Merry Christmas & a few crude notes!

Yes! Its that time of the year to wish you the dear readers of this blog the joys of the season and a very Merry Christmas, as another eventful year comes to a close. The Oilholic has been busy these past few weeks scribbling one's crude notes on oil market affairs for the International Business Times UK and Forbes. 

For starters, here is this blogger's take on US President-elect Donald Trump's nomination of ExxonMobil CEO Rex Tillerson as his Secretary of State. 

When the news emerged, as usual there were oversimplifications in the media, saying the nomination had much to do with Tillerson being close to Russian President Vladimir Putin. However, the Oilholic believes there's much more to the appointment; Tillerson for intents and purposes would be a formidable top US diplomat, not just Putin's mate. 

Additionally, here is one's commodities market year-ender, and some predictions on gold, silver and of course crude oil for 2017. Finally, here are some reasons - as outlined on Forbes - for why methinks the oil price might not rise further beyond $60 per barrel in 2017, as there is limited upside to such an an occurrence over the next 12 months. 

That's all on Christmas day folks! Keep reading, keep it Christmasy and 'crude'!

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© Gaurav Sharma 2016. Photo: Christmas tree at Rotterdam Station, The Netherlands © Gaurav Sharma.

‘Yukos Affair’ and its shadow over Putin’s Russia

President Vladimir Putin and what colours his vision of modern Russia are under the spotlight like never before. As Ukraine burns and western sanctions hit the Kremlin, Russia’s president remains defiant spewing yet stronger nationalistic rhetoric with a coterie of supporters in tow. Many would find internal politics in Putin’s Russia to be fascinating and repugnant in equal measure.

Yet, in order to understand the present, a past occurrence – the downfall of Yukos and its former chief Mikhail Khodorkovsky – would be a good starting point. In his latest work published by I.B. Tauris, academic Richard Sakwa not only describes the episode in some detail but also contextualises power struggles and insecurities that shaped one of the most controversial episodes in contemporary Russia.

This book isn’t merely Khodorkovsky's story from an unceremonious arrest in 2003 to a surprising release in December 2013. Rather, the author has taken that backdrop to give the readers an insight into the beginning and subsequent evolution of ‘Putinism’ as we know it. 

In just under 300 pages split by 12 chapters, Sakwa, an expert on Russian affairs with half a dozen works under his belt, has portrayed the event as an extraordinary confrontation between the two great forces of modernity – the state and the market – with Putin and Khodorkovsky as antagonists. 

“It was about their associated conceptions of freedom and at the same time – a struggle for Russia,” he writes. Putin’s determination to clip Khodorkovsky’s petrodollar powered wings marked a turning point. The oligarch’s controversial trial(s) attracted widespread international condemnation and ended in one of the world's richest and most powerful men becoming the state's prisoner. 

Far-reaching political and economic consequences in its wake left an indelible black mark about the quality of freedom in Putin's Russia. It also laid bare the complex connection between the Kremlin and big business during Russia's troubling transformation from a planned economy during the Soviet era to capitalism.

Being an outsider, it is easy to feel sympathetic towards Khodorkovsky and castigate the Russian way. However, by not overtly romanticising Khodorkovsky's resistance to Putin’s view of modern Russia, Sakwa paints a convincing picture of how the oligarch turned prisoner himself was no stranger to the contradictory essence of the country's democratic evolution.

As the author notes, Khodorkovsky was not only Putin’s antagonist, but also at the same time a protagonist of the contradictions that the president's regime reflected. Ultimately, it all leads on to how subversion of law and constitutionality has become commonplace in today’s Russia.

While the said subversion started taking hold in post-Soviet Russia, and Khodorkovsky most certainly used it to his advantage when it suited him; it was the oligarch’s ultimate downfall that made the state of affairs manifestly obvious beyond the country’s borders. It resonates today with Putin’s modus operandi as entrenched as ever. 

Through his brilliant, balanced description of a key episode in Russia’s rise towards becoming an oil and gas powerhouse, Sakwa has charted a warning from history on what to expect and where it might lead. The Oilholic would be happy to recommend Putin and the Oligarch to energy analysts, those interested in geopolitics, Russia, Yukos Affair or the oil world at large.

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© Gaurav Sharma 2014. Photo: Front Cover – Putin and the Oligarch: The Khodorkovsky-Yukos Affair © I.B. Tauris, February 2014.

Crude permutations of the Ukrainian stand-off

When the Russo-Georgian skirmish happened in 2008, European policymakers got a stark reminder of how reliant they were on Russian natural gas. Regardless of the geopolitics of that conflict, many leading voices in the European Union, especially in Germany, vowed to reduce their reliance on Russian gas.

The idea was to prevent one of the world's leading exporters of natural gas from using its resource as a bargaining tool should such an episode occur again. Now that it has, as the Ukrainian crisis brings Russia and West into yet another open confrontation, the Oilholic asks what happened to that vow. Not much given the scheme of things! What's worse, the Fukushima meltdown in Japan and a subsequent haphazard dismissal of the nuclear energy avenue by many European jurisdictions actually increased medium-term reliance on mostly Russian gas.

According to GlobalData, Russian gas exports to Europe grew to a record of 15.6 billion cubic feet per day last year. The US, which is not reliant on Russian natural resources, finds itself in a quandary as EU short-termism will almost certainly result in a toning down of a concerted response by the West against Russia in the shape of economic sanctions.

The human and socioeconomic cost of what's happening in Crimea and wider Ukraine is no laughing matter. However, President Vladimir Putin should be allowed a smirk or two at the idiocy and short-sightedness of the EU bigwigs – reliant on him for natural gas but warning him of repercussions! Therefore, sabre rattling by Brussels is bound to have negligible impact.

Meanwhile, Russia's Gazprom has said it will no longer offer Ukraine discounted gas prices because it is over US$1.5 billion in payment arrears which have been accumulating for over 12 months. Additionally, Rosneft could swoop for a Ukrainian refinery, according to some reports. While economic warfare has already begun, this blogger somehow does not see Russians and Ukrainians shooting at each other; Georgia was different.

Having visited both countries in the past, yours truly sees a deep familial and historic bond between the two nations; sadly that's also what makes the situation queasy. The markets are queasy too. Ukraine was hoping for a shale gas revolution and Crimea – currently in the Kremlin's grip – has its own shale bed. In November 2013, Chevron signed a $10 billion shale gas production sharing agreement with the Ukrainian government to develop the western Olesska field. Shell followed suit with a similar agreement.

Matthew Ingham, lead analyst covering North Sea and Western Europe Upstream at GlobalData, says shale gas production was inching closer. "Together with the UK and Poland, Ukraine could see production within the next three to four years."

However, what will happen from here is anyone's guess. A geopolitical bombshell has been dropped into the conundrum of exploratory and commercial risks.

Away from gas markets, the situation's impact on the wider crude oil market could work in many ways. First off, rather perversely, a mobilisation or an actual armed conflict is price positive for regional oil contracts, but not the wider market. A linear supply shortage dynamic applies here.

An economic tit-for-tat between Russia and the EU, accompanied by a conflict on its borders, would hurt wider economic confidence. So a prolonged escalation would be price negative for the Brent contract as economic activity takes a hit. Russia can withstand a dip in price by as much as $20 per barrel; but worries would surface should the $90-resistance be broken. To put things into perspective, around 85% Russia's oil is sold to EU buyers.

Finally, there is the issue of Ukraine as a major transit point for oil & gas, even though it is not a major producer of either. According to JP Morgan Commodities Research over 70% of Russia's oil & gas flow to Europe passes through Ukrainian territory. In short, all parties would take a hit and the risk premium, could just as well turn into a news sensitive risk discount.

Furthermore, in terms of market sentiment, this blogger notes that 90% of the time all of the risk priced and built into the forward month contract never really materialises. So this then begs the question, whose risk is it anyway? The guy at the end of a pipeline waiting for his crude cargo or the paper trader who actually hasn't ever known what a physical barrel is like!

The situation has also made drawing conclusions from ICE's latest Commitments of Traders report a tad meaningless for this week. Speculative long positions by hedge funds and other money managers that the Brent price will rise (in futures and options combined), outnumbered short positions by 139,921 lots in the week ended February 25, prior to the Ukrainian escalation.

For the record, that is the third weekly gain and the most since October 22. Net-long positions rose by 18,214 contracts, or 15%, from the previous period. ICE also said bearish positions by producers, merchants, processors and users of the North Sea crude outnumbered bullish wagers by 266,017 lots, rising 8.2% from the week before.

Away from Ukraine and on to supply diversity, Norway's Statoil has certainly bought cargo from a land far, far away. According to Reuters, Statoil bought 500,000 barrels of Colombian Vasconia medium crude, offered on the open market in February by Canada's Pacific Rubiales.

When a cargo of Columbian crude is sold by a Canadian company to Norwegian one, you get an idea of the global nature of the crude supply chain. That's if you ever needed reminding. The US remains Pacific Rubiales' largest market, but sources say it is increasing its sales to Europe.

Finally, in the humble opinion of yours truly, Vitol CEO Ian Taylor provided the soundbite of the International Petroleum Week held in London last month.

The boss of the world's largest independent oil trading firm headquartered in serene Geneva opined that Dated Brent ought to broaden its horizons as North Sea production declines. The benchmark, which currently includes Brent, Forties, Oseberg and Ekofisk blend crudes, was becoming "less effective" according to Taylor.

"We are extremely concerned about Brent already not becoming a very efficient or effective benchmark. It’s quite a concern when you see that production profile. Maybe the time has come to really broaden out Dated Brent," he said.

Broadening a benchmark that's used to price over half the world's crude could include Algeria's Saharan Blend, CPC Blend from the Caspian Sea, Nigeria's Bonny Light, Qua Iboe and Forcados crudes and North Sea grades DUC and Troll, the Vitol CEO suggested.

Taylor also said Iran wasn't going to be "solved anytime soon" and would stay just about where it is in terms of exports. The Oilholic couldn't agree more. That's all for the moment folks! Keep reading, keep it 'crude'! 

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© Gaurav Sharma 2014. Photo: Pipelines & gas tank, Russian Federation © Rosneft (TNK-BP archives)

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

On another BP sale, another Chavez term & more

A not so surprising news flash arrived this week that BP has finally announced the sale of its Texas City refinery and allied assets to Marathon Petroleum for US$2.5 billion. A spokesperson revealed that the deal included US$600 million in cash, US$1.2 billion for distillate inventories and another US$700 million depending on future production and refining margins.

 

Following the Carson oil refinery sale in California, the latest deal ratchets BP’s asset divestment programme up to US$35 billion with a target of US$38 billion within reach. It is time for the Oilholic to sound like a broken record and state yet again that – Macondo or no Macondo – the oil major would have still divested some of its refining and marketing assets regardless.

 

However, for fans of the integrated model – of which there are quite a few including ratings agencies who generally rate integrated players above R&M only companies – the head of BP's global R&M business Iain Conn said, "Together with the sale of our Carson, California refinery, announced in August, the Texas City divestment will allow us to focus BP's US fuel investments on our three northern refineries."

 

Things have also picked-up pace on the TNK-BP front. On Tuesday, Reuters reported that BP’s Russian partners in the venture Alfa Access Renova (AAR) would rather sell their stake than end-up in a ‘devalued’ partnership with Kremlin-backed rival Rosneft. On Wednesday, the Russian press cited sources claiming a sale of BP’s stake to Rosneft has the full backing of none other than Russian President Vladimir Putin himself. Now that is crucial.

On a visit to Moscow and Novosibirsk back in 2004, the Oilholic made a quick realisation based on interaction with those in the know locally – that when it comes to natural resources assets the Kremlin likes to be in control. So if BP and the Russian government have reached some sort of an understanding behind the scene, AAR would be best advised not to scream too loudly.

 

Another hypothesis gaining traction, in wake of AAR’s intention to sell, is that instead of being the seller of its stake in TNK-BP, the British oil major could now turn buyer. BP could then re-attempt a fresh partnership with Rosneft; something which it attempted last year only for it to be scuppered by AAR.

 

There can be any amount of speculation or any number of theories but here again a nod from the Kremlin is crucial. Away from ‘British Petroleum’ (as Sarah Palin and President Obama lovingly refer to it in times of political need) to the British Government which reiterated its support for shale exploration earlier this week.

 

On Monday, Minister Edward Davey of UK's Department of Energy and Climate Change (DECC) expressed hopes of lifting a suspension on new shale gas exploration. It was imposed in 2011 following environmental concerns about fracking and a series of minor earthquakes in Lancashire triggered by trial fracking which spooked the nation. In near sync with Davey, Chancellor of the Exchequer George Osborne told the Conservative Party conference in Birmingham that he was considering a 'generous new tax regime' to encourage investment in shale gas.

 

In case you haven’t heard by now, Hugo Chavez is back as president of Venezuela for another six year stint. This means it will be another rendezvous in Vienna for the Oilholic at the OPEC meeting of ministers in December with Rafael Ramirez, the crude Chavista likely to be hawkish Venezuela’s man at the table. Opposition leader Henrique Capriles believed in change, but sadly for the Venezuelan economy grappling with mismanagement of its ‘crude’ resources and 20% inflation, he fell short.

 

On January 10, 2012 when Chavez will be inaugurated for another term as Venezuela's president, he will be acutely aware that oil accounts for 50% of his government’s revenue and increasingly one dimensional economy. Bloomberg puts Chinese lending to Venezuela between 2006 and 2011 at US$42.5 billion. In a staggering bout of frankness, Ramirez admitted in September that of the 640,000 barrels per day (bpd) that Venezuela exported to China, 200,000 bpd went towards servicing government debt to Beijing.

 

The country's oil production is hardly rising. Just as Chavez’s health took a toll from cancer, national oil company PDVSA has not been in good health either. Its cancer is mismanagement and underinvestment. Most would point to an explosion in August when 42 people perished at the Amuay refinery – Venezuela’s largest distillate processing facility as an example. However, PDVSA has rarely been in good health since 2003 when it fired 40% of its workforce in the aftermath of a general strike aimed at forcing Chavez from power.

 

Staying with Latin America, the US Supreme Court has said it will not block a February 2011 judgement from an Ecuadorean court that Chevron must pay US$19 billion in damages for allegedly polluting the Amazonian landscape of the Lago Agrio region. The court’s announcement is the latest salvo in a decade-long legal tussle between Texaco, acquired by Chevron in 2001, and the people of the Lago Agrio.

 

The Ecuadorians and Daryl Hannah (who is not Ecuadorian) wont rejoice as Chevron it is not quite done yet. Far from it, the oil major has always branded the Ecuadorian court’s judgement as fraudulent and not enforceable under New York law. It has also challenged it under an international trade agreement between the US and Ecuador.

 

The latter case will be heard next month – so expect some more ‘crude’ exchanges and perhaps some stunts from Ms. Hannah. That’s unless she is under arrest for protesting about Keystone XL! That’s all for the moment folks! Keep reading, keep it ‘crude’ or Elle Driver might come after you!

 

© Gaurav Sharma 2012. Photo: East Plant of the Texas City Refinery, Texas, USA © BP Plc

Exxon 1 – BP 0 (Ref: Putin, Retired Hurt: Markey)

One has to hand it to ExxonMobil’s inimitable boss – Rex Tillerson – for successfully forging an Arctic tie-up with Rosneft so coveted by beleaguered rival BP. On August 30, beaming alongside Russian Prime Minister Vladimir Putin, Tillerson said the two firms will spend US$3.2 billion on deep sea exploration in the East Prinovozemelsky region of the Kara Sea. Russian portion of the Black Sea has also been thrown in the prospection pie for good measure as has the development of oil fields in Western Siberia.

The US oil giant described the said deal as among the most promising and least explored offshore areas globally “with high potential for liquids and gas.” If hearts at BP sank, so they should, as essentially the deal has components which it so coveted.

The Oilholic is pretty stumped too for harbouring the belief that BP's Arctic deal with Rosneft – originally agreed in January but scuppered by a legal challenge from Russian co-investors in BP's existing Russian joint venture TNK-BP – would be revived. It seems what BP could not manage, ExxonMobil did, and successfully fought off Shell in the process as well if the City rumour mill is to be believed. Some won, some lost, some got stumped but one looked like a moron or hypocrite or possibly both. That is none other than US Congressman Ed Markey, a Massachusetts Democrat on the House Natural Resources Committee.

Remember when BP first announced its proposed tie-up Rosneft back in January? At the time Markey quipped "BP once stood for British Petroleum. With this deal, it now stands for Bolshoi Petroleum." Bolshoi actually means “big” in Russian so it seems while Markey had right context for the slur, he ended up choosing the wrong word.

As the news of the Exxon-Rosneft tie-up emerged, Eben Burnham-Snyder, Markey's spokesman, told the Associated Press that the Congressman's office is looking into the Exxon-Rosneft deal. But he said the deal doesn't appear to involve the same ownership issues that were involved in the BP-Rosneft stock swap. Tut, tut, sir! Of course they don’t – after all this time it is an American firm that’s gone fishing.

As if with impeccable timing, barely a day after Exxon-Rosneft deal was inked, Russian Bailiffs raided the offices of BP in Moscow, seeking documents on its failed deal with Rosneft. According to RIA Novosti, the raid was conducted in line with a ruling by an arbitration court in the Siberian region of Tyumen, which is hearing a case over the Rosneft deal that collapsed in May.

Minority shareholders are claiming that TNK-BP suffered losses of US$3 billion as a result of the wrangling over the now failed BP-Rosneft joint venture. In a statement, BP confirmed that its Russian offices in Moscow were raided by the Russian bailiff's service in relation to an order from the court in Tyumen.

The company said there was no "legitimate basis" for the court case against BP or the raid. The legal entity searched in the raid - BP Exploration Operating Company Ltd - had “no connection to the Tyumen process,” the statement read. Let the games begin! Maybe this time Markey can be the referee!

© Gaurav Sharma 2011. Photo: ExxonMobil office exterior, Houston, Texas, USA © Gaurav Sharma, March 2011