Russian Production Capped Saudi Output in 2009

Russian production of crude oil overtook that of Saudi Arabia in 2009, thereby making the former the world’s leading oil producer, according to BP’s Statistical Review of World Energy.

Russian crude production rose 1.5% year over year, increasing the country's global oil output share to 12.9%. This compared favourably, for the Russians at least, with Saudi Arabia’s decline in market share to 12% of global output, following an annualised production fall of 10.6%. The difference may be marginal, but it gives the Russians some much needed bragging rights.

Proven oil global reserves rose by 700 million barrels to 1.33 trillion barrels in 2009, the report adds. It also notes that after the global financial crisis, oil consumption dipped 1.7% or 1.2 million barrels per day last year; highest decline since 1982.

It does seem a shade ironic that BP should be bringing this data while the Gulf of Mexico oil spill saga carries on. However, to be fair, they have been publishing this particular data-set for years and are among the most reliable sources of oil industry data.

Following publication of the BP report, the International Energy Agency (IEA) revised its 2010 global oil demand forecast upwards by 60,000 barrels a day to 86.4 million barrels, on the basis of above expectation preliminary economic data from the OECD countries.

The new demand forecast suggests annual demand growth is seen up by 1.7 million barrels or 2% year over year from 2009.

© Gaurav Sharma 2010. Photo Courtesy © Adrian R. Gableson

A Bashed-up BP and a Desperate President

Just how much political capital is worth is one tough question? President Obama is playing a strange and desperate game in his repetitive bashing of BP over the Deepwater Horizon oil spill. A clear strategy seems to be emerging – whenever the President feels the heat, he calculates that a rant (sprinkled with real or staged anger) against BP will help. It makes for good political theatre and to a certain extent it plays out well to an American audience. Having trawled the blogosphere as well as key US news reports, I found very little, if any, mention of Transocean or Halliburton or the fact that it was a rig built, operated and managed by Americans.

Obama can’t bash BP and see all of the pain being felt across the Pond. As many commentators on either side of the Atlantic, including the BBC’s Business Editor Robert Peston, have noted nearly 40% of its shares are held in the US. The financial pain will and perhaps already is being felt in Britain – whether we’re talking pension funds or investment trust ISAs. But the Brit’s wallets, Gulf Coastline Residents and wildlife would not be the only ones to suffer.

Long-term investors are not panicking (yet!) according to my investigations. If anything, from what I hear in the City, many opine now would be a “good time to buy BP shares” on the cheap. One mute point is that crude oil is trading in the circa of US$71 – 77 per barrel in recent weeks. It stood at $74-plus levels the last time I checked. It is not as if crude futures are trading at sub $10 levels, and the US is the only market BP operates in?

I would stress that no one denies the Deepwater Horizon Gulf oil spill is an appalling tragedy in more ways than one. However, drilling in the Gulf is crucial for the energy security of the United States. Obama acknowledged just as much in a speech in March prior to this incident. This morning the International Energy Agency (IEA) opined that a long-term impact on future off-shore supply was unlikely in wake of the incident.

“The longer-lasting impact of Deepwater Horizon on U.S. oil supplies may depend on whether operational negligence on the part of companies or regulators, or rather shortcomings in current operating procedures and regulatory structures, were the key cause. The former might suggest a less profound impact on future oil supply than the latter,” the agency said.

Additionally, the IEA made another interesting comment. It said the US government was now belatedly following the steps taken by the UK after the Piper Alpha disaster (1988) - but noted that scores of new offshore fields were developed in the subsequent demand.

In the interim, what’s influencing markets’ sentiment about BP momentarily is that both the US President and the company’s executives sound desperate given the battering they’ve taken in recent weeks. Neither is helping either which is a real shame.

© Gaurav Sharma 2010. Logo Courtesy © BP Plc

Is Brent Winning Battle of the Indices?

Is London’s Brent Crude winning the battle of the indices? David Peniket, President and Chief Operating Officer of Intercontinental Exchange (ICE) Futures Europe, certainly seems to think so.

Speaking at the Reuters Global World Energy Summit on May 27th, Peniket said, “Brent is the global oil benchmark. Brent is used as the price benchmark for around two-thirds of the world's traded oil. It reflects the fundamentals of the oil market on a global basis and we're seeing Brent used as part of the pricing for oil throughout the world.”

Looking ahead, he added that based on “ongoing” growth in Asia, ICE currently expects Asian market participants to use Brent to hedge their risk rather than other benchmarks.

WTI Volumes traded on the NYMEX are far higher than those of Brent on ICE but Peniket said that from 2008 to 2009 Brent grew by 8% in volume terms while WTI grew 2%. Over Q1 2010, Brent grew by 34% while NYMEX WTI grew by 8%.

He declined comment on when he thought ICE Brent volumes may exceed WTI on NYMEX but said that, “Brent is a seaborne crude; it's at a point of the world where crude oil can move around and it can act as a point of arbitrage between different crude grades. Clearly WTI is an important US benchmark but I don't think it reflects the fundamentals of the global oil market in the way that Brent reflects them.”

Elsewhere in the summit, Reuters reported that top bosses of several leading commodities exchange, including Peniket, expressed their common view that speculation has not caused extreme volatility in oil prices and the efforts by state regulators in various markets are unwise to say the least. That will hardly convince politicians seeking capital and a largely sceptical wider public opinion, most notably in the US.

© Gaurav Sharma 2010. Photo Courtesy © Royal Dutch Shell

The Crude Month of May!

The month of May was an extraordinary one for those following crude price fluctuations. Cumulatively speaking, both the major oil futures markets saw the oil price tumble by nearly a fifth since April 30. Over the last fortnight, the price of oil closed below US$70 a barrel for the first time in 2010 driven down by the Greek debt crisis as well as US inventory build-up.

However, between May 26 and 28, the market witnessed a spectacular rebound when the NYMEX contract for July spiked nearly $7 a barrel. Hence, the weekly rise on the back of a healthy 48 hours came in at 5.6% or $3.93 a barrel. Impressive as it may appear, several market commentators I spoke to on the day seemed reluctant to rule out fresh lows over the course of next week (and well into June).

There’s plenty to spook the markets – Greece debt crisis, the Euro’s woes as a result of it, Spain’s recent debt ratings downgrade and US consumer spending. Brent’s premium to NYMEX, which was markedly visible mid-May, also disappeared by Friday.

Predictably, near-term futures contracts are trading at a discount to more-distant contracts. Prices for the most actively traded NYMEX futures contract fell 14.1% or $12.18 in May, the worst month on record since December 2008. Concurrently, over the same period, the front-month Brent crude contract fell 15.4% or $13.42 a barrel, the highest monthly decline since November 2008.

Overall, May was a tough old month for energy futures in general, with perhaps the notable exception of Natural Gas. Expect more of the same in June.

© Gaurav Sharma 2010. Chart Courtesy © Digital Look/BBC

To Drill or Not to Drill Mr. President?

One cannot but help feeling for President Barack Obama. As a candidate and Democrat nominee for the highest American office, Obama was often sceptical about offshore drilling. While his opponents were screaming “Drill Baby Drill,” the then young senator from Illinois was not convinced for his own reasons – some sound, others well – not all that sound.

As President, facing the ground realities and very real concerns about US energy security, Obama made the correct call on March 31 to permit offshore drilling off the US coastline. His opponents claimed the President was not going far enough. Some on his own side claimed he was pandering to the Republicans.

Sadly, before the dust could settle, on April 20th, an environmentally tragic oil spill in the Gulf of Mexico that followed an explosion on an offshore rig, complicated the scenario further. More so executives, from both - oil giant BP which commissioned the rig and Transocean, one of the world’s largest offshore drilling companies, and the rig's operator - did not acquit themselves well in front of American legislators by trying to shift the blame for the incident.

As both companies were trying their hardest to ensure that they do not endear themselves to the American public, the President summed up the emotions, “The American people could not have been impressed with that display, and I certainly wasn’t...There’s enough responsibility to go around, and all parties should be willing to accept it. That includes, by the way, the federal government.”

Trouble is, even though he says oil exploration and drilling must still be part of US energy strategy, the issue has become more political than ever. Following the spill, Obama announced a moratorium on new offshore drilling projects unless rigs have new safeguards to prevent another disaster.

Governor of California Arnold Schwarzenegger said the accident had caused him to drop his support for new offshore drilling in his state. "You turn on the television and see this enormous disaster. You say to yourself, 'Why would we want to take on that kind of risk?” he added.

Across the political divide politicians are asking the very same questions, albeit not for the same reasons. Let us take things into perspective. No one, not least the author of this blog, or people within or outside the oil world including BP (who may have to foot most if not all of the bill to clean up the mess), are suggesting for a moment that what has happened is not terrible and tragic in equal measure.

However, the spill will make it harder for America to follow an energy policy that could actually deliver long-term satisfaction. Some in political circles would try their best to pander to the voting public’s fears for their own gains. Here is a telling fact - before the latest oil spill began on April 20th; the last “big” oil platform leak in the US was 40 years ago. Exxon Valdez incident, though related, cannot be brought into the equation.

So, while any such incident is regrettable to say the least, the figure not only speaks for itself but also indicates that safety standards have improved markedly. However, the figure is something the politicians risk even raising, let alone rely upon to justify offshore drilling and the list does include the President. The oil spill, will be contained and hopefully soon, but US energy policy is currently in a mess and all at sea. Actually it could be both and that in itself is no laughing matter.

© Gaurav Sharma 2010. Photo Courtesy © The White House website