding – has been widely reported, telegraphed, and analysed for months. There is absolutely nothing new about this information!"

While it is plausible that such factors get priced in twice, Wittner opined that there still appear to be "some large and even relatively new trading positions that are long WTI, possibly CTAs and algorithmic funds."

In a note to clients, he added, that even though fundamentals were not the only price drivers, "they do strongly suggest that WTI should not strengthen any further versus the Louisiana Light Sweet (LLS) and Brent."

Speaking of algorithms, another pack of feral beasts are making Wall Street home; ones which move at a 'high frequency' if recent evidence is anything to go by. One so-called high frequency trader (HFT) has much to chew over, let alone a total of $3 million in fines handed out to him and his firm.

Financial regulators in UK and US found that Michael Coscia of Panther Energy used algorithms that he developed to create false orders for oil and gas on trading exchanges in both countries between September 6, 2011 and October 18, 2011. Nothing about supply, nothing about demand, nothing do with market conditions, nothing to do with the pride of benchmarks, just a plain old case of layering and spoofing (i.e. placing and cancelling trades to manipulate the crude oil price).

You have to hand it to these HFT guys in a perverse sort of a way. While creating mechanisms to place, buy or sell orders, far quicker than can be executed manually, is an act of ingenuity; manipulating the market is not. Not to digress though, Coscia and Panther Energy have made a bit of British regulatory history. The fine of $903,176 given to him by UK's Financial Conduct Authority (FCA) was the first instance of a watchdog this side of the pond having acted against a HFT.

Additionally, the CFTC fined Coscia and Panther Energy $1.4 million while the Chicago Mercantile Exchange fined them $800,000. He’s thought to have made $1.4 million back in 2011 from the said activity, so it should be a $3 million lesson of monetary proportions for him and others. Or will it? The Oilholic is not betting his house on it!

Away from pricing matters, a continent which consumes more than it produces – Asia – is likely to see piles of investment towards large E&P oil and gas projects. But this could pressure fundamentals of Asian oil companies, according to Moody’s.

Simon Wong, senior credit officer at the ratings agency, reckons companies at the lower end of the investment-grade rating scale will, continue to face greater pressure from large debt-funded acquisitions and capital spending."

"Moreover, acquisitions of oil and gas assets with long development lead time are subject to greater execution delays or cost overruns, a credit negative. If acquisitions accelerate production output and diversify oil and gas reserves, then the pressure from large debt-funded acquisitions will reduce," Wong added.

Nonetheless, because most Asian oil companies are national oil companies (NOCs) - in which governments own large stakes and which often own or manage their strategic resources of their countries – their ratings incorporate a high (often very high) degree of explicit or implied government support.

The need for acquisitions and large capital-spending reflects the fact that Asian NOCs are under pressure to invest in order to diversify their reserves geographically. Naming names, Moody’s made some observations in a report published last week.

The agency noted that three companies – China National Petroleum Corporation, Petronas (of Malaysia) and ONGC (of India) – have very high or high capacity to make acquisitions owing to their substantial cash on hand (or low debt levels). The trio could spend over $10 billion on acquisitions in addition to their announced capex plans without hurting their respective underlying credit quality.

Then come another four companies – CNOOC (China), PTT Exploration and Production Public (Thailand), Korea National Oil Corp (South Korea) and Sinopec (China) – that have moderate headroom according to Moody’s and can spend an additional $2 billion to $10 billion. These then are or rather could be the big spenders.

Finally, if Nigeria’s crude mess interests you – then one would like to flag-up a couple of recent articles that can give you a glimpse into how things go in that part of the world. The first one is a report by The Economist on the murky world encountered by Shell and ENI in their attempts to win an oil block and the second one is a Reuters’ report on how gasoline contracts are being ‘handled’ in the country. If both articles whet your appetite for more, then Michael Peel’s brilliant book on Nigeria’s oil industry, its history and complications, would be a good starting point. And that's all for the moment folks. Keep reading, keep it ‘crude’!

To follow The Oilholic on Twitter click here.

To email: gaurav.sharma@oilholicssynonymous.com

© Gaurav Sharma 2013. Photo 1: Pipeline in Alaska, USA © Michael S. Quinton / National Geographic. Photo 2: Oil drilling site, North Dakota, USA © Phil Schermeister / National Geographic. 

Shale & the 163rd OPEC ministers’ summit

The Oilholic has exchanged the blustery wind and rain in London for the blustery wind and rain in Vienna ahead of 163rd OPEC meeting of ministers here on May 31, which half the world’s media and energy analysis community have already dubbed a ‘non-event’. The other half are about to! Industry commentators here and beyond think the 12 member group is going to hold its current production quota at just above 30 million barrels per day (bpd).

 

Even before yours truly boarded the flight from London Heathrow, a Rotterdam based contact in the spot trading world suggested one needn’t have bothered with the market having already factored-in an “as you were” stance by OPEC. This is borne out in further anecdotal evidence; the futures market on leading benchmarks has been bearish in the past 48 hours (not solely down to OPEC).

 

Accompanying overtones describing the meeting as a non-event is the sentiment that OPEC is being haunted by North America’s shale revolution. As if with perfect timing, the US EIA announced on Thursday that the country's crude-oil supplies rose 3 million barrels for the week ended May 24, to 397.6 million barrels; the highest level on record since it began collecting data in 1978.

 

Last week, the International Energy Agency (IEA) added its take on North American production scenarios by suggesting that demand for OPEC's oil is expected to plummet as production from the US (and Canada) increases by a fifth to 11.9 million bpd by 2018, compared with this year.

 

Additionally, Iraqi production is returning to health. So to put things into context, by 2020 the IEA expects Iraq's oil output to more than double to 6.1 million bpd and were this to happen, OPEC’s unofficial production could rise well above 36 million bpd. As a knee-jerk reaction, the cartel – according to the agency – would have to withhold up to 2.3 million bpd from the market by 2015 (with its spare capacity rising well above 7 million bpd).

 

Given all of this, you might be excused for thinking the global crude market was facing a supply glut and everything was gloomy from OPEC’s standpoint. Yet, the price of oil – Brent or OPEC’s own basket of crude(s) – is still above US$100 per barrel. That’s exactly where most in OPEC want it to be.

 

Arriving a day (or two) ahead of the meeting, 7 out of 12 OPEC ministers have told various media outlets that a US$100 price was acceptable, where it needs to be and “necessary” for investment.  These include senior government officials from Angola, Ecuador, Iraq, Kuwait, Saudi Arabia, UAE and Venezuela. A US$100 floor price is a uniting theme it seems and most have sounded intent on holding the current official production quota!

 

The conjecture is that as long that floor is maintained, the cartel won’t be cutting production. In fact, OPEC kingpin and Saudi Arabia’s oil minister Ali al-Naimi, who has been in Vienna since May 28, has said existing conditions represent the best environment possible for the market in the face of economic headwinds and that “demand is great.” Despite the best efforts of scribes, bloggers, wiremen and analysts collective, neither Iran nor Venezuela, both of whom are always pushing for cuts to boost the price, have uttered much in the past 24 hours.

 

In contrast, Abdul Kareem al-Luaibi, oil minister for Iraq, OPEC’s second-largest producer, said, “There is balance between demand and supply, and this is reflected on prices, they are stable. We don’t want any shock to the market, the stability of prices is important for the global economy.”

 

The Oilholic thinks the cartel will maintain status quo until the floor dips to US$80 per barrel, if it does. However, the unity will disappear the moment the oil price dips below US$99 with Venezuela and Iran being among the first to start clamouring for another production quota cut.

 

This brings us back to the hullabaloo about North American shale (and unconventional E&P) versus OPEC! The right wing commentators and the US media plus politicians of all stripes – some of whom of conveniently forget Canada’s part in the North American energy spectrum – make it sound as if OPEC, which still accounts for just over 40% of the world’s crude oil market, would suddenly become irrelevant overnight.

 

The IEA, as the Oilholic noted a few weeks ago, described it as nothing short of a paradigm shift in the context of the oil market, although in not these exact words. Then there is the dilemma of OPEC ministers – who are damned if they do and damned if they don’t. If an OPEC minister acknowledges the impact of North American shale, he is described in the media as one who is resigned to the cartel’s decline. Conversely, if an OPEC minister dismisses it, the rebuttal is that he’s doing so because he’s scared!

 

Here is an example from this afternoon, when Iraqi minister al-Luaibi was asked for a comment, he said, “The US shale oil production increase – although it has some impact, it's not a significant impact on oil production or exports, and as you all might notice OPEC countries are all producing more oil than the agreed quota ceiling.”

Now, instead of the Oilholic doing so, do your own research on how the quote has been reported stateside? It will vindicate the sentiment expressed in the previous paragraph. Yours truly is not belittling the shale revolution stateside – but how on earth can the current level of incremental production be maintained beyond the medium term is beyond common sense. So its worth getting excited about but not overexcited about it too! Furthermore, a bit of pragmatism is needed in this debate – one which the Oilholic saw in a brilliant article in the FT by Ajay Makan.

 

In the column, Makan notes how within OPEC there is divide between the relatively comfortable Gulf producers (for e.g. Saudi Arabia) and the rest (most notably Iran, Venezuela and African members). The Saudis have welcomed the impact of shale as they can afford the price falling below US$100 level but some of their peers in OPEC can’t. For some more than the others, “a reckoning appears inevitable, particularly if growth in demand slows,” writes Makan.

 

Then again, beyond supply scenarios, it is worth asking whose shale bonanza is it anyway? First and foremost it is, and as the Oilholic was discussing with Phil Flynn of Price Futures a couple of months ago, price positive for American consumers, followed by LNG importing Asian jurisdictions. While Indian and Chinese policymakers are hardly jumping for joy and will for the foreseeable future continue to rely on OPEC members (and Russia) for majority of their crude cravings, some in the US are already fretting about what US exports would mean for domestic prices!

 

A group – America’s Energy Advantage – backed by several prominent US industrial brands including Alcoa, Huntsman chemicals and Dow Chemical, has claimed that "exporting proceeds of shale (to be read LNG) carries with it the potential threat of damaging jobs and investment in the US manufacturing sector as rising exports will drive up the price of gas to the detriment of domestic industries."

 

Boone Pickens, in a brilliant riposte, has asked can the US do what it has been criticising OPEC for since the cartel's inception and restrict exports? The inimitable industry veteran has a point! That's all for the moment from Vienna folks! Keep reading, keep it 'crude'!

 

To follow The Oilholic on Twitter click here.

 

To email: gaurav.sharma@oilholicssynonymous.com
 

© Gaurav Sharma 2013. OPEC logo on HQ exterior, Vienna, Austria © Gaurav Sharma.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

To follow The Oilholic on Twitter click here. 

To email: gaurav.sharma@oilholicssynonymous.com 

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

The Keystone XL saga: Views of Toronto analysts

The Oilholic arrived in Toronto, ON for the briefest of visits to find the energy community here in bullish mood about the Keystone XL pipeline project getting a nod of approval from the Obama administration this summer.

Out of a snap, unscientific, random poll of seven energy analysts in downtown Toronto, none of the commentators thought the project’s second application for approval would be turned down this summer by the US Government. Only one analyst thought the second application would face severe delays yet again. On the subject of what next if the unthinkable happens and the US yet again denies approval, most thought Canada can find plenty of takers for Alberta’s most precious resource.

Simply put, if the US does not want oil derived from a bituminous source, there are many takers – as is evident from the interest in the oil sands from burgeoning Asian importers. Make no mistake, the oil sands would be developed, most said. Additionally, there were some predictable quips as well from our friends in Toronto along the lines of “Obama doesn’t have a re-election to fight, so he’ll approve”, “who would the US deal with Canadians or Venezuelans?” or “it could be a shot in the arm for US refinery upgrade projects”.

All of these quips ring true in parts. Furthermore, a recent poll, conducted across the border by the non-partisan Pew Research Center, suggests two-thirds of Americans (66%) favour building the pipeline, which would transport oil from Alberta via the Midwest to Texan refineries. For purposes of its research, Pew polled 1501 adult US citizens between March 13 and 17. The survey result is a pretty convincing one, polled by a very respectable source.

Away from Pew’s findings was a totally unrelated editorial calling for the project’s approval in none other than the Chicago Tribune. The Oilholic is not from Illinois but is quietly confident that President Obama, who was once a senator from the state, does read his local broadsheet. On March 29, printed on page 22, he would have found the lead editorial declaring: “Enough dawdling. Obama should approve the Keystone pipeline.”

Further down the editorial, the paper wrote: “The President is expected to make a decision by this summer. He rejected a Keystone plan a year ago, in the midst of his re-election campaign. This was applauded by some environmental groups and angered the Canadian government. But the most significant impact was this: It kept Americans from getting good-paying jobs.”

Powerful stuff one would say! Canada, you have the support of the President’s (once) local newspaper! Furthermore, most Chicago-based analysts the Oilholic spoke to last week seemed to be clamouring for an approval. Phil Flynn, senior analyst at Price Future Group, said it had been a sad political story symptomatic of dysfunctional US politics and government.

“Here we have a bizarre situation that a pipeline is geopolitically right, but politically...a mess! Democrats had a pop at President George W. Bush tying him with “big oil”; Obama is getting the other end of the stick with people labelling him “big green.” Had he approved the Keystone XL project before it had become a “major issue” in this social media age – well it would not have become an issue at all; just one of the many North American pipelines plain and simple!”

“I see it as a classic case of a bungled energy policy. The Obama administration grossly underestimated the both the importance of Canadian oil sands and American shale and worse still that we could be energy independent. This side of the border, the shale gas revolution happened not because of Washington, but rather despite of Washington,” he said.

Most in the trading community this blogger met in Toronto and Chicago feel an important reason why Keystone XL is going to be approved this time around is because the US labour unions want it badly. Now, hardly any Democrat would flag this up as a reason for approving the project in the summer. Saddest part of it all – for both Canada and the US – is that the Keystone XL project is such a small part of the ongoing energy story of both countries.

Flynn reckons it is all about finding a way to approve it and save face in the summer! “Canadian crude from the oil sands is coming to the market anyway. So the Democrats on Capitol Hill will say America may as well go for it anyway! Mark my word, that’ll be the argument used to peddle the approval,” he concluded.

Moving away from Keystone XL, but sticking with pipelines, ratings agency Moody’s has given thumbs-up to Enbridge’s capital expenditure programme. In a note to clients this morning, Moody's affirmed Enbridge's Baa1 senior unsecured, Baa1 long term issuer, (P)Baa2 subordinate shelf and Baa3 preferred stock ratings.

“The company has taken timely advantage of opportunities that have developed in the North American liquids market over the last few years as a result of regulatory delays in getting new pipelines approved and a persistent liquids pricing differential attributed to tight takeaway capacity, bottlenecks and an inability for shippers to access tidewater and global markets,” the agency said.

According to Moody’s, Enbridge's announced projects are lower risk because they are generally on existing rights of way as either expansions or reversals. “Once this large programme is completed, Enbridge's business risk should be lower due to even greater liquids network diversity,” it added.

Just one more footnote before a farewell to Toronto, the local networks and newspapers are awash with news that Canada's Information Commission is poised investigate claims the Federal government is "muzzling" its scientists.

According to The Globe and Mail, the Commission is investigating seven government departments. These include Environment, Fisheries and Oceans, Natural Resources, National Defence, the Treasury Board Secretariat, National Research Council of Canada and the Canadian Food Inspection Agency.

A spokesperson said the investigation is in response to a complaint filed by the University of Victoria, BC and the campaign group Democracy Watch. Assistant Information Commissioner Emily McCarthy’s office would be leading the probe. Intriguing story indeed and one to watch out for!

It is almost time to head back home, but before heading up in the air towards London Heathrow, the Oilholic leaves you with a view of a natural wonder which helps Ontario Power and Power Authority of New York harness copious amounts of hydroelectricity – the Niagara Falls.

With even Americans saying the view is better from the Canadian side, the Oilholic simply had to pop over and admire it. So it turned out to be quite a view. Photographed here is the Horseshoe Falls – on the side yours truly has snapped from is Canada and on the other is the USA. Sandwiched between is the Niagara River which drains Lake Erie in to Lake Ontario.

The first known effort to harness these waters for power generation was made by one Daniel Joncaire who built a small canal above the falls to power his sawmill in 1759, according to a local park official. Today, if the US (Robert Moses Niagara Power Plant and the Lewiston Pump Generating Plant) and Canadian (Sir Adam Beck I and II) power generation facilities are pooled, the total power production would be 4.4 gigawatts! That’s all from Toronto folks! Keep reading, keep it ‘crude’!

To follow The Oilholic on Twitter click here.

To email: gaurav.sharma@oilholicssynonymous.com

© Gaurav Sharma 2013. Photo 1: Toronto’s Skyline and Lake Ontario, Canada. Photo 2: The Niagara Falls, Ontario, Canada © Gaurav Sharma.

Crude thoughts from 141 West Jackson Blvd

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

To follow The Oilholic on Twitter click here.

To email: gaurav.sharma@oilholicssynonymous.com

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

Well ‘Why-EA’? Agency wilts as politicians win!

Earlier this afternoon, for only the third time in its history, the IEA asked its members to release an extra 60 million barrels of their oil stockpiles on to the world markets.

The previous two occasions were the first gulf war (1991) and the aftermath of Hurricane Katrina (2005). That it has happened given the political clamour for it is no surprise and whether or not one questions the wisdom behind the decision, it is a significant event.

The impact of the move designed to stem the rise of crude prices was felt immediately. At 17:15GMT ICE Brent forward month futures contract was trading at US$108.45 down 4.99% or US$5.74 in intraday trading while the WTI contract fell 3.64% or US$3.51 to US$91.46.

Nearly half of the 60 million barrels would be released from the US government’s Strategic Petroleum Reserve (SPR). In relative terms, UK’s contribution would be three million barrels – which tells you which nation the IEA was mostly looking to. The agency’s executive director Nobuo Tanaka feels the move will contribute to “well-supplied markets” and ensure a soft landing for the world economy.

This begs the question if the market is “well-supplied” especially with overcapacity at Cushing (Stateside) why now? Why here? For starters, and as the Oilholic blogged earlier, some politicians like Senator Jeff Bingaman – a Democrat from New Mexico and chairman of the US Senate energy committee – have been clamouring for his country’s SPR to be raided to relieve price pressures since April.

OPEC’s shenanigans earlier this month gave them further ammunition amid concerns that the summer or “driving season” rise in US demand would cause prices to rise further still. That is despite the fact that the American market remains well supplied and largely unaffected by 132 million barrels of Libyan light sweet crude oil which the IEA reckons have disappeared from the market (until the end of May since the hostilities began).

Nonetheless, all this mega event does is add to the market fear and confirm that a perceptively short term problem is worsening! Long term hope remains that the Libyan supply gap would be plugged. Releasing portions of the SPRs would not alleviate market concerns and could even be a disincentive for the Saudis to pump more oil – although they made it blatantly obvious after the OPEC meeting deadlock on June 8 that they will up production. Now how they will react is anybody's guess?

Jason Schenker, President and Chief Economist of Prestige Economics, feels that while the decision is price bearish for crude oil in the immediate term, these measures are being implemented with the intent to stave off significantly higher prices in the near and medium term.

In a note to clients, Schenker notes: “The fact that the IEA had to go to these lengths in the second year of an expanding business cycle says something very bullish about crude oil prices in the medium and long term. The global economy is up against a wall in terms of receiving additional oil supplies to meet demand. Additional demand or supply disruption would have a massively bullish impact on prices. After all, releasing emergency inventories is a last resort.”

But must we resort to last resorts, just yet? While Sen. Bingaman would be happy, most in the market are worried. Some moan that Venezuelan and Iranian intransigence in Vienna brought this about. For what it is worth, the market trend was already bearish, Libya or no Libya. Concerns triggered by doubts about the US, EU and Chinese economies were aplenty as well as the end of QE2 liquidity injections coupled with high levels of non-commercial net length in the oil markets.

Some for instance like Phil Flynn, analyst at PFG Best, think the IEA’s move was “the final nail in the coffin for the embattled oil markets.” Let’s see what the agency itself makes of its move 30 days from now when it reassesses the situation.

Those interested in the intricacies of this event would perhaps also like to know how the sale takes place but we only have the US example to go by. Last time it happened – under the Bush administration on September 6, 2005 – of the 30 million barrels made available, only 11 million were actually sold to five bidders by the US energy department. Nine of a total of 14 bidders were rejected, with deliveries commencing in the third week of the month. What the take-up would be in all IEA jurisdictions this time around remains to be seen.

Medium term price sentiments according to the Oilholic’s feedback have not materially altered and so they shouldn’t either. An average of five City forecasts sees Brent at US$113.50 in Q3 2011, US$112.50 in Q4 11 and US$115 in Q1 2012. Finally, most city forecasters, and to cite one, remain “marginally” bullish for 2012 though no one, this blogger including, sees a US$150 price over 2012.

Finally to all of the Oilholic's American readers concerned about the rising price of gas, spare a thought for some of us across the pond. OPEC’s research suggests (click graph above) that much higher taxes in most national jurisdictions in this part of the world means we pay way more than you guys. That is not changing any time soon. Releases of SPRs woould not meaningfully ease price pressures at the pump for us.

© Gaurav Sharma 2011. Photo: Gas Station, Sunnyvale, California, USA © Gaurav Sharma, April 2011. Graphics: Who gets what from a litre of Oil? © OPEC Secretariat, Vienna 2010.