Still they come – News wrap – Aug. 26th


The main end-of-summer story continues to be the price of oil futures, what is or is not behind the latest spurt and whether the benchmark WTI contract in New York will stall at US$75 a barrel and slide back or break through and advance further.

We’ve avoided getting bogged down in the “technical” talk, which though it means a great deal to those who follow it and can be a self-fulfilling market driver from time to time, often sounds like it’s arguing along the lines of “oil will keep rising if it keeps rising and vice versa.” Thus, maybe it will run up to US$90 a barrel, maybe it will fall below US$68/barrel, and so on.

We have noted some of the discussion about “sentiment”, whereby futures traders pick which of the multifarious factors affecting world oil trade to concentrate on at any given time, whether it’s the weak US dollar, stronger share prices or economic health indicators – there are plenty of people selecting these, usually post facto, to argue rising oil prices, or indeed sinking natural gas prices.

But the only consistent determinant for oil prices over time is, of course, demand and supply, and particularly whether spare production capacity is rising or falling. The International Energy Agency just a few weeks ago revised down its forecast 2010 “call on OPEC” – the amount of demand expected to be filled by the swing-producing cartel – to 27.8m b/d, which would be hardly changed from this year. Spare capacity has been growing, particularly Saudi Arabia’s, whose spare capacity the IEA put at 3.3m b/d in July.

Saudi Aramco, the state oil company, puts capacity at nearly 1m higher than the IEA. Also, while some members have been saying that OPEC should agree lower production targets at their next meeting on Sept. 9th, the cartel already is showing signs of ill discipline in a weak market. The IEA estimated that Angola, for example, was completely ignoring its quota (“0% compliance”), while Iran was meeting just 5% if its agreed target – in other words, it is producing at almost 3.8m b/d, or nearly 500,000 b/d above target. The Latin American members are meeting only about half their commitments and even amongst the Gulf states, some are slipping well below full compliance.

Meanwhile, the best gauge of market direction alongside spare capacity – OECD oil inventories – showed a “counter-seasonal” rise of 8.5m barrels in June, the IEA reported in its latest monthly report, and stood 5.5% above last year’s level at just above 2.7bn barrels. Furthermore, the latest news on the inventory front is not bullish – according to Reuters, quoting the world’s largest oil tanker group, oil stored offshore in tankers (which does not show up on the official statistics) remains high. Earlier in the week, Oil Daily (subscription required) reported that there has also been a large surge in oil products being stored offshore.

It may be that the futures market’s collective wisdom is anticipating a turnaround in demand and another move toward zero supply capacity, thus explaining the rising oil prices. But it’s hard to find the evidence for that just yet.


Monkey business – News Wrap, August 26th

smonkIt appears that sceptics of global warming want their day in court, so to speak. Evoking the memory of the infamous Scopes Monkey trial, which challenging a law forbidding the teaching of evolution, the Los Angeles Times shrieks ‘Chamber of Commerce seeks trial on global warming‘. There is a certain fervour that accompanies the climate change debate and in the run up to the Copenhagen conference tensions between “believers” and “sceptics” will run high as both seek coverts.

The US Chamber of Commerce, a pro-business lobby, wants to put the science of climate change on the stand. It would certainly revive interest in US global warming legislation, which appears to have slipped down the pecking order as the debate over healthcare reform rages. 

The chamber wants the US Environmental Protection Agency (EPA) to set up a hearing to discuss the science behind the EPA’s move to declare carbon dioxide (CO2) and other greenhouse gases a threat to human health and therefore subject to regulation under the Clean Air Act. The Chamber of Commerce, trying to ward off potentially sweeping federal emissions regulations, wants the EPA to hold a unique public hearing on the scientific evidence for man-made climate change – ostensibly seeking transparency on the issue. 

The Chamber, apparently hoping for a 21st century Scopes, might be well served to heed the old adage ‘careful what you wish for’. While the result of the original Scopes trial favoured the creationists it was ultimately a victory for Darwinism as US public opinion shifted. What’s to say things won’t go the same way this time?  The EPA certainly has done its home work and described the Chamber’s threat as a waste of time. Case closed? Don’t hold your breath.

Fundamentalists – News Wrap, August 25th

The word “fundamentals” is used in a universal, amorphous and elastic way when it comes to the oil complex.

Since about the middle of the summer, the fundamental factor driving oil futures has been, it seems, the perception that oil futures traders have about the prospects for the “world economy”. Thus, on Tuesday, the market report from Reuters, for example, explained that traders have been following as a proxy for the economy share prices, which rose on Monday but fell back overnight on Tuesday. The Reuters report explained, “Commodities markets have closely tracked equities indexes in recent months, as dealers view stocks as a lead indicator of economic performance, which would boost or reduce energy and commodities demand.”

As the graph above shows, this relationship has been fairly close since about mid-June, though oil prices rose earlier in the year when the S&P500 – the main share index in the US – was still in decline. There is certainly no strong correlation between oil prices and share prices over time, just as oil prices might have a reverse correlation with the US dollar from time to time as a perceived inflation hedge, but that relationship usually only lasts but a brief few weeks.

In terms of the more direct measures of fundamentals for oil – i.e., actual supply of and demand for the stuff – the news would indicate that the market could well continue to be fairly well supplied even if there is a turn in the world economy. According to a story by UPI, “Bloomberg reported at the end of July that refineries from Germany to Hawaii, foreseeing 25% idle capacity in North America and 30% in Europe within five years, are weighing plans to shut or sell plants. These include big names such as Petroplus Holdings AG, Royal Dutch Shell – one in Germany and another in Montreal – Total SA and Chevron Corp. from the United States.

Two of Shell’s European refineries already have been grabbed up by India’s Essar Oil, subject to final terms being agreed.

Meantime, after its strong first-half results on Monday, Sinopec, China’s largest oil refiner, said in a statement to the Shanghai Stock Exchange that it plans to raise its refining output by 10% by 2011 as part of its overseas expansion. The company’s statement explained that Sinopec aims to refine 202m metric tonnes of crude oil a year by 2011, up 9.8% from its 2009 target of 184 million tonnes of crude oil. While that may reflect a bullish long-term view of China’s economic prospects, it also suggests that the present worldwide refining glut will take some time to dissipate.

In upstream developments, there was also news to support the idea that supply may remain ample. Iraq, holding the second round of its talks to bring in foreign companies to help it expand production by 2m barrels a day, has struck a deal with a Japanese consortium to develop one of its mega-fields.

There have also been more positive developments in Nigeria this week as the government there seeks to turn around the politically- and criminally-driven chaos that has cut its oil exports by 40% and more during the past few years. The government has said it wants to push output back to well above 2m barrels a day next year.

Both Iraq and Nigeria have been the wild cards in the OPEC pack in the past few years as civil strife has made development of its sector highly unpredictable.

Among the non-OPEC producers, the central Asian Azerbaijan-Kazakhstan hub also has more positive news for the medium-term as its infrastructural development prepares it to ramp up oil exports considerably over the next few years.

On the other side of the world, it is too early to say that the Hurricane season has passed without incident, though there have been no major threats so far. But operators in the Gulf of Mexico will be keeping a close eye on those low pressure systems out in the Atlantic until at least the end of September.

Among the bank analysts, where the focus is on the broader economic indicators, there has been talk creeping back in of the inevitability of a looming supply crunch once the world recession turns back to growth. Morgan Stanley, for example, has a paper to that effect on Tuesday.

But writing in the New York Times, Michael Lynch, an energy analyst and former Asia director at the Centre for International Studies at the Massachusetts Institute of Technology, takes a poke at the “Malthusian beliefs” of the “peak oilers” with his well-reasoned piece which serves to remind of the many elements that make up the complex process from finding oil to bringing it to its end users.

For now, however, oil prices no doubt will be linked to share prices for a little while longer.

A national triumph – News Wrap, Aug. 24, 2009

japan-and-china-flagsSo things look pretty good for Sinopec. A 333% increase in first half profit is nothing to be sniffed at and Asia’s largest refiner is clearly not going to rest on it laurels as its net profit shot up to nearly US$5bn for the first half of the year – to put that in perspective BP reported a profit of US$5.5bn over the same period.

Sinopec has benefited more than most from reform to the rules governing China’s pricing mechanism, ending years of hurt (how England’s cricketers can relate) and turning its massive refining business from a loss making entity into one returning sizable profit. First-half operating profit at Sinopec’s refining division climbed to nearly Rmb20bn compared with a loss of Rmb46.5bn a year earlier.

The company has just completed China’s largest ever foreign takeover and its appetite for foreign acquisitions is apparently yet to be sated. Perhaps more galling for international oil companies, will be that as many are forced to trim to expenditure plans, Sinopec plans to simply keep spending.

Yet it was not all good news for Sinopec. Beijing’s new fuel price framework only guarantees refiners a profit when crude is trading below US$80 per barrel. With prices seemingly trending up (see below blog) Sinopec will fear a return to the bad old days – something equity analysts are already appearing to factor in. Iraq, Baghdad to be more precise, also rained on Sinopec’s parade. Iraq’s Oil Ministry, as was widely expected, has taken a dim view of its acquisition of Addax and looks set to take punitive action.

The suspicion is that Sinopec will care little. The tight terms offered in the first round, which only saw one license award, only enhanced further the suspicion that Sinopec had been smart throwing its lot in with Addax. There are still outstanding issues to be resolved in Kurdistan but Addax’s (now Sinopec’s) West African acreage should more than compensate for the loss of Iraq proper – plus with other Chinese state-owned companies eligible to bid in the second round Beijing is not going to miss out on Iraq’s bounty. Iraq may also have to revise the terms on offer if the second round isn’t to flop like its first.

Sticking with Asian companies in Iraq, Japan’s Nippon Oil looks to have tied up a deal to develop the Nassiriya oilfield. Eni and Repsol YPF were other bidders, the latter apparently baulking at the terms on offer the former set to lose out. There was also some good news for Iran, which announced a sizable discovery. While Vladimir Putin was in attendance as Rosneft launched the massive Vankor oil field. Much of the Vankor’s output is expected to supply the Chinese market through the Eastern Siberia-Pacific Ocean (ESPO) pipeline. It should also ensure that having fallen last year, Russian production increases in 2009. All in all then a good day for the flag waving hordes.

Target leading – News Wrap, Aug. 21, 2009

targetIt’s been a dismal summer for gasoline and other oil product demand in the US (see previous post), but another spurt in oil prices this week was rationalised by a weekly drop in US crude oil inventories. Despite the Energy Information Agency’s best efforts, people trading oil futures ignore the fact that these weekly stats can be erratic and are often revised so that they have a handy “indicator” to trade against.

The quick and dirty assessments of data often cite the EIA numbers as the reason behind a price rise, though this may be revised later if other possible rationales come along (not to pick on the Associated Press, but theirs is a typical example).

Analysts at the banks similarly are under pressure to come up with quick explanations for price moves that may not be rational and may subsequently be reversed. On Friday, Credit Suisse referred to the 8.4m barrel drawdown in US crude stocks, noting that it was the highest since May 2008.

But the CS analyst was quick to look elsewhere and brought in the thoughts of Vandana Hari, the head of Asian news at Platts, an energy price and market tracker that is part of McGraw-Hill, quoting her on another of the rationales being offered for recent market strength. She is quoted saying, “The recent robust Chinese oil demand growth rates seem counterintuitive, given that exports – the mainstay of the Asian giant’s economy – remained depressed in July.” She goes on to point out that changes to the government’s fuel pricing policy may be spurring refiners to run more crude but put products in storage and to question whether there is any rebound in end-user demand.

Similarly, if you look at the US numbers, the apparent demand figures for gasoline and middle distillates (comprised of heating oil, jet fuel and diesel) are flat on a four-week moving average basis (which the EIA recommends as a better gauge than weekly).

Looking at another view, Morgan Stanley’s assessment of the market is – in the analyst’s very Wall Street phrase – “cautiously positive”, basing the “positive” part of that on signs that supply-demand fundamentals are possibly improving in non-OECD countries. Problem there, as Ms. Hari’s comments indicated about China, is that the data are far less reliable than in the more developed economies.

No doubt that is the reason for the “cautiously” part of Morgan Stanley’s qualified conclusion, which the leads the bank’s analyst to conclude: “We will remain cautious until we see real (and transparent) demand improvements.”

Thursday, Aug 20 – News Wrap

newspapersThe end of oil?

It appears that OPEC’s determination to keep oil prices high could hasten the end of black gold. Heralding the end of oil is always a little risky but Bill Emmott makes a decent case in The Times. The themes touched upon in Emmott’s piece are also covered in an FT blog which discusses some painful home truths on the cost of oil for the Golden State. The German’s certainly appear to have taken the hint in their ambitious plans to be rid of the black stuff.

Both stories coincide nicely with a spike in crude prices on the back of a much greater than expected drop in US crude inventories. However, reality appeared to be returning to the market with crude stocks still way above 2008 levels, US production about 160,000b/d higher and imports much reduced. Despite the cacophony of noise in the market US data suggests that gasoline demand remains largely unchanged and down year on year.

As western oil companies implement cost cutting measures on the back of a glum second quarter results, Beijing’s reformed fuel price structure looks set to usher in a new era of profits for its leading refiner Sinopec. Coming on the back of a raft of Chinese deals the prospect of massive profits is likely to leave multinational oil companies quaking.

Australia: the Saudi of Gas?

Following the announcement of a record deal to buy gas from the Gorgon LNG project in Western Australia, Aussie gas developments in the country remain a hot topic. Woodside’s Pluto LNG project is lining up customers, GdF Suez the French utility has signed a deal with Santos to develop a floating LNG, while Chevron (Gorgon’s developer) announced a double gas discovery.

 Some further news comes on the political front as the Australia Senate approves laws requiring 20% of the country’s energy to come from renewable sources by 2020. Now Prime Minister Kevin Rudd has to negotiate the trickier issue of a law on emissions – an issue that could potentially force a snap election.

Wednesday, Aug 19 – News Wrap

Gas deal

China and Australia announced their largest ever trade deal, whereby PetroChina will purchase from the Exxon Mobil-run Gorgon project 2.25m tonnes of liquefied natural gas (LNG) a year for 20 years. While the deal is primarily a coup for Exxon, which has contracted its share (25%) of the projects expected output (a final investment decision is yet to be made on Gorgon), put the deal in the context of the two countries’ fraught diplomatic and commercial relations.

Wind swirls

Vestas, the wind power sector’s benchmark company, emphasised the recovery aspects of the market even while it reported a decline in quarterly profit. Meanwhile, the widely reported comments by a Vestas executive about the difficulties of getting planning permission in the UK, a factor that contributed to its pulling out of the market, received fairly broad support. Vestas is among those concentrating more on the USA and China – the latter is moving ahead fast with wind and other alternative energy development, both at national and company level.

Lobbying subterfuge

While the raging debate on healthcare in the US puts the energy bill in the shade, the New York Times reports that the “town hall”-style protests that also have been set up to protest the proposed energy legislation appear to have been backed by oil companies.