OPEC & the downward bias in Black Gold’s value

The OPEC ministers have packed-up and left with no real surprises as the cartel maintained its daily output at 30 million barrels per day (bpd). But in the absence of any real surprises from OPEC, the downward bias in the direction of leading oil futures benchmarks is getting stronger, given the perceived oversupply and a flat, if not dicey, macroeconomic climate. The Brent forward month futures contract plummeted to nearly US$100, seeing a near 2.5% dip from last week (click on graph to enlarge). Given that the trading community had already factored in the outcome of the 163rd OPEC meeting even before it concluded, most appear to be waiting to see whether the US Federal Reserve continues with its monetary stimulus programme. Even if it does so, given the macroeconomic permutations, it is not worth holding your breath for a ‘crude’ bounceback.

 

Far from cutting production, there seem to be murmurs and concern in the hawkish camps of Iran and Venezuela about constantly improving production levels in Iraq. Abdul Kareem al-Luaibi, Iraq’s oil minister, confirmed at a media scrum in Vienna that the country plans to start production at two of its largest oilfields within “a matter of weeks.”

 

Production commencement at Majnoon (which is imminent) and Gharraf (due in July), followed by a third facility at West Qurna-2 (due by December if not earlier) would lift Iraqi capacity by 400,000 bpd according to al-Luaibi. The country’s current output is about 3.125 million bpd. The additional capacity would bolster its second position, behind Saudi Arabia, in the OPEC output league table.

 

The Iraqis have a monetary incentive to produce more of the crude stuff. Sadly for OPEC, it will come at a time the cartel does not need it. Instead of adherence, there will be further flouting of the recently agreed upon quota by some members. Iraq is not yet even included in the quota (and may not be until late into 2014).

 

Non-OPEC supply is seeing the ranks of the usual suspects Russia and Norway, joined ever more meaningfully by Brazil, Kazakhstan, Canada and not to mention (and how can you not mention) – the US, courtesy of its shale supplies and more efficient extraction techniques at Texan conventional plays. So a downward bias will prevail – for now.

 

In fact, Morgan Stanley did not even wait for the OPEC meeting to end before downgrading oil services firms, mostly European ones, based on the conjecture that IOCs as well as NOCs (several of whom hail from OPEC jurisdictions) would allocate relatively lower capex towards E&P.

 

Robert Pulleyn, analyst at Morgan Stanley, wrote and the Oilholic quotes: “With oil prices the key determinant of industry operating cash flow, and given our expectation for an increasingly range bound price environment, we expect industry-operating-cash-flow growth to fall from 14% compound annual growth rate (since 2003) to about 3% in the future. We expect capex growth to fall to around 5% a year to 2020, compared to 18% compound annual growth rate since 2003.”

 

Of the five it downgraded on Thursday – viz. Vallourec, SBM Offshore, CGG Veritas, TGS-NOPEC and Subsea 7 – only the latter avoided a dip in share price following the news. However, Morgan Stanley upgraded John Wood Group, saying it is better positioned to withstand a lower growth outlook for industry spending.

 

As for the price of the crude stuff itself, many analysts didn’t wait for OPEC either with Commerzbank, Société Générale and Bank of America Merrill Lynch (BoAML) all sounding bearish on Brent. BoAML cut its Brent crude price forecasts to $103 per barrel from $111 for the second half of 2013, citing lower global oil demand, rising supplies and higher inventories. The bank expects the general weakness to persist next year and reduced its 2014 average Brent price outlook from $112 to $105 per barrel. So there you have it and that’s all from Vienna folks!

 

Since it’s time to say Auf Wiedersehen, the Oilholic leaves you with a view of the city’s Irrgarten and Labyrinth at the Schönbrunn Palace grounds (see right). Once intended for the amusement of Austro-Hungarian royalty and their guests, this amazing maze is now for the public’s amusement.

 

While visitors to this wonderful place are getting lost in a maze for fun, OPEC ministers going round in circles over a key appointment to the post of Secretary General is hardly entertaining. At such a challenging time for it, the 12-member oil exporters’ club could do with a bit of unity. Yet it cannot even unite behind a single candidate for the post – something which has been dragging on for a year – as rivals Iran and Saudi Arabia continue to hold out for their chosen candidate for the post. Furthermore, it’s taken an ugly sectarian tone along Shia and Sunni lines.

 

Worryingly, this time around, neither the Saudis nor the Iraqis are in any mood for a compromise as the rest of the 10 members wander around in a maze feeling dazed about shale, internal rivalries, self interest and plain old fashioned market anxieties. The Oilholic maintains it’s premature to suggest that a rise in unconventional production is making OPEC irrelevant, but its members are unwittingly trying really hard to do just that! Keep reading, keep it ‘crude’!

 

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To email: gaurav.sharma@oilholicssynonymous.com
 

© Gaurav Sharma 2013. Graph: World crude oil futures benchmarks to May 25, 2013 © Société Générale. Photo: Irrgarten & Labyrinth, Schönbrunn Palace, Vienna, Austria © Gaurav Sharma 2013.

Col Gaddafi, crude euphoria & last 7 days

The moment Libyan rebels or the National Transitional Council (NTC) as the media loosely describes them, were seen getting a sniff around the Libyan capital Tripoli and Col. Gaddafi’s last bastion, some crude commentators went into euphoric overdrive. Not only did they commit the cardinal sin of discarding cautious optimism, they also belied the fact that they don’t know the Colonel and his cahoots at all. Well, neither does the Oilholic for that matter – at least not personally. However, history tells us that this belligerent, rambling dictator neither has nor will give up that easily. In fact at the moment, everyone is guessing where he is?

To begin, while the end is nigh for the Gaddafi regime, a return to normalcy of oil production outflows will take months if not years as strategic energy infrastructure was damaged, changed hands several times or in some cases both. As a consequence production, which has fallen from 1.5 million barrels per day (bpd) in February to just under 60,000 bpd according to OPEC, cannot be pumped-up with the flick of a switch or some sort of an industrial adrenaline shot.

In a note to clients, analysts at Goldman Sachs maintain their forecast that Libya's oil production will average 250,000 bpd over 2012 if hostilities end as "it will be challenging to bring the shut-in production back online."

These sentiments are being echoed in Italy according to the Oilholic's, a country whose refineries stand to gain the most in the EU if (and when) Libyan production returns to pre-conflict levels. All Italy’s foreign ministry has said so far is that it expects contracts held by Italian companies in Libya to be respected by “whoever” takes over from Gaddafi.

Now, compound this with the fact that a post-Gaddafi Libya is uncharted geopolitical territory and you are likely to get a short term muddle and a medium term riddle. Saudi (sour) crude has indirectly helped offset the Libyan (sweet) shortfall. The Saudis are likely to respond to an uptick in Libyan production when we arrive at that juncture. As such the risk premium in a Libyan context is to the upside for at least another six months, unless there is more clarity and an abrupt end to hostilities.

Moving away from Libya, in a key deal announced last week, Russia’s Lukoil and USA’s Baker Hughes inked a contract on Aug 16th for joint works on 23 new wells at Iraq's promising West Qurna Phase 2 oil field. In a statement, Lukoil noted that drilling will begin in the fourth quarter of this year and that the projected scope of work will be completed “within two years.”

While tech-specs jargon regarding the five rigs Baker Hughes will use to drill the wells at a depth exceeding 4,000 meters was made available, the statement was conspicuously low on the cost of the contract. The key objective is to bring the production in the range of 145,000 to 150,000 bpd by 2013.

Switching tack to commodity ETFs, according to early data for August (until 11th) compiled by Bloomberg and as reported by SGCIB, energy ETPs have attracted their first net inflows in five months with US$9.5 billion under management. This represents a net inflow of US$0.7 billion in August versus an outflow of US$1.5 billion recorded in January. Interest in precious metals continues, even after a very strong July, but base metal ETPs have returned to net outflows. (See adjoining table, click to enlarge)

Meanwhile, Moody’s has raised the Baseline Credit Assessment (BCA) of Russian state behemoth Gazprom to 10 (on a scale of 1 to 21 and equivalent to its Baa3 rating) from 11. Concurrently, the ratings agency affirmed the company's issuer rating at Baa1 with a stable outlook on Aug 17th. The rating announcement does not affect Gazprom's assigned senior unsecured issuer and debt ratings given the already assumed high level of support it receives from the Kremlin.

Moody's de facto regards Gazprom as a government-related issuer (GRI). Thus, the company's ratings incorporate uplift from its BCA of 10 and take into account the agency's assessment of a high level of implied state support and dependence. In fact raising Gazprom's BCA primarily reflects the company's strengthened fundamental credit profile as well as proven resilience to the challenging global economic environment and negative developments on the European gas market in 2009-10.

"Gazprom has a consistent track record of strong operational and financial performance, which was particularly tested in 2009 - a year characterised by lower demand for gas globally and domestically, as well as a generally less favourable pricing environment for hydrocarbons," says Victoria Maisuradze, Senior Credit Officer and lead analyst for Gazprom at Moody's.

Rounding-off closer to home, UK Customs – the HMRC – raided a farm on Aug 17th in Banbridge, County Down in Northern Ireland, where some idiots had set-up a laundering plant with the capacity to produce more than two million litres of illicit diesel per year and evade around £1.5 million in excise duty. Nearly 6,000 litres of fuel was seized and arrests made; but with distillate prices where they are no wonder some take risks both with their lives, that of others and the environment. And finally, Brent and WTI are maintaining US$100 and US$80 plus levels respectively for the last seven days.

© Gaurav Sharma 2011. Photo: Veneco Oil Pumps © National Geographic. Table: Global commodities ETPs © Société Générale CIB/Bloomberg Aug 2011.