IEA on demand, Lavrov on Iran plus crude chatter

In its latest monthly report, the IEA confirmed what the Oilholic has been blogging for the past few months on the basis of City feedback – that the likelihood of another global recession will inhibit demand for crude oil this year, a prevalent high oil price might in itself hit demand too and seasonally mild weather already is.

While geopolitical factors such as the Iranian tension and Nigerian strikes have supported bullish trends of late, the IEA notes that Q4 of 2011 saw consumption decline on an annualised basis when compared with the corresponding quarter of 2010. As a consequence, the agency feels inclined to reduce its 2012 demand growth forecast by 220,000 barrels per day (bpd) from its last monthly report to 1.1 million barrels.

"Two inherently destabilising factors are interacting to give an impression of price stability that is more apparent than real. The first is a rising likelihood of sharp economic slowdown, if not outright recession, in 2012. The second factor, which is counteracting bearish pressures, is the physical market tightening evident since mid-2009 and notably since mid-2010," it says in the report.

The IEA also suggests that a one-third downward revision to GDP growth would see this year's oil consumption unchanged at 2011 levels. On the Iranian situation and its threat to disrupt flows in the Strait of Hormuz, through which 20% of global oil output passes, the agency notes, “At least a portion of Iran's 2.5 million bpd crude exports will likely be denied to OECD refiners during second half 2012, although more apocalyptic scenarios for sustained disruption to Strait of Hormuz transits look less likely.”

Meanwhile, Russian foreign minister Sergei Lavrov has weighed in to the Iran debate with his own “chaos theory”. According to the BBC, the minister has warned that a Western military strike against Iran would be "a catastrophe" which would lead to "large flows" of refugees from Iran and would "fan the flames" of sectarian tension in the Middle East. Israeli Defence Minister Ehud Barak earlier said any decision on an Israeli attack on Iran was "very far off".

Meanwhile, one of those companies facing troubles of its own when it comes to procuring light sweet crude for European refiners is Italy’s Eni which saw its long term corporate credit rating lowered by S&P from 'A' from 'A+'. In addition, S&P removed the ratings from CreditWatch, where they were placed with negative implications on December 8, 2011.

Eni’s outlook is negative according to S&P and the downgrade reflects the ratings agency’s view that the Italian oil major’s business risk profile and domestic assets have been impaired by the material exposure of many of its end markets and business units to the deteriorating Italian operating environment. Eni reported consolidated net debt of €28.3 billion as of September 30, 2011. Previously, Moody’s has also reacted to the Italian economy versus Eni situation over Q4 2011.

Elsewhere conflicting reports have emerged about the Obama administration’s decision to deny a permit to Keystone XL project something which the Oilholic has maintained would be a silly move for US interests as Canadians can and will look elsewhere. Some reports said the President has decided to deny a permit to the project while others said a decision was unlikely before late-February. This article from The Montreal Gazette just about sums up Wednesday's conflicting reports.

When the formal rejection by the US state department finally arrived, the President said he had been given insufficient time to review the plans by his Republican opponents. At the end of 2011, Republicans forced a final decision on the plan within 60 days during a legislative standoff.

The Republican Speaker of the US House of Representatives, John Boehner, criticised the Obama administration for its failure over a project that would have created "hundreds of thousands of jobs" while the President responded by starting an online petition so that the general population can express its opposition to the Keystone XL pipeline.

The merits and demerits of the proposal aisde, this whole protracted episode represents the idiocy of American politics. Canadians should now seriously examine alternative export markets; something which they have already hinted at. The Oilholic's timber trade analogy always makes Canadians smile. (Sadly, even Texans agree, though its no laughing matter).

On the crude pricing front, the short term geopolitically influenced bullishness continues to provide resistance to the WTI at the US$100 per barrel level and Brent at US$111. Sucden Financial's Myrto Sokou expects some further consolidation in the oil markets due to the absence of major indicators and mixed signals from the global equity markets, while currency movements might provide some short-term direction. “Investors should remain cautious ahead of any possible news coming out from the Greek debt talks,” Sokou warns.

Finally, global law firm Baker & McKenzie is continuing with its Global Energy Webinar Series 2011-2012 with the latest round – on International Competition Law – to follow on January 25-26 which would be well worth listening in to. Antitrust Rules for Joint Ventures, Strategic Alliances and Other Modes of Cooperation with Competitors would also be under discussion. Thats all for the moment folks. Keep reading, keep it 'crude'!

© Gaurav Sharma 2012. Photo: Oil Refinery, Quebec, Canada © Michael Melford / National Geographic.

Looming embargo on Iran, Nigeria & few other bits

An EU ban on Iranian crude imports in response to the country’s continued nuclear programme is imminent but not immediate or so the City analysts and government sources would have you believe. Furthermore, news agency Bloomberg adds that the planned embargo is likely to be delayed by up to six months as European governments scramble to seek alternative sources.

The Japanese and Indian governments are also looking to reduce dependence on Iranian imports according to broadcasts from both countries while OPEC has indicated that it does not wish to be involved in row. Add the ongoing threats strike threats by Nigeria’s largest oil workers union, the Pengassan, as well the second largest, Nupeng, and political tension in the country to the Iranian situation and you don’t need the Oilholic to tell you that the short term risk premium is going mildly barmy.

It is nearly the end of the week and both benchmarks have rebounded with City analysts forecasting short term bullishness. With everyone scrambling for alternative sources, pressure is rising on already tight supply conditions notes Sucden Financial analyst Jack Pollard. “With the near-term geopolitical risk premium being priced in, Brent’s backwardation looks fairly assured as the front spreads continue to widen. Well-bid Italian and Spanish auctions have no doubt supported risk appetite, as the US dollar tracks back to lend upward pressure on commodities,” he adds.

When the Oilholic checked on Thursday, the Brent forward month futurex contract was resisting the US$110 per barrel level while WTI was resisting the US$99 level sandwiched between a bearish IEA report and geopolitical football. The next few weeks would surely be interesting.

Away from crude pricing, to a few corporate stories, ratings agency Moody’s has affirmed LSE-listed Indian natural resources company Vedanta Resources Plc's Corporate Family Rating of Ba1 but has lowered the Senior Unsecured Bond Rating to Ba3 from Ba2. The outlook on both ratings is maintained at negative following the completion of the acquisition of a controlling stake in Cairn India, on December 8, 2011.

Since announcing the move in August 2010, Vedanta has successfully negotiated the course of approvals, objections and amended production contract arrangements and now holds 38.5% of Cairn India directly, with a further 20% of the company held by Sesa Goa Ltd., Vedanta's 55.1%-owned subsidiary.

Moody’s believes the acquisition of Cairn India should considerably enhance Vedanta's EBITDA, but the agency is concerned with the sharply higher debt burden placed on the Parent company. In order to lift its stake from 28.5% to 58.5%, Vedanta drew US$2.78 billion from its pre-arranged acquisition facilities. Coupled with the issue of US$1.65 billion of bonds in June 2011, debt at the Parent company level is now in excess of US$9 billion on a pro forma basis. This compares with a reported Parent equity of US$1 billion at FYE March 2011.

Moving on, Venezuelan oil minister Rafael Ramírez said earlier this week that his country had decided to compensate ExxonMobil for up to US$250 million after President Hugo Chávez nationalised all resources in 2007. Earlier this month the International Chamber of Commerce in Paris, already stated that the country must pay Exxon Mobil a total of US$907 million, which after numerous reductions results in - well US$250 million.

Elsewhere, law firm Herbert Smith has been advising HSBC Bank Plc and HSBC Bank (Egypt) on a US$50 million financing for the IPR group of companies, to refinance existing facilities and to finance the ongoing development of IPR's petroleum assets in Egypt – one of a limited number of financings in the project finance space in Egypt since the revolution. It follows four other recent financings for oil and gas assets in Egypt on which Herbert Smith has advised namely – Sea Dragon Energy, Pico Petroleum, Perenco Petroleum and TransGlobe Energy.

On a closing note and sticking with law firms, McDermott Will & Emery has launched a new energy business blog – Energy Business Law – which according to a media communiqué will provide updates on energy law developments, and insights into the evolving regulatory, business, tax and legal issues affecting the US and international energy markets and how stakeholders might respond. The Oilholic applauds MWE for entering the energy blogosphere and hopes others in the legal community will follow suit to enliven the debate. Keep reading, keep it 'crude'!

© Gaurav Sharma 2012. Photo: Pipeline, South Asia © Cairn Energy.

Examining a crude 2011 & talking Iran vs. 2012

As the Oilholic conjectured at the end of 2010, the year 2011 did indeed see Brent Crude at “around US$105 to US$110 a barrel”. However there was nothing ‘crudely’ predictable about 2011 itself – the oil markets faced stunted global economic growth, prospect of another few quarters of negative growth (which may still transpire) and a Greek crisis morphing into a full blown Eurozone crisis.

The Arab Spring also understandably had massive implications for the instability / risk premium in the price of crude over much of 2011. However, the impact of each country’s regional upheaval on the price was not uniform. The Oilholic summarised it as follows based on the perceived oil endowment (or the lack of it) for each country: Morocco (negligible), Algeria (marginal), Egypt (marginal), Tunisia (negligible), Bahrain (marginal), Iran and Libya (substantial).

Of the latter, when Libya imploded, Europe faced a serious threat of shortage of the country’s light sweet crude. But with Gaddafi gone and things limping back to normal, Libya has awarded crude oil supply contracts in 2012 to Glencore, Gunvor, Trafigura and Vitol. Of these Vitol helped in selling rebel-held crude during the civil war as the Oilholic noted in June.

Meanwhile Iran remains a troubling place and gives us the first debating point of 2012. It saw protests in 2011 but the regime held firm at the time of the Arab spring. However, in wake of its continued nuclear programme, recent sanctions have triggered a new wave of belligerence from the Iranian government including its intention to blockade the Straits of Hormuz. This raises the risk premium again and if, as expected a blanket ban by the EU on Iranian crude imports is announced, the trend for the crude price for Q1 2012 is decidedly bullish.

Société Générale's oil analyst Michael Wittner believes an EU embargo would possibly prompt an IEA strategic release. The price surge – directly related to the Saudi ability to mitigate the Iran effect – would dampen economic and oil demand growth. Market commentators believe an EU embargo is highly likely, especially after it reached an agreement in principle on an embargo on January 4th.

However, a more serious development would be if Iran carries out its threat to shut down the Straits of Hormuz, disrupting 15 million bpd of crude oil flows and we would expect Brent prices to spike into the US$150-200 range albeit for a limited time period according to Wittner.

“A credible threat from missiles, mines, or fast attack boats is all it would take for tanker insurers to stop coverage, which would halt tanker traffic. However, we believe that Iran would not be able to keep the Straits shut for longer than two weeks, due to a US-led military response. The disruption would definitely result in an IEA strategic release. The severe price spike would sharply hurt economic and oil demand growth, and from that standpoint, be self-correcting,” he adds.

Nonetheless, not many in the City see a “high” probability of such a step by Iran. Anyway, enough about Iran; lets resume our look back at 2011 and the release of strategic reserves would be a good joiner back to events of the past year.

Political pressure, which started building from April 2011, onwards saw the IEA ask its members to release an extra 60 million barrels of their oil stockpiles on to the world markets on June 23rd. The previous two occasions were the first gulf war (1991) and the aftermath of Hurricane Katrina (2005). That it happened given the political clamour for it is no surprise and whether or not one questions the wisdom behind the decision, it was a significant event.

For what it was worth, the market trend was already bearish at the time, Libya or no Libya. Concerns triggered by doubts about the US, EU and Chinese economies were aplenty as well as the end of QE2 liquidity injections coupled with high levels of non-commercial net length in the oil markets.

On the corporate front, refineries continued to struggle as expected with many major NOCs either divesting or planning to divest refining and marketing (R&M) assets. US major ConocoPhillips' announcement in July that it will be pursuing the separation of its exploration and production (E&P) and R&M businesses into two separate publicly traded corporations via a tax-free spin-off R&M co. to shareholders did not surprise the Oilholic – in fact it’s a sign of times.

Upstream remains inherently more attractive than the downstream business and the cliché of “high risk, high reward” resonates in the crude world. Continuing with the corporate theme, one has to hand it to ExxonMobil’s inimitable boss – Rex Tillerson – for successfully forging an Arctic tie-up with Rosneft so coveted by beleaguered rival BP.

On August 30th, 2011, beaming alongside Russian Prime Minister Vladimir Putin, Tillerson said the two firms will spend US$3.2 billion on deep sea exploration in the East Prinovozemelsky region of the Kara Sea. Russian portion of the Black Sea has also been thrown in the prospection pie for good measure as has the development of oil fields in Western Siberia.

The US oil giant described the said deal as among the most promising and least explored offshore areas globally “with high potential for liquids and gas.” If hearts at BP sank, so they should, as essentially the deal had components which it so coveted. However, a dispute with local partner TNK-BP first held up a BP-Rosneft tie-up and then finished it off.

One the pipelines front, the TransCanada Keystone XL project continues to be hit by delays and decision is not expected before the US presidential election; but the Oilholic feels the delay is not necessarily a bad thing. (Click here for thoughts)

The Oilholic saw M&A activity in the oil & gas sector over 2011 – especially corporate financed asset acquisitions – marginally exceeding pre-crisis deal valuation levels. Recent research for Infrastructure Journal – suggests the deal valuation figure for acquisition of oil & gas infrastructure assets, using September 30th as a cut-off date, is well above the total valuation for 2008, the year that the global credit squeeze meaningfully constricted capital flows.

Finally, on the subject of the good old oil benchmarks, since Q1 2009, Brent has been trading at premium to the WTI. This divergence has stood in recent weeks as both global benchmarks plummeted in wake of the recent economic malaise. WTI’s discount reached almost US$26 per barrel at one point in 2011.

Furthermore, waterborne crudes have also been following the general direction of Brent’s price. The Louisiana Light Sweet (LLS) increasingly takes its cue from Brent rather than the WTI, and has been for a while. Hence, Brent continues to reflect global conditions better.

Rounding things up, 2011 was a great year in terms of crude reading, travelling and speaking. Starting with the reading bit, 2011 saw the Oilholic read several books, but three particularly stood out; Daniel Yergin’s weighty volume - The Quest, Dan Dicker’s Oil’s Endless Bid and last but not the least Reuters’ in-house Oilholic Tom Bergin’s Spills & Spin.

Switching to crude travels away from London town, the Oilholic blogged from Calgary, Vancouver, Houston, San Francisco, Vienna, Dusseldorf, Bruges, Manama and Doha; the latter being the host city of the 20th World Petroleum Congress. The Congress itself and other signature events in the 2011 oil & gas calendar duly threw up several tangents for discussion.

Most notable among them were the two OPEC summits, the first in June which saw a complete disharmony among the cartel’s members followed by a calmer less acrimonious one in December where a unanimous decision to hold production at 30 million bpd was reached.

On the speaking circuit front, 2011 saw the Oilholic comment on CNBC, Indian and Chinese networks, OPEC webcasts and industry events, most notable among which was the Baker & McKenzie seminar at the World Petroleum Congress which was a memorable experience. That’s all for the moment folks. Here’s to 2012! Keep reading, keep it 'crude'!

© Gaurav Sharma 2012. Photo: Oil rig © Cairn Energy.

Speaking @ OPEC & WPC plus Dec's trading lows

It’s been a hectic few weeks attending the OPEC conference in Vienna and the 20th World Petroleum Congress in Doha, but the Oilholic is now happily back in London town for a calm Christmas. In fact, a more than passive interest in the festive period’s crude trading lows is all what you will get for the next fortnight unless there is a geopolitical mishap. However, before we discuss crude pricing, this humble blogger had the wonderful experience of doing a commentary hit for an OPEC broadcast and moderating a Baker & McKenzie seminar at the WPC.

Starting with OPEC, it was a pleasure ditching pricing and quotas for once in Vienna and discussing the infrastructure investment plans of its 12 member nations in OPEC webcast on December 14th. The cartel has announced US$300 billion of upstream infrastructure investment between 2011 and 2015.

The market is right in believing that Kuwait and Qatar would lead the new build and give project financiers considerable joy. However, intel gathered at the WPC suggests the Algerians could be the surprise package. (To watch the video click here and scroll down to the seventh video on the 160th OPEC conference menu)

This ties-in nicely to the Baker & McKenzie seminar at the WPC on December 7th where the main subject under the microscope was investment opportunities for NOCs.

Six legal professionals attached to Baker's myriad global practices, including familiar names from their UK office, offered the audience insight on just about everything from sources of funding to a reconciliation of different drivers for NOCs and IOCs in partnerships.

Once the panel discussion was over, the Baker partners were kind enough to allow the Oilholic to open the floor for some lively questioning from the audience. While the Oilholic did most of the probing and Baker professionals did most of the answering, the true credit for putting the seminar and its research together goes to Baker’s Emily Colatino and Lizzy Lozano who also clicked photos of the proceedings.

Now from crude sound-bites to crude market chatter post-OPEC, as the end of last week saw a major sell off. Despite the price of crude oil staging a minor recovery in Monday’s intraday trading; both benchmarks were down by over 4 per cent on a week over week, five-day cycle basis on Tuesday. Since the festive period is upon us, trading volumes for the forward month futures contracts will be at the usual seasonal low over the Christmas holidays. Furthermore, the OPEC meeting in Vienna failed to provide any meaningful upward impetus to the crude price level, which like all traded commodities is witnessing a bearish trend courtesy the Eurozone crisis.

Sucden Financial Research analyst Myrto Sokou notes that investors remained very cautious towards the end of last week and were prompted towards some profit taking to lock in recent gains as WTI crude was sliding down toward US$92 per barrel level.

“After market close on Friday, Moody’s downgraded Belgium by two notches to Aa3, as liabilities associated with the Dexia bailout and increased Eurozone risks were cited as key factors. In addition, market rumours on Friday of a France downgrade by S&P were not followed up, though the agency did have server problems during the day. Suspicion is now that they will wait until the New Year to conclude review on Eurozone’s second largest economy,” Sokou said in a note to clients.

Additionally, crude prices are likely to trade sideways with potential for some correction higher, supported by a rebound in the global equity markets. “However, should the US dollar strengthen further we expect some pressure in the oil market that looks fairly vulnerable at the moment,” Sokou concludes.

Away from pricing projections, the Reuters news agency reports that Libya has awarded crude oil supply contracts in 2012 to Glencore, Gunvor, Trafigura and Vitol. Of these Vitol helped in selling rebel-held crude during the civil war as the Oilholic noted in June.

On to corporate matters and Fitch Ratings has upgraded three Indonesian oil & gas utilities PT Pertamina (Persero) (Pertamina), PT Perusahaan Listrik Negara (Persero) (PLN) and PT Perusahaan Gas Negara Tbk (PGN) to 'BBB-' following the upgrade to Indonesia's Long-Term Foreign- and-Local-Currency Issuer Default Ratings (IDRs) to 'BBB-' from 'BB+'. The outlooks on all three entities are Stable, agency said in a note on December 15th.

Meanwhile, a Petrobras communiqué suggests that this December, the combined daily output of the Brazilian major and its partners exceeded 200,000 barrels of oil equivalent per day (boe/day) in the promising Santos Basin. The company said that on December 6, two days after operations began at well RJS-686, which is connected to platform FPSO Cidade de Angra dos Reis (the Lula Pilot Project), the total output operated by Petrobras at the Santos Basin reached 205,700 boe/day.

This includes 144,100 barrels of oil and condensate, in addition to 9.8 million cubic meters of natural gas (equivalent to an output of 61,600 boe), of which 8.5 million cubic meters were delivered to the Monteiro Lobato Gas Treatment Unit (UTGCA), in Caraguatatuba, and 1.3 million cubic meters to the Presidente Bernardes Refinery (RPBC) Natural Gas Unit, in Cubatão, both in the state of São Paulo.

Finally, ratings agency Moody's notes a potential sizable lawsuit against Chevron Corporation in Brazil could have a negative impact on the company, but it is too early to judge the full extent of any future liability arising from the lawsuit.

Recent news reports indicate that a federal prosecutor in the state of Rio de Janeiro is seeking BRL20 billion (US$10.78 billion) in damages from Chevron and Transocean Ltd. for the offshore oil leak last month. The Oilholic thinks Transocean’s position is more troublesome given it’s a party to the legal fallout from the Macondo incident.

That’s all for the moment folks – a crude year-ender to follow in early January! In the interim, have a Happy Christmas! Keep reading, keep it ‘crude’!

© Gaurav Sharma 2011. Photo 1: Gaurav Sharma on OPEC's 160th meeting live webcast from Vienna, Austria on Dec 14, 2011 © OPEC Secretariat. Photo 2 & 3: The Oilholic at Baker & McKenzie seminar on investment opportunities for NOCs at the 20th World Petroleum Congress in Doha, Qatar on Dec 7, 2011 © Lizzy Lozano, Baker & McKenzie.

OPEC 'maintains' production at 30 million bpd

In line with market expectations and persistent rumours heard here all morning in Vienna, OPEC has agreed to officially maintain its crude production quota at 30 million barrels per day (bpd) at its 160th meeting, thereby legitimising the increase the Saudis triggered after the acrimony of the last meeting in June.

The OPEC Secretary General Abdalla Salem El-Badri said the heightened price volatility witnessed during the course of 2011 is predominantly a reflection of increased levels of speculation in the commodities markets, exacerbated by geopolitical tensions, rather than a result of supply/demand fundamentals.

Ministers also expressed concern regarding the downside risks facing the global economy including the Euro-zone crisis, persistently high unemployment in the advanced economies, inflation risk in emerging markets and planned austerity measures in OECD economies.

“All these factors are likely to contribute to lower economic growth in the coming year. Although world oil demand is forecast to increase slightly during the year 2012, this rise is expected to be partially offset by a projected increase in non-OPEC supply,” El-Badri noted.

Hence, OPEC decided to maintain the production level of 30 million bpd curiously “including production from Libya, now and in the future”. The quota would be reviewed in six months and does not include Iraqi supply. The cartel also agreed that its members would, if necessary, take steps including voluntary downward adjustments of output to ensure market balance and reasonable price levels.

The last bit stirred up the scribes especially as El-Badri, himself a Libyan, noted that his country’s production will be back to 1 million bpd “soon” followed by 1.3 million bpd end-Q1 2012, and 1.6 million at end of Q2 2010; the last figure being the pre-war level.

Despite persistent questioning, the Secretary General insisted that Libyan production will be accommodated and 30 million bpd is what all members would be asked to adhere to formally. He added that the individual quotas would be reset when Libyan production is back to pre-war levels.

El-Badri also described the "meeting as amicable, successful and fruitful" and that OPEC was not in the business of defending any sort of crude price. “We always have and will leave it to market mechanisms,” he concluded.

Iran's Rostem Ghasemi said the current OPEC ceiling was suitable for consumers and producers. “We and the Saudis spoke in one voice.” He also said his country was "cool" on possible oil export embargoes but neither had any news nor any inclination of embargoes being imposed against his country yet. OPEC next meets in Vienna on June 14th, 2012.

Following OPEC’s move, the Oilholic turned the floor over to some friends in the analyst community. Jason Schenker, President and Chief Economist of Prestige Economics and a veteran at these events, believes OPEC is addressing a key question of concern to its members with the stated ceiling.

“That question is how to address the deceleration of global growth and pit that against rising supply. And what OPEC is doing is - not only leaving the production quota essentially unchanged but also holding it at that unchanged level,” Schenker said.

“When the Libyan production does indeed come onstream meaningfully or to pre-war levels between now and Q2 or Q3 of 2012, smart money would be on an offsetting taking place via a possible cut from Saudi Arabia,” he concluded.

Myrto Sokou, analyst at Sucden Financial Research, noted that an increase (or rather the acknowledgement of an increase) in the OPEC production limit after three years might add further downward pressure to the crude price for the short-term with a potential for some correction lower in crude oil prices.

“On top of this, the uncertain situation in the Eurozone continues to dominate the markets, weighting heavily on most equity and commodity prices and limiting risk appetite,” he said. And on that note, it is goodbye from the OPEC HQ. Keep reading, keep it ‘crude’!

© Gaurav Sharma 2011. Photo: OPEC's 160th meeting concludes in Vienna, Austria - seated (R to L) OPEC Secretary General Abdalla Salem El-Badri and President Rostem Ghasemi © Gaurav Sharma 2011.