Oh the market ‘insouciance’ outside is frightful!

It is no longer strange to see Americans and Canadians complain about the rising price of gasoline. After all, it’s the price at the pump which hurts us all – something which has seen a steady rise.

A short-term respite is quite frankly not in sight; more so for Europeans but complaints from North American consumers and change in consumption patterns (in relative terms) have grown in the last five years. Although some in the English town of Bradford, who pay more for their petrol/per litre than North Americans, got a temporary one-off respite according to the BBC, after the station staff put a decimal point in the wrong place. The story is hilarious, aptly timed for April Fools Day and one for the little guy troubled by rising inflation in UK.

US President Obama finally pointed to Canada, Mexico as reliable sources of crude oil and said they could play their part in his consuming nation’s bid to slash imports from unfriendly governments. Both countries rank higher than Saudi Arabia in terms of crude exports to the US, so very welcome quotes – but as with all else about him – a bit late.

The short-term problem – and a global one it is too – is the widening of premium between easier to refine sweet crude oil and sour crude which is the opposite. Anecdotal evidence, either side of the Atlantic is that refiners (either European or European subsidiaries of overseas owners), are paying record physical premiums to secure supplies of sweet crude in wake of the Libyan stand-off.

The quality of Libyan sweet crude is excellent and as a short-term problem starts resembling a longer termed stand-off, the market is getting spooked as no one can make up their minds about who is in charge of the country. That’s despite the on / off media reports of oil being loaded on to tankers both on the rebels’ side and Gaddafi’s side.

End result - Brent Crude forward month futures (May) contract, more reflective of global conditions, has spiked to a 30-month high. Oilholic believes this is no ordinary or linear spike resulting from a geopolitical bias/risk premium to the upside. Rather it is clearly reflective of the rise in price differentials between sweet and sour crude in wake of Libya and hence impacts Brent as a benchmark to a greater extent than the WTI.

As early as a fortnight ago, the IEA rightly warned that we are underestimating the impact of the temporary (or otherwise) loss of Libyan sweet crude on traded paper barrels. In its monthly report for March, it noted, "Market insouciance may change abruptly as April approaches, when global crude demand is expected to increase by around 1 million barrels a day as Atlantic Basin refinery maintenance ends."

Sweet crude varieties are trading at a premium of US$2.80 to US$4.10 per barrel above sour varieties, according to the Oilholic’s sources. This is the highest for some time. Try as they might, Saudis won’t materially alter this; the premium has solid foundations!

Finally before I leave Canada for San Francisco, here is a brilliant editorial in The Economist about European nations trying to forget embarrassing ties in the Middle East and a BBC report on Transocean’s 'crude' announcement of bonuses related to their "best year of safety."

© Gaurav Sharma 2011. Photo: Gas Station, Houston, Texas, USA © Gaurav Sharma, March 2011

Crude Oil prices & some governments

I have spent the last two weeks quizzing key crude commentators in US and Canada about what price of crude oil they feel would be conducive to business investment, sit well within the profitable extraction dynamic and last but certainly not the least won't harm the global economy.

Beginning with Canada, since there’s no empirical evidence of the Canadian Dollar having suffered from the Dutch disease, for the oil sands to be profitable – most Canadians remarked that a price circa of US$75 per barrel and not exceeding US$105 in the long term would be ideal. On the other hand, in the event of a price dive, especially an unlikely one that takes the price below US$40 per barrel would be a disaster for petro-investment in Canada. A frozen Bow River (pictured above) is ok for Calgarians, but an investment freeze certainly wont be!

The Americans came up with a slightly lower US$70-90 range based on consumption patterns. They acknowledge that should the price spike over the US$150 per barrel mark and stay in the US$120-150 range over the medium term, a realignment of consumption patterns would occur.

This begs the question – what have Middle Eastern governments budgeted for? Research by commentators at National Commercial Bank of Saudi Arabia, the Oilholics’ feedback from regional commentators and local media suggests the cumulative average would be US$65 per barrel. Iran and Iraq are likely to have budgeted at least US$10 above that, more so in the case of the former while Saudi Arabia (and maybe Kuwait) would have budgeted for US$5 (to US$10) below that.

Problem for the Oilholic is getting access to regional governments’ data. Asking various ministries in the Middle East and expecting a straight forward answer, with the notable exception of the UAE, is as unlikely as getting a Venezuelan official to give accurate inflation figures.

Meanwhile, price is not the only thing holding or promoting investment. For instance, the recent political unrest has meant that the Egypt Petroleum Corp. has delayed the Mostorod refinery construction until at least May. The reason is simple – some 20-odd participating banks, who arranged a US$2.6 billion loan facility want the interim government to reaffirm its commitment to the project, according to a lawyer close to the deal. The government, with all due respect, has quite a few reaffirmations to make.

© Gaurav Sharma 2011. Photo: Bow River, Calgary, Alberta, Canada © Gaurav Sharma, April 2011

Glimpses of Fort Calgary, 1914 & all that!

The Oilholic paid a visit to Fort Calgary in between meetings; not far from Downtown Calgary (towards the east end of the city). There is no better place to soak in the city’s rich heritage. Founded in 1875, the then North West Mounted Police (NWMP) built this outpost at the convergence point of Bow and Elbow Rivers. In all fairness, say local historians, they laid the foundations of the modern city of Calgary.

For oilholics the world over, the 'crude' bits are very crucial and merit a detailed look. First gas and (as was often the case with hydrocarbon prospecting) then oil was found in May, 1914, just south of Calgary. After the first discovery, there was a long wait of some 33 years before the next meaningful discovery was made.

The rest, as they say, is all history and I am reading up on it thanks to some wonderful books obtained from stores recommended by Rusty Miller, Ogilvy Renault LLP’s managing partner here. He also spared time from his busy schedule to give me some valuable insight on intricacies of the energy business in this part of the world.

Uploaded above are some 'crude' snaps from the Fort, captioned as appropriate. If you happen to be in town – please do visit. For some strange reason, and locals scratch their heads too, this wonderful place does not receive any Federal funding! Even provincial support needs to be applied for and is not a given thing by any means according to an official. Local energy companies have been good though and long may that continue.

Finally, a few crude words on the price and differentials between both benchmarks – WTI & Brent. This weekend, using the Brent forward month (May) futures contract as a benchmark – the crude price is at its highest since August 2008. With the May contract at US$117.36 per barrel, that is an annualised price appreciation of nearly 24% and by my estimation – a week-over-week appreciation of nearly 2.4% plus. Price differential between Brent and WTI also averaged US$10 and shows no sign of narrowing!

The Libyan situation also shows no signs of a resolution. Both in Alberta and Texas – the overwhelming sentiment is that Libya is fast resembling a stand-off and that adds to the upside bias reflected in the risk premium. It seems that for the short term, the market will have to make do without Libyan crude.

Problem is if it becomes a medium term supply concern. Surely, a high price should please Texans and Albertans – but "only to a point" notes one. That tipping point could hurt both the global economy and the profit margins of those in the business.

© Gaurav Sharma 2011. Photos: (Top) Fort Calgary, (Clockwise) Signage charting the first discovery of oil on the exterior of the fort, Turner Valley & Leduc crudes on display, Model of an old Gas station (Click on images to enlarge) © Gaurav Sharma, March 2011

Remembering Eddie Junior

Just heard via the BBC World Service in Canada about the sad and untimely death of hauling and trucking legend Eddie Stobart who passed away yesterday of heart complications. At 56 years young, Eddie had achieved iconic status in the UK.

Oilholic believes if any Brit is asked to name a haulage company – there’s 9:1 chance that man, woman or child would say Eddie Stobart; that unmistakable name flashing at us from a green background off the side of a truck zipping past.

For 30 years, Eddie helped to build his dad – Edward senior’s company into the UK largest independent haulage company, retiring from his post at the helm in 2004. By this time, the firm had achieved iconic status – so much so that it had sparked a booming accessories and kids’ model toy trade. I confess to being a proud owner of a miniature Eddie Stobart truck which I refuse to let go at any price.

In a statement issued by the Stobart Group, it said: "With great sadness and regret that Stobart Group shares the news that Edward Stobart, 56, son of Eddie Stobart, passed away at 8.10am this morning [Thursday, March 31st, 2011] at University Hospital Coventry, after heart problems yesterday. Our thoughts are with Edward's wife Mandy, his children and family at this difficult time."

Rest in peace Eddie, you will be missed Sir.

© Gaurav Sharma 2011. Photo: Eddie Stobart truck © Stobart Group, UK

Goodbye Houston; first thoughts from Calgary

Instability or risk premium is not being reflected in the US Mid West as much as it is in Europe in light of the Libyan situation. Following accidents in San Bruno, CA and Michigan, MI – pipeline safety legislation is likely to be added to the pile of regulatory activity related to the energy business which followed BP’s Gulf of Mexico fiasco. In fact, a bill on pipeline safety is already making its way through the US senate.

There is also common conjecture that retirement of coal-fired power plants may assist in shifting established gas flow patterns (& prices). However, the Oilholic feels while this is likely to happen at some point, it will not happen in a meaningful way any time soon. Mid West’s problem is akin to that of Australia’s when it comes to power generation – a traditional dependence on coal which is hard to tackle. Gas prices, in any case, are likely to remain low as there are abundant supplies and storage levels are solid.

Given that the US overtook Russia as the leading gas producer courtesy of shale gas, it is not bravado to assume that it could meaningfully export to Europe or that US-bound LNG could well be diverted to Europe.

Moving on to refining, some local analysts are following the “things can only get better” logic for North American refiners – who they feel are well positioned to demonstrate a recovery (or some form of stabilisation) of their margins after six troubled quarters to end-2010. The speed of the economic recovery will have a big say in the state of affairs.

After leaving Houston, the Oilholic has now arrived in its sister Canadian city of Calgary – quite a switch from a sweltering 30 C on a Texan morning to about -4 C on an Albertan evening. While both cities do not share their climate – they do share the same sense of frustration about the delays associated with the expansion project of the Keystone pipeline.

It seems Alberta and Texas are quite keen on the expansion – it’s just that everyone in between is the problem. The politics associated with this pipeline, as with other projects of its ilk is deeply complicated. However, this one involves cross-border politics, some of which has turned ugly especially in relation to the “cleanness” of Canadian oil.

And by the way its “oil sands” not “tar sands” stupid, say the locals! I’ll have more from Calgary shortly when I soak in and refine the local commentators’ viewpoints.

© Gaurav Sharma 2011. Photo: Calgary Tower, Alberta, Canada © Gaurav Sharma, March 2011