On crude producers’ talks, analysts & academics

As the second month of the third oil trading quarter of 2016, comes to a close both Brent and WTI futures remain in technical bull territory despite a recent cooling down of oil prices. 

The Oilholic is struggling to find any market analysts – including those at UBS, Commerzbank, Morgan Stanley or Barclays to name a few – keeping their faith in (a) the oil producers’ talks pencilled in for end-September producing anything tangible, and (b) whether an output freeze would actually work with oil production in Russia and Saudi Arabia at record highs. 

A real terms cut in production could provide a short-term boost to prices but it does not appear to be even a remote possibility at this point. Yet, the long callers continue to bet on an uptick if the latest US CFTC data is anything to go by. As the Oilholic pointed out in July, demand projections continue to head lower, so yours truly did ask the question in a recent Forbes piece – are the talks as much about stabilising oil supply, or a likely post-Sept dip in China’s demand.

As for viewing the oil price via the prism of demand permutations, Fitch Ratings’ latest assumption for ratings purposes just about sums it up. The rating agency assumes Brent and WTI will average $42 per barrel in 2016, up from its $35 base case in February.

“However, we do not believe that the rapid price recovery seen in the first half of 2016 will continue. The sub-$30 prices at the start of the year approached cash costs for many producers and were unsustainable in all but the very short term. Prices in the $40-$50 range allow most producers to break even on a cash basis, if not to cover sunk costs,” it added. 

Furthermore, market expectations that US shale production will begin to rebound at prices above $50, will keep prices below that level until a supply deficit has eroded some of the inventory overhang.

Away from market shenanigans, another one of those research papers predicting there are no viable alternatives to oil and gas for meeting global energy needs arrived in the Oilholic’s mailbox. This one is from the Head of Petroleum Geoscience and Basin Studies research and Chair of Petroleum Geoscience at University of Manchester Dr Jonathan Redfern and energy recruiters Petroplan; overall an interesting read. 

Sticking with ‘crude’ academic papers, another interesting one was published this month by Luisa Palacios of Columbia University’s Center on Global Energy Policy charting Venezuela’s growing risk to the global oil market.

The country’s problems are well documented, but Palacios claims glaring losses in oil production have "yet to translate into a commensurate fall in oil exports", due to the heavy toll taken by the economic collapse on domestic demand. (PDF download link)

Furthermore, the stability of exports reflected in the data in first half of the year "masks a deteriorating trend with June exports already more than 300,000 barrels per day lower than last year’s average."

Despite all the headline noise about Venezuela, the most severe risks to oil markets thus still lie ahead. Certainly food for thought, but that’s all for the moment folks! Keep reading, keep it crude! 

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© Gaurav Sharma 2016. Photo: Oil platform © Cairn Energy Plc. 

Why ‘chiflados’ in Caracas infuriate Colombians

Colombia and Venezuela haven’t always been the best of friends over the last 15 years, since the late Hugo Chavez swept to power. However, here in Bogota, the Oilholic finds relations between the two neighbours at an all time low, largely down to a select bunch of “chiflados oportunistas en Caracas” (loosely translated as opportunistic crackpots in Caracas), who blame everyone but themselves for  the effects their own mad economic policies, say locals.

But first some background – A general election is slated for 6 December in Venezuela with oil nowhere near the three-figure per barrel price the country needs to balance its budget. Regional analysts fear a sovereign default and monthly inflation according to independent forecasts is in double figures as Caracas hasn’t published official data for a while (even the fudged version). Meanwhile, industrial production is in doldrums as the government continues to print money. 

The Venezuelan Bolivar’s official exchange rate to the dollar is VEF6.34, but you’d be lucky if anyone in Bogota or elsewhere in Latin America would be willing to exchange the greenback for VEF635; forget the decimal point! Price controls and availability have played havoc with what Venezuelans can and cannot buy. More often than not, it is no longer a choice in a country that famously ran out of loo rolls last year. So what does President Nicolas Maduro do? Why blame it all on “conspirators” in Colombia! 

Now hear the Oilholic out, as he narrates a tale of farce, as narrated to him by an economics student at the local university, which this blogger has independently verified. With the Venezuelan Bolívar more or less not quite worth the paper its printed on – as explained above – most of the country’s citizens (including Chavistas, and quite a few regional central banks if rumours are to be believed) – turn to DolarToday, or more specifically to the website’s twitter account, to get an unofficial exchange rate based on what rate the Bolívar changes hands in Cucuta, a Colombian town near the border with Venezuela (The website currently puts the Bolivar just shy of VEF800 to the dollar). 

It is where Venezuelans and Colombians meet to exchange cheap price-controlled fuel, among other stuff from the false economy created by Caracas, to smuggle over to Colombia. The preferred currency, is of course, the Colombian peso, as the dollar’s exchange rate to the Bolívar is calculated indirectly from the value of the peso with little choice to do anything else but. 

The final calculation is extremely irregular, as the Colombian peso itself grapples with market volatility, but what the fine folks in Cucata come up with and DolarToday reports is still considered a damn sight better than the official peg, according to most contacts in Colombia and beyond, including the narrator of the story himself. 

So far so much for the story, but what conclusions did President Maduro take? Well in the opinion of the Venezuelan President, DolarToday is a conspiracy by the US, their pals in Colombia and evil bankers to wreck Venezuela’s economy; as if it needs their help! Smuggling across the border and of course food shortages in the country have been promptly blamed on private enterprise players “without scruples” and Colombians, carefully omitting Venezuela’s National Guard personnel, without whose alleged complicity, it is doubtful much would move across the border.

Maduro subsequently closed the border crossing from Tachira, Venezuela to Norte de Santander, Colombia earlier this quarter. He also announced special emergency measures in 13 Venezuelan municipalities in proximity of the Colombian border. The shenanigans prompted an angry response form President Juan Manuel Santos, Maduro’s counterpart in Bogota. Both countries recalled their respective ambassadors in wake of the incident. 

However, in line with the prevalent theme of finding scapegoats, Maduro’s government didn’t stop there. Nearly 2,000 Colombians have been deported from Venezuela, according newspapers here. Another 20,000 have fled back to Colombia, something which President Santos has described as a humanitarian crisis. Santos also chastised Venezuela at the Organisation of American States (OAS) noting that Caracas was blaming its “own economic incompetence on others” (translating literally from Spanish).

The Colombian President might well have felt aggrieved but he need not have bothered. The chiflados in Caracas know what they are. For example, when Venezuela was hit by an outbreak of chikungunya (last year), a disease marked by joint pains and bouts of fever according to the WHO website, the government’s response was as removed from reality as it currently is when it comes to DollarToday and smuggling across the Colombia-Venezuela border.

At the time, a group of doctors west of Caracas calling for emergency help saw their leader accused of leading a “terrorist campaign” of misinformation. With a warrant was issued for his arrest, the poor man fled the country. Close to 200,000 were affected according media sources outside of Venezuela but government statistics put the figure below 26,500. 

Each time economists and independent analysts challenge any data published by PDVSA or INE or any Venezuelan government institution, it is dismissed by Caracas as “politically motivated.” And so the story goes with countless such examples, albeit an international spat like the one with Colombia are relatively rare. Maduro is also miffed with neighbouring Guyana at the moment, for allowing ExxonMobil to carry out oil exploration in “disputed waters” which prompted a strong response at the UN from the latter.

Expect more nonsense from Caracas as the Venezuelan election approaches. However, here’s one telling fact from Colombian experts to sign off with – over the past year the Venezuelan Bolívar’s value has plummeted by 93% against the peso in the unofficial market. Now that’s something. 

The Oilholic tried to change pesos for the bolivar officially in the Colombian capital, but found few takers and got lots of strange looks! That’s all from Bogota for the moment folks as one heads to Peru! Back here later in the month, keep reading, keep it ‘crude’!   

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© Gaurav Sharma 2015. Plaza de Bolívar, Bogota, Colombia © Gaurav Sharma, October 2015

Oil prices, OPEC shenanigans & the North Sea

It has been a crude fortnight of ups and downs for oil futures benchmarks. Essentially, supply-side fundamentals have not materially altered. There’s still around 1.3 million barrels per day (bpd) of crude oil hitting the markets in excess of what’s required.

Barrels put in storage are at an all time high, thanks either to those forced to store or those playing contango. US inventories also remain at a record high levels. 

However, the biggest story in the oil market, as well as the wider commodities market, is the strength of the US dollar. All things being equal, the dollar’s strength is currently keeping both Brent and WTI front month futures contracts at cyclical lows. The past five trading days saw quite a few spikes and dives but Friday’s close came in broadly near to the previous week’s close (see graph on the left, click to enlarge).

In the Oilholic’s opinion, a sustained period of oil prices below $60 is not ideal for unconventional exploration. Nonetheless, not all, but a sufficiently large plethora of producers just continue to grin and bear it. While that keeps happening, and the dollar remains strong, oil prices will not find support. We could very well be in the $40-60 range until June at the very least. Unless excess supply falls from 1.3 million bpd to around 750,000 bpd, it is hard to see how the oil price will receive support from supply constriction. 

Additionally, Fitch Ratings reckons should Brent continue to lurk around $55, credit ratings of European, Middle Eastern and African oil companies would take a hit. European companies that went into the slump with stretched credit profiles remain particularly vulnerable.

In a note to clients, Fitch said its downgrade of Total to 'AA-' in February was in part due to weaker current prices, and the weaker environment played a major part in the downgrade and subsequent default of Afren.

"Our investigation into the effect on Western European oil companies' credit profiles with Brent at $55 in 2015 shows that ENI (A+/Negative) and BG Group (A-/Negative) were among those most affected. Both outlooks reflect operational concerns, ENI because of weakness in its downstream and gas and power businesses, BG Group due to historical production delays. Weaker oil prices exacerbate these problems," the agency added.

Of course, Fitch recognises the cyclical nature of oil prices, so the readers need not expect wholesale downgrades in response to a price drop. Additionally, Afren remains an exception rather than the norm, as discussed several times over on this blog.

Moving on, the Oilholic has encountered empirical and anecdotal evidence of private equity money at the ready to take advantage of the oil price slump for scooping up US shale prospects eyeing better times in the future. For one’s Forbes report on the subject click here. The Oilholic has also examined the state of affairs in Mexico in another detailed Forbes report published here.

Elsewhere, a statement earlier this week by a Kuwaiti official claiming that there is no appetite for an OPEC meeting before the scheduled date of June 5, pretty much ends all hopes of the likes of Nigeria and Venezuela in calling an emergency meeting. The official also said OPEC had “no choice” but to continue producing at its current levels or risk losing market share.

In any case, the Oilholic believes chatter put out by Nigeria and Venezuela calling for an OPEC meeting in the interest of self-preservation was a non-starter. Given that we’re little over two months away from the next meeting and the fact that it takes 4-6 weeks to get everyone to agree to a meeting date, current soundbites from the ‘cut production’ brigade don’t make sense.

Meanwhile, the UK Treasury finally acknowledged that taxation of North Sea oil and gas exploration needed a radical overhaul. In his final budget, before the Brits see a General Election on May 7, Chancellor George Osborne cut the country’s Petroleum Revenue Tax from its current level of 50% to 35% largely aimed at supporting investment in maturing offshore prospects.

Furthermore, the country’s supplementary rate of taxation, lowered from 32% to 30% in December, was cut further down to 20% and its collection at a lower rate backdated to January. Altogether, the UK’s total tax levy would fall from 60% to 50%.

Osborne’s move was widely welcomed by the industry. Some are fretting that he’s left it too late. Yet others reckon a case of better late than never could go a long way with the North Sea’s glory days well behind it. That’s all for the moment folks! Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2015. Graph: Tracking Friday oil prices close, year to date 2015 © Gaurav Sharma, March 20, 2015.

Brent’s premium gets dents as oil price dips

It’s definitely a moment worth recording and the Oilholic was rather glad he was awake earlier today when it happened. For at one point in Asian trading, both Brent and WTI were in perfect sync at US$48.05 per barrel as the oil markets rout continues (see screen grab below, click to enlarge). What's more, for a precious few minutes, the WTI actually traded at a premium of a few cents to Brent marking only the third such occurrence since 2010.

Of course, Brent’s premium has been since been restored back to well over a dollar and rising. However, it is a far cry from 2012 when the premium was averaging around $20 per barrel above the WTI, and did touch $25 at one point if this blogger’s memory serves him well.

The near coming together of both global benchmarks shouldn’t come as a surprise as it was on the horizon. What transpired today was merely for the sake of a record which might not be all that unique over the coming weeks and months of volatility. That said, once the projected supply correction kicks in around midway point of this year, the Oilholic does see Brent’s single digit premium to the WTI climb up to around $5.

As of now, one's 2015 oil price forecast is for a Brent price in the range of $75 to $85 and WTI price range of $65 to $75. Weight on Brent should be to the upside, while weight on WTI should be to the downside of the aforementioned range.

Meanwhile, a Baron’s article is suggesting oil could fall to $20, while industry veteran T. Boone Pickens says he’s seen several slumps in his lifetime and reckons a return to a $100 level within the next “12 to 18 months” is inevitable.

Additionally, the Oilholic has called an end to the so-called “commodities supercycle” in his latest quip for Forbes. On a related note, Goldman Sachs has trimmed its six and 12 month 2015 estimates for Brent to $43 and $70, from $85 and $90, and to $39 and $65, from $75 and $80, for the WTI.

Finally, as talk of a Venezuelan default gains market traction, Moody’s has downgrades ratings of PDVSA and its wholly-owned US-based refining subsidiary Citgo Petroleum. PDVSA’s long term issuer rating and senior unsecured notes were downgraded by the agency to Caa3 from Caa1. Moody’s changed its outlook on the ratings to stable from negative. 

Citgo Petroleum's Corporate Family Rating was downgraded to B3 from B1; its Probability of Default rating to B3-PD from B1-PD; and its senior secured ratings on term loans, notes and industrial revenue bonds to B3 from B1.

Additionally, the rating on Citgo's senior secured revolving credit facility was downgraded to B2 from B1, reflecting a lower expected loss in case of default vis-à-vis other classes of debt in the company's capital structure. The rating outlook was also changed to stable from negative.

The rating actions follow Moody's downgrade of the Venezuelan government's bond ratings to Caa3 from Caa1 with a stable outlook, earlier this week. The principal driver of the decision to downgrade Venezuela's sovereign rating was "a marked increase in default risk owing to lower oil prices," the agency said. That’s all for the moment folks! Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2015. Photo: Bloomberg screen grab as Brent and WTI futures achieve parity on January 15, 2015 © Bloomberg