‘9-month’ high to a ‘9-month’ low? That's crude!

In early February, we were discussing the Brent forward month futures contract's rise to a nine-month high of US$119.17 per barrel. Fast forward to mid-April and here we are at a nine-month low of US$97.53 – that’s ‘crude’!

The Oilholic forecast a dip and so it has proved to be the case. The market mood is decidedly bearish with the IMF predicting sluggish global growth and all major industry bodies (OPEC, IEA, EIA) lowering their respective global oil demand forecasts.

OPEC and EIA demand forecasts were along predictable lines but from where yours truly read the IEA report, it appeared as if the agency reckons European demand in 2013 would be the lowest since the 1980s. Those who followed market hype and had net long positions may not be all that pleased, but a good few people in India are certainly happy according to Market Watch. As the price of gold – the other Indian addiction – has dipped along with that of crude, some in the subcontinent are enjoying a “respite” it seems. It won’t last forever, but there is no harm in short-term enjoyment.

While the Indians maybe enjoying the dip in crude price, the Iranians clearly aren’t. With Brent below US$100, the country’s oil minister Rostam Qasemi quipped, "An oil price below $100 is not reasonable for anyone." Especially you Sir! The Saudi soundbites suggest that they concur. So, is an OPEC production cut coming next month? Odds are certainly rising one would imagine.

Right now, as Stephen Schork, veteran analyst and editor of The Schork Report, notes: "Oil is in a continued a bear run, but there's still a considerable amount of length from a Wall Street standpoint, so it smells like more of a liquidation selloff."

By the way, it is worth pointing out that at various points during this and the past week, the front-month Brent futures was trading at a discount to the next month even after the May settlement expired on April 15th. The Oilholic counted at least four such instances over the stated period, so read what you will into the contango. Some say now would be a good time to bet on a rebound if you fancy a flutter and “the only way is up” club would certainly have you do that.

North Sea oil production is expected to fall by around 2% in May relative to this month’s production levels, but the Oilholic doubts if that would be enough on a standalone basis to pull the price back above US$100-mark if the macroclimate remains bleak.

Meanwhile, WTI is facing milder bear attacks relative to Brent, whose premium to its American cousin is now tantalisingly down to under US$11; a far cry from October 5, 2011 when it stood at US$26.75. It seems Price Futures Group analyst Phil Flynn’s prediction of a ‘meeting in the middle’ of both benchmarks – with Brent falling and WTI rising – looks to be ever closer.

Away from pricing, the EIA sees US oil production rising to 8 million barrels per day (bpd) and also that the state of Texas would still beat North Dakota in terms of oil production volumes, despite the latter's crude boom. As American companies contemplate a crude boom, one Russian firm – Lukoil could have worrying times ahead, according to Fitch Ratings.

In a note to clients earlier this month, the ratings agency noted that Lukoil’s recent acquisition of a minor Russian oil producer (Samara-Nafta, based in the Volga-Urals region with 2.5 million tons of annual oil production) appeared to be out of step with recent M&A activity, and may indicate that the company is struggling to sustain its domestic oil output.

Lukoil spent nearly US$7.3 billion on M&A between 2009 and 2012 and acquired large stakes in a number of upstream and downstream assets. However, a mere US$452 million of that was spent on Russian upstream acquisitions. But hear this – the Russian firm will pay US$2.05 billion to acquire Samara-Nafta! Unlike Rosneft and TNK-BP which the former has taken over, Lukoil has posted declines in Russian oil production every year since 2010.

“We therefore consider the Samara-Nafta acquisition as a sign that Lukoil is willing to engage in costly acquisitions to halt the fall in oil production...Its falling production in Russia results mainly from the depletion of the company's brownfields in Western Siberia and lower than-expected production potential of the Yuzhno Khylchuyu field in Timan-Pechora,” Fitch Ratings notes.

On a closing note, the Oilholic would like to share a brilliant article on the BBC's website touching on the fallacy of the good biofuels are supposed to do. Citing a Chatham House report, the Beeb notes that the UK's "irrational" use of biofuels will cost motorists around £460 million over the next 12 months. Furthermore, a growing reliance on sustainable liquid fuels will also increase food prices. That’s all for the moment folks. Until next time, keep reading, keep it crude! 

To follow The Oilholic on Twitter click here. 

To email: gaurav.sharma@oilholicssynonymous.com 

© Gaurav Sharma 2013. Photo: Oil Rig © Cairn Energy Plc.

The Keystone XL saga: Views of Toronto analysts

The Oilholic arrived in Toronto, ON for the briefest of visits to find the energy community here in bullish mood about the Keystone XL pipeline project getting a nod of approval from the Obama administration this summer.

Out of a snap, unscientific, random poll of seven energy analysts in downtown Toronto, none of the commentators thought the project’s second application for approval would be turned down this summer by the US Government. Only one analyst thought the second application would face severe delays yet again. On the subject of what next if the unthinkable happens and the US yet again denies approval, most thought Canada can find plenty of takers for Alberta’s most precious resource.

Simply put, if the US does not want oil derived from a bituminous source, there are many takers – as is evident from the interest in the oil sands from burgeoning Asian importers. Make no mistake, the oil sands would be developed, most said. Additionally, there were some predictable quips as well from our friends in Toronto along the lines of “Obama doesn’t have a re-election to fight, so he’ll approve”, “who would the US deal with Canadians or Venezuelans?” or “it could be a shot in the arm for US refinery upgrade projects”.

All of these quips ring true in parts. Furthermore, a recent poll, conducted across the border by the non-partisan Pew Research Center, suggests two-thirds of Americans (66%) favour building the pipeline, which would transport oil from Alberta via the Midwest to Texan refineries. For purposes of its research, Pew polled 1501 adult US citizens between March 13 and 17. The survey result is a pretty convincing one, polled by a very respectable source.

Away from Pew’s findings was a totally unrelated editorial calling for the project’s approval in none other than the Chicago Tribune. The Oilholic is not from Illinois but is quietly confident that President Obama, who was once a senator from the state, does read his local broadsheet. On March 29, printed on page 22, he would have found the lead editorial declaring: “Enough dawdling. Obama should approve the Keystone pipeline.”

Further down the editorial, the paper wrote: “The President is expected to make a decision by this summer. He rejected a Keystone plan a year ago, in the midst of his re-election campaign. This was applauded by some environmental groups and angered the Canadian government. But the most significant impact was this: It kept Americans from getting good-paying jobs.”

Powerful stuff one would say! Canada, you have the support of the President’s (once) local newspaper! Furthermore, most Chicago-based analysts the Oilholic spoke to last week seemed to be clamouring for an approval. Phil Flynn, senior analyst at Price Future Group, said it had been a sad political story symptomatic of dysfunctional US politics and government.

“Here we have a bizarre situation that a pipeline is geopolitically right, but politically...a mess! Democrats had a pop at President George W. Bush tying him with “big oil”; Obama is getting the other end of the stick with people labelling him “big green.” Had he approved the Keystone XL project before it had become a “major issue” in this social media age – well it would not have become an issue at all; just one of the many North American pipelines plain and simple!”

“I see it as a classic case of a bungled energy policy. The Obama administration grossly underestimated the both the importance of Canadian oil sands and American shale and worse still that we could be energy independent. This side of the border, the shale gas revolution happened not because of Washington, but rather despite of Washington,” he said.

Most in the trading community this blogger met in Toronto and Chicago feel an important reason why Keystone XL is going to be approved this time around is because the US labour unions want it badly. Now, hardly any Democrat would flag this up as a reason for approving the project in the summer. Saddest part of it all – for both Canada and the US – is that the Keystone XL project is such a small part of the ongoing energy story of both countries.

Flynn reckons it is all about finding a way to approve it and save face in the summer! “Canadian crude from the oil sands is coming to the market anyway. So the Democrats on Capitol Hill will say America may as well go for it anyway! Mark my word, that’ll be the argument used to peddle the approval,” he concluded.

Moving away from Keystone XL, but sticking with pipelines, ratings agency Moody’s has given thumbs-up to Enbridge’s capital expenditure programme. In a note to clients this morning, Moody's affirmed Enbridge's Baa1 senior unsecured, Baa1 long term issuer, (P)Baa2 subordinate shelf and Baa3 preferred stock ratings.

“The company has taken timely advantage of opportunities that have developed in the North American liquids market over the last few years as a result of regulatory delays in getting new pipelines approved and a persistent liquids pricing differential attributed to tight takeaway capacity, bottlenecks and an inability for shippers to access tidewater and global markets,” the agency said.

According to Moody’s, Enbridge's announced projects are lower risk because they are generally on existing rights of way as either expansions or reversals. “Once this large programme is completed, Enbridge's business risk should be lower due to even greater liquids network diversity,” it added.

Just one more footnote before a farewell to Toronto, the local networks and newspapers are awash with news that Canada's Information Commission is poised investigate claims the Federal government is "muzzling" its scientists.

According to The Globe and Mail, the Commission is investigating seven government departments. These include Environment, Fisheries and Oceans, Natural Resources, National Defence, the Treasury Board Secretariat, National Research Council of Canada and the Canadian Food Inspection Agency.

A spokesperson said the investigation is in response to a complaint filed by the University of Victoria, BC and the campaign group Democracy Watch. Assistant Information Commissioner Emily McCarthy’s office would be leading the probe. Intriguing story indeed and one to watch out for!

It is almost time to head back home, but before heading up in the air towards London Heathrow, the Oilholic leaves you with a view of a natural wonder which helps Ontario Power and Power Authority of New York harness copious amounts of hydroelectricity – the Niagara Falls.

With even Americans saying the view is better from the Canadian side, the Oilholic simply had to pop over and admire it. So it turned out to be quite a view. Photographed here is the Horseshoe Falls – on the side yours truly has snapped from is Canada and on the other is the USA. Sandwiched between is the Niagara River which drains Lake Erie in to Lake Ontario.

The first known effort to harness these waters for power generation was made by one Daniel Joncaire who built a small canal above the falls to power his sawmill in 1759, according to a local park official. Today, if the US (Robert Moses Niagara Power Plant and the Lewiston Pump Generating Plant) and Canadian (Sir Adam Beck I and II) power generation facilities are pooled, the total power production would be 4.4 gigawatts! That’s all from Toronto folks! Keep reading, keep it ‘crude’!

To follow The Oilholic on Twitter click here.

To email: gaurav.sharma@oilholicssynonymous.com

© Gaurav Sharma 2013. Photo 1: Toronto’s Skyline and Lake Ontario, Canada. Photo 2: The Niagara Falls, Ontario, Canada © Gaurav Sharma.

End of Q1 2013 trade @ CBOT & hot air on shale

As trading came to a close for Q1 2013 at the Chicago Board of Trade (CBOT) on Thursday afternoon, the Oilholic saw crude oil futures rise during the last session of the first quarter aided undoubtedly by a weaker dollar supporting the prices. However, yours truly also saw something particularly telling – fidgeting with the nearest available data terminal would tell you that Brent crude futures slipped nearly 1 percent over Q1 2013. This extended a near-1 percent dip seen in Q4 2012. Overall, Brent averaged just around the US$112 per barrel level for much of 2012 and the Brent-WTI premium narrowed to its lowest level in eight months on March 28. That said, it must be acknowledged that US$112 is still the highest ever average annual price for the benchmark as far as the Oilholic can remember.

In its quarter ending oil market report, the CME/CBOT said improved sentiment towards Cyprus was seen as a supportive force helping to lift risk taking sentiment in the final few days before Easter. On the other hand, concerns over ample near term supply weighed on nearby calendar spreads, in particular the Brent May contract.

In fact, the May versus June Brent crude oil spread narrowed to its slimmest margin since July 2012. Some traders here indicated that an unwinding of the spread was in part due to an active North Sea loading schedule for April and prospects for further declines in Cushing, Oaklahoma supply.

Away from price issues, news arrived here that ratings agency Moody’s reckons an escalation in the cost of complying with US federal renewable fuel requirements poses a headwind for the American refining and marketing industry over the next two years (and potentially beyond if yours truly read the small print right).

Moody’s said prices were spiking for renewable identification numbers (RIN) which the US Environmental Protection Agency (EPA) uses to track whether fuel refiners, blenders and importers are meeting their renewable-fuel volume obligations.

Senior analyst Saulat Sultan said, "US refining companies either amass RINs through their blending efforts or buy them on the secondary market in order to meet their annual renewable-fuel obligations. It isn't yet clear whether recent price increases reflect a potential shortfall in RIN availability in 2014, or more structural and permanent changes for the refining industry."

The impact of higher RIN prices will depend on a company's ability to meet its RIN requirements internally, as well as the amount of RINs it can carry over to 2014 and gasoline export opportunities, Sultan says. Refiners carried over about 2.6 billion excess RINs to 2013 from 2012, but the EPA expects a lower quantity to be carried over to 2014.

"RIN purchasing costs can be sizable, even while refiners are generally enjoying a period of strong profitability, such as they are now. Integrated refining and marketing companies including Phillips 66, Marathon Petroleum and Northern Tier Energy LLC are likely to be better positioned than sellers that do not blend most of their gasoline, such as Valero Energy, CVR Refining LLC and PBF Energy, or refiners with limited export capabilities, such as HollyFrontier," Sultan added.

Concurrently, increasing ethanol blending, which is used to generate enough RINs to comply with federal regulations, raises potential legal issues for refiners. This is because gasoline demand is flat or declining and exceeding the 10% threshold (the "blend wall") could attract lawsuits from consumers whose vehicle warranties prohibit using fuel with a higher percentage. However, Moody's does not believe that companies will raise the ethanol content without some protection from the federal government. 

Meanwhile, all the hot air about the ‘domestic dangers’ and ‘negative implications’ of the US exporting gas is getting hotter. A group – America’s Energy Advantage – has hit the airwaves, newspapers and wires here claiming that "exporting LNG carries with it the potential threat of damaging jobs and investment in the US manufacturing sector as rising exports will drive up the price of gas to the detriment of domestic industries."

So who are these guys? Well the group is backed by several prominent US industrial brands including Alcoa, Huntsman chemicals and Dow Chemical. Continuing with the subject, even though only one US terminal – Sabine Pass – has been permitted to export the fruits of the shale revolution, chatter in forex circles is already turning to shale oil and gas improving the fortunes of the US Dollar!

For instance, Ashok Shah, investment director at London & Capital, feels this seismic shift could improve growth prospects, reduce inflation and diminish the US current account deficit, with significant ramifications for long-term investors.

"For the past decade we have seen the US Dollar in decline, on a trade weighted basis. I believe the emergence of shale oil as a viable energy source looks set to have a considerable impact on the US dollar, and on the global economy as a whole," Shah said.

"Furthermore, a lower oil price will drive lower global headline inflation benefiting the US in particular - and a lower relative inflation rate will be a positive USD driver, improving the long-term purchasing power of the currency," he added.

The Russians are stirring up too. Last week, Gazprom and CNPC signed a 30-year memorandum to supply 38 billion cubic meters (bcm) to 60 bcm of natural gas from Eastern Siberian fields to China from 2018. The negotiations haven’t concluded yet. A legally binding agreement must be signed by June and final documents by the end of the year, covering pricing and prepayment terms. Let us see the small print before making a call on this one. On a related note, ratings agency Fitch says Gazprom is unlikely to offer any meaningful gas price concessions to another one of its customers – Naftogaz of Ukraine – in the short term owing to high spot prices for natural gas in Europe, currently being driven by the continued cold weather.

Sticking with the Russian front, Rosneft, which recently completed the acquisition of TNK-BP, has negotiated an increase in its oil shipments to China from the current 15mtpa to as much as 31mtpa in exchange for a pre-payment, and has agreed on a number of joint projects in exploration, refining and chemicals production with CNPC and Sinopec.

This is it for this post; it is time to bid goodbye to Chicago and Lake Michigan’s shoreline and hop 436 miles across the Great Lakes to say hello to Lake Ontario’s shoreline and Toronto. The Oilholic leaves you with a view of the waterfront and the city’s iconic buildings; the Willis Tower (once Sears Tower is on the left of the frame above).

It’s been a memorable adventure to Illinois, not least getting to visit  CBOT – the world’s oldest options and futures exchange. Leaving is always hard, but to quote Robert Frost – “I have promises to keep, and miles before I go to sleep.” That’s all from the Windy City folks! Keep reading, keep it ‘crude’!

To follow The Oilholic on Twitter click here.

To email: gaurav.sharma@oilholicssynonymous.com

© Gaurav Sharma 2013. Photo 1: Exterior of the Chicago Board of Trade. Photo 2: Chicago's Skyline and Lake Michigan, Illinois, USA © Gaurav Sharma.

Crude thoughts from 141 West Jackson Blvd

A visit to Chicago would not be complete without setting foot inside 141 West Jackson Boulevard – the Chicago Board of Trade’s (CBOT) iconic abode – and gathering the pulse of the market straight from the world's oldest futures and options exchange. Over 50 different options and futures contracts are traded here, including ‘cruder’ ones, via close to 4000 member traders both electronically and through open outcrys; so plenty to observe and discuss.

There was only one man though whom the Oilholic had in mind – the inimitable Phil Flynn of Price Futures Group, veteran market analyst and the doyen of the business news broadcasters. The man from the “South Side” of Chicago has never been one to sit on the fence in all the years that yours truly has been mapping his market commentary. And he wasted no time in declaring that the WTI could reassert itself in the Battle of the Benchmarks pretty soon.

“First, let’s take the Brent-WTI differential into perspective. It narrowed to US$13 at one point today [March 28] and it will continue to narrow, albeit in fits and starts. We’ll come back to this point. WTI’s claw-back in terms of market stature could be down to simple nuts and bolts stuff! The US could – and I think will – become a treble impact jurisdiction – i.e. one of the world’s largest consumer, producer and exporters of crude oil somewhere between 2015-2018; if you believe the current market projections. So what could be a better way to get a sense of the global energy market than to have all of that rolled into one contract?”

Flynn reckons people were behind the curve in awarding Brent a victory in the Battle of the Benchmarks. “Everyone says these days that Brent is more reflective of global conditions. My take is that they should have reached this conclusion five years ago and it’d have been fine! Yet now when the clamour for Brent being the leading benchmark is growing, market supply and demand dynamics are changing for the better here in the US and for the worse in the North Sea.”

The veteran market commentator says the period of Brent being a global benchmark will be akin to the "rise and fall of the Roman Empire" through no fault of its champions but rather that of "late adopters" who missed the pulse of the market which was ticking differently back in 2007-08 with the rise of Asian crude oil consumption.

“There is a lot of politics in anointing the ‘favoured’ benchmark. As a trader I don’t care about the politics, I go with my gut instinct which tells me the problems associated with the WTI – for instance the Oklahoma glut – are being tackled while Brent’s are just beginning. WTI is liquid, has broad participation and also has the backdrop giving an indication of what supply and demand is. Therein, for me, lies the answer.”

Flynn also feels the technicals tell their own story. In December, he called a WTI low of US$85 and the top at US$97 and was vindicated. “It is flattering to look like some kind of a genius but it was pure technical analysis. I think there was a realisation that oil was undervalued at the end of 2012 (fiscal cliff, dollar-cross). When that went away, WTI had a nice seasonal bounce (add cold weather, improving US economy). It’s all about playing the technicals to a tee!”

Flynn sees the current WTI price as being close to a short-term top. “Now that’s a scary thing to say because we’re going into the refining season. It is so easy to say pop the WTI above US$100. But the more likely scenario is that there would a much greater resistance at about the price level where we are now.”

Were this to happen, both the Oilholic and Flynn were in agreement that there could be a further narrowing between Brent and WTI - a sort of “a meeting in the middle” with WTI price going up and Brent falling.

“The WTI charts look bullish but I still maintain that we are closer to the top. What drives the price up at this time of the year is the summer driving season. Usually, WTI climbs in March/April because the refiners are seen switching to summer time blends and are willing to pay-up for the higher quality crudes so that they can get the switchover done and make money on the margins,” he says.

His team at Price Futures (see right) feels the US seasonal factors are currently all out of whack. “We’ve recently had hurricanes, refinery fires, the Midwest glut, a temporary gas price spike – which means the run-up of gasoline prices that we see before Memorial Day has already happened! Additionally, upward pressure on the WTI contracts that we see in March/April may have already been alleviated because we had part of the refinery maintenance done early. So barring any major disasters we ‘may not’ get above US$100,” he adds.

As for the risk premium both here and across the pond, the CBOT man reckons we can consider it to be broadly neutral on the premise that a US$10 premium has already been priced in and has been for some time now.

“The Iran issue has been around for so long that it’s become a near permanent feature. The price of oil, as far as the risk premium goes, reflects the type of world that we live in; so we have an in-built risk premium every day.”

“Market wizards could, in theory, conjure up a new futures gimmick solely on the “risk premium in oil” – which could range between US$3 to US$20 were we to have a one! Right now we have a US$7 to US$10 premium “near” permanently locked in. So unless we see a major disruption to supply, that risk premium is now closer to 7 rather than 10. That’s not because the risks aren’t there, but because there is more supply back-up in case of an emergency,” he adds.

“Remember, Libya came into the risk picture only because of the perceived short supply of the (light sweet) quality of its crude. That was the last big risk driven volatility that we had. The other was when we were getting ready for the European embargo on Iranian crude exports,” he adds.

With the discussion done, Flynn, with his customary aplomb, remarked, “Let’s show you how trading is done the Chicago way.” That meant a visit down to the trading pit, something which alas has largely disappeared from London, excluding the London Metals Exchange.

While the CBOT was established in 1848, it has been at its 141 West Jackson Boulevard building since 1930 and so has the trading pit. “Just before the Easter break, volumes today [March 28] are predictably lower. I think the exchange record is 454 million contracts set 10 years ago,” says Flynn.

As we stepped into the pit, the din and energy on the floor was infectious. Then there was pin drop silence 10 seconds before the pit traders awaited a report due at 11:00 am sharp...followed by a loud groan.

“No need to look at the monitors – that was bearish all right; a groan would tell you that. With every futures contract, crude including, there would be someone who’s happy and someone who’s not. The next day the roles would be reversed and so it goes. You can take all your computers and all your tablets and all your Blackberries – this is trading as it should be,” says Flynn (standing here on the right with the Oilholic).

In July 2007, the CBOT merged with the Chicago Mercantile Exchange (CME) to form the CME Group, a CME/Chicago Board of Trade Company, making it a bigger market beast than it was. Having last visited a rather docile trading pit in Asia, the Oilholic was truly privileged to have visited this iconic trading pit – the one where many feel it all began in earnest.

They say the Czar’s Russia first realised the value of refining Petroleum from crude oil, the British went about finding oil and making a business of it; but it is the United States of America that created a whole new industry model as we know it today! The inhabitants of this building in Chicago for better parts of 80 years can rightly claim “We’re the money” for that industry.

That’s all from the 141 West Jackson Boulevard folks! It was great being here and this blogger cannot thank Phil Flynn and Price Futures Group enough, not only for their time and hospitality, but for also granting access to observe both their trading room and the CBOT pit. More from Chicago coming up! Keep reading, keep it ‘crude’!

To follow The Oilholic on Twitter click here.

To email: gaurav.sharma@oilholicssynonymous.com

© Gaurav Sharma 2013. Photo 1: The Chicago Board of Trade at West Jackson Boulevard (left) with the Federal Reserve Bank of Chicago (right), Chicago, USA. Photo 2: Phil Flynn (standing in the centre) with his colleagues at Price Futures Group. Photo 3: Phil Flynn (right) with the Oilholic (left) at the CBOT trading floor © Gaurav Sharma 2013.

US LNG exports to the UK: The ‘Stateside’ Story

The Oilholic finds himself in Chicago IL, meeting old friends and making new ones! A story much discussed this week in the Windy City is US firm Cheniere Energy’s deal to export LNG to UK’s Centrica. More on why it is such a headline grabber later, but first the headline figures related to the deal.

The agreement, inked by Centrica and Cheniere on March 25, sees the latter provide 20-years' worth of LNG shipments starting from September 2018, which according to the former is enough to fuel 1.8 million British homes.

Centrica said it would purchase about 1.75 million metric tonnes per annum of annual LNG volumes for export from the Sabine Pass Project in Louisiana. (see Cheniere Energy’s graphic on the left, click image to enlarge). The contract covers an initial 20-year period, with an option for a 10-year extension.

Centrica, which owns utility British Gas, has fished overseas in recent years as the North Sea’s output plummets. For instance, around the 20th World Petroleum Congress in 2011, it inked deals with Norway’s Statoil and Qatar Petroleum. US companies have also flirted with the export market. So the nature of the deal is not new for either party; the timing and significance of it is.

According to City analysts and their peers here in Chicago, the announcement is a ground breaking move owing to two factors – (1) it’s the first ever long-term LNG supply deal for the Brits and (2) a market breakthrough for a US gas exporter in Europe.

Additionally, it blows away the insistence by the Russians and Qataris to link longer term supply contracts to the crude oil price (hello?? keep dreaming) instead of contracts priced relative to gas market movements. As for gas market prices, here is the math – excluding the recent (temporary) spike, gas prices in the UK are on average 3 to 3.5 times higher than the current price in the US. So we’re talking in the range of US$9.75 to $10.25 per million British thermal units (mmBtu). The Americans want to sell the stuff, the Brits want to buy – it’s a no brainer.

Except – as a contact in Chicago correctly points out – things are never straightforward in this crude world. Sounding eerily similar to what Chatham House fellow Prof. Paul Stevens told the Oilholic earlier this month, he says, “Have you forgotten the politics of ‘cheap’ US gas exports landing up on foreign shores? Even if it’s to our old friends the Brits?”

The US shale revolution has been price positive for American consumers – the exchequer is happy, the political classes are happy and so is the public which sees their country edging towards “energy independence.” (A big achievement in the current geopolitical climate and despite the quakes in Oklahoma).

The only people who are not all that happy, apart from the environmentalists, are the pioneers who persevered and kick-started this US shale gas revolution which was three decades in the making. To quote one who is now happily retired in Skokie, IL, “We no longer get more bang for our bucks anymore when it comes to domestic contracts.”

Another valid argument, from some in the trading community here in Chicago, is that as soon as US gas exports gain traction, bulk of which would head to Asia and not mother England, domestic prices will start climbing. So the Centrica-Cheniere deal, while widely cheered in the UK, has got little more than a perfunctory, albeit positive, acknowledgement from the political classes stateside.

In contrast, across the pond, none other than the UK Prime Minister David Cameron himself took to the airwaves declaring, “Future gas supplies from the US will help diversify our energy mix and provide British consumers with a new long term, secure and affordable source of fuel.”

The Prime Minister is quite right – the UK would rather buy from a ‘friendly’ country. Problem is, the friendly country might cool off on the idea of gas exports, were US domestic prices to pick-up in tandem with a rise in export volumes.

That’s all for the moment from Chicago folks! More from here over the next few days; keep reading, keep it ‘crude’!

To follow The Oilholic on Twitter click here.

To email: gaurav.sharma@oilholicssynonymous.com

© Gaurav Sharma 2013. Photo: Sabine Pass Project, USA © Cheniere Energy Inc.