Of inequalities, debt, oil & international finance

Rewind the clock back to the morning after the collapse of Lehman Brothers; the Oilholic remembers it vividly. The world's fourth-largest investment bank at the time ran out of options, ideas, saviours and most importantly - working capital - on that fateful morning in September 2008. However, when filing for bankruptcy, it committed one final blunder. The administrators and liquidators - spread as far and as wide as the investment bank's own global operations - failed to coordinate with each other.

Uninstructed, the London administrator froze the bank's assets and panic ensued as investors started pulling out money from all investment banks; even those few with no question marks surrounding them. It was the moment the US sub-prime crisis became a global financial malaise that nearly took the entire system down. 

Since the episode, several books have been written about the when, where, why and how; even what lead to the crisis and the inequity of it all has been dealt with. However, via his book Baroque Tomorrow, Jack Michalowski has conducted a rather novel examination – not just of the crisis alone, but also of our economic health either side of it, the proliferation of international finance and consumer driven innovations.

His claim about our present reality is a bold and controversial one – that virtually every element of the story of the past four decades points to a structural decline, one that's rooted, as in all other historical declines, in massively growing populations faced with declining innovation and lack of new energy converters or new cheap energy sources.

Drawing interesting parallels with what happened in Renaissance and Baroque Europe, Michalowski opines that the so-called Third Wave visions of mass affluence and broad technological progress hailed by Alvin Toffler and other futurists were just a fantasy.

In his book of just under 360 pages, split into four parts, Michalowski writes that in a world where political programmes last only until the next election; progress is flat or worse still non-existent. That all innovations are driven by returns on the money invested, and the major life-changing ones that propelled us onwards and upwards from the Industrial Revolution are already with us. What has followed in their wake are fads delivered to a consumer-led debt-laden world with rising levels of energy consumption. 

According to Michalowski, history proves that we were only rescued from decline and propelled along a new path by the invention of new energy sources and new energy converters – things like agriculture, sailships, windmills, iron ploughs, combustion engines, trains, cars and airplanes, or nuclear reactors – and never by invention of new information processing technologies. IT advances, he argues, usually come late in the historical cycle.

On reading this book, many would remark that the author is over-simplifying the complex issues of innovation, progress and prosperity (or the lack of). Others would say he is bang on. That's the beauty of this work – it makes you think. For this blogger – it was a case of 50:50. There are parts of the book the Oilholic profoundly disagrees with, yet there are passages after passages, especially the ones on proliferation of international finance centres, debt, hydrocarbon usage and pricing, that one cannot but nod in agreement with. 

Perhaps we are wiser in wake of the financial crisis and have turned a corner. That may well be so. But here's a tester – drive away from the glitzy Las Vegas Strip to other parts of the city where you’ll still see streets with plenty of foreclosed homes. Or perhaps, you care to visit the suburbs of Spanish cities littered with incomplete apartment blocks where developers have run out of money and demand is near-dead. Or simply check the inflation stats where you are? And so on.

In which case, is Michalowski wrong in assuming that there is a "de-education and de-skilling of the rapidly pauperizing middle class and dramatic polarization of the society between rich and poor. Very high levels of inequality are proven by history to be absolutely destructive. As malaise sets in, they become a major contributor to decline."

Some of the author's thoughts are hard to take; some of the dark quips – especially one describing Dubai as a Disneyland for grown-ups – make one smirk. None of his arguments are plain vanilla, but they make you turn page after page either in agreement or disagreement. You'll keep going because the book itself is very engaging; even more so in a climate of persistent inflation and stagnant real incomes. 

Michalowski says that unless current trends change dramatically, the next forty years will bring more of the same. If so, we are looking at an entire century of decline in incomes and living standards or a "true Baroque era." Now, whether one buys that or not, the way the author has used history to make a statement on the macroeconomics of our time is simply splendid and a must read.

The Oilholic is happy to recommend it to peers in the world of energy analysis, economists and social sciences students. Even the enthusiasts of digital media might find it well worth their while to pick this book off the bookshelves or download it on their latest gizmo.

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To email: gaurav.sharma@oilholicssynonymous.com

© Gaurav Sharma 2013. Photo: Front Cover – Baroque Tomorrow © Xlibris / Jack Michalowski

OPEC holds quota at 30 mbpd, El-Badri stays on

We’ve been here before dear readers, we’ve been here before. Main headline at the conclusion of the 164th OPEC conference here in Vienna is a familiar one. OPEC’s production quota stays at 30 million barrels per day and Secretary General Abdalla Salem El-Badri – long overdue to step down – stays on in his post, as member nations torn between Iranian and Saudi tussles fail to agree on a candidate for the post. So at the end of it all a battle-weary El-Badri, took the stage as usual. Not entirely bereft of a sense of humour, the secretary general had a few quips, the odd joke, brushed off scribes pokes to say that the cartel had considered the global economic outlook which remains “uncertain with the fragility of the Euro-zone remaining a cause for concern.”

 

“We was also noted that, although world oil demand is forecast to increase during the year 2014, this will be more than offset by the projected increase in non-OPEC supply. Nevertheless, in the interest of maintaining market equilibrium, the OPEC decided to maintain the current production level of 30 million bpd.”

 

In taking this decision, OPEC said it had reconfirmed its members’ readiness to swiftly respond to developments which could have an adverse impact on the maintenance of an orderly and balanced oil market.

 

El-Badri's tenure as Secretary General carries on for a period of one year, with effect from January 1, 2014. As the Oilholic noted in an earlier post, OPEC had a chance to send a message but missed a trick here. Despite the threat of incremental non-OPEC barrels, it failed to present a united front leaving El-Badri to carry the can in front of the world’s press and fly the OPEC flag.

 

The man himself though had a thing or two to say or avoid saying. Coming on the latter bit first, El-Badri declined comment on what increasing Iranian production would mean for the overall production quota. He also described incremental non-OPEC supply as "good for global consumers", acknowledged OPEC’s concerns about shale and said he was monitoring the supply side situation.

 

Yet later, he cut short an analyst’s question saying people should not “exaggerate” the impact of incremental or additional project barrels. “You keep going down this track and very soon you will see both prospective and thriving E&P jurisdictions lose their appetite for investing in new fields and enhancing existing facilities.” The Oilholic thinks the Secretary General has a point, albeit the point itself is a bit exaggerated.

 

One key theme to emerge was that OPEC members’ focus for exports was firmly to the East now. Several delegates and El-Badri himself acknowledged that supplies heading to the US – especially from Nigeria, Angola and Venezuela – were being diverted to far Eastern markets. The US it seems “wasn’t a priority” for OPEC in the first place; it’s even less so now. That's your lot from OPEC HQ! Keep reading, keep it ‘crude’!

 

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To email: gaurav.sharma@oilholicssynonymous.com
 

© Gaurav Sharma 2013. Photo: OPEC Secretary General Abdalla Salem El-Badri at the conclusion of 164th OPEC meeting of ministers in Vienna, Austria © Gaurav Sharma December 4, 2013.

The acknowledgement: OPEC flags-up US output

There should be no shock or horror – it was coming. Ahead of taking a decision on its production quota, president of the 164th OPEC conference Mustafa Jassim Mohammad Al-Shamali, who is also the deputy prime minister and minister of oil of Kuwait, openly acknowledged the uptick in US oil production here in Vienna.

 

“In the six months that have passed since the Conference met here in Vienna in May, we have seen an increasingly stable oil market, which is a reflection of the gradual recovery in the world economy. This positive development stems mainly from a healthy performance in the US, in addition to the Eurozone countries returning to growth,” Al-Shamali told reporters in his opening remarks.

 

It follows on from an acknowledgement by OPEC at its last summit in May about the impact of shale, which up and until then it hadn’t. But the latest statement was more candid and went further. “Non-OPEC oil supply is also expected to rise in 2014 by 1.2 million barrels per day (bpd). This will be mainly due to the anticipated growth in North America and Brazil,” Al-Shamali added.

 

You can add Canada and Russia to that mix as well even though the minister didn’t.

 

Turning to the wider market dynamics, Al-Shamali said that although the market had started to gradually emerge from the tough economic situation of the past few years, the pace of world economic growth remains slow. “Clearly, there are still many challenges to overcome.”

 

Finally, a few footnotes before the Oilholic takes your leave for the moment. Here is the BBC’s take why OPEC is losing control of oil prices due to US fracking – not entirely accurate but largely on the money. Meanwhile, Nigerian oil minister Diezani Alison-Madueke has just told Platts that her country supports OPEC’s current 30 million bpd crude output ceiling, at least for the next few months until the group's next meeting.

 

Alison-Madueke also said she was keen to see how OPEC saw the impact of the US shale oil and gas boom on itself. "We would like to see that we continue with volumes we have held for the last year or so at least between now and the next meeting. I think that would be a good thing. We would like to see a review of the situation referencing the shale oil and gas to see where we are at this stage as OPEC among other things."

 

Earlier, the Saudi oil minister Al-Naimi poured cold water over the idea of a production cut lest some people suggest that. He sounded decidedly cool on the subject at this morning's media scrum. So that’s three of the ministers saying the quota is likely to stay where it was. The Oilholic would say that removes all doubt. That's all from OPEC HQ for the moment folks, more from Vienna later as we gear up for an announcement! Keep reading, keep it ‘crude’! 

 

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To email: gaurav.sharma@oilholicssynonymous.com
 

© Gaurav Sharma 2013. Photo: OPEC media briefing room, Vienna, Austria © Gaurav Sharma 2013.

OPEC's politics is the main show, not the quota

The Oilholic finds himself in a decidedly chilly Vienna ahead of the 164th meeting of OPEC ministers. This blogger's correspondence on all crude matters from the lovely capital of Austria goes back a good few years and to the old OPEC HQ.

However, in all these years of journeying here from London, there has been one constant - nearly every leading financial newspaper one could pick up at Heathrow Airport carried a report about expectations from the ministers' meeting ahead of the actual event taking place. Yet this morning, most either didn't flag up the meeting or had a perfunctory brief on it. The FT not only omitted a report, but with eerie symmetry had a special report on the future of NAFTA containing an article on shale transforming North American fortunes!

There is clear sense of anti-climax here as far as the decision on the production quota goes. Analysts think OPEC will hold its quota at 30 million barrels per day (bpd), traders think so too, as do "informed sources", "sources close to sources", "sources of sources", etc, etc. Making it even more official, Algerian oil minister Youcef Yousfi has quite candidly told more than one scribe here today that quota fiddling was unlikely.

So why are we all here? Why for the sideshow of course! Silly you, for thinking it was anything but! Only thing is, cometh the meeting tomorrow - it's going to be one hell of a sideshow. Weaved into it is the Oilholic's own agenda of probing the hypothesis of the incremental barrel a bit further.

For not only are additional barrels available globally owing to a decline in US imports courtesy shale, Iraq - which hasn't had an OPEC quota since 1998 - is seeing a massive uptick in production. Additionally Iran, apart from being miffed with Iraq for pumping so much of the crude stuff, could itself be welcomed back to market meaningfully over the coming months, adding its barrels to that 'crude' global pool.

While that is likely to take another six months at the very least - the Iraqis are pumping on regardless. You wouldn't expect anything else, but it has made Iran's new oil minister Bijan Zanganeh come up with the crude quote of the month (ok, last month) when he noted: “Iraq has replaced Iran's oil with its own. This is not friendly at all." Yup, tsk, tsk not nice and so it goes with the Saudis, who pumped in overdrive mode when the Iranians were first hit by sanctions in 2012.

To put things into context, without even going on a tangent about Shia-Sunni Muslim politics in the Middle East, Iraqi production has risen to 3 million bpd on the back of increasing inward investment. On the other hand, Iran has seen stunted investment following US and EU sanctions with production falling from 3.7 million bpd to 2.7 million bpd as the move hit it hard in 2012. Even if the Iranians go into overdrive, reliable sources suggest they'd be hard pressed to cap 3.5 million bpd over the next 12 months.

As for the Saudis, they have always been in a different league vying with Russia (and now the US) for the merit badge of being the world's largest producer of the crude stuff. Meanwhile, the price of Brent stays at three figures around US$111-plus - not a problem for the doves such as Saudi Arabia, but not high enough for the hawks such as Venezuela.

The Oilholic seriously doubts if political problems will be ironed out at this meeting. But what's crucial here is that it could mark a start. Can OPEC unite to effectively manage the issue of both its and the global pool's incremental barrels in wake of shale and all that? Appointing a new secretary general to replace Libya's Abdalla Salem el-Badri would be a start.

El-Badri is long due to step down but has carried on as the Iranians and Saudis have tussled over whose preferred candidate should be his successor. The quota decision is not the main talking point here, this OPEC sideshow most certainly is, especially for supply-side analysts and students of geopolitics. That's all from OPEC HQ for the moment folks, more from Vienna later! Keep reading, keep it ‘crude’! 

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To email: gaurav.sharma@oilholicssynonymous.com 

© Gaurav Sharma 2013. Photo: OPEC flag © Gaurav Sharma 2013.

A chat at Platts, ‘LHS’ & the Houston glut

The 'Houston glut debate' gained further traction this summer as the metropolitan area has been a recipient of rising inland crude oil supplies heading towards the US Gulf Coast. New light and heavy grades of crude are showing up – principally from the Eagle Ford, Permian Basin, North Dakota and Western Canada.

The ongoing American oil production boom complements existing Texas-wide E&P activity which is getting ever more efficient courtesy horizontal drilling. Yet, infrastructural impediments stunt the dispatch of crude eastwards from Texas to the refineries in Louisiana.

In fact, many analysts in Chicago and New York have long complained that Houston lacks a benchmark given it has the crude stuff in excess. It seems experts at global energy and petrochemical information provider Platts thought exactly the same.

Their response was the launch of the Platts Light Houston Sweet (or should we say ‘LHS’) in July. Nearly four months on, the Oilholic sat down with Platts Associate Editorial Director Sharmilpal Kaur to get her thoughts on the benchmark and more. So first off, why here and why now?

"We launched the new crude assessment this year as we felt it was finally time for a benchmark that reflected the local dynamic. I’d also say the US was ripe for a fresh benchmark and we went for one based on the price of physical crude oil basically FOB out of three major terminals in Houston."

These include Magellan East Houston Terminal, Enterprise Houston Crude Oil (ECHO) Terminal, and the Oil Tanking Houston Terminal – the location markers for the assessment. Kaur says as the Houston crude transportation infrastructure develops, Platts may consider additional terminals for inclusion in its LHS assessment basis.

Specifically, completion of the Kinder Morgan/Mercuria 210,000 barrels per day (bpd) rail terminal on the Houston Ship Channel could potentially provide another avenue for both WTI Midland and Domestic Sweet quality crudes to enter the Houston market.

The chances of Platts making a fist of LHS are good according to anecdotal evidence, especially as half of the supply side analyst community has been calling for such an assessment. The minimum volume considered by the information provider is 25,000 barrels, or 1,000 bpd rateable, in line with other US domestic pipeline grades.

Platts publishes LHS as a flat price; which is assessed using both fixed as well as floating price information. In the case of floating prices against WTI, Platts generally calculates the fixed price assessment using calendar month average (CMA) WTI or front-month WTI as the floating basis, depending on the WTI basis reported in bids, offers, and transactions.

In the case of light sweet price information reported against the Louisiana Light Sweet (LLS), Platts calculates the fixed price using LLS trade month. In the case of ICE Brent light sweet crude market, Platts calculates the resulting fixed price using an ICE Brent strip that reflects the value of ICE Brent for the relevant pipeline month. Additionally, in the absence of spot activity for light sweet crude in Houston, Platts will look at related markets such as WTI at Midland or WTI at Cushing and adjust its daily LHS assessment accordingly.

That absence won’t be all that frequent as the Houston crude oil distribution system looks set to receive new supplies of over 1.7 million bpd in terms of pipeline capacity delivering into the region by the end of June 2014.

A regional trading market for producers and dispatchers selling the crude stuff to Gulf Coast refiners is well past infancy. Kaur reckons Houston’s spot trading market could rival those at Cushing, Oklahoma and St. James, Louisiana. (See Platts map illustrating the area’s crude oil storage and distribution projections on the right, click to enlarge).

 

So far so good, but in the ancillary infrastructure development and supply sources to Texas, does Kaur include Keystone XL at some point in the future?

"Yes, the pipeline extension will be built and despite the uptick in US crude oil production remains as relevant as ever. There are facets of Keystone XL which are hotly contested by those for and against the project – from its job creation potential to environmental concerns. My take is that Keystone XL would offer is incremental supply of heavy crude out of Canada that comes all the way down to the Gulf Coast and then gets blended."

"What’s produced domestically in the US (say in the Eagle Ford and Bakken) is light crude. What Gulf Coast refiners actually like are heavier crudes blended to form a middle blend. Canadian crude has started pushing out the Latin American crudes and the reason for that is pure pricing as Canadian crude is cheaper than Latin American crude. That trend is basically continuing…it’s why the pipeline extension was planned, and why every refiner in Houston will tell you its needed. President Barack Obama will get there once the legacy component of Keystone XL has been worked out."

As for the hypothesis that Canada may look elsewhere should the project not materialise, Kaur doesn’t quite see it that way. Simple reason is that the Americans know the Canadians and vice versa with very healthy trading relations between the two neighbours for better parts of a century.

"China as an export market is an option for Canada. It’s being explored vigorously by Canadian policymakers – but I see two impediments. Pulling a pipeline from Alberta to British Columbia in order to access the Chinese market via the West Coast won’t be easy. It will, as Keystone XL will, eventually get built, but not overnight. Secondly, the Chinese have diversified their importation sources more than any other country in the world – OPEC, Latin America, West Africa and Russia, to name a few."

Furthermore, US crude imports from West Africa are on the decline. That cargo has to go somewhere and industry evidence suggests its going to China, followed by Japan and to a much lesser extent India.

 

"The Indians would like to get their hands on Canadian crude too – no doubt about that; but logistics and cost of shipping complicates matters. A simple look at the world map would tell you that. Don’t get me wrong; China needs Canadian exports, but given the global supply dynamic Canada probably needs China more as a major export market."

In sync with what the ratings agencies are saying, Kaur sees also E&P capex going up over the next two to three years. "Most IOCs and NOCs see it that way. If you drove through exploration zones in the Bakken Shale, you’d be a busy man counting all the logos of oil & gas firms dotting the landscape, ditto for the Canadian oil sands where foreign direct investment is clearly visible."

Sharmilpal Kaur, Associate Editorial Director, Platts

The Platts expert flags up a fresh example – that of Hess Corporation which recently sold its US trading operations to Centrica-owned Direct Energy.

"Here is a company indicating quite clearly that it’s selling up the trading book and using that money to invest in Bakken wells as well as globally. Right now, in terms of E&P – the market is so lucrative, with an oil price level to sustain it, that people are making sure they find the capex for it and in many cases preferably from their balance sheets." The integrated model is not dead yet, but IOCs holding refineries on their balance sheet have clearly indicated that their priorities are elsewhere.

"You see ageing refineries in trouble within the OECD; at least 15 have faced problems in Europe owing to overcapacity. Yet China, India and Middle East continue to build new refineries – often out of need."

"China has indicated that it wants to be a regional exporter of refined products at some point. That’s a trading model it wants to adopt because it now has access to multiple crude oil supply sources. As a follow-up to its equity stakes in crude production sites, China now has ambitions and wherewithal of becoming a global refining power. In the Chinese government’s case – its need and ambition combined!"

The Oilholic and Kaur agreed that the chances of US crude oil ending up in the hands of foreign refiners, let alone Chinese ones, were slim to none for the moment. In the fullness of time, the US may actually realise it is in its own interest to export crude. Yet, given the politics it is still a question of 'if' and not an imminent 'when'. 

Hypothetically, should the US employ free market principals and export its light crude which is surplus to its requirements, but get heavier crude in return more in sync with its refining prowess – the exchange would work wonders.

"It could command a better price for its light crude and actually buy the heavier crude cheaper. My thinking is that the US would actually come out on top and the rest of the world would benefit too. Here we have too much light crude, the rest of the world craves it – so there’s the opportunity in theory. In the unlikely event that this was to happen, we would see a very different supply dynamic. Price spikes associated with disruptions - for example as we saw during the Libyan conflict in 2011 - would be mitigated," says Kaur

Nonetheless, even with a ban on crude oil exports, the US oil & gas bonanza has weakened OPEC. There are two ways of approaching this – concept of incremental barrels on a virtual supply ledger and the constantly declining level of US imports.

"As US imports decline, barrels originally heading to these shores will be diverted elsewhere. That’s where the US has a voice when it speaks to OPEC. Supply side analysts such as you are tallying US, Russia and [OPEC heavyweight] Saudi Arabia’s production level. Now add Canada, prospects of a Mexican and Iraqi revival, a gradual Libyan uptick and some semblance of a resolution to the Iranian standoff – then there’s a lot of it around and OPEC understands it."

While Platts does not comment on the direction of the oil price, what Kaur sums up above is precisely why the Oilholic has constantly quipped over the course of 2013 that a three-figure Brent price is barmy and unreflective of supply side scenarios in an uncertain macroeconomic climate. Blame the blithering paper barrels!

"At least, you can take comfort from the fact that the peak oil theorists have temporarily disappeared. I haven’t seen one in Houston for while," Kaur laughs. In fact, the Oilholic hasn’t either – in Houston and beyond. That’s all for the moment from Platts' Houston hub! Keep reading, keep it ‘crude’!

To follow The Oilholic on Twitter click here.

To email: gaurav.sharma@oilholicssynonymous.com
 

© Gaurav Sharma 2013. Photo 1: Oil pipeline, Fairfax, Virginia, USA © O. Louis Mazzatenta / National Geographic. Photo 2: Sharmilpal Kaur, Associate Editorial Director at Platts © Gaurav Sharma. Graphic: Map of Houston crude oil storage and distribution © Platts