All about crude "market stability"

The Oilholic arrived at the first day of the OPEC International Seminar to find the oil producers' group in a belligerent mood led by kingmaker Saudi Arabia. The kingdom's energy minister Prince Abdulaziz bin Salman said recent OPEC+ actions demonstrate the strength of the partnership and teamwork with Russia. 

Furthermore, he uttered two words that shaped the entire day - "market stability". Addressing delegates, Abdulaziz said his country will do whatever it takes to ensure it, and looks like Riyadh is not ditching its stance of unilateral voluntary oil production cut of 1 million barrels per day (bpd) in a huff. Though Abdulaziz did go to some length to say the Kingdom's current stance does imply it was returning to its 1980s swing producer status.

His address followed that of several of his OPEC ministerial peers repeatedly mentioning the need for "market stability" - cue a higher crude price, perhaps one that's above $81 per barrel the Saudis need to balance their budget. UAE Energy Minister Suhail Al Mazrouei chimed in by adding that if anything OPEC deserves an even larger market share in a "balanced" energy market, and added that market commentary on the group's intentions had been a tad er....unbalanced. 

And not to be outdone, Azerbaijan's Minister of Energy Parviz Shahbazov quipped that if OPEC+ or OPEC didn't hypothetically exist as groups, "we would need to create them" across the energy value chain, and not just oil, in the interests of well, you guessed it - "market stability". 

But one of the main reasons a higher oil price that OPEC+ craves is proving elusive is down to the 6 million bpd of Russian oil that is still finding its way to the market despite a near absence of Western buyers, and India and China duly obliging by importing copious amounts it. 

Canada, Guyana, US, Brazil and Norway are all also pumping more. But the biggest weight on the crude price is the uncertain economic climate and the hawkish stance of global central banks, especially the US Federal Reserve. More to follow from Vienna, but that's all for the moment folks! Keep reading, keep it crude! 

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© Gaurav Sharma 2023. Photo © Gaurav Sharma, July 5, 2023.

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

Oil markets take in the 'Rouble Trouble' saga

The Oilholic is feeling somewhat melancholy today! A crisp rouble note yours truly kept as a memento following a visit to Moscow in June is now worth considerably less when pitted against one’s lucky dollar! 

At one stage over the past 24 hours, the US$1 banknote on the left was worth 79% of the RUB100 note on the right. One doubts whether a dollar would fetch a 100 roubles - but just putting it out there.

Barring a brief jump when the Russian government went for a free float of the currency back in November, there hasn’t been much to be positive about the rouble. Last evening’s whopper of an announcement by the Central Bank of Russia to raise interest rates by 650 basis points to 17% from 10.5% did little more than provide temporary respite.

Since January till date, Russia has spent has spent over $70 billion (and counting) in support of the rouble. Yet, the currency continues to feel the strain of escalating sanctions imposed by the West in tandem with a falling oil price.

However, there is a very important distinction to be made here. A falling oil price does not necessarily imply that Russian oil companies are in immediate trouble, repeat ‘immediate’ trouble. While a weak rouble makes imports costlier for the wider economy, which will almost certainly tip into a recession next year; oil – priced and exported in dollars - will get more ‘domestic’ bang for the converted bucks.

The Russian Treasury also adjusts tax and ancillary levies on oil exports in line with a falling (or rising) oil price. The policy is likely to keep things on a sound footing for the country’s oil & gas companies, including state-owned behemoths, for at least another 12 months.

How things unfold beyond that is anybody’s guess. First off, several Russian oil & gas players would need their next round of refinancing late next year or early on in 2016. With several international debt markets off limits owing to Western sanctions, the state will have to step in at least partially.

Secondly, the oil price is unlikely to stage a recovery before the summer, and would be nowhere near $100 per barrel. If it is still below $85 come June, as the Oilholic thinks it would be and the rouble does not recover, then corporate profits would take a plastering regardless of however much the Russian Treasury adjusts its tax takings. 

Of course, not all in trouble would be Russian. Austrian, French and German banks with exposure to the country, accompanied by Russia-centric ETFs and Arctic oil & gas exploration will be hit hard.

Oil majors with exposure to Russia are already taking a hit. In particular, BP springs to mind. However, as the Oilholic opined in a Forbes article earlier this year - while BP could well do without problems in Russia, the company can indeed cope. For Total and Exxon Mobil, the financial irritants that their respective Russian forays have become of late would not be of major concern either.

Taking a macro viewpoint, market chatter about a repetition of the 1998 crisis is just that – chatter! Never say ‘never’ but a Russian default is highly unlikely.

Kit Juckes, global head of forex at Société Générale, says, “Comparisons with past crises – and 1998 in particular – are inevitable. The differences are more important than the similarities. Firstly, emerging market central banks (including and especially Russia) have vastly larger currency reserves with which to defend their currencies.

“Secondly, US real Fed Funds are negative now, where they had risen sharply from 1994 onwards. That's a double-edged sword as merely the thought of Fed tightening has been enough to spark a crisis after such a long period of zero rates, but when the dust settles, global investors will still need better yields than are on offer on developed market bonds.”

The final difference, Juckes says, is that the rouble, in particular, is falling from a very great height in real terms. “It has only fallen below the pre-1998 peak in the last few days. It's still not cheap unless we believe that the gains in the last 16 years are all justified by productivity – an argument that works for some emerging market economies rather more than it does for Russia.," he concludes.

Finally, there is no disguising one pertinent fact in the entire ongoing Russian melee – the manifestly obvious lack of economic diversification with the country. Russia has remained stubbornly reliant on oil & gas exports and its attempts to diversify the economy seem even feebler than Middle Eastern sheikdoms of late.

For this blogger, the lone voice of reason within Russia has been former Finance Minister Alexei Kudrin. As early as 2012, Kudrin repeatedly warned of impending trouble and overreliance on oil & gas exports. Few Kremlin insiders listened then, but now many probably wish they had! That’s all for the moment folks! Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2014. Image: Dollar versus Rouble: $1 and RUB100 banknotes © Gaurav Sharma, 2014.

Hallelujah, it’s Bearish Brent!

Mercury is not rising (at least where this blogger is), it’s not half past 10 (more like half past four), and it’s certainly not for the first time in history, but Hallelujah it’s Bearish Brent!

Sorry, a rather crude attempt to re-jingle that ‘80s hit song, but on a more serious note there is a bit of a commotion in the oil markets with bears roaming the streets. As the readers of this blog would testify, the Oilholic has short called Brent for a while now. Being precise, the said period covers most of the past six and current Brent front-month contracts.

Aggressive yelling of the word 'risk' proved this supply-side scribe wrong for June, but one has been on the money most of the time since the summer. July’s high of US$115.71 per barrel was daft with speculators using the initial flare-up in Iraq as a pretext to perk things up.

The Oilholic said it would not last, based on personal surmising, feedback from physical traders and their solver models. And to the cost of many speculators it didn’t. As one wrote in a Forbes post earlier this week, if an ongoing war (in the Middle East of all places) can’t prop up a benchmark perceived to be a common proxy for oil prices on the world market, then what can?

Rather controversially, and as explained before, the Oilholic maintains that Brent is suffering from risk fatigue in the face of lacklustre demand and erratic macroeconomic data. In Thursday’s trade, it has all come to down to one heck of a bear maul. Many in the City are now wondering whether a $90 per barrel floor might be breached for Brent; it already has in the WTI’s case and on more than one occasion in intraday trading.

All of this comes on the back of Saudi Arabia formally announcing it is reducing its selling price for oil in a move to protect its share in this buyers’ market. The price of OPEC basket of twelve crudes stood at $92.31 dollars a barrel on Wednesday, compared with $94.17 the previous day, according to its calculations.

With roughly 11 days worth of trading left on the November Brent front-month contract, perceived oversupply lends support to the bears. Nonetheless, a bit of caution is advised. While going short on Brent would be the correct call at the moment, Northern Hemisphere winter is drawing closer as is the OPEC meeting next month. So the Oilholic sees a partial price uptick on cards especially if OPEC initiates a production cut.

The dip in price ought to trouble sanction hit Russia too. According to an AFP report, Herman Gref, head of Sberbank, Russia’s largest bank, said the country could repeat the fate of the Soviet Union if it doesn't reform its economic policies and avoid the "incompetent" leadership that led to the end of communism.

Speaking at the annual “Russia Calling” investment forum in Moscow, Gref said Russia imports too much, is too reliant on oil and gas exports and half of its economy is monopolised. The dynamic needs to change, according to Russia’s most senior banker, and one employed by a state-owned bank.

Away from Russia, here is the Oilholic's latest Forbes post on the prospects of shale exploration beyond North America. It seems initial hullabaloo and overexcitement has finally been replaced by sense of realism. That said, China, UK and Argentina remain investors’ best hope.

On a closing note, while major investment banks maybe in retreat from the commodities market and bears are engulfing it for the time being, FinEx group, an integrated asset management, private equity and hedge fund business, has decided to enter the rocky cauldron.

Its specialist boutique business – FinEx Commodity Partners – will be led by Simon Smith, former Managing Director and Head of OTC Commodity Solutions at Jefferies Bache. That’s all for the moment folks! Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2014. Photo: Disused gas station, Preston, Connecticut, USA © Todd Gipstein / National Geographic.

EU’s Russian gas, who gets what & BP’s Bob

The vexing question for European Union policymakers these days is who has what level of exposure to Russian gas imports should the taps get turned off, a zero storage scenario at importing nations is assumed [hypothesis not a reality] and the Kremlin's disregard for any harm to its coffers is deemed a given [easier said than done].

Depending on whom you speak to, ranging from a European Commission mandarin to a government statistician, the figures would vary marginally but won't be any less worrying for some. The Oilholic goes by what Eurogas, a non-profit lobby group of natural gas wholesalers, retailers and distributors, has on its files.

According to its data, the 28 members of the European Union sourced 24% of their gas from Russia in 2012. Now before you say that's not too bad, yours truly would say that's not bad 'on average' for some! For instance, Estonia, Finland, Lativia and Lithuania got 100% of their gas from Russia, with Bulgaria, Hungary and Slovakia not far behind having imported 80% or more of their requirements at the Kremlin's grace and favour.

On the other hand, Belgium, Croatia, Denmark, Ireland, Netherlands, Portugal, Spain, Sweden and the UK have nothing to worry about as they import nothing or negligible amounts from Russia. Everyone in between the two ends, especially Germany with a 37% exposure, also has a major cause for concern.

And it is why Europe can't speak with one voice over the Ukrainian standoff. In any case, the EU sanctions are laughable and even a further squeeze won't have any short term impact on Russia. A contact at Moody's says the Central Bank of the Russian Federation has more than enough foreign currency reserves to virtually guarantee there is no medium term shortage of foreign currency in the country. Industry estimates, cited by the agency, seem to put the central bank's holdings at just above US$435 billion. EU members should know as they contributed handsomely to Russia's trade surplus!

Meanwhile, BP boss Bob Dudley is making a habit of diving into swirling geopolitical pools. Last November, Dudley joined Iraqi Oil Minister Abdul Kareem al-Luaibi for a controversial visit to the Kirkuk oilfield; the subject of a dispute between Baghdad and Iraqi Kurdistan. While Dudley's boys have a deal with the Iraqi Federal government for the oilfield, the Kurds frown upon it and administer chunks of the field themselves to which BP will no access to.

Now Dudley has waded into the Ukrainian standoff by claiming BP could act as a bridge between Russia and the West. Wow, what did one miss? The whole episode goes something like this. Last week, BP's shareholders quizzed Dudley about the company's exposure to Russia and its near 20% stake in Rosneft, the country's state-owned behemoth.

In response, Dudley quipped: "We will seek to pursue our business activities mindful that the mutual dependency between Russia as an energy supplier and Europe as an energy consumer has been an important source of security and engagement for both parties for many decades. We play an important role as a bridge."

"Neither side can just turn this off…none of us know what can happen in Ukraine," said the man who departed Russia in a huff in 2008 when things at TNK-BP turned sour, but now has a seat on Rosneft's board.

While Dudley's sudden quote on the crisis is surprising, the response of BP's shareholders in recent weeks has been pretty predictable. Russia accounts for over 25% of the company's global output in barrels of oil equivalent per day (boepd) terms. But, in terms of booked boepd reserves, the percentage rises just a shade above 33%.

However, instead of getting spooked folks, look at the big picture – according to the latest financials, in petrodollar terms, BP's Russian exposure is in the same investment circa as Angola and Azerbaijan ($15 billion plus), but well short of anything compared to its investment exposure in the US.

Sticking with the  crudely geopolitical theme, this blogger doesn't always agree with what the Henry Jackson Society (HJS) has to say, but its recent research strikes a poignant chord with what yours truly wrote last week on the Libyan situation.

The society's report titled - Arab Spring: An Assessment Three Years On (click to download here) - noted that despite high hopes for democracy, human rights and long awaited freedoms, the overall situation on the ground is worse off than before the Arab Spring uprisings.

For instance, Libyan oil production has dramatically fallen by 80% as neighbouring Tunisia's economy is now dependent on international aid. Egypt's economy, suffering from a substantial decrease in tourism, has hit its lowest point in decades, while at the same time Yemen's rate of poverty is at an all-time high.

Furthermore, extremist and fundamentalist activity is rising in all surveyed states, with a worrying growth in terror activities across the region. As for democracy, HJS says while Tunisia has been progressing towards reform, Libya's movement towards democracy has failed with militias now effectively controlling the state. Egypt remains politically highly-unstable and polarised, as Yemen's botched attempts at unifying the government has left many political splits and scars.

Moving on to headline crude oil prices, both benchmarks have closed the gap, with the spread in favour of Brent lurking around a $5 per barrel premium. That said, supply-side fundamentals for both benchmarks haven't materially altered; it's the geopolitical froth that's gotten frothier. No exaggeration, but we're possibly looking at a risk premium of at least $10 per barrel, as quite frankly no one knows where the latest Eastern Ukrainian flare-up is going and what might happen next.

Amidst this, the US EIA expects the WTI to average $95.60 per barrel this year, up from its previous forecast of $95.33. The agency also expects Brent to average $104.88, down 4 cents from an earlier forecast. Both averages and the Brent-WTI spread are within the Oilholic's forecast range for 2014. That's all for the moment folks! Keep reading, keep it 'crude'!

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© Gaurav Sharma 2014. Photo: Sullom Voe Terminal, UK © BP

An arduously researched book on ‘crude’ Russia

When looking up written material on the Russian oil and gas industry, you are (more often than not) likely to encounter clichés or exaggerations. Some would discuss chaos in wake of the collapse of the Soviet Union and the rise of the oligarchs as a typical “Russian” episode of corruption and greed – yet fail to address the underlying causes that led to it. Others would indulge in an all too familiar Russia bashing exercise without concrete articulation. Amidst a cacophony of mediocre analysis, academic Thane Gustafson’s splendid work – Wheel of Fortune: The Battle for Oil and Power in Russia – not only breaks the mould but smashes it to pieces. This weighty, arduously researched book of just under 700 pages split by 13 chapters does justice to the art of scrutiny when it comes to examining this complex oil and gas exporting jurisdiction; a rival of Saudi Arabia for the position of the world’s largest producer and exporter of oil.

 

It is about power, it is about money, it is about politics but turning page after page, you would realise Gustafson is subtly pointing out that it is a battle for Russia’s ‘crude’ soul. In order to substantiate his arguments, the book is full of views of commentators, maps, charts and tables and over 100 pages of footnotes. The narrative switches seamlessly from discussing historical facts to the choices Russia’s political classes and the country’s oil industry face in this day and age.

 

The complex relationship between state and industry, from the Yeltsin era to Putin’s rise is well documented and in some detail along with an analysis of what it means and where it could lead. In a book that the Oilholic perceives as the complete package on the subject, it is hard to pick favourite passages – but two chapters stood out in particular.

 

Early on in the narrative, Gustafson charts the birth of Russian oil majors Lukoil, Surgutneftegaz and Yukos (and the latter’s dismembering too). Late on in the book, the author examines Russia’s (current) accidental oil champion Rosneft. Both passages not only sum up the fortunes of Russian companies and how they have evolved (or in Yukos’ case faced corporate extinction) but also sum up prevailing attitudes within the Kremlin.

 

What’s more, as crude oil becomes harder and more expensive to extract and Russian production dwindles, Gustafson warns that the country’s current level of dependence on revenue from oil is unsustainable and that it simply must diversify.

 

Overall, the Oilholic is inclined to feel that this book is one of the most authoritative work on Russia and its oil industry, a well balanced critique with substantiated arguments and one which someone interested in geopolitics would appreciate as much as an enthusiast of energy economics.

 

This blogger is happy to recommend Wheel of Fortune to readers interested in Russia, the oil and gas business, geopolitics, economics, current affairs and last but certainly not the least – those seeking a general interest non-fiction book on a subject they haven’t visited before. As for the story seekers, given that it’s Russia, Gustafson has more that few tales to narrate all right, but fiction they aren’t. Fascinating and brilliantly written they most certainly are!

 

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© Gaurav Sharma 2013. Photo: Front cover - Wheel of Fortune: The Battle for Oil and Power in Russia © Belknap Press of Harvard University Press.