Taiwan’s crude demands & IEA’s latest quip

The Oilholic has ventured further eastwards, some 6080 miles from London, to Taipei – the vibrant capital of Taiwan. On a rain soaked evening, yours truly absorbed splendid views of the city's 101 Tower (once Asia’s tallest building before) and pondered over the island nation’s oil supply-demand dynamic.

Perhaps unsurprisingly, according to government data, the country imports 98% of its domestic fuel requirements mostly from OPEC producers in the Gulf and Angola to the tune of 1 million barrels per day (bpd). It does have tiny proven oil reserves of around 2.3 million but nothing to write home about.

Despite wider historical and geopolitical tension with Beijing, Taiwan’s CPC and China’s state-owned China National Offshore Oil Corporation (or CNOOC) are jointly exploring the Strait of Taiwan for oil and gas. Initial prospection bids in shallow waters turned out to be duds, but deepwater exploration is “encouraging” say insiders.

Given such a setting in an era of low oil prices, the International Energy Agency’s latest quip – that the oil price may well have “bottomed out” – pricked ears both within and well beyond Taiwan. In a recent market update, the agency said, “There are clear signs that market forces... are working their magic and higher-cost producers are cutting output.”

It noted falling oil production stateside, in tandem with a decline in OPEC’s output by 90,000 bpd in February, albeit due to outages in Nigeria, Iraq and the United Arab Emirates, that knocked out a combined 350,000 bpd from the oil cartel's total output.

“Iran's return to the market has been less dramatic than the Iranians said it would be; in February we believe that production increased by 220,000 bpd and provisionally, it appears that Iran's return will be gradual,” the IEA added.

See now all that is well and good, but the Oilholic reckons that at some point crude in storage will need to come into play. That, coupled with lacklustre demand, is the market’s “known known” and how and to what extent it serves as a drag on the price remains to be seen.

The market has indeed been a lot calmer in recent days, but there are likely to be a few more twists and turns. As the IEA itself notes, “For oil prices, there may be light at the end of what has been a long, dark tunnel, but we cannot be precisely sure when in 2017 the oil market will achieve the much-desired balance. It is clear that the current direction of travel is the correct one, although with a long way to go.”

Fairly obvious and no biggie, methinks. That’s all from Taiwan folks. This blogger’s next stop is Tokyo. Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2016. Photo: 101 Tower, Taipei, Taiwan © Gaurav Sharma, March 2016

Trouble at the South Korean mill

The Oilholic finds himself 5,506 miles east of London in Seoul, South Korea, on the first leg of a round the world trek, alongside a fact finding mission for an upcoming Forbes article. 

In tandem with this blogger’s arrival in South Korea, was that of the USS John C. Stennis, the US Navy’s nuclear-powered aircraft carrier as tensions in the Korean Peninsula run high. With neighbouring North Korea’s leader Kim Jong-Un (once again!) promising nuclear armageddon, Seoul and Washington are in the midst of their annual ongoing joint Key Resolve and Foal Eagle exercises to instil regional confidence.

To be perfectly honest, South Koreans have seen it all before – their Northern neighbour’s shenanigans are hardly the stuff that is keeping the intelligentsia occupied or the subject of much chatter in cafés and bars dotted across the capital. The primary concern remains whether recent economic stimulus measures are cutting through or not.

The economic health of South Korea also matters to oil and gas analysts like yours truly, as the country is among the biggest global importers of the crude stuff, relying on the importation of 97% its fuel needs having negligible domestic hydrocarbon resources. Crude oil consumption is currently around 2.5 million barrels per day, almost all of which is imported, making South Korea the fifth largest oil importer in the world.

In wake of the MERS virus outbreak in South Korea last year and increasingly lacklustre consumer confidence, the government unveiled a $20 billion economic stimulus package in July 2015. Among the most eye-catching measures was the introduction of tax cuts on automobiles – the very domestically engineered sort yours truly saw whizzing across Seoul, and ones that happen to be household brands across the world.

However, while the MERS virus might be a thing of the past, the country's economic malaise persists worrying the Bank of Korea and the government alike. Exports contracted 18.5% in January, while the economy grew 2.6% in 2015. It prompted the central bank to revise South Korea’s growth forecast for the current year down to 3.0% from 3.2%.

Nonetheless, petrochemical and refining exports are proceeding at pace, given that three of the 10 largest refining facilities in world happen to be in South Korea. And crude oil imports are – so far – holding firm at current averages of 2.3 to 2.5 million bpd. However, one questions whether the said levels can indeed be maintained. 

That’s despite a further $5 billion in stimulus measures announced by the government in February, including the extension of automobile tax cuts. There’s definitely trouble at the South Korean mill! That’s all from Seoul folks as the Oilholic leaves you with a view of traffic zipping past the city’s Dongdaemun Gate. This blogger’s next stop is Taipei; more from there shortly. Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2016. Photo: Dongdaemun Gate, Seoul, South Korea © Gaurav Sharma, March 2016

Aubrey McClendon (1959 – 2016): A flawed titan?

On Saturday, March 5, a riverfront in USA’s Oklahoma City saw well wishers, former employees, friends and family of controversial energy sector entrepreneur Aubrey McClendon, gather to pay their respects, following his death in a car crash on March 2; a day after being indicted on bid-rigging charges following an antitrust investigation by the US Department of Justice.

In keeping with his swashbuckling life, the end, when it came, was just as dramatic. While a police investigation into the crash is still ongoing, reports said the Chevy Tahoe McClendon was driving slammed straight into a cement wall, despite the driver having had multiple opportunities to avoid the collision. It was also revealed that he was not wearing his seat-belt.  

That was the final act of a glittering, albeit controversial oil and gas industry titan. As the shale bonanza took off stateside, McClendon was one of the poster boys of rising US natural gas production, taking Chesapeake Energy – a company he co-founded in 1989 at the young age of 29 – to the second spot on the country’s top gas producers’ roster by volume.

But in 2013, he was ousted from Chesapeake following damaging revelations that he had personal stakes in wells owned by the company. An accompanying corporate governance crisis tarnished his reputation further.

Yet, McClendon’s penchant for lavish spending never subsided. His investments in property, restaurants and businesses are littered across Oklahoma City. Famously, in 2008, he brought the National Basketball Association's Supersonics franchise to Oklahoma City from Seattle, renaming them Oklahoma City Thunder.

Following the Chesapeake debacle, McClendon marked a return to the industry by setting up a new company – American Energy Partners. Being the wildest of wildcatters, he made bets, not all of them sound, worth billions of dollars buying land with potential for oil and gas drilling.

However, all was not well with the US Justice Department set to haul him to the courts. He was alleged to have put in place a scheme between two “large oil and gas companies” to not bid against each other for leases in northwest Oklahoma from December 2007 to March 2012, to keep the price of leasing drilling rights artificially low, the Department of Justice said a day before his sudden death.

The American antitrust law – Sherman Act – which McClendon was accused of violating carries a maximum prison sentence of 10 years and a $1 million fine. 

None of this mattered to the hundreds who gathered on Saturday at Oklahoma City's Boathouse District to pay their respects to McClendon, with a formal public memorial service due on Monday at a local community church.

For them, the state in general and the city in particular, McClendon was instrumental in reviving the regional economy. As for the US shale industry, his impact in the history books – the good, the bad, the ugly, the unproven and the controversial. However, in his untimely passing, it is McClendon’s ingenuity that ought to be remembered by most.

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© Gaurav Sharma 2016. Photo: A shale drilling site © Chesapeake Energy.

Fitch joins Moody’s in cutting oil price estimates

Barely a month after Moody’s drastically revised its oil price assumptions, rival Fitch Ratings followed suit last week. Writing to clients, Fitch said its new base case is for Brent and WTI oil prices to average $35 per barrel in 2016. 

It had previously expected oil to average $45 per barrel. However, Fitch’s long-term base case price assumptions remain unchanged at $65 per barrel. The ratings agency said its drastic revision was down to a combination of stock build-up over the mild winter, higher-than-expected OPEC production in January and increasing evidence that global economic growth for the year will be weaker than previously forecast.

“This suggests there will still be a supply surplus in the second half of 2016, albeit reduced from current levels, and that markets will probably only reach a balance in 2017. Even then, very high inventories will limit price increases,” Fitch added.

In light of recent volatility, Fitch’s reworking of price assumptions is hardly a surprise, and on Jan 21st rival Moody’s had done likewise. The latter lowered its 2016 price estimate for both Brent WTI to $33 per barrel.

In Moody’s case, for Brent, it marked a $10 per barrel reduction from the rating agency's previous estimate, and for WTI, a $7 reduction. It currently expects both benchmark prices to rise by $5 per barrel on average in 2017 and 2018. The move also represented Moody’s second revision is as many months, having already slashed estimates back in December.

Terry Marshall, Senior Vice President at the ratings agency, said, "OPEC countries continue high levels of production in the battle for market share, contributing to the current oil glut despite moderate consumption growth by key consumers such as China, India and the US.

“In addition, we expect the rise in Iranian oil output this year to offset or exceed production cuts in the US."

So more cheer for the bears it seems, but little else. Volatility is likely to persist until June, but for the record, the Oilholic expects a very gradual climb in the oil price towards $50 per barrel from then onwards, as one wrote in a recent Forbes column. That’s all for the moment folks! Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2016. Photo: Oil production facility © Cairn Energy

Get used to crude swings & volatility

Oil markets are likely to face further bouts of volatility. When Saudi Arabia and Russia, together with Venezuela and Qatar, offered the false hope of a so-called production freeze packaged in the shape of market support last week, the Oilholic wasn't the only one who did not buy it.

Predictably, oil futures rose by over 7% towards the middle of last week, but rapidly slipped into negative territory as Iran, while welcoming the move, did not say whether it would participate. In any case, the move itself was a farce of international proportions.

The Russians can’t raise their production further, while the Saudis have little exporting to room to justify a further output hike. So for market consumption it was packaged as a freeze, subsequently undermined by both countries who said they had no intentions of cutting production. It might well have been the first joint move on output matters between OPEC and non-OPEC producers, but it virtually came to naught.

Unless a clear pattern of production declines appears on the horizon, market volatility will persist. That sort of clarity won’t arrive at least before June, with swings between $25-40 likely to continue, and yes a drop to $20 is still possible.

OPEC will need to announce a real terms production cut of 1.5 million barrels per day to make any meaningful short-term difference to the oil price by $7-10 per barrel, and even that may not be sustainable with non-OPEC producers likely to be the primary beneficiaries of such a move.

Expect more of the same, and more downgrades of oil and gas companies by ratings agencies of the sort the market has gotten used to in recent months. After Fitch Ratings downgraded Shell last week, Moody’s moved to place another 29 of its rated US exploration and production firms on review for downgrade over the weekend.

Meanwhile, the latter also said continued low oil prices could have an increasingly negative impact on banks across the Gulf Cooperation Council (GCC). This could occur both directly - by a weakening in governments' capacity and willingness to support domestic banks - and indirectly, through a weakening of banks' operating conditions, Moody’s added.

Khalid Howladar, senior credit officer at Moody's, said, "Despite low oil prices and a high dependency on oil revenues across the GCC countries, banks' ratings in the region continue to benefit from their governments' willingness to tap accumulated wealth to support counter-cyclical spending."

But continued oil price declines signal "increasing challenges" to the sustainability of this dynamic, he added.

Finally, some news from the North Sea to end with – Genscape has flagged up the shutdown and restart of BP’s 1.15mn bpd Forties Pipeline System in a note to clients. It caused the April ICE Brent futures contract price to spike before falling slightly on February 12, but nothing to be overtly concerned about.

The system was shut due to an issue at the Kinneil fractionaction terminal, located where the flow from the North Sea on the Forties pipeline system is stabilised for consumption. Elsewhere, North Sea E&P firm First Oil is reportedly filing for involuntary administration, according to the BBC.

Enquest and Cairn Energy will takeover its 15% stake in Kraken field, east of Aberdeen in the British sector of the North Sea. That’s all for the moment folks! Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2016. Photo: Oil rig in the North Sea © BP

Ho hum moves for fewer oil drums

In case you have been on another planet and haven’t heard, after weeks of chatter about coordinated oil output cuts by OPEC and non-OPEC producers, we finally had some movement. The Oilholic deploys the word 'movement' here rather cagily.

Three OPEC members led by heavyweight Saudi Arabia, with Qatar and Venezuela in tow, joined hands with the Russians, to announce a production ‘freeze’ at January’s output levels  on Tuesday, provided ‘others’ agree to do likewise. 

The most important others happen to be Iraq and Iran who haven’t exactly come out in support of the said freeze just yet. Even if they do agree, or in fact all OPEC members agree, the freeze would come at production levels deemed to be historical highs for both the Russians and OPEC. In case of the latter, industry surveys and data from aggregators as diverse as Platts and Bloomberg points to all 12 exporting OPEC nations collectively pumping above 32 million barrels per day.

Predictably, the oil futures market treated the news of the 'freeze' with the sort of disdain it deserved. The price remains stuck in the range where it has been and short-term volatility is likely to last; so much of what transpired was, well, exceedingly boring from a market standpoint, excepting that it was the first instance of OPEC and non-OPEC coordinated action in 15 years. 

If OPEC really wants to support prices, an uptick in the region of $7-10 per barrel would require the cartel to introduce a real terms cut of 1.5 million bpd. Even then, the gains would short-term, and the only people benefitting would be North American players. Some of them are the very wildcatters, whose tenacity for surviving when oil is staying ‘lower for longer’, OPEC has so far failed to work out with any strategic coherence. Expect more of the same in a market that's still awash with crude oil. 

Finally, just before one takes your leave, it seems Moody's has placed on review for downgrade the Aa3 ratings of China National Petroleum Corporation (CNPC), Sinopec Group, Sinopec Corp, China National Offshore Oil Corporation (CNOOC Group) and CNOOC Limited.

The ratings agency has also placed on review for downgrade the ratings of the Chinese national oil companies' rated subsidiaries, including Kunlun Energy Company Limited, CNPC Finance (HK) Limited, CNPC Captive Insurance Company Limited, CNOOC Finance Corporation Ltd, and Sinopec Century Bright Capital Investment Limited.

In a statement, Moody’s said global rating actions on many energy companies, reflect its efforts to "recalibrate the ratings in the energy portfolio to align with the fundamental shift in the credit conditions of the global energy sector." Can’t argue with that! That’s all for the moment folks! Keep reading, keep it ‘crude’! 

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© Gaurav Sharma 2016. Photo: Oil exploration site in Russia © LukOil

Are you serious Mr President?

Ah, the joys of the oil market! Yet another day of volatility is all but guaranteed. Nearly a fortnight into February, it’s increasingly looking like how it was in January, and how it’s likely to be in March - an uptick of 2-6% followed by a slump of 2-6% in headline oil futures prices on repeat mode.

In the meantime, we have descended into the realm of the ridiculous. If you believe market chatter – it goes something like the Russians will cut oil production, only if the Saudis agree. They’ll cut only if the Iranians agree, who say it’s the Saudis and their allies who should make room for additional Iranian production. 

It is manifestly apparent, that should there be a coordinated OPEC and non-OPEC oil production cut excluding Canada and the US, the only producers to benefit would be the ones in North America. Such a cut would at most provide a short-term bounce of $7-10 per barrel, enabling shale producers, who were coping and managing just fine at $35 per barrel, to come back into the game and hedge better for another 12-18 months, as one wrote on Forbes. 

The Oilholic suspects both Russian and Saudi policymakers know that already. Which is why, it is a borderline ridiculous idea for parties who know very well that the market will take its own course, and any attempts to manipulate it artificially could have the very opposite effect some in OPEC such as Nigeria and Venezuela are hoping for. 

Meanwhile, each US oil inventory update makes Brent and WTI dance. With the latter currently below $30 barrel, US President Barack Obama has come up with his own sublime contribution to a ridiculous market. 

News emerged earlier this week that Obama has proposed a $10.25 per barrel levy on oil extracted in the US! According to Treasury projections, the levy, which would be applied to both imported and domestically-produced oil but won’t be collected on US oil shipped overseas, would raise  $319 billion over 10 years.

The plan would temporarily exempt home-heating oil from the tax. According to Obama, it "creates a clear incentive for private sector innovation to reduce America's reliance on oil and invest in clean energy technologies that will power our future."

The levy would be collected from oil companies to boost spending on transportation infrastructure, including mass transit and high-speed rail, and autonomous vehicles. However, noble the intention might be, its timing, execution and rate cap are completely barmy. In fact so barmy, the President knows there is no chance a Republican-controlled Congress would pass it. 

Without going into a costing analysis, oil companies would (a) be hit hard, and (b) almost certainly attempt to pass it over to consumers. Domino effect in terms of jobs and consumer spending adds another layer, making it extremely unpopular. So only a President who has no more elections to fight can come up with such a policy at such a time for the industry! That’s all for the moment folks! Keep reading, keep it ‘crude’! 

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© Gaurav Sharma 2016. Photo: White House, Washington DC, USA © Gaurav Sharma, April 2008.

Predicting a $50/bbl end-2016 oil price

It’s been one heck of a volatile start to the New Year with the oil market going berserk for what is coming up to nearly four weeks now. We’ve seen 10%-plus week-on-week declines to 5%-plus intraday gains for Brent and WTI. Plenty of predictions are around the market from extremely bearish to wildly optimistic.

For instance, ratings agency Moody’s is assuming a drop to $33 per barrel for both Brent and WTI, while Citigroup calls oil the ‘trade of the year’ should you choose to stick with it. Doubtless, Moody’s errs on the side of caution, and Citigroup’s take is premised on the buying low, selling high slant. 

The Oilholic's prediction is somewhere in the mundane middle. On balance of probability, squaring oil supply and demand, yours truly sees Brent and WTI facing severe turbulence for the next six months, but very gradually limping up to $50 by the end of this year. That’s a $10 reduction on a prior end-2016 forecast. A detailed explanation is in the Oilholic’s latest Forbes column available here.  

In the event that surplus Iranian oil starts cancelling out production declines in North America and other non-OPEC production zones, there are several known unknowns. These include the strength of the dollar prolonging the commodities cycle and the copious amount of oil held in storage, the release (or otherwise) of which would have a heavy impact on the direction of the market. Nonetheless, $20 oil doesn’t sound all that implausible anymore even if it won’t stay there.  

Another key revision is the narrowing of the Brent-WTI spread to zero (twice over the course of last year), and a subsequent turn in WTI’s favour. From predicting a $5 premium in favour of Brent, the Oilholic is coming around to the conclusion that WTI would now have an equal, if not upper hand to Brent. 

The so-called premium in the global proxy benchmark’s favour was only established after a domestic US glut rendered the WTI unreflective of global market conditions back in 2008-09. Now that the global market is facing a glut of its own; oversupply sentiment is weighing on Brent too.

Even if the WTI does not regain market prominence as many commentators are predicting, the US benchmark wont play second fiddle either. The usual caveats apply, and the Oilholic would be revisiting the subject over the second quarter. But that’s all for the moment folks! Keep reading, keep it ‘crude’! 

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© Gaurav Sharma 2016. Photo: Oil rig in the North Sea © Cairn Energy.

Suddenly $20/bbl oil isn't all that implausible

Successive bouts of over 10% week-on-week/five-day price declines have hit the oil market for six and made for a wretched start to 2016. 

Last Friday, Brent ended 12.33% lower to the Friday [Jan 8] before, WTI fell 10.37% and OPEC’s Basket of crude oils was 10.23% lower. (see graph, click to enlarge)

Closing Brent price of that Friday itself was some 10.54% lower, WTI was down 10.48% lower and OPEC Basket Price down 10.94% versus the closing price of December 31. Suddenly, $20 per barrel oil doesn’t sound all that implausible!

However, the Oilholic still maintains that while $20 oil is possible, it won’t stay there as an inevitable supply correction would kick-in. Excluding Gulf production, much of the world’s current oil production is barely being produced at cost, let alone at a marginal profit. As non-OPEC producers’ hedges roll-off, the pain will hit home for we are a long way from the $60 comfort threshold for many. 

As for OPEC, even if the decline continues, the Oilholic feels there is little it can do other than to let the market take its own course. An OPEC cut would only keep rivals in the current game of survival called 'lower for longer'. That’s all for the moment folks! Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2016. Graph: Oil benchmark prices (Friday closes) © Gaurav Sharma / Oilholics Synonymous Report, 2016.

A crude rout & all those downgrades

Both Brent and WTI futures are trading at their lowest levels since 2008 and previous weeks have offered some spectacular declines, if there is such a thing as that!

Biggest of the declines were noted when Brent fell by 12.65% and WTI by 11.90% between Friday, December 4th and Friday, December 11th using 2130 GMT as the cut-off point for 5-day week-on-week assessment. Following that, like January, we had another spread inversion in favour of the WTI, with the US benchmark trading at a premium to global proxy Brent for a good few sessions before slipping lower, as both again got dragged lower in lacklustre post-Christmas trading.

It all points to the year ending just as it began - with a market rout, as yours truly explained in some detail via a recent Forbes post. With nearly 3 million barrels per day of surplus oil hitting the market, the scenario is unavoidable. While the situation cannot and will not last, oversupply will not disappear overnight either. 

The Oilholic reckons it will be at least until the third quarter of 2016 before the glut shows noticeable signs of easing, mostly at the expense of non-OPEC supplies. That said, unless excess flow dips below 1 million bpd, it is doubtful ancillary influences such as geopolitical risk would come into play. 

For the moment, one still maintains an end-2016 Brent forecast near $60 per barrel and would revisit it in the New Year. Much will depend on the relative strength of the dollar in wake of US Federal Reserve’s interest rate hike, but Kit Juckes, Head of Forex at Societe Generale, says quite possibly commodity markets fear even a dovish Fed!

Meanwhile, with the oil market rout in full swing, rating agencies are queuing up predictable downgrades and negative outlooks. Moody’s described the global commodity downturn as “exceptionally severe in its depth and breadth” and expects it to be a substantial factor driving the number of defaults higher on a global basis in 2016.

Collapsing commodity prices have placed a significant strain on credit quality in the oil and gas, metals and mining sectors. These sectors have accounted for a disproportionately large 36% of Moody’s downgrades and 48% of defaults among all corporates globally so far this year. The agency anticipates continued credit deterioration and a spike in defaults in these sectors in 2016.

Over the past four weeks, we’ve had Moody's downgrade several household energy companies, including all ratings for Petrobras and ratings based on the Brazilian oil giant's guarantee, covering the company's senior unsecured debt rating, to Ba3 from Ba2. Concurrently, the company's baseline credit assessment (BCA) was lowered to b3 from b2. 

“These rating actions reflect Petrobras' elevated refinancing risks in the face of deteriorating industry conditions that make it more difficult to raise cash through asset sales; tighter financing conditions for companies in Brazil and in the oil industry, coupled with the magnitude of eventual needs to finance debt maturities; as well as the company's negative free cash flow,” Moody’s explained.

It also downgraded Schlumberger Holdings to A2; with its outlook changed to negative for Holdings and Schlumberger. "The downgrade of Schlumberger Holdings to A2 reflects the expected large increase in debt outstanding related to the adjustment of its capital structure following the Cameron acquisition," commented Pete Speer, Moody's Senior Vice President.

Corporate family rating of EnQuest saw a Moody’s downgrade to B3 from B1 and probability of default ratings to B3-PD from B1-PD. Of course, it’s not just oilfield and oil companies feeling the heat; Moody’s also downgraded the senior unsecured ratings of Anglo American and its subsidiaries to Baa3 from Baa2, its short term ratings to P-3 from P-2, and so it goes in the wider commodities sphere.

In the past week, outlook for Australia’s Woodside Petroleum outlook was changed to negative, while the ratings of seven Canadian and 29 US E&P companies were placed on review for downgrade. And so went the final month of the year. 

Not just that, the ratings agency also cut its oil price assumption for 2016, lowering Brent estimates to average $43 from $53 per barrel in 2016, and WTI to $40 from $48 per barrel. Moody’s said “continued high levels of oil production” by global producers were significantly exceeding demand growth, predicting the supply-demand equilibrium will only be reached by the end of the decade at around $63 per barrel for Brent. 

While, the Oilholic doesn’t quite agree that it would take until the end of the decade for supply-demand balance to be achieved, mass revisions tell you a thing or two about the mood in the market. Meanwhile, at a sovereign level, Fitch Ratings says low oil prices will continue to weigh on the sovereign credit profiles of major exporters in 2016. Of course, the level of vulnerability varies.

“In the last 12 months, we have downgraded five sovereigns where oil revenues accounted for a large proportion of general government and/or current external receipts. Another three - Saudi Arabia, Nigeria, and Republic of Congo - were not downgraded but saw Outlook revisions to Negative from Stable,” the agency said in a pre-Christmas note to clients.

It is now all down to who can manage to stay afloat and maintain production as the oil price stays ‘lower for longer’. Non-OPEC producers will in all likelihood run into financing difficulties, as one said in an OPEC webcast on December 4, with Brent ending 2015 over 35% lower on an annualised basis.

Finally, the Oilholic believes it is highly unlikely a divided OPEC will vote for a unanimous production cut even at its next meeting in June. For what’s it worth, $35 per barrel could be the norm for quite a bit of 2016. So in 12 months’ time, the oil and gas landscape could be very, very different. That’s all for 2015 folks! Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2015. Graph: Oil benchmark Friday closes, Q4 2015 © Gaurav Sharma / Oilholics Synonymous Report, December 2015. Photo: Gaurav Sharma speaking at the 168th OPEC Ministers' Meeting in Vienna, Austria © OPEC Secretariat.

Brent- WTI parity (again) before the year-end!

Before the year is out, we’ve got parity yet again between both benchmarks. Right at the start of the year, the West Texas Intermediate briefly traded at a premium to Brent having achieved parity at $48.05 per barrel on January 15. 

Come the end of the year and we are here again! Parity between both benchmarks was achieved once more at a lower level of $36.40 per barrel on December 22 (see above, click to enlarge), exactly $11.65 lower with WTI in the ascendancy. In fact, the US marker's premium appears to holding.

The OPEC stalemate, peak winter demand and lifting of US exports ban are and will remain price positives for the WTI, as one wrote in a Forbes column. So is this a reversal of the 'crude' pecking order of futures contracts we have gotten used to since 2010? The Oilholic feels its early days yet. However, the development sure makes for an interesting 12 months in more ways than one.

Happy Christmas dear readers, but that’s all for the moment folks! Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2015. Photo: Bloomberg terminal screen grab showing moment of Brent-WTI parity on December 22, 2015  © Bloomberg.

US oil exports could level crude playing field

It has taken 40 years but US politicians finally found the timing, inclination and effort required to get rid of a legislative relic dating back to the Arab oil embargo of 1975 – a ban on exporting the country's crude oil that has plagued the industry for so long for reasons that no longer seem relevant.

Late on Friday, when news of the lifting of the ban arrived, the Oilholic could scarcely believe it. As recently as July 2014, this blogger opined in a Forbes column that movement on this front was highly unlikely until after the US Presidential election. However, in this instance, one is both pleasantly surprised as well as glad to have been proved wrong.

US producers, including independent upstarts behind the country’s shale bonanza, would now be able to sell their domestically produced barrels out in the international market competing with those already having to contend with a global supply glut.

Let's not kid ourselves, lifting of the ban would not necessarily lead to a significant spike in US oil exports over the short-term. However, it at least levels the playing field for the country’s producers should they want to compete on the global markets. It is also price positive for WTI as a crude benchmark leading it to compete better and achieve parity (at the very least) with global benchmarks in the spirit of free market competition.

Of course, in keeping with the shenanigans long associated with political circles in Washington DC, lifting of the ban came as part of a $1.1 trillion spending bill approved by the Senate that will fund the government until 2016.

The spending bill also includes tax breaks for US solar and wind power, and a pledge by both errant Republicans and Democrats not to derail a $500 million grant to the UN Green Climate Fund.

No matter what the political trade-offs were like, they are certainly worth it if the reward is the end of an unnecessary and redundant ban. That’s all for the moment folks! Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2015. Photo: Alaska Pipeline, Brooks Range, USA © Michael S. Quinton / National Geographic

Crude oil tumbles as OPEC stumbles

Having been to every single OPEC ministers’ summit since 2008, the Oilholic thought he’d seen it all. Not quite it seems; when the 168th meeting of ministers ended – for the very time since yours truly had been here, the oil producers collective failed to mention its production quota. Here’s a link to the communiqué on December 4, that's historic for all the wrong reasons!

In farcical fashion the market was left guessing what OPEC’s actual production is based on previously published data and anecdotal evidence. OPEC itself puts the quota at 30 million barrels per day (bpd). Until recently, while Saudi Arabian production was in overdrive, 31.88 million bpd was the industry consensus, and barely days before the OPEC meeting convened a Bloomberg survey put the figure at 32.1 million bpd.

Bulk of the incremental OPEC barrels are coming from Saudi Arabia and Iraq, with discounting by all 12 members in full swing, as the Oilholic wrote on Forbes. Now Iran, eyeing a meaningful return to the international fold, is also not in favour of production cuts, unlike on previous occasions. It is not just the analyst community that is in uncharted waters, the producers’ group itself appears to be pretty dazed.

OPEC has not published a target oil price since 2004. Then in December 2008, it ceased publication of individual members’ quotas leaving the market to second guess the figure. All we know is that Iraq and Libya are currently not included in the headline quota. Now it seems OPEC will not even reveal what its daily production target is. It is all pretty strange and quite unlike any cartel in the world, if you feel OPEC should be described as such.

No slide rule or calculator was required in working out the stalemate in Vienna would be short-term bearish! There’s just too much oil in the market. In fact, latest surveys suggest we are seeing nearly 2.6 – 2.9 million bpd of surplus oil, double of 1.3 million bpd estimates earlier in the year.

At this rate it would be well into 2016 before supply adjustment occurs, which means that oil price will remain in lacklustre mode. Only saving grace is that a steep decline for Brent below $40 per barrel was not a high probability unless there is a global financial tsunami; even though the global proxy benchmark did briefly fall below the 40-level in intraday trading today.

Expect an uptick next year, but the undeserved oil price heights of Q1 2014 won’t be touched anytime soon. That’s all from Vienna folks. Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2015. Photo: OPEC Secretary General Abdalla Salem El-Badri (right) at the conclusion of the 168th OPEC Ministers Summit in Vienna, Austria on December 4, 2015 © Gaurav Sharma / Oilholics Synonymous Report, December 4, 2015.

Brent & WTI fall by over 3% on OPEC call

The Oilholic is still gathering thoughts on a most unusual conclusion to the OPEC meeting here in Vienna, with the formal communiqué issued by the member nations making no mention of the official production quota but noting that its members had opted to keep production where it was. 

So the only thing that's clear - minus an actual figure - is that OPEC will keep on pumping and maintaining its line of holding on to its market share. Having since waited for the US close, and done the relevant calculations, both Brent and WTI shed over 3% based on a five-day, week-on-week basis, with short-sellers predictably all over both futures contract. 

Using 2130 GMT on Friday as cut-off point, Brent was down $1.70 or 3.79% to $43.17 per barrel compared to the charting point last week, while WTI was $1.35 or 3.23% lower at $40.12 per barrel (see chart above left, click to enlarge). Get prepared for short term bearishness!

Finally, here is how far the OPEC oil price basket has plummeted since June 2014 (see chart below, click to enlarge) More from Vienna shortly; but here is some initial reaction in one’s latest Forbes report. Keep reading, keep it ‘crude’! 

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© Gaurav Sharma 2015. Chart 1: Oil benchmark prices Jan to YTD 2015. Chart 2: OPEC Oil Price Basket June 2014 – November 2014 © Gaurav Sharma / Oilholics Synonymous Report, November 2015.

OPEC quota where it was, no figures needed

OPEC decided to roll over its 'previous quota' published at 30 million barrels per day, but declined to put a figure in its official communique issued at the conclusion of its 168th ministers' meeting in Vienna, Austria.

Despite repeated questioning on the quota ceiling, OPEC Secretary General Adalla Salem El-Badri said Indonesia's re-entry into the OPEC fold, additional Iranian barrels entering the market and concerns over economic growth meant putting forward a quota figure needed further consideration.

"OPEC will wait and see how the market develops" over the next six months and saw no need to alter the current production level during a period of market adjustment, he added, having been asked to stay on as "acting" Secretary General until July 2016. 

In wake of the OPEC announcement, at 1656 GMT, WTI was trading at $40.47 per barrel, down 61 cents or 1.48%, while Brent came in at $43.52, down 32 cents or 0.73%. Industry surveys suggest OPEC's production for November was at 32.1m bpd, well in excess of stated levels. More shortly! Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2015. Photo: OPEC logo © Gaurav Sharma.

Saudis, Iranians not budging - short baby short!

It’s not official yet, but highly likely that an OPEC quota cut is not on cards as the Saudis won’t budge and the Iranians, hoping to return to the international fold, aren’t keen on a cut either. 

That’s unless other non-OPEC producers, most notably the Russians come on board too. It is the latter part that’s the tricky bit. It ain’t happening at the moment, but could it happen at some point 2016? 

Not likely, says our old friend Jason Schenker, President of Prestige Economics. "They might meet and greet, talk on the sidelines. But chatter of a possible joint policy announcement [with Russia] seems pretty far fetched to me."

To The Oilholic, it seems the Saudis want to see how demand goes in the early part of 2016, before possibly backing a cut. Were that to be the case, the good folks in Riyadh reckon they would quite literally get more bang for their bucks.

For the moment, don’t expect much, as yours truly reported for Sharecast. In the interim, here’s the current mantra of OPEC’s Middle Eastern producers, as one wrote for Forbes – i.e. discount the competition to death.

Either way, there appears to quite a bit of intraday short covering going on at moment, which to me suggests the market is bracing for a no change scenario here in Vienna, before an almighty cry of “Short, baby short” once OPEC actually confirms that it will not be cutting. 

That’s all for the moment from Vienna folks, plenty more from here shortly! In the interim, keep reading, keep it ‘crude’!

Update: 1600 CET OPEC Press Conference delayed; ministers have broken up for second session according to sources 

Update: 1630 CET Conference delayed further, expected at 1700 CET now

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Oil oversupply has triggered risk premium fatigue

The Oilholic reckons it will take at least another six months in the New Year to ease the current oil oversupply glut. More so, as OPEC is highly likely to maintain its current production level, according to initial conjecture here in Vienna, Austria with the latest oil ministers’ summit currently underway.

That would probably take us to somewhere around June 2016, when we’ll see excess supply falling to somewhere in the region of 1 million barrels per day (bpd). Be that as it may, even such a decline might not be enough to bring the so-called risk or geopolitical premium into play. 

Last week, offered a clear case in point when the Turkish Air Force brought down a Russian fighter jet. Both countries are significant players in the oil and gas world – Turkey, is a custodian of the key shipping artery of the Bosphorus, and Russia, is the world’s leading oil and gas producer.

Yet, an oil futures "rally" in wake of the incident barely lasted two sessions and a few dollars, before oversupply sentiment returned to dictate market direction as per the current norm. Furthermore, both Brent and WTI futures are going sideways in the $40-45 per barrel range, as has been the case of late.

Flashpoints in the oil and gas world haven’t disappeared. Nigeria, Libya, West’s relations with Russia and Iraq are broadly where they were, if not worse. In fact, situation in the wider Middle East is pretty dire. Yet, the risk premium - so prevalent in the oil trade - is more or less nonexistent in a market struggling to park its barrels.

That will remain the case until excess supply falls to around 700,000 to 800,000 bpd. Even beyond the first half of 2016, few expect a dramatic uptick in oil prices, using Brent as a global proxy benchmark. At Fitch Ratings’ recent London Energy Seminar, this blogger found himself in the company of several experts who agreed that $60-level is unlikely to be capped before the end of 2016.

Alex Griffiths, Head of Natural Resources and Commodities at Fitch Ratings, Tim Barker, Head of Credit Research at Old Mutual Global Investors, Julian Mylchreest, Global Head of Energy at Bank of America Merrill Lynch, and Mutlu Guner, Executive Director at Morgan Stanley, all agreed there is little around to instil confidence in favour of a fast uptick above $60 being on cards within 12 months time. 

Moving away from the oil price, Genscape Oil Editor David Arno’s thoughts on the impact of Keystone XL’s rejections by the Obama administration, chimed with yours truly. Rail freight companies would undoubtedly be the biggest beneficiaries. In his blog post following the decision last month, Arno also felt denial of the pipeline provides rail shippers with “at least a year and a half more of comfort that Canadian rail opportunities will be needed.”

Finally, a couple of notes from Moody’s are worth flagging. The agency recently changed Kinder Morgan's outlook to negative from stable. Senior Vice-President Terry Marshall said the negative outlook reflects Kinder Morgan's increased business risk profile and additional pressure on its already high leverage that will result from its agreement to increase ownership in Natural Gas Pipeline Company, a distressed company. 

On November 30, Kinder Morgan announced an agreement to increase its ownership in NGPL of America to 50% from 20% for approximately $136 million. Brookfield Infrastructure Partners will own the remaining 50%. Proportionate consolidation of NGPL's debt will add about $1.5 billion to KMI's consolidated debt. NGPL's trailing twelve month September 30, 2015 EBITDA was $273 million (gross).

Moving on to state-owned crude giants, Moody's also said China National Petroleum Corporation's (CNPC) proposal to sell some of its pipeline assets is credit positive, as profits and proceeds from the sale will partially offset negative impact from low crude oil and gas prices and help preserve its financial profile during the current industry downturn.

However, Moody’s said the sale has no immediate impact on its ratings and outlook as the benefits “are marginal, given CNPC's extremely large revenue and asset size.” Nonetheless, the ratings agency expects sale proceeds to help CNPC fund the gap between its capital expenditure and operating cash flow and therefore lower its reliance on additional debt to fund its growth.

Finally, the rating agency also downgraded Pemex’s global foreign currency and local currency ratings to Baa1 from A3. Simultaneously, Moody's lowered Pemex's baseline credit assessment (BCA), which reflects its standalone credit strength, to ba3 from ba1.

The actions were prompted by Moody's view that the company's current weak credit metrics will "deteriorate further in the near to medium term. The outlook on all ratings was changed to negative." That’s all for the moment folks from Vienna folks, as the Oilholic finds his bearings at yet another OPEC summit. Plenty more from here shortly! In the interim, keep reading, keep it ‘crude’!

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© Gaurav Sharma 2015. Photo: OPEC Signage © Gaurav Sharma / Oilholics Synonymous Report.

Going sideways: Brent & WTI lurk above $40

The market’s huffed and puffed, issues and influences have come and gone but both oil benchmarks – Brent and WTI have done little to escape their current ranges by more than $2 per barrel.

What’s more, if you outstrip the week’s volatility, on a five-day week-on-week basis to Friday, November 20, Brent ended a mere ten cents lower while WTI rose 67 cents. In fact we've been going sideways for over a month now (see graph, above left, click to enlarge).

Expect more of this for some time yet, as oversupply - the overriding market sentiment that has prevailed for much of 2015 - dominates market chatter and will continue to do so for at least another two quarters. With as much as 1.3 to 1.5 million barrels per day (bpd) of surplus crude oil regularly hitting the market, there’s little around by way of market influence to dilute the impact of oversupply.

The OPEC ministers’ meeting, due early December, is the next major event on the horizon, but the Oilholic does not expect the producers’ collective to announce a production cut. Since, all players are entrenched in their positions in a bid to keep hold of market share, it would be mighty hard to get all 12 players to agree to a production cut, more so as the impact of such a cut remains highly questionable in terms of lending meaningful (and sustainable) support to prices.

Away from the direction of the oil price, yet on a related note, Fitch Ratings unsurprisingly expects the macro environment for EMEA oil and gas majors to remain challenging in 2016. “Crude prices are unlikely to recover (soon), while refining margins will moderate from the record 2015 levels. However, cost deflation should become more pronounced and help to cushion the majors' profits,” the agency noted.

While the sector outlook is viewed by Fitch as “generally negative”, the rating outlook is "stable"  as the agency does not expect sector-wide negative rating actions. “Credit metrics of most players will remain stretched in 2016, but this cyclicality is a known feature of companies in this industry, and we will only take negative action where we expect the current downturn to permanently impair companies' credit profiles,” it added. 

That’s all for the moment folks! Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2015. Chart: Oil benchmark prices Jan to YTD 2015 © Gaurav Sharma / Oilholics Synonymous Report, November 2015.

Upstream woes denting midstream prospects

In wake of weak oil prices, the upstream side of this ‘crude’ world is going through the worst cyclical downturn in years. The Oilholic’s most conservative of estimates sees the situation staying the way it is, if not worsening, for at least another 15 months.

In fact, one feels fresh investment towards exploration and production (E&P) could remain depressed for as much as 18 to 24 months. Both Fitch Ratings and Moody’s have negative outlooks on the upstream industry, as 2015 looks set to end as the year with the lowest average Brent price since 2005.

National Oil Companies (NOCs), bleeding cash reserves in order to stay in the game and put rivals out of it, are maximising existing onstream capabilities. Meanwhile, International Oil Companies (IOCs) looking to cut costs, are delaying final investment decisions on E&P projects at the moment.

As one wrote on Forbes, Big Oil is gearing up for a $60 breakeven oil price for the next three years and capital expenditure cuts of 10%-15% in 2016 with far reaching consequences. Of course, the pain will extend well beyond the obvious linear connection with oilfield services (OFS) and drilling companies.

Global midstream growth is getting hammered by E&P cuts too, according anecdotal evidence from reliable contacts at advisory firms either side of the pond. Most point to a Moody’s subscriber note issued on November 6, that set out the ratings agency’s stable outlook on the US midstream sector, but also suggested that industry EBITDA [Earnings before interest, taxes, depreciation, and amortisation] growth will struggle to cap 5% in 2016.

Andrew Brooks, Senior Analyst at Moody’s, noted: "For the past five years, the midstream industry has rapidly ramped up investment in infrastructure projects to serve the E&P industry's extensive investment in US oil and gas shale resource plays. 

"But now deep cuts in the E&P sector and continued low oil and natural gas prices will limit midstream spending through at least early 2017."

There was a sense in Houston, Texas, US when the Oilholic last went calling in February and again in May this year that midstream companies have already built much, if not most, of the infrastructure required for US shale production. Therefore it is only logical for ratings agencies and analysts to suggest incremental EBITDA growth will slow as fewer new shale and tight oil assets go into service. 

Only thing in midstream players' favour over the next, or quite possibly two, lean fiscal year(s) is the linkage they provide between producers and downstream markets. In Moody’s view this need would mitigate some of the risk of slower growth, even if gathering and processing margins remain at cyclical lows.

"And the midstream sector should be more insulated from contract renegotiation risk with upstream operators having less flexibility to force price concessions on midstream services companies than they have had with OFS firms and drillers," Brooks concluded.

So all things considered, midstream is perhaps not as deeply impacted as E&P, OFS segments of the oil and gas business, but suffering it most certainly is. That’s all for the moment folks! Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2015. Photo: Pipeline signage, Fairfax, Virginia, USA © O. Louis Mazzatenta / National Geographic

Keystone XL farce and rail freighters' smiles

The Obama administration’s long anticipated rejection of the Keystone XL project – an extension [from Hardisty, Alberta to Port Arthur, Texas] to the already existing transnational pipeline between Canada and the US – on 5 November hardly came as a surprise to the oil and gas industry. But is it finally the end of the saga? Not quite, only for the Obama White House staff. 

Once a new US president is in, the project sponsors can, should they choose to do so (and is quite likely they will), launch a fresh application with amendments and new proposals. Quite frankly, the development might be new but the talking points aren’t.

The saga has dragged on and on for seven years and descended into a farce that even provided material for comedian Jon Stewart on more than one occasion (click here). However jokes apart whatever side of the argument you are, that the whole thing got dragged into the quagmire of US politics in the way that it did, is no laughing matter.

This blogger has always maintained that the project's rejection is not some sort of a fatal blow to Canada’s oil and gas industry, but rather an inconvenience and one that has arrived at a time of wider difficulties in the market. Several analysts in Canadian financial circles concur and rail freight companies probably cheered the rejection, despite their own problems with safety related issues and incidents when it comes to moving crude oil.

Of course, moving crude by rail to the Gulf Coast costs almost double per barrel in the region of $7.00 to $11, but for some it won't be a choice. Moving crude by rail is also probably twice as much environmentally unfriendly, something few of the pipeline extension's naysayers appear to be touching on.

There will need to be some medium term adjustments. As the Oilholic noted in 2013, TransCanada is already forging ahead with a West to East pipeline corridor aimed at bringing domestic crude in meaningful volumes from Alberta to Quebec and New Brunswick by 2017 and 2018 respectively. Additionally, considerable amount of lobbying is afoot in terms of looking towards Eastern markets, especially China (despite the recent oil price decline), via British Columbia’s coastline. 

As for the near term, Moody’s expects currently available pipeline and rail transportation to meet anticipated production growth through to the fourth quarter of 2017.

“Post 2017, we expect that as oil egress from Canada becomes constrained, additional rail capacity will fill the void until one of the three proposed major domestic pipelines – Trans Canada's Energy East, Kinder Morgan's Trans Mountain expansion or Enbridge's Northern Gateway – is approved and built,” said Moody’s analyst Terry Marshall. 

There already exists about 550,000 barrels per day (bpd) of unused rail capacity in Western Canada at present, according to the Canadian Association of Petroleum Producers' (CAPP) data. That’s over and above the approximate 200,000 bpd of capacity that will be used to ship oil in 2015, and few, including Moody’s analysts, are in any doubt that moving crude by rail will rise in all likelihood.

Rail freighters' joy is also likely to be further prolonged by the current political climate in Canada. With the oil and gas industry friendly Stephen Harper administration having been voted out after nine years in office, it is all but guaranteed the new Liberal Party Government's pre-election promise to “rework the domestic pipeline approval process” will go ahead.

Not quite clear on the minutiae and what this would entail until details are published and then put to the Canadian parliament later down the year. However, having seen plenty of such overtures in numerous jurisdictions, the Oilholic feels an increase in cost and timescale of the regulatory process is highly likely, alongside the escalating cost of environmental compliance in Canada. 

All of this comes at a time when Canadian oil exploration and production companies could well have done without it. A tough few years are on the horizon. That’s all for the moment folks! Keep reading, keep it ‘crude’! 

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© Gaurav Sharma 2015. Photo: Railway oil tankers outside of Calgary, Alberta, Canada © Gaurav Sharma, March 2011.