Statoil’s move & a crude view from Oslo

The Oilholic finds himself in Oslo, Norway for the briefest of visits at a rather interesting time. For starters, back home in London town, recent outages at Norway's Statoil-operated Heimdal Riser platform are still causing jitters and firming up spot natural gas prices despite the low demand. Although it’s a lot calmer than last Wednesday as order has been restored. The UK is also soaking in news that Norway's US$760 billion oil fund (the world's biggest investor), has cut its British government debt holdings by a whopping 26% to NKr42.9 billion (£4.51 billion, $7.26 billion) and increased its Japanese government bond holdings by 30% to NKr129.5 billion.

However, the biggest story in Oslo is Statoil’s decision to sell minority stakes in several key offshore fields in the Norwegian sector of the North Sea and far north to Austria's OMV. To digest all of that, the Oilholic truly needed a pint of beer – but alas that hurts here! No, not the alcohol – but the price! On average, a pint of beer at a bar on Karl Johans Gate with a view of the Royal Palace (pictured above left) is likely to set you back by NKr74 (£8.20 yes you read that right £8.20). Monstrous one says! Anyways, this blog is called Oilholics Synonymous not Alcoholics Anonymous – so back to 'crude' matters.

Chatter here is dominated by the Statoil decision to sell offshore stakes for which OMV forked-up US$2.65 billion (£1.7 billion). The Norwegian oil giant said the move freed up much needed funds for capex. Giving details, the company announced it had reduced its ownership in the Gullfaks field to 51% from 70% and in Gudrun field to 51% from 75%.

The production impact for Statoil from the transaction is estimated to be around 40,000 barrels of oil equivalent (boe) per day in 2014, based on equity and 60 boe per day in 2016, according to a company release. However, Chief Executive Helge Lund told Reuters that the company will still have the capacity to deliver on its 2.5 million barrels per day (bpd) ambition in 2020.

"But we will of course evaluate it as we go along, whether that is the best way of creating value.It will impact the short-term production...but we are not making any changes to our guiding at this stage," he added.

For OMV, the move will raise its proven and probable reserves by about 320 million boe or nearly a fifth. What is price positive for Austrian consumers is the fact that it will also boost OMV’s production by about 40,000 bpd as early as 2014.

Statoil’s consideration might be one of capex; for the wider world the importance of the deal is in the detail. First of all, it puts another boot into the North Sea naysayers (who have gone a bit quiet of late). There is very valid conjecture that the North Sea is in decline - hardly anyone disputes that, but investment is rising and has shot up of late. The Statoil-OMV deal lends more weight that there's still 'crude' life in the North Sea.

Secondly, $2.65 billion is no small change, even in terms relative to the oil & gas business. Finally, OMV is a unique needs-based partner for Statoil. The Oilholic is not implying it’s a strange choice. In fact, both parties need to be applauded for their boldness. Furthermore, OMV will also cover Statoil's capex between January 1 and the closing of the deal, which could potentially raise the final valuation to $3.2 billion in total, according to a source.

And, for both oil firms it does not end here. OMV and Statoil have also agreed to cooperate, contingent upon situation and options, on Statoil's 11 exploration licences in the North Sea, West of Shetland and Faroe Islands.

Continuing the all around positive feel, Statoil also announced a gas and condensate discovery near the Smørbukk field in the Norwegian Sea. However, talking to the local media outlets, the Norwegian Petroleum Directorate played down the size of the discovery estimating it to be between 4 and 7.5 million cubic metres of recoverable oil equivalents. Nonetheless, every little helps.

Right that’s about enough of crude chatter for the moment. There’s a Jazz festival on here in Oslo (see above right) which the Oilholic has well and truly enjoyed and so has Oslo which is basking in the sunshine in more ways than one. But this blogger also feels inclined to share a few other of his amateur photos from this beautiful city – (clockwise below from left to right, click image to enlarge) – views of the Oslofjord from Bygdøy museums, sculptures at Frogner Park and the Edvard Munch Museum, which is currently celebrating 150 years since the birth of the Norwegian great in 1863.

Away from the sights, just one final crude point – data from ICE Futures Europe suggests that hedge funds (and other money managers) raised bullish bets on Brent to their highest level in more than two years in the week ended August 13.

In its weekly Commitments of Traders report, ICE noted – speculative bets that prices will rise, in futures and options combined, outnumbered short positions by 193,527 lots; up 2.5% from the previous week and is the highest since January 2011. Could be higher but that’s the date ICE started the current data series – so there’s no way of knowing.

In the backdrop are the troubles in Egypt. As a sound Norwegian seaman might tell you – it’s not about what Egypt contributes to the global crude pool in boe equivalent (not much), but rather about disruption to oil tankers and shipping traffic via the Suez Canal. That’s all from Oslo folks. Next stop – Abu Dhabi, UAE! Keep reading, keep it ‘crude’!

To follow The Oilholic on Twitter click here.

To email: gaurav.sharma@oilholicssynonymous.com

© Gaurav Sharma 2013. Photo 1: View of the Royal Palace from Karl Johans Gate, Oslo, Norway. Photo collage: Various views of Oslo, Norway © Gaurav Sharma, August, 2013.

That other Canadian pipeline project

As its Keystone XL pipeline project continues to remain stuck in the quagmire of US politics, TransCanada gave details about plans to build a pipeline from Western Canada to Eastern Canada.

 

The so-called TransCanada Energy East line would have the capacity to bring 1.1 million barrels per day (bpd) of the crude stuff from the resource rich western provinces to refiners in the east. The idea is to replace foreign imports for the refineries in Quebec (as much as 92% in the state) and Atlantic Canada.

 

The pipeline, which would cost CAD$12 billion, shall run from Hardisty, Alberta, to a new receptor terminal in St John, New Brunswick. Upon completion, not only will the project reduce reliance on Middle Eastern and East African imports (thought to be in the region of 750,000 bpd for Atlantic Canada), but St John could actually become an exporting terminal for unused surplus. For all intents and purposes, this would be a colossal endeavour. Surely, the approval process won’t be as slow as Keystone XL, as the project enjoys support in the Canadian corridors of power and finds flavour with the public at large. Furthermore, the TransCanada Energy East pipeline would link about 3,000km of an already-built natural gas pipeline with roughly 1,400km of newly constructed pipeline.

 

A spokesperson for TransCanada said the company was confident of supplying oil to Quebec refineries by late 2017 and further on to New Brunswick by 2018. At a press conference detailing the plans, TransCanada's Chief Executive Russ Girling said, "This is a historic opportunity to connect the oil resources of western Canada to the consumers of eastern Canada, creating jobs, tax revenue and energy security for all Canadians for decades to come."

 

Indeed Sir! Reversing the east coast oil deficit into an export surplus would be one hell of 'crude' story. Canadian oil production is tipped to more than double by 2025 from its current level of 1.5 million bpd. Everyone from Saudi Arabia to the Venezuela is casting a nervous eye on Canada’s rise while domestic realisation is spurring projects such as the East to West pipeline. However, the Obama administration remains oblivious, or shall we say exceedingly slow, in letting the USA respond to this seismic shift by approving Keystone XL!

 

A summer approval was expected but has not materialised so far. Instead we are told that the US State Department will issue a final report on the project before the end of the year. On a related note, a report published by Moody’s late last month noted that most Canadian E&P companies are protected from volatile price differentials for heavy oil.

 

To provide context, the heavy oil differential is the difference in price between WTI, and the price at which heavy oil is sold, most commonly referenced to the Western Canadian Select (WCS) benchmark. These discounts have been volatile and sometimes pretty wide, especially since Q2 2012.

 

"We expect the differential to remain highly volatile. Even so, most producers of Canadian heavy oil draw some protection from their diverse products, low cost structures, or integration," said Moody's Senior Vice President Terry Marshall.

 

"The possible lack of significant new pipeline capacity to reach export markets and eastern Canadian refineries will have an impact on the growth of Canadian oil producers and will likely widen our $20 assumption for the differential," Marshall added. "This uncertainty will be a key consideration in upward rating movements for Canadian producers until the addition of incremental takeaway capacity is apparent."

 

According to the ratings agency, the pure bitumen producers such as MEG Energy and Connacher Oil and Gas will remain the hardest hit by wide differentials, because highly dense bitumen requires about 35% dilution and condensate generally sells at prices above WTI. The diluted bitumen then sells at the price of heavy oil.

 

Mining oil sands operations that upgrade their bitumen, such as those held by Canadian Oil Sands Limited (COSL), Canadian Natural Resources Limited (CNRL) and Suncor Energy, have no exposure to the heavy oil differential. That's because these operations produce synthetic crude oil (SCO), a light oil product that trades around WTI prices.

 

According to Moody’s, companies that produce a high component of heavy oil, such as Baytex Energy, lie between these two extremes, with full exposure to the differential, but minimal need to buy costly diluent in order to ship their product.

 

The largest companies, including CNRL, Suncor Energy, Husky Energy and Cenovus Energy, sell a diverse mix of products, limiting their exposure to the differential, the agency noted. Furthermore, Suncor, Cenovus and Husky all draw an additional advantage from mid-continent downstream refinery operations, which benefit from wide differentials.

 

The discount on the heavy crude reflects a supply and demand relationship based on the available heavy oil refinery capacity, and infrastructure constraints and bottlenecks, Moody's noted.

 

As heavy, light oil and SCO all utilise the same finite pipeline space, a back-up in the system affects all products to varying degrees. For what it’s worth, this underscores the importance of TransCanada’s latest pipeline foray.

 

Away from Canada, the US EIA says the country’s crude oil output could exceed imports as early as October; the first such instance since February1995. In its monthly Short-term Energy Outlook, the EIA also said US crude oil production increased to an average of 7.5 million bpd in July 2013; the highest monthly level since 1991.

 

The report also raised its forecast for Brent, and noted that spot prices will average US$104 a barrel over the second half of 2013, marginally above the $102 forecast last month. The forecast for 2014 was left unchanged at $99.75 per barrel. WTI will average $96.96 a barrel this year, the EIA said, up from the July projection of $94.65. The US benchmark grade will average $92.96 in 2014, up from the previous month’s estimate of $91.96. That’s all for the moment folks! Keep reading, keep it ‘crude’!

 

To follow The Oilholic on Twitter click here.

 

To email: gaurav.sharma@oilholicssynonymous.com

 

© Gaurav Sharma 2013. Photo: Oil Refinery, Quebec, Canada © Michael Melford / National Geographic.

The subtle rise of the OFS innovators

Going back to the turn of 1990s, vertical drilling or forcing the drill bit down a carefully monitored well-shaft into a gentle arc was the best E&P companies could hope from contractors in their quest for black gold.

That’s until those innovators at Oilfield Services (OFS) firms - the guys who often escape notice despite having done much of heavy work involved in prospection and extraction - came up with commercially viable ways for directional drilling. The technique, which involves drilling several feet vertically before turning and continuing horizontally thus maximising the extraction potential of the find, transformed the industry. But more importantly, it transformed the fortunes of the innovators too.

The Oilholic has put some thought into how 21st century OFS firms ought to be classified, if a linear examination by market capitalisation and size is ignored for a moment. After acquiring gradual industry prominence from the 1970s onwards, OFS firms these days could be broadly grouped into three tiers.

The first tier would be the makers and sellers of equipment used in onshore or offshore drilling. Some examples include Cameron International, FMC Technologies and National Oilwell Varco with a market capitalisation in the range of US$10 billion to $30 billion. Then come the 'makers-plus' who also own and lease drill rigs – for example Seadrill, Noble and Transocean with a market cap in a similar sort of a range.

 

And finally there are the big three 'full service' OFS companies Baker Hughes, Halliburton and the world’s largest – Schlumberger. The latter has a market cap of $110 billion plus, last time the Oilholic checked. That’s more than double that of its nearest rival Halliburton. Quite literally, Schlumberger's market cap could give many big oil companies a run for their money. However, if someone told you back in the 1980s that this would be the case in August 2013 – you could be excused for thinking the claimant was on moonshine!

 

The reason for the rise of OFS firms is that their innovation has been accompanied by growing global resource nationalism and maturing wells. The path to prosperity for the services sector began with low margin drilling work in the 1980s and 1990s being outsourced to them by the IOCs. Decades on, the firms continue to benefit from historical partnerships with the oil majors (and minors) aimed at maximising production at mature wells alongside new projects.

 

However, with a rise in resource nationalism, while NOCs often prefer to keep IOCs at arm's length, the same does not apply to OFS firms. Instead, many NOCs choose to project manage exploration sites themselves with the technical know-how from OFS firms. In short, the innovators are currently enjoying, in their own understated way, the best of both worlds! Unconventional prospection from deepwater drilling to the Arctic is an added bonus.

 

If you excluded all of North America, drilling activity is at a three-decade high, according to the IEA and available rig data trends. The Baker Hughes rig count outside North America climbed to 1,333 in June, the highest level in 30 years. Presenting his company’s seventh straight quarterly profit last month, a beaming Paal Kibsgaard, chief executive of Schlumberger, named China, Australia, Saudi Arabia and Iraq among his key markets.

 

Of the four countries named by Kibsgaard, Australia is the only exception where an NOC doesn’t rule the roost, vindicating the Oilholic’s conjecture about the benefits of resource nationalism for OFS firms.

 

Rival Halliburton also flagged up its increased activity and sales in Malaysia, China and Angola and added that it is banking on a second half bounceback in Latin America this year. By contrast, Baker Hughes reported a [45%] fall in second quarter profit, mainly due to weak margins in North America, given the gas glut stateside.

 

Resource nationalism aside, OFS players still continue (and will continue) to maintain healthy partnerships with the IOCs. None of the big three have shown any inclination of owning oil & gas reserves and most of the big players say they never will.

 

Some have small equity stakes here and a performance based contract there. However, this is some way short of ownership. Besides, if there is one thing the OFS players don’t want – it's taking asset risk on their balance sheets in a way the likes of Shell and ExxonMobil do and are pretty good at.

 

Furthermore, the IOCs are major OFS clients. Why would you want to upset your oldest clients, a relationship that is working so well even as the wider industry is undergoing a hegemonic and technical metamorphosis?

 

Success though, does not come cheap especially as it's all about innovation. As a share of annual sales, Schlumberger spent as much on R&D as ExxonMobil, Shell and BP, did using 2010-11 exchange filings. And sometimes, unwittingly, taking the BP 2010 Gulf of Mexico oil spill as an example, the guys in background become an unwanted part of a negative story; Transocean and Halliburton could attest to that. None of this should detract observers from the huge strides made by OFS firms and the ingenuity of the pioneers of directional drilling. And there's more to come!

 

Moving on from the OFS subject, but on a related note, the Oilholic read an interesting Reuters report which suggests oil & gas shareholder activism is coming to the UK market. Many British companies, according to the agency, have ended up with significant assets, including cash, relative to their shrunken stock market value.

 

Some of these have lost favour with mainstream shareholders and are now attracting investors who want to push finance bosses and board members out, access corporate cash and force asset sales. An anonymous investment banker specialising the oil & gas business, told Reuters, rather candidly: "It's a very simple model. You don't have to take a view on the value of the actual assets or know anything about oil and gas. You just know the cash is there for the taking."

 

Finally, linked here is an interesting Bloomberg report on how much the Über-environmentally friendly Al Gore is worth and what he is up to these days. Some say he is 'Romney' rich! That's all for the moment folks! Keep reading, keep it 'crude'!

 

To follow The Oilholic on Twitter click here.

 

To email: gaurav.sharma@oilholicssynonymous.com
 

© Gaurav Sharma 2013. Photo: Rig in the North Sea © BP

The WTI rally, hubris, hedge funds & speculators

The 24-7 world of oil futures trading saw Brent and WTI benchmarks draw level this weekend. In fact, the latter even traded at a premium of more than a few cents for better parts of an hour at one point.

After having traded at a discount to Brent for three years, with the spread reaching an all time high of around US$30 at one point (in September 2011), the WTI’s turnaround is noteworthy. However, the commentary that has followed from some quarters is anything but!

Some opined, more out of hubris than expertise, that the WTI had reclaimed its status as the world’s leading benchmark back from Brent. Others cooed that the sread’s shrinkage to zilch, was America’s way of sticking up two fingers to OPEC. The Oilholic has never heard so much [hedge funds and speculative trading inspired] tosh on the airwaves and the internet for a long time.

Sticking the proverbial two fingers up to OPEC from an American standpoint, should involve a lower WTI price, one that is price positive for domestic consumers! Instead we have an inflated three-figure one which mirrors geopolitically sensitive, supply-shock spooked international benchmarks and makes speculators uncork champagne.

Furthermore, if reclaiming 'world status' for a benchmark brings with it higher prices at the pump – is it really worth it? One would rather have a decoupled benchmark reflective of conditions in the backyard. An uptick in US oil production, near resolution of the Cushing glut and the chalking of a path to medium term energy independence should lead the benchmark lower! And that’s when you stick two fingers up to foreign oil imports.

So maybe mainstream commentators stateside ought to take stock and ask whether what’s transpired over the weekend is really something to shout about and not let commentary inspired by speculators gain traction.

Looking at last Friday’s instalment of CFTC data, it is quite clear that hedge funds have been betting with a near possessed vigour on the WTI rally continuing. Were the holdings to be converted into physical barrels, we’d be looking roughly around 350 million barrels of crude oil! That’s above the peak level of contracts placed during the Libyan crisis. You can take a wild guess the delivery won’t be in The Hamptons, because a delivery was never the objective. And don’t worry, shorting will begin shortly; we’re already down to US$106-107.

The Oilholic asked seven traders this morning whether they thought the WTI would extend gains – not one opined that it would. The forward month contract remains technically overbought and we know courtesy of whom. When yours truly visited the CBOT earlier this year and had a chat at length with veteran commentator Phil Flynn of Price Futures, we both agreed that the WTI’s star is on the rise.

But for that to happen, followed by a coming together of the benchmarks – there would need to be a "meeting in the middle" according to Flynn. Meaning, the relative constraints and fundamentals would drive Brent lower and WTI higher over the course of 2013. What has appened of late is nothing of the sort.

Analysts can point to four specific developments as being behind the move - namely Longhorn pipeline flows (from the Permian Basin in West Texas to the USGC, bypassing Cushing which will be ramping up from 75 kbpd in Q2 to the full 225 kbpd in Q3), Permian Express pipeline Phase I start-up (which will add another 90 kbpd of capacity, again bypassing Cushing), re-start of a key crude unit at the BP Whiting refinery (on July 1 which allows, mainly WTI sweet, runs to increase to full levels of 410 kbpd) and finally shutdowns associated with the recent flooding in Alberta, Canada. 

But as Mike Wittner, global head of oil research at Société Générale, notes: "Everything except the Alberta flooding – has been widely reported, telegraphed, and analysed for months. There is absolutely nothing new about this information!"

While it is plausible that such factors get priced in twice, Wittner opined that there still appear to be "some large and even relatively new trading positions that are long WTI, possibly CTAs and algorithmic funds."

In a note to clients, he added, that even though fundamentals were not the only price drivers, "they do strongly suggest that WTI should not strengthen any further versus the Louisiana Light Sweet (LLS) and Brent."

Speaking of algorithms, another pack of feral beasts are making Wall Street home; ones which move at a 'high frequency' if recent evidence is anything to go by. One so-called high frequency trader (HFT) has much to chew over, let alone a total of $3 million in fines handed out to him and his firm.

Financial regulators in UK and US found that Michael Coscia of Panther Energy used algorithms that he developed to create false orders for oil and gas on trading exchanges in both countries between September 6, 2011 and October 18, 2011. Nothing about supply, nothing about demand, nothing do with market conditions, nothing to do with the pride of benchmarks, just a plain old case of layering and spoofing (i.e. placing and cancelling trades to manipulate the crude oil price).

You have to hand it to these HFT guys in a perverse sort of a way. While creating mechanisms to place, buy or sell orders, far quicker than can be executed manually, is an act of ingenuity; manipulating the market is not. Not to digress though, Coscia and Panther Energy have made a bit of British regulatory history. The fine of $903,176 given to him by UK's Financial Conduct Authority (FCA) was the first instance of a watchdog this side of the pond having acted against a HFT.

Additionally, the CFTC fined Coscia and Panther Energy $1.4 million while the Chicago Mercantile Exchange fined them $800,000. He’s thought to have made $1.4 million back in 2011 from the said activity, so it should be a $3 million lesson of monetary proportions for him and others. Or will it? The Oilholic is not betting his house on it!

Away from pricing matters, a continent which consumes more than it produces – Asia – is likely to see piles of investment towards large E&P oil and gas projects. But this could pressure fundamentals of Asian oil companies, according to Moody’s.

Simon Wong, senior credit officer at the ratings agency, reckons companies at the lower end of the investment-grade rating scale will, continue to face greater pressure from large debt-funded acquisitions and capital spending."

"Moreover, acquisitions of oil and gas assets with long development lead time are subject to greater execution delays or cost overruns, a credit negative. If acquisitions accelerate production output and diversify oil and gas reserves, then the pressure from large debt-funded acquisitions will reduce," Wong added.

Nonetheless, because most Asian oil companies are national oil companies (NOCs) - in which governments own large stakes and which often own or manage their strategic resources of their countries – their ratings incorporate a high (often very high) degree of explicit or implied government support.

The need for acquisitions and large capital-spending reflects the fact that Asian NOCs are under pressure to invest in order to diversify their reserves geographically. Naming names, Moody’s made some observations in a report published last week.

The agency noted that three companies – China National Petroleum Corporation, Petronas (of Malaysia) and ONGC (of India) – have very high or high capacity to make acquisitions owing to their substantial cash on hand (or low debt levels). The trio could spend over $10 billion on acquisitions in addition to their announced capex plans without hurting their respective underlying credit quality.

Then come another four companies – CNOOC (China), PTT Exploration and Production Public (Thailand), Korea National Oil Corp (South Korea) and Sinopec (China) – that have moderate headroom according to Moody’s and can spend an additional $2 billion to $10 billion. These then are or rather could be the big spenders.

Finally, if Nigeria’s crude mess interests you – then one would like to flag-up a couple of recent articles that can give you a glimpse into how things go in that part of the world. The first one is a report by The Economist on the murky world encountered by Shell and ENI in their attempts to win an oil block and the second one is a Reuters’ report on how gasoline contracts are being ‘handled’ in the country. If both articles whet your appetite for more, then Michael Peel’s brilliant book on Nigeria’s oil industry, its history and complications, would be a good starting point. And that's all for the moment 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: Pipeline in Alaska, USA © Michael S. Quinton / National Geographic. Photo 2: Oil drilling site, North Dakota, USA © Phil Schermeister / National Geographic. 

Speculators make the oil price belie market logic

The fickle crude oil market is yet again giving an indication about how divorced it is from macroeconomic fundamentals and why a concoction of confused geopolitics and canny speculation is behind the recent peaks and troughs. To give a bit of background – the WTI forward month futures contract surpassed the US$106 per barrel level last week; the highest it has been in 16 months. Concurrently, the spread between WTI and Brent crude narrowed to a near 33-month low of US$1.19 in intraday on July 11 [versus a high of US$29.70 in September 2011].

 

Less than a couple of weeks ago Goldman Sachs closed its trading recommendation to buy WTI and sell Brent. In a note to clients, the bank’s analysts said they expected the spread to narrow in the medium term as new pipelines help shift the Cushing, Oklahoma glut, a physical US crude oil delivery point down to the Houston trading hub, thus removing pressure from the WTI forward month futures contract to the waterborne Brent.

 

Goldman Sachs' analysts were by no means alone in their thinking. Such a viewpoint about the spread is shared by many on Wall Street, albeit in a nuanced sort of way. While Cushing's impact in narrowing the spread is a valid one, the response of the WTI to events elsewhere defies market logic.

 

Sadly Egypt is in turmoil, Syria is still burning, Libya’s problems persist and Iraq is not finding its feet as quick as outside-in observers would like it to. However, does this merit a WTI spike to record highs? The Oilholic says no! Agreed, that oil prices were also supported last week by US Federal Reserve Chairman Ben Bernanke's comments that economic stimulus measures were "still" necessary. But most of the upward price pressure is speculators' mischief - pure and simple.

 

Less than two months ago, we were being peddled with the argument that US shale was a game changer – not just by supply-side analysts, but by the IEA as well. So if that is the case, why are rational WTI traders spooked by fears of a wider conflict in the Middle East? Syria and Egypt do not even contribute meaningfully to the global oil market supply train, let alone to the North American market. Furthermore, China and India are both facing tough times if not a downturn.

 

And you know what, give this blogger a break if you really think the US demand for distillates rose so much in 10 days that it merited the WTI spiking by the amount that it has? Let's dissect the supply-side argument. Last week's EIA data showed that US oil stocks fell by about 10 million barrels for a second consecutive week. That marked a total stockpile decline of 20.2 million barrels in two weeks, the biggest since 1982.

 

However, that is still not enough to detract the value of net US inventories which are well above their five-year average. Furthermore, there is nothing to suggest thus far that the equation would alter for the remainder of 2013 with media outlets reporting the same. The latest one, from the BBC, based on IEA figures calmly declares the scare over 'peak oil' subsiding. US crude production rose 1.8% to 7.4 million barrels per day last week, the most since January 1992 and in fact on May 24, US supplies rose to 397.6 million, the highest inventory level since 1931!

 

But for all of that, somehow Bernanke's reassurances on a continuation of Federal stimulus, flare-ups in the Middle East [no longer a big deal from a US supply-side standpoint] and a temporary stockpile decline were enough for the latest spike. Why? Because it is a tried and tested way for those who trade in paper barrels to make money.

 

A very well connected analogy can be drawn between what's happening with the WTI and Brent futures' recent "past". Digging up the Brent data for the last 36 months, you will see mini pretexts akin to the ones we've seen in the last 10 days, being deployed by speculators to push to the futures contract ever higher; in some instances above $110 level by going long. They then rely on publicity hungry politicians to bemoan how consumers are feeling the pinch. Maybe an Ed Markey can come alone and raise the issue of releasing strategic petroleum reserves (SPRs) and put some downward pressure – especially now that he's in the US Senate.

 

Simultaneously, of course the high price starts hurting the economy as survey data factors in the drag of rising oil prices, usually within a three-month timeframe, and most notably on the input/output prices equation. The same speculators then go short, blaming an economic slowdown, some far-fetched reason of "uptick" in supply somewhere somehow and the Chinese not consuming as much as they should! And soon the price starts falling. This latest WTI spike is no different.

Neither the underlying macroeconomic fundamentals nor the supply-demand scenarios have altered significantly over the last two weeks. Even the pretexts used by speculators to make money haven't changed either. The Oilholic suspects a correction is round the corner and the benchmark is a short! (Click graph above to enlarge)

 

Away from crude pricing matters to some significant news for India and Indonesia. It seems both countries are reacting to curb fuel subsidies under plans revealed last month. The Indian government agreed to a new gas pricing formula which doubled domestic natural gas prices to $8.40/million British thermal units (mmbtu) from $4.20/mmbtu.

Meanwhile, the Indonesian government is working on plans to increase the price of petrol by 44% to Rupiah 6,500 ($2.50) per gallon and diesel by 22% to Rupiah 5,500. With the hand of both governments being forced by budgetary constraints, that's good economics but bad politics. In Asia, it's often the other way around, especially with general elections on the horizon - as is the case with both countries.

 

Elsewhere, yours truly recently had the chance to read a Moody's report on the outlook for the global integrated oil and gas industry. According to the ratings agency, the outlook will remain stable over the next 12 to 18 months, reflecting the likelihood of subdued earnings growth during this period.

Analyst Francois Lauras, who authored the report, said, "We expect the net income of the global oil and gas sector to fall within the stable range of minus 10% to 10% well into 2014 as robust oil prices and a slight pick-up in US natural gas prices help offset ongoing fragility in the refining segment." 

 

"Although oil prices may moderate, we expect demand growth in Asia and persistent geopolitical risk to keep prices at elevated levels," he added.

 

The agency anticipates that integrated oil companies will concentrate on reinvesting cash flows into their upstream activities, driven by "robust" oil prices, favourable long-term trends in energy consumption and the prospects of higher returns.

 

However, major projects are exerting pressure on operating and capital efficiency measures as they are often complex, highly capital intensive and have long lead times. In the near term, Moody's expects that industry players will continue to dispose of non-core, peripheral assets to complement operating cash flows and fund large capex programmes, as well as make dividend payouts without impairing their balance sheets.

 

Finally, the agency said it could change its outlook to negative if a substantial drop in oil prices were triggered by a further deterioration in the world economy. It would also consider changing its outlook to positive if its forecast for the sector's net income increased by more than 10% over the next 12-18 months.

Moody's has maintained the stable outlook since September 2011. In the meantime, whatever the macroeconomic climate might be, it hardly ever rains on the speculators' parade. That's all for the moment folks! Keep reading, keep it 'crude'!

 

To follow The Oilholic on Twitter click here.

 

To email: gaurav.sharma@oilholicssynonymous.com
 

© Gaurav Sharma 2013. Photo: Pump Jacks, Perryton, Texas, USA © Joel Sartore / National Geographic. Graph: WTI Crude Futures US$/barrel © BBC / DigitalLook.com