Crude prices: Syrian conundrum & bearish trends

As the immediate threat of a US-led campaign against Syria recedes, some semblance of decidedly bearish calm has returned to the oil markets. The last two weeks have seen steady declines in benchmark prices as the Assad regime agreed to a Russian-led initiative aimed at opening up the Syrian chemical weapons arsenal to international inspection. Jury is still out on whether it will work, but that’s enough to keep the oil market bulls in check.

 

Supply-side analysts also took comfort from the improving situation in terms of Libyan production. However, an appreciable caveat needs to be taken into account here. Libya’s oil production has recovered, but only to about 40% of its pre-war rate of 1.6 million barrels per day (bpd), and is currently averaging no more than 620,000 bpd, according to the government.

 

A further lull in violence in Egypt has helped calm markets as well. Much of the market fear in this context, as the Oilholic noted from Oman a few weeks ago, was invariably linked to the potential for disruption to tanker traffic through the Suez Canal which sees 800,000 barrels of crude and 1.5 million barrels of petroleum distillate products pass each day through its narrow confines.

 

Furthermore, it wasn’t just the traffic between the Red Sea and the Mediterranean Sea via the canal that was, and to a certain extent still is, an area of concern. Disturbances could also impact the Suez-Mediterranean pipeline which ferries through another 1.7 million bpd. Syria, Libya and Egypt aside, Iran is sending conciliatory notes to the US for the first time in years in its nuclear stand-off with the West.

 

Factoring in all of this, the risk premium has retreated. Hence, we are seeing are near six-week lows as far as the Brent forward month futures contract for November goes. There is room for further correction even though winter is around the corner. On a related note, the WTI’s discount to Brent is currently averaging around US$5 per barrel and it still isn’t, and perhaps never will be, sufficiently disconnected from the global geopolitical equation.

 

Shame really, for in what could be construed further price positive news for American consumers, the US domestic crude production rose 1.1% to 7.83 million bpd for the week that ended September 13. That’s the highest since 1989 according to EIA. At least for what it’s worth, this is causing the premium of the Louisiana Light Sweet (LLS) to the WTI to fall; currently near its lowest level since March 2010 (at about $1.15 per barrel).

 

Moving away from pricing matters, the Oilholic recently had the chance to browse through a Fitch Ratings report published last month which seemed to indicate that increasing state control of Russian oil production will make it harder for private companies to compete with State-controlled Rosneft. Many commentators already suspect that.

 

Rosneft's acquisition of TNK-BP earlier this year has given the company a dominant 37% share of total Russian crude production. It implies that the state now controls almost half of the country's crude output and 45% of domestic oil refining.

 

Fitch analyst Dmitri Marinchenko feels rising state control is positive for Rosneft's credit profile but moderately negative for independent oil producers. “The latter will find it harder to compete for new E&P licences, state bank funding and other support,” he adds.

 

In fact, the favouring of state companies for new licences is already evident on the Arctic shelf, where non-state companies are excluded by law. However, most Russian private oil producers have a rather high reserve life, and Marinchenko expects them to remain strong operationally and financially even if their activities are limited to onshore conventional fields.

 

“We also expect domestic competition in the natural gas sector to increase as Novatek and Rosneft take on Gazprom in the market to supply large customers such as utilities and industrial users. These emerging gas suppliers are able to supply gas at lower prices than the fully regulated Gazprom. But this intensified competition should not be a significant blow to Gazprom as it generates most of its profit from exports to Europe, where it has a monopoly.”

 

There is a possibility that this monopoly could be partly lifted due to political pressure from Rosneft and Novatek. But even if this happens, Marinchenko thinks it is highly likely that Gazprom would retain the monopoly on pipeline exports – which would continue to support its credit rating.

 

Continuing with the region, Fitch also said in another report that the production of the first batch of the crude stuff from the Kashagan project earlier this month is positive for Kazakhstan and KazMunayGas. The latter has a 16.8% stake in the project.

 

Eni, a lead member of North Caspian Operating Company, which is developing Kashagan, has said that in the initial 2013-14 phase, output will grow to 180,000 bpd, compared with current output from Kazakh oilfields of 1.6 million bpd. Kashagan has estimated reserves of 35 billion barrels, of which 11 billion barrels are considered as recoverable.

 

The onset of production is one reason Fitch expects Kazakhstan's economic growth rate to recover after a slight slowdown in 2012. Meanwhile, KazMunayGas expects the Kashagan field to make a material contribution to its EBITDA and cash flow from next year, the agency adds.

 

Increased oil exports from Kashagan will also support Kazakhstan's current account surplus, which had been stagnating thanks to lower oil prices. However, Fitch reckons foreign direct investment may decline as the first round of capital investment into the field slows.

 

What's more, China National Petroleum Company became a shareholder in Kashagan with an 8.3% stake earlier this month. Now this should certainly help Kazakhstan increase its oil supplies to China, which are currently constrained by pipeline capacity. Watch this space! That’s all for the moment folks! Keep reading, keep it ‘crude’!

 

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To email: gaurav.sharma@oilholicssynonymous.com
 

© Gaurav Sharma 2013. Photo: Oil production site, Russia © Lukoil

Speculators make the oil price belie market logic

The fickle crude oil market is yet again giving an indication about how divorced it is from macroeconomic fundamentals and why a concoction of confused geopolitics and canny speculation is behind the recent peaks and troughs. To give a bit of background – the WTI forward month futures contract surpassed the US$106 per barrel level last week; the highest it has been in 16 months. Concurrently, the spread between WTI and Brent crude narrowed to a near 33-month low of US$1.19 in intraday on July 11 [versus a high of US$29.70 in September 2011].

 

Less than a couple of weeks ago Goldman Sachs closed its trading recommendation to buy WTI and sell Brent. In a note to clients, the bank’s analysts said they expected the spread to narrow in the medium term as new pipelines help shift the Cushing, Oklahoma glut, a physical US crude oil delivery point down to the Houston trading hub, thus removing pressure from the WTI forward month futures contract to the waterborne Brent.

 

Goldman Sachs' analysts were by no means alone in their thinking. Such a viewpoint about the spread is shared by many on Wall Street, albeit in a nuanced sort of way. While Cushing's impact in narrowing the spread is a valid one, the response of the WTI to events elsewhere defies market logic.

 

Sadly Egypt is in turmoil, Syria is still burning, Libya’s problems persist and Iraq is not finding its feet as quick as outside-in observers would like it to. However, does this merit a WTI spike to record highs? The Oilholic says no! Agreed, that oil prices were also supported last week by US Federal Reserve Chairman Ben Bernanke's comments that economic stimulus measures were "still" necessary. But most of the upward price pressure is speculators' mischief - pure and simple.

 

Less than two months ago, we were being peddled with the argument that US shale was a game changer – not just by supply-side analysts, but by the IEA as well. So if that is the case, why are rational WTI traders spooked by fears of a wider conflict in the Middle East? Syria and Egypt do not even contribute meaningfully to the global oil market supply train, let alone to the North American market. Furthermore, China and India are both facing tough times if not a downturn.

 

And you know what, give this blogger a break if you really think the US demand for distillates rose so much in 10 days that it merited the WTI spiking by the amount that it has? Let's dissect the supply-side argument. Last week's EIA data showed that US oil stocks fell by about 10 million barrels for a second consecutive week. That marked a total stockpile decline of 20.2 million barrels in two weeks, the biggest since 1982.

 

However, that is still not enough to detract the value of net US inventories which are well above their five-year average. Furthermore, there is nothing to suggest thus far that the equation would alter for the remainder of 2013 with media outlets reporting the same. The latest one, from the BBC, based on IEA figures calmly declares the scare over 'peak oil' subsiding. US crude production rose 1.8% to 7.4 million barrels per day last week, the most since January 1992 and in fact on May 24, US supplies rose to 397.6 million, the highest inventory level since 1931!

 

But for all of that, somehow Bernanke's reassurances on a continuation of Federal stimulus, flare-ups in the Middle East [no longer a big deal from a US supply-side standpoint] and a temporary stockpile decline were enough for the latest spike. Why? Because it is a tried and tested way for those who trade in paper barrels to make money.

 

A very well connected analogy can be drawn between what's happening with the WTI and Brent futures' recent "past". Digging up the Brent data for the last 36 months, you will see mini pretexts akin to the ones we've seen in the last 10 days, being deployed by speculators to push to the futures contract ever higher; in some instances above $110 level by going long. They then rely on publicity hungry politicians to bemoan how consumers are feeling the pinch. Maybe an Ed Markey can come alone and raise the issue of releasing strategic petroleum reserves (SPRs) and put some downward pressure – especially now that he's in the US Senate.

 

Simultaneously, of course the high price starts hurting the economy as survey data factors in the drag of rising oil prices, usually within a three-month timeframe, and most notably on the input/output prices equation. The same speculators then go short, blaming an economic slowdown, some far-fetched reason of "uptick" in supply somewhere somehow and the Chinese not consuming as much as they should! And soon the price starts falling. This latest WTI spike is no different.

Neither the underlying macroeconomic fundamentals nor the supply-demand scenarios have altered significantly over the last two weeks. Even the pretexts used by speculators to make money haven't changed either. The Oilholic suspects a correction is round the corner and the benchmark is a short! (Click graph above to enlarge)

 

Away from crude pricing matters to some significant news for India and Indonesia. It seems both countries are reacting to curb fuel subsidies under plans revealed last month. The Indian government agreed to a new gas pricing formula which doubled domestic natural gas prices to $8.40/million British thermal units (mmbtu) from $4.20/mmbtu.

Meanwhile, the Indonesian government is working on plans to increase the price of petrol by 44% to Rupiah 6,500 ($2.50) per gallon and diesel by 22% to Rupiah 5,500. With the hand of both governments being forced by budgetary constraints, that's good economics but bad politics. In Asia, it's often the other way around, especially with general elections on the horizon - as is the case with both countries.

 

Elsewhere, yours truly recently had the chance to read a Moody's report on the outlook for the global integrated oil and gas industry. According to the ratings agency, the outlook will remain stable over the next 12 to 18 months, reflecting the likelihood of subdued earnings growth during this period.

Analyst Francois Lauras, who authored the report, said, "We expect the net income of the global oil and gas sector to fall within the stable range of minus 10% to 10% well into 2014 as robust oil prices and a slight pick-up in US natural gas prices help offset ongoing fragility in the refining segment." 

 

"Although oil prices may moderate, we expect demand growth in Asia and persistent geopolitical risk to keep prices at elevated levels," he added.

 

The agency anticipates that integrated oil companies will concentrate on reinvesting cash flows into their upstream activities, driven by "robust" oil prices, favourable long-term trends in energy consumption and the prospects of higher returns.

 

However, major projects are exerting pressure on operating and capital efficiency measures as they are often complex, highly capital intensive and have long lead times. In the near term, Moody's expects that industry players will continue to dispose of non-core, peripheral assets to complement operating cash flows and fund large capex programmes, as well as make dividend payouts without impairing their balance sheets.

 

Finally, the agency said it could change its outlook to negative if a substantial drop in oil prices were triggered by a further deterioration in the world economy. It would also consider changing its outlook to positive if its forecast for the sector's net income increased by more than 10% over the next 12-18 months.

Moody's has maintained the stable outlook since September 2011. In the meantime, whatever the macroeconomic climate might be, it hardly ever rains on the speculators' parade. That's all for the moment folks! Keep reading, keep it 'crude'!

 

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To email: gaurav.sharma@oilholicssynonymous.com
 

© Gaurav Sharma 2013. Photo: Pump Jacks, Perryton, Texas, USA © Joel Sartore / National Geographic. Graph: WTI Crude Futures US$/barrel © BBC / DigitalLook.com

Sights & sounds from the G8 in Enniskillen

As the G8 circus prepares to leave town, with the Lough Erne Declaration firmly signed, it is time to reflect on the town and the folks who played host to the leaders of the eight leading industrialised nations. Wherever this blogger went, asked for directions, picked-up something in a shop, had a meal or a beer, you name it – he was greeted by helpful people with welcoming smiles.

The leaders’ motorcades were met with much gusto, especially by local school children “Welcoming the G8” even when there wasn’t a leader inside the cars zipping by! Bless them! On Monday, the townsfolk got a pleasant surprise to see President Barack Obama and Prime Minister David Cameron waving to them from a vehicle in the same motorcade.

Later, the two leaders also visited Enniskillen Integrated Primary School, attended by both Catholic and Protestant children, on the outskirts of Enniskillen. It was established, as a place of reconciliation and peace, in wake of the 1987 IRA Poppy Day bombing which resulted in 12 local fatalities. The bomb may have killed and maimed but didn’t break the community here, says one resident. The town itself got a complete makeover with every building spruced-up, primed and painted, according to locals and as is apparent.

However, like any other High Street in the British Isles, Enniskillen is no exception from the economic downturn, with retailers either going under or vacating premises. Yet, instead of boarding these shops up, their glass panes had a façade of wallpaper showing people and products inside, perhaps to convey a positive illusion for cars zipping past.

The protestors were here in numbers too, and in spirit as far away as Belfast and London. Everyone from anti-poverty campaigners to food scarcity examiners, from rights and environmental groups to fair trade advocates were here in numbers. Amnesty International’s protest ‘display’ on the arms-supplying shenanigans by G8 nations was the most eye-catching one for the Oilholic.

There is one mute point though. It seems the militant element largely stayed away and most of the protesters, barring few nutcases, engaged and sent their message out peacefully. That the Lough Erne Resort is surrounded by water supplemented by miles of metal fences, multiple security checkpoints and around 8,000 security personnel, certainly ensured the G8 2013 Summit saw far fewer protestors relative to the norm in recent years.

Swimming, sailing, paddling and canoeing in the waters around Lough Erne Resort were banned for the duration of the summit, but not fishing! That’s all from Enniskillen folks which is getting back to normalcy. Before his departure back to London via Belfast, the Oilholic leaves you with some views from the G8 summit through the lens of his non-professional but supremely effective automatic camera. Click on images(s) to enlarge. Keep reading, keep it ‘crude’!
 

A 'wallpapered' shop in Enniskillen

Enniskillen Castle



Waters 'off limits' says PSNI

Police comb River Erne

 

Amnesty Intl makes its point on Syria

Police personnel from around UK make their way back home from Belfast City airport

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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To email: gaurav.sharma@oilholicssynonymous.com
 

© Gaurav Sharma 2013. Photos: As captioned, images from the G8 2013 summit in Northern Ireland © Gaurav Sharma, June 16-19, 2013.

Crude bits of the ‘Lough Erne Declaration'

As predicted, Russia and the West's differing positions for and against supporting the Assad regime in Syria threatened to overshadow everything else at the G8 Summit here in Lough Erne Resort, Enniskillen, Northern Ireland but mercifully didn’t.

The leaders of the group of eight leading industrialised nations, meant to promote trade and dialogue at this forum, did make some progress and provided lots of hot air…er sorry…soundbites. The outcome of talks was grandiosely dubbed the 'The Lough Erne Declaration'. But before that, the European Union and the US finally agreed to 'start talks' on a new trade pact while not losing sight (or to the detriment) of ongoing negotiations with Canada.

The trade talks had been under threat from a potential French veto, but EU ministers agreed to their demand "or exclusion of the film and television industry from the talks". On to crude notes, the leaders thankfully did not indulge in silly talk of doing something to 'bring down the price of oil' (and leave it to market forces) just because the Brent contract is at US$100-plus levels.

 

There were also no wide-ranging discussions about price levels of crude benchmarks, apart from individual non-Russian grumbling that they should be lower. More importantly, the G8 thinks the state of their respective economies would hopefully act as a correcting mechanism on prices in any case. The leaders agreed that global economic prospects "remain weak".

 

Ironically, just as US Federal Reserve Chairman Ben Bernanke was issuing soundings stateside about easing-up on quantitative easing, they noted that downside risks have reduced thanks in part to "significant policy actions taken in the US, euro area and Japan, and to the resilience of major developing and emerging market economies".

 

The leaders said most financial markets had seen marked gains as a result. "However, this optimism is yet to be translated fully into broader improvements in economic activity and employment in most advanced economies. In fact, prospects for growth in some regions have weakened since the Camp David summit." You bet they have!

 

The Lough Erne declaration had one very significant facet with implications for the oil and gas industry along with mining. The G8 leaders said developing countries should have corporate identification data and the capacity to collect the taxes owed to them and other countries had "a duty to help them".

 

The move specifically targets extractive industries. It follows revelations that many mining companies use complex ownership structures in the Netherlands and Switzerland to avoid paying taxes on the natural resources they extract in developing countries. Hence, the G8 agreed that mining companies should disclose all the payments they make, and that "minerals should not be plundered from conflict zones".

 

Speaking after the declaration was signed, UK Prime Minister David Cameron said, "We agreed that oil, gas and mining companies should report what they pay to governments, and that governments should publish what they receive, so that natural resources are a blessing and not a curse." Good luck with that Sir!

 

And that dear reader is that! Here are the links to this blogger's reports for CFO World on tax, trade, economy and US President Barack Obama’s soundbites (to students in Belfast), should they interest you. Also on a lighter note, here is a report from The Sun about Obama's idiotic gaffe of calling UK Chancellor of the Exchequer George Osborne – "Jeffery" Osborne on more than one occasion and his bizarre explanation for it.

 

So the leaders' motorcades have left, the ministerial delegations are out and the police – who did a great job – are packing it in. Out of the eight leaders and EU officials in Lough Erne, the Oilholic felt Canadian PM Stephen Harper looked the most relaxed while German Chancellor Angela Merkel looked least cranky among her European peers. Guess they would be, as both economies are the only ones in the G8 still rated as AAA by all three ratings agencies.

 

That's all from Enniskillen folks! Should you wish to read the so called Lough Erne Declaration in full, it can be downloaded here. Despite the pressures of reporting, the buzz of a G8 Summit and the hectic schedule, yours truly could not have left without visiting Enniskillen Castle (above right) in this lovely town full of welcoming, helpful people with big smiles.

The location's serenity is a marked contrast from the Russians versus West goings-on at Lough Erne. It's a contrasting memory worth holding on to. And on Syria, both sides agreed to disagree, but expressed the urgency to hold a 'peace summit.' Sigh! Not another summit? Keep reading, keep it 'crude'!

 

To follow The Oilholic on Twitter click here.

 

To email: gaurav.sharma@oilholicssynonymous.com
 

© Gaurav Sharma 2013. Photo 1: Lough Erne Resort, Enniskillen, Northern Ireland © Invest NI. Photo 2: Enniskillen Castle, Northern Ireland © Gaurav Sharma, June 18, 2013.

The 2013 G8 summit, Syria & crude prices

There is a certain measure of positive symbolism in being here in Northern Ireland for the 2013 G8 summit. Who would have imagined when the Good Friday agreement was signed in 1998, that 15 years later the then sectarian strife-torn province would host the leaders of the eight leading industrialised nations for their annual shindig?

That point was not lost on US President Barack Obama, among the few who didn’t express apprehensions, when UK PM David Cameron announced the venue for the summit last year. Cameron wanted to send a message out to the world that Northern Ireland was open for business and based on what yours truly has seen and heard so far, that's certainly a view many share.

 

Addressing an audience of students in Belfast, Obama said, "Few years ago holding a summit of world leaders in Northern Ireland would have been unthinkable. That we are here today shows the progress made in the path to peace and prosperity [since 1998]."

"If you continue your courageous path towards permanent peace, and all the social and economic benefits that come with it, that won't just be good for you. It will be good for this entire island, for the United Kingdom, for Europe; and it will be good for the world," he added.

Here we all are in Belfast heading to a quaint old town called Enniskillen. Of course, the Oilholic won’t be making his way there in a style befitting a president, a prime minister or a gazillion TV anchors who have descended on Northern Ireland, but get there - he most certainly will - to examine the 'cruder' side of things.

It has barely been a year since the G8 minus Russia (of course) griped about rising oil prices and called on oil producing nations to up their production. "We encourage oil producing countries to increase their output to meet demand. We stand ready to call upon the International Energy Agency (IEA) to take appropriate action to ensure that the market is fully and timely supplied," the G7 said in a statement last August.

Of course since then, we’ve had the US 'Shale Gale', dissensions at OPEC and rising consumption of India and China according to the latest data. The smart money would be on the G7 component of the G8 not talking about anything crude, unless you include the geopolitical complications being caused by Syria, which to a certain extent is overshadowing a largely economic summit.

That wont be a shame because its not for politicians to fiddle with market mechanisms. Nonetheless, the Brent forward month futures touched a 10-week high close to US$107 a barrel on Monday before retreating. Despite a lull, if not a downturn, in OECD economic activity, the benchmark remains in three figures.

Syria's impact on oil markets is negligible, but a prolonged civil war there could affect other countries in the Middle East, worse still drag a few oil producers in. Yet a stalemate between Russian President Vladimir Putin and the West has already become apparent here at the G8. There will, as expected, be no agreement on Syria with the Russians supporting the Assad regime and the West warily fretting over whether or not to supply the Syrian rebels with arms.

Away from geopolitics and the G8, in an investment note to clients, analysts at investment bank Morgan Stanley said the spread between WTI and Brent crude will likely widen in the second half of 2013, with a Gulf Coast "oversupply driving the differential".

The banks notes, and the Oilholic quotes, "WTI-Brent may struggle to narrow below US$6-7 per barrel and likely needs to widen in 2H13 (second half 2013)." That’s all for the moment from Belfast folks, as the Oilholic heads to Enniskillen! In the interim, yours truly leaves you with a view of Belfast's City Hall. Keep reading, keep it 'crude'

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© Gaurav Sharma 2013. Photo: City Hall, Belfast, Northern Ireland © Gaurav Sharma, June 17, 2013

A Syrian muddle, Barclays on Brent & more

The Brent forward month futures contract for August spiked above US$106 per barrel in intraday trading on Friday at one point. Most analysts cited an escalation of the Syrian situation and the possibility of it morphing into a wider regional conflict as a reason for the 1%-plus spike. The trigger was Obama administration’s reluctant acknowledgement the previous evening of usage of chemical weapons in Syria. The Oilholic’s feedback suggests that more Europe-based supply-side market analysts regard a proactive US involvement in the Syrian muddle as a geopolitical game-changer than their American counterparts. There is already talk of Syria become as US-Russia proxy war.

Add to that Israel’s nervousness about securing its border, jumpiness in Jordon and behind the scenes manipulation of the Assad regime and Syria by Iran. In an investment note, analysts at Barclays have forecasted Brent to climb back to the Nelson figure of 111. Yet a deeper examination of what the bank’s analysts are saying would tell you that their take is not a reactive response to Syria.

In fact, Barclays cites supply constriction between OPEC members as a causative agent, specifically mentioning on-going problems in Nigeria, Libya and shipment concerns in Iraq. For what its worth, and appalling as it might well be, Syria's conflict is only being priced in by traders in passing in anticipation of a wider regional geopolitical explosion, which or may not happen.

Away from OPEC and Syria, the Sudan-South Sudan dispute reared its ugly head again this week. A BBC World Service report on Thursday said Sudan had alleged that rebels based in South Sudan attacked an oil pipeline and Diffra oilfield in the disputed Abyei region. The charge was denied by South Sudan and the rebels.

 

The news follows Sudan’s call for a blockade of South Sudan's oil from going through the former’s pipelines to export terminals to take effect within 60 days. The flow of oil only resumed in April. Both Sudan and the South are reliant on oil revenue, which accounted for 98% of South Sudan's budget. However, the two countries cannot agree how to divide the oil wealth of the former united state. Some 75% of the oil lies in the South, but all the pipelines…well run north.

 

As the geopolitical analysts get plenty of food for thought, BP’s latest Statistical Review of World Energy noted that global energy consumption grew by 1.8% in 2012, with China and India accounting for almost 90% of that growth. Saudi Arabia remained the world’s top producer with its output at 11.5 million barrels of oil equivalent per day (boepd) followed by Russia at 10.6 million boepd. However, the US in third at 8.9 million boepd gave the “All hail shale” brigade plenty of thought. Especially, as BP noted that 2012 saw the largest single-year increase in US oil production ever in the history of the survey.

 

Moving on to corporate news, Fitch Ratings said Repsol's voluntary offer to re-purchase €3 billion of preference shares will increase the group's leverage, partially offsetting any benefit from the proceeds of its recent LNG assets divestment (revealed in March). This reduces the potential for an upgrade or Positive Outlook on the group's 'BBB-' rating in the near term, the agency added. Repsol's board voted in May to repurchase the preference shares partly with cash and partly with new debt.

 

Finally, Tullow Oil has won its legal battle, dating back to 2010, over tax payable on the sale of oilfields in Uganda. On Friday, the company said a UK court had ruled in favour of its indemnity claim for $313 million in its entirety (when the Uganda’s government demanded over $400 million in capital gains tax after Heritage Oil sold assets in the country to Tullow in a $1.45 billion deal).

 

Heritage said it would now evaluate its legal options and could launch an appeal. When the original deal between Heritage and Tullow was concluded, Tullow paid the Ugandan Revenue Authority $121.5 million – a third of the original $405 million tax demand – and put the remaining $283.5 million into an escrow account.

 

That’s all for the moment folks! The Oilholic has arrived in Belfast ahead of 2013 G8 Summit in Northern Ireland under the UK’s presidency, where Syria, despite the meeting being an economic forum, is bound to creep up on the World leaders’ agenda. As will energy-related matters. So keep reading, keep it ‘crude’!

 

To follow The Oilholic on Twitter click here.

 

To email: gaurav.sharma@oilholicssynonymous.com

 

© Gaurav Sharma 2013. Photo: Veneco Oil Platform, California, USA © Rich Reid / National Geographic.

Brent’s ‘nine-month high’, Aubrey, BP & more

Oh boy, what one round of positive data, especially from China, does to the oil market! The Brent forward month futures contract for March is within touching distance of a US$120 per barrel price and the bulls are out in force. Last Friday’s intraday price of US$119.17 was a nine-month high; a Brent price level last seen in May 2012. The cause – and you have heard this combination before – was healthy economic data from China, coupled with Syrian turmoil and an Iranian nuclear stalemate.

 

The Oilholic has said so before, and will say it again – the last two factors touted by market commentators have been broadly neutral in terms of their impact for the last six months. It is the relatively good macroeconomic news from China which is principally behind the rally that nearly saw the Brent price breach the US$120 level.

 

The bull-chatter is already in full force. In a note to clients, Goldman Sachs advised them last week to maintain a net long position in the S&P GSCI Brent Crude Total Return Index. The investment bank believes this rally is "less driven by supply shocks and instead by improving demand."

 

"Global oil demand has surprised to the upside in recent months, consistent with the pick-up in economic activity," the bank adds in an investment note. Really? This soon – on one set of data? One thing is for sure, with many Asian markets shut for the Chinese New Year, at least trading volumes will be lighter this week.

 

Nonetheless, the ‘nine-month high’ also crept into the headline inflation debate in the UK where the CPI rate has been flat at 2.7% since October, but commentators reckon the oil spike may nudge it higher. Additionally, the Brent-WTI spread is seen widening yet again towards the US$25 per barrel mark. On a related note, Enterprise Product Partners said that capacity on its Seaway pipeline to the US Gulf of Mexico coast from Cushing, Oklahoma will remain limited until much later this year.

 

Moving away from pricing, news arrived end-January that the inimitable Aubrey McClendon will soon vacate the office of the CEO of Chesapeake Energy. It followed intense scrutiny over the last nine months about revelations, which surfaced in May, regarding his borrowings to finance personal stakes in company wells.

 

As McClendon announced his departure on January 29, the company’s board reiterated that it had found no evidence to date of improper conduct by the CEO. McClendon will continue in his post until a successor is found which should be before April 1st – the day he is set to retire. The announcement marks a sad and unspectacular exit for the great pioneer who co-founded and led Chesapeake Energy from its 1989 inception in Oklahoma City and has been a colourful character in the oil and gas business ever since.

 

Whatever the circumstances of his exit may be, let us not forget that before the so called ‘shale gale’ was blowing, it was McClendon and his ilk who first put their faith in horizontal drilling and hydraulic fracturing. The rest, and US’ near self-sufficiency in gas supplies, is history.

Meanwhile, BP has been in the crude news for a number of reasons. First off, an additional US$34 billion in claims filed against BP by four US states earlier this month have provided yet another hurdle for the oil giant to overcome as it continues to address the aftermath of the 2010 Gulf of Mexico oil spill.

 

However, Fitch Ratings not believe that the new round of claims is a game changer. In fact the agency does not think that any final settlement is likely to be enough to interfere with BP's positive medium term credit trajectory. The latest claims come on top of the US$58 billion maximum liability calculated by Fitch. If realised, the cost of the spill could rise up to as much as US$92 billion.

 

The agency said the new claims should be put in the context of an asset sale programme that has raised US$38 billion. “This excludes an additional US$12 billion in cash to come from the sale of TNK-BP this year – upside in our analysis because we gave BP no benefit for the TNK-BP stake. BP had US$19 billion of cash on its balance sheet at 31 December 2012. That is after it has already paid US$38 billion in settlements or into escrow,” it added.

 

Away from the spill, the company announced that it had started production from new facilities at its Valhall field in the Norwegian sector of the North Sea on January 26 with an aim of producing up to 65,000 barrels of oil equivalent per day in the second half of 2013. Valhall's previous output averaged about 42,000 barrels per day (bpd), feeding crude into the Ekofisk oil stream.

 

Earlier this month, BP also said that both consortiums vying to link Azerbaijan's Shah Deniz gas field in the Caspian Sea, into Western European markets have an equal chance of success. BP operates the field which was developed in a consortium partnership with Statoil, Total, Azerbaijan’s Socar, LukAgip (an Eni, LUKoil joint venture) and others.

 

A decision, whether to pipe gas from the field into Austria via the proposed Nabucco (West) pipeline or into Italy through the rival Trans Adriatic Pipeline (TAP) project, is expected to be made by mid-2013. Speaking in Vienna, Al Cook, head of BP's Azeri operations, said, “I genuinely believe both pipelines at the moment have an equal chance. There's certainly no clear-cut answer at the moment.”

 

BP is aiming for the first gas from Shah Deniz II to be delivered to existing customer Turkey in 2018. Early 2019 is the more likely date for the first Azeri gas to reach Western Europe via this major development often touted as one which would reduce European dependence on Russia for its energy supplies.

 

The Shah Deniz consortium owns equity options in both the pipeline projects and Cook did not rule out that both Nabucco (West) and TAP could be built in the long term. Specifically, BP's own equity options, which are part of the Shah Deniz stakes, are pegged at 20% in TAP and 14% in Nabucco. Cook said BP was not “actively seeking” to increase its stake in either project – a wise choice indeed.

 

On February 4, BP said its Q4 2012 net profit, adjusted for non-operating items, currency and accounting effects, fell to US$3.98 billion from US$4.98 billion recorded over the corresponding quarter last year. Moving away from BP, Royal Dutch Shell posted a 6% dip in 2012 profits to US$27 billion on the back of weak oil and gas prices and lower exploration and production (E&P) margins.

 

The Anglo-Dutch oil major reported Q4 earnings of US$7.3 billion, a rise of 13%. However, on an adjusted current cost of supply basis and one-off asset sales, the profit came in at US$5.58 billion. In particular, Shell’s E&P business saw profits dip 14% to US$4.4 billion, notwithstanding an actual 3% increase in oil and gas production levels. However, the company did record stronger refining margins.

 

Ironically, while acknowledging stronger refining margins, Shell confirmed its decision to close most of its Harburg refinery units in Hamburg, Germany. The permanent shutdown of much of its 100,000 bpd refinery is expected next month in line with completing a deal made with Swedish refiner Nynas in 2011.

 

Finally, in a typical Italian muddle, several oil executives in the country are under investigation following a probe into alleged bribery offences related to the awarding of oil services contracts to Saipem in Algeria. Eni has a 43% stake in Saipem which is Europe’s biggest oil services provider. While the company itself denied wrongdoing, the probe was widened last Friday to include Eni CEO Paolo Scaroni.

 

The CEO’s home and office were searched as part of the probe. However, Eni is standing by their man and said it will cooperate fully with the prosecutor’s office in Milan. So far, Pietro Franco Tali (the CEO of Saipem) and Eni’s Chief Financial Officer Alessandro Bernini (who was Saipem’s CFO until 2008) have been the most high profile executives to step down in wake of the probe. Watch this crude space! That’s all for the moment folks! Keep reading, keep it ‘crude’!

 

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© Gaurav Sharma 2013. Photo 1: Asian oil rig © Cairn Energy. Photo 2: Gas extraction site © Chesapeake Energy.

The drivers, the forecasts & the ‘crude’ mood

At times wild swings in the crude market’s mood do not reflect oil supply and demand fundamentals. The fundamentals, barring a geopolitical mishap on a global scale, alter gradually unlike the volatile market sentiment. However, for most parts of Q2 and now Q3 this year, both have seemingly conspired in tandem to take the world’s crude benchmarks for a spike and dive ride.

 

Supply side analysts have had as much food for thought as those geopolitical observers overtly keen to factor in an instability risk premium in the oil price or macroeconomists expressing bearish sentiments courtesy dismal economic data from various crude consuming jurisdictions. For once, no one is wrong.

 

A Brent price nearing US$130 per barrel in mid-March (on the back of Iranian threats to close the Strait of Hormuz) plummeted to under US$90 by late June (following fears of an economic slowdown in China and India affecting consumption patterns). All the while, increasing volumes of Libyan oil was coming back on the crude market and the Saudis, in no mood to compromise at OPEC, were pumping more and more.

 

Then early in July, as the markets were digesting the highest Saudi production rate for nearly three decades, all the talk of Israel attacking Iran resurfaced while EU sanctions against the latter came into place. It also turned out that Chinese demand for the crude stuff was actually up by just under 3% for the first six months of 2012 on an annualised basis. Soon enough, Brent was again above the US$100 threshold (see graph on the right, click to enlarge).

 

Fast forward to the present date and the Syrian situation bears all the hallmarks of spilling over to the wider region. As the West led by the US and UK helps rebels opposed to President Bashar al-Assad, Russia is seen helping the incumbent; not least via a recent announcement concerning exchange of refined oil products from Russia for Syrian crude oil exports desperately needed by the latter.

 

A spread of hostilities to Lebanon, Jordan, Turkey and Iraq could complicate matters with the impact already having been seen in the bombing of Iraq-Turkey oil pipeline. Additionally, anecdotal evidence suggests the Saudis are now turning the taps down a bit in a bid to prop up the oil price and it appears to be working. The Oilholic will be probing this in detail on visit to the Middle East next week.

 

While abysmal economic data from the Old Continent may not provide fuel – no pun intended – to bullish trends, one key component of EU sanctions against Iran most certainly will. A spokesperson told the Oilholic that tankers insured by companies operating in EU jurisdictions will lose their coverage if they continue to carry Iranian oil from July.

 

Since 90% of the world's tanker fleet – including those behemoths called ‘supertankers’ passing through dangerous Gulf of Aden – is insured in Europe, the measure could take out between 0.8 and 1.1 million barrels per day (bpd) of Iranian oil from Q3 onwards according an Istanbul-based contact in the shipping business.

 

In fact OPEC’s output dipped by 70,000 bpd in month over month terms to 31.4 million bpd in July on the back of a 350,000 bpd drop in June over May. No prizes for guessing that of the 420,000 bpd production dip from May to July – 350,000 bpd loss is a direct result of the Iranian squeeze. Although Tehran claims it is a deliberate ploy.

With an average forecast of a rise in consumption by 1 million bpd over 2012 based on statements of various agencies and independent analysts, price spikes are inevitable despite a dire economic climate in Europe or the OECD in general.

 

Cast aside rubbish Iranian rhetoric and throw in momentary geopolitical supply setbacks like the odd Nigerian flare-up, a refinery fire in California or the growing number of attacks on pipeline infrastructure in Columbia. All of these examples have the potential to temporarily upset the apple cart if supply is tight.

 

“Furthermore, traders are wising up to fact that a price nudge upwards these days is contingent upon non-OECD consumption patterns and they hedge their bets accordingly. WTI aside, most global benchmarks look towards the motorist in Shanghai more than his counterpart in San Francisco these days,” says one industry insider of his peers.

 

When the Oilholic last checked at 1215 BST on August 23, the ICE Brent October contract due for expiry on September 13 was trading at US$115.95 while the NYMEX WTI was at US$97.81. It is highly likely that ICE Brent forward futures contracts for the remaining months of the year will end-up closing above US$110 per barrel, and almost certainly in three figures. Nonetheless, prepare for a rocky ride over Q4!

 

Moving away from pricing of the crude stuff, it seems the shutdown of Penglai 19-3 oilfield by the Chinese government in wake of an oil spill last year has hit CNOOC’s output and profits. According to a recent statement issued at Hong Kong Stock Exchange, CNOOC saw its H1 2012 output fall 4.6% on an annualised basis owing to Penglai 19-3 in which it holds 51% of the participating interest for the development and production phase. ConocoPhillips China Inc (COPC) is the junior partner in the venture.

 

This meant H1 2012 net income was down by 19% on an annualised basis from Yuan 39.34 billion to Yuan 31.87 billion (US$5 billion) according to Chief Executive Li Fanrong. CNOOC's US$15.1 billion takeover of Canada’s Nexen, a move which could have massive implications for the North Sea, is awaiting regulatory approval from Ottawa.

 

Away from the “third largest” of the big trio of rapidly expanding Chinese oil companies to a bit of good news, however temporary, for refiners either side of the pond. That’s if you are to believe investment bank UBS and consultancy Wood Mackenzie. UBS believes that for better parts of H1 2012, especially May and June, refining margins were at near “windfall levels” as the price of the crude stuff dipped in double-digit percentiles (25% at one point in the summer) while distillate prices held-up.

 

Wood Mackenzie also adds that given the refiners’ crude raw material was priced lower but petrol, diesel and other distillates remained pricey meant moderately complex refiners in northwest Europe made a profit of US$6.40 per barrel of processed light low sulphur Brent crude in June, compared with the average profit of 10 cents per barrel last year.

 

The June margin for medium, high sulphur Russian Urals crude was a profit of US$13.10 per barrel compared with the 2011 average of US$8.70, the consultancy adds. American refiners had a bit of respite as well over May and June. Having extensively researched refining investment and infrastructure for over two years, the Oilholic is in complete agreement with Société Générale analyst Mike Wittner that such margins are not going to last (see graph above, click to enlarge).

 

To begin with the French investment bank and most in the City expect global refinery runs to drop shortly and sharply to -1.3 million bpd in September versus August and -0.8 million bpd in October versus September. Société Générale also remains neutral on refining margins and expects them to weaken on the US Gulf Coast, Rotterdam and the Mediterranean but strengthen in Singapore. Yours truly will find out more in the Middle East next week. That’s all for the moment from London folks! Keep reading, keep it ‘crude’!

 

© Gaurav Sharma 2012. Photo 1: Russian oil pump jacks © Lukoil. Graph 1: Comparison of world crude oil benchmarks (Source: ICE, NYMEX, SG). Graph 2: World cracking margins (US$/barrel 5 days m.a) © SG Cross Asset Research, August 2012.

Hello Doha! Time for kick-off at 20th WPC

The Oilholic arrived in Doha late last night before the biggest bash in the oil & gas business kicks-off in Qatar – yup its 20th World Petroleum Congress! Sadly a very late arrival at the hotel meant, the first square meal was not a local delicacy – but a visit to Dunkin’ Donuts which was just about the only place open at 12:20 am local time. Still there’ll be plenty of opportunities to savour local delights over the next five days!

As the opening ceremony takes place later this evening, there is lots to discuss already following Shell’s announcement about its withdrawal from the Syrian market in wake of EU sanctions. Other oil companies are simply bound to follow suit. Syrian officials are expected to be in attendance but it is highly doubtful that the Oilholic would gain an attendance with them.

A few more bits before things get going, one hears that Fitch Ratings expects the credit profiles of the European oil majors to remain stable in 2012 despite the risk of a possible slowdown in revenue growth combined with still ambitious investment spending programmes of around US$90 billion over the following four quarters. The agency believes sector revenue growth in 2012 will probably slow to single digits from more than 20% in 2011, according to a new research note.

The Oilholic also had the pleasure of interviewing Eduardo de Cerqueira Leite, the chairman of (currently) the world’s largest law firm by revenue – Baker & McKenzie – on behalf of Infrastructure Journal. Leite does not believe the integrated model of combining upstream, downstream and midstream businesses is dead as far as major oil companies are concerned.

“We saw Marathon Oil Corp split off its refining business and know that ConocoPhillips is planning to do the same. By spinning off R&M infrastructure assets a company can focus on producing oil and gas, particularly in the more innovative areas of offshore oil exploration and unconventional oil and gas production,” he said.

“However, we are not seeing all of the majors spin off their R&M divisions. Many still have a need for refining expertise and processing plants due to the increasing development of liquefied natural gas, natural gas liquids and high-sulphur heavy crudes. So, I wouldn't call the integrated model dead, although we are seeing changes to it,” Leite concludes.

That’s it for now. Keep reading, keep it 'crude'!

© Gaurav Sharma 2011. Photo: Doha Skyline © WPC. Logo: 20th World Petroleum Congress © WPC.

Penglai 19-3, Syrian oil & the latest price forecast

Starting with the latter point first, Société Générale’s latest commodities review for Q4 2011 throws up some crude points for discussion. In the review, the French investment bank’s analysts hold a largely bearish stance over the price of crude for the remainder of 2011; even for the forecasts where the possibility of a recession has not been factored in.

Société Générale’s global head of oil research Mike Wittner notes that oil markets have not yet priced in a weaker economic and oil demand growth environment. “As such, our view is that crude oil prices are due for a significant decline, which will ratchet the oil complex down into a lower trading range that will last through 2012,” he adds.

He notes that the crude price drop “should” begin within the next 30-45 days, for a variety of reasons. “Current bullish supply disruptions in Nigeria and the UK are temporary, and peak Atlantic hurricane season typically ends in mid-October. As these bullish factors fade, a bearish driver will begin to emerge,” Wittner adds.

As the Oilholic noted last week, this driver is the new Libyan government’s move toward a modest resumption of crude production by end-September. Couple this with weak economic data and Société Générale is not alone in bearish price forecasts. It projects ICE Brent crude to average US$98 in both Q4 2011 and Q1 2012 (each revised downward by US$15). Brent forecast for 2012 is US$100 (also down US$15).

Concurrently, NYMEX WTI crude is expected to average US$73 in both Q4 2011 and Q1 2012 (down US$28). Société Générale’s WTI projection for 2012 is US$80 (down US$23). The reason for the larger revisions to WTI is that the bank expects current price disconnect with waterborne crudes, such as LLS and Brent, to continue.

As widely expected, and in line with weaker economic growth, Société Générale also lowered its forecasts for global oil demand growth to 1.0 million barrels per day (bpd) in both 2011 and 2012 (revised downward by 0.4 million bpd and 0.5 million bpd, respectively). Additionally, it is now looking increasingly like that growth in non-OPEC supply and OPEC NGLs will be enough to meet demand, so OPEC will not need to increase crude output above the current 30.0 million bpd at its next meeting in December.

Moving away from pricing, the row over whether or not banning or restricting the import of Syrian crude oil is an effective enough tool to force President Bashar al-Assad to give up violent ways continues. While clamour had been growing for the past four weeks, it gained momentum when the EU has stepped up sanctions on Syria by banning imports of its oil, as protests against the rule of President Assad were brutally crushed last week. On the other side of the argument, Russia condemned the EU’s move as ‘ineffective.’

Quite frankly, in a crude hungry world, there is nothing to stop the Syrians from seeking alternative markets. Nonetheless, the Oilholic feels it is prudent to point out that EU member nations are buyers of 95% of Syrian crude. So a sudden ban could be a blow to Assad, albeit a temporary one. From a risk premium standpoint, Syrian contribution to global markets is not meaningful enough to impact crude prices.

Elsewhere, the State Oceanic Administration of China ordered ConocoPhillips China Inc (COPC) to stop all operations at the Penglai 19-3 oil field in the Bohai Bay off North-eastern China last week because of its dissatisfaction with COPC's progress in cleaning up an oil spill.

The field is operated under a Production Sharing Contract wherein COPC is the operator and responsible for the management of daily operations while CNOOC holds 51% of the participating interest for the development and production phase. However, ratings agency Moody’s thinks suspension of Penglai 19-3 work has no ratings impact on CNOOC itself.

"CNOOC expects the suspension of all operations at Penglai 19-3 will reduce the company's net production volume by 62,000 barrels per day, or approximately 6.7% of its average daily production in H1 2011. Although the reduction is sizable, the impact is mitigated by the higher-than-expected oil prices realised by CNOOC year-to-date, and which provide it with strong operational cash flow and a strong liquidity buffer," says Kai Hu, a Moody's Vice President and Lead Analyst for CNOOC.

Even after the volume reduction and a moderate retreat of crude oil prices to around US$90 is factored in, Moody’s estimates that CNOOC will still generate positive free cash flow in 2011 and 2012, on the assumption that there is no material change in its announced capex and investment plan, and that it will maintain prudent discipline in reserve acquisitions and development.

"CNOOC has maintained a solid liquidity profile, which is supported by a total of Rmb 88.37 billion in cash and short-term investments as of June 30, 2010, and compared with Rmb 40.66 billion in total reported debt (including Rmb 21.99 billion in short-term debt)," Hu concludes.

© Gaurav Sharma 2011. Photo: Alaska Pipeline, Brooks Range, USA © Michael S. Quinton/National Geographic