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Items filtered by date: November 2019

THE DAY AFTER THANKSGIVING THE MARKET SLUMPS

 

The day afer Thanksgiving Brent fell almost $1.44 per barrel and WTI fell nearly $3 per barrel with oil prices seeing their largest single day drop in around two and a half months. The sharp drop has been variously attributed in part to rumours that a disgruntled Saudi Arabia upset over both OPEC and OPEC+ members alike, flouting their production quotas by outright cheating, was preparing to increase its own production to meet its own official quota. This would increase OPEC output by around 510,00 bpd. The Saudis had taken the unilateral decision to only produce 9.8 million bpd as opposed to its full quota entitlement of 10.31 million bpd. They have proved willing mules to shoulder the largest burden of OPEC production cuts, mostly motivated by their strategic objective to list Aramco.

It was reported in a bloomberg article as an act to punish and deter the serial offenders in OPEC such as Iraq, Nigeria and Kuwait. Though on reflection the notion of Saudi Arabia punishing other members by increasing production itself does not bear scrutiny. Certainly not at a time when OPEC's influence in balancing global oil markets is deteriorating, but also at a time when the faltering Aramco IPO needs oil benchmarks to be rising not plummeting.

What is the point of belonging to a cartel that can no longer affect global oil prices. The sharp drop does promote the message that the cartel do need to act in unison with discipline if it is to command any market sentiment. Both OPEC and OPEC+ meet on consecutive days next week to discuss the current market situation. Most commentators see them extending their production cuts but not cutting deeper.

The Russian energy minister Alexander Novak has however said it is too early to talk about extending the OPEC+ crude production agreement and the producer group should take a decision closer to April. It is has been reported that Russia is considering asking for new condensate volumes to be exempt from its OPEC+ quota, around 7%-8% of Russian oil output is condensate.

These OPEC meetings seem critical. Over supply in a contracting market with increased shale production has created pressure on OPEC and seemingly opened up the disalignment in policy positions between members. Broadly speaking country members with current account deficits and high production costs and those with inexpensive production cost and current account surplus. There is very little parity in value terms which quotas do not adequately account for or compensate. Now the Russian seek to carve out a niche to accomodate their own condensate production. Achieving consensus will not be easy

The resignation of Iraq's Prime Minister could signal the abatement of the growing crisis in that country and the uncertainty around Iraqi production disruption removed. However given that elections are impending and there is a real possibility of civil strife the situation is difficult to decipher. Iraq is the 2nd largest producer in OPEC. Another factor must be the fallout from the Hong Kong Bill which will undoubtedly derail China-US trade talks with many investors seeing this Bill being the catalyst for global economic contraction. Many economists now see Hong Kong as the biggest geopolitical threat to the markets.

 

 

 

 

 

 

Published in OIL MARKETS

Hong Kong Human Rights and Democracy Act

 Just at the time the oil market  is struggling to break out it could have done with out this. The Trump administration have enacted legislation which targets China's human rights record and its handling of pro democracy protestors in Hong Kong. The legislation not only backs protestors, it encourages protest. This act  will put the Trump Administration further into dispute with the leadership of the Peoples Republic, an act the Chinese authorities see as an unwarranted intrusion into their internal affairs. rump has described the Hong Kong protests as linked to the trade deal his administration has been negotiating with Beijing and voiced a desire to balance those two interests.

A furious China have lashed out warning the US of the dark and dire consequences of such legislation. The counter measures they said they would take in retaliation would be firm.  Chinese Vice Foreign Minister Le Yucheng summoned U.S. Ambassador to China, Terry Branstad to demand that Washington stop meddling in Beijing's domestic affairs. Quite how any sort of trade negotiations can take place in such a toxic environment remains to be seen.

 Much has been made of the two protagonists establishing an interim phase one agreement.  Such a deal if agreed would have provided the market with confidence by providing a platform for restoring global demand growth. Phase one in all reality might be loosely interpreted as a return to the position from which they started negotiations, a sort of cease fire where either country can bank their supposed gains, the relatively easy stuff.

Oil prices fell for a second day today (Thursday)  on a combination of the passing of the bill and  official data that showed US crude and petrol stocks rose.  Brent crude was down 19c, or 0.3%, at $63.87 a barrel by 8.54am GMT, having dropped 0.3% on Wednesday. West Texas Intermediate (WTI) crude fell 33c, or 0.6%, to $57.78, after losing 0.5% in the previous session. The market is nervously watching developments between beijing and Washington. There is a distinct possibility of an imminent sell off as the much anticipated 'Phase One' deal not only fails to materialise but tensions create a breakdown in negotiations.

Alot will depend what happens with OPEC and  allies including Russia, a group known as OPEC+, which have imposed quotas on members in an attempt to support prices. Whilst many analysts predict OPEC extending their production cuts, it is hard to seehow members would favour ceding additional marketshare by making deeper cuts. Especially at a time when shale is now producing over 12.9 million bpd. It will be interesting to see how the Saudis and the Russians balance their domestic agenda

against those of global demand. OPEC's 2020 demand growth forecast has been downgrade a number of times and currently provides a bleak future for producers in a market oversupplied with oil.

Fatih Birol, the Executive Director of the International Energy Agency (IEA), when speaking to Reuters  remarked  "Strong oil supply

growth from non-OPEC countries puts a lot of pressure on OPEC and its Russia-led partners to act, and they will hopefully make the right decision for themselves and for the still ‘very fragile’ global economy...

 

Published in OIL MARKETS

QUA IBOE PRICED AT +$4 PREMIUM TO DATED BRENT

Qua Iboe the light sweet crude grade produced by Exxon Mobil rom numerous offshore fields in the Bight of Biafra in southeastern Nigeria is being offered at a $4 per barrel premium to Dated Brent, even though official selling prices published on Wednesday were significantly less . The grade hasn't been valued at dated plus $4 since 2013. Nigerian crude differentials have appreciated significantly with some grades at their highest for years apparently supported by strong demand. Reuters reported the selling price for Bonny Light wasincreased to dated Brent plus 128 cents, from plus 58 cents in November, and Qua Iboe crude oil to 150 cents from 63 cents per barrel last month.

Both grades were last offered at around at least $3.50above dated Brent and selling for the highest prices since at least 2014 amid a similar spike for Azeri and North Sea crude. It said both grades were last offered at around $3.50 above dated Brent and selling for the highest prices since at least 2014 amid a similar spike for Azeri and North Sea crude. Spot trade however remained thin as traders waited for Nigerian loading programmes and official prices, as well as for Angolan allocations.

Nigeria's Nembe Creek oil trunk pipeline that moves Bonny Light crude has been shut down yet again due to sabotage. A spokesman for the pipeline operator Aiteo confirmed the shutdown. Tthe shutdown occurred last week. Nembe Creek Trunk Line (NCTL) is a 97 kilometre, 150,000 bpd pipeline. The Trunk Line is one of Nigeria's major oil transportation arteries that evacuate crude from the Niger Delta to the Atlantic coast for export. It was build by Shell but is now owned by Aiteo Group. Shell announced there was no force majeure in place over exports of Bonny Light. Bonny is transported to its export terminal by two pipelines, the other is operational. January loading programmes is expected soon with at least 20 Nigerian cargoes reportedly still available from the December programme.

Published in OIL MARKETS
Friday, 22 November 2019 00:26

ARAMCO IPO SIGNALS THE END OF DAYS FOR OPEC

The end of days for OPEC is nigh, not only has it outlived its usefulness, it is no longer fit for purpose. In a global economy so vastlydifferent from the time the organisation was established the impending Aramco IPO provides a clear indication, if any were needed as to the direction of global oil. The Aramco IPO, the largest IPO in history, will not only serve as the precursor to the demise of OPEC but will also have repercussions for the Kingdom, Shale and the global oil markets.

 

The outlook for the global oil industry looks increasing unfathomable. After the so called "US shale revolution" , which has eroded OPEC’s market position, the new potentially more lethal danger is finally at hand. History has shown that cartels collapse because of recessions, breakdown of co-operation between members, or cheating on quotas, which is the predominant method of controlling prices . We might add to that, when the largest producer and de-facto leader of the cartel places its own economic interests above those of the members of the group.

OPEC has seen and been through many challenges since it was established in 1960. It has managed to confound analysts and Critics alike as an organisation where both Sunnis and Shiites are pragmatic enough to co-exist and able to put their rivalries aside and broadly co-operate for the greater good. The cartel currently finds itself in one of the most challenging binds in its history. The accelaration of the renewable footprint and a sudden urgency of extreme climate and environmental degradation has put the long term future of fossil fuel into sharp focus.

The existential threat has come to OPEC not in the form of a widely predicted military conflict between the longstanding sunni and shiite protagonists which dominate the cartel, but by the de-facto leader essentially seeking to cash their chips by transforming the national oil company Aramco into an oil major. The first step by the Saudi authorities to fulfill their governments Vision 2030

OPEC is changing too. Gone is Qatar, ostensibly to focus on gas production but in all reality as a consequence of their dispute with the sunni Saudis and the UAE which resulted in the imposition of sanctions . Equador have announced their departure, effective 1st January 2020. The Venezuaelian's production has collapsed and are under US sanction. Iran is also under US sanctions and an existential struggle with the US, whilst Libya is consumed and constrained by civil war. How much longer can the cartel continue to survive?

OPEC's initial Saudi led response to the immediate market challenges posed by both Shale and weak global economic growth was to align with Russia in a OPEC+ configuration. The objective to leverage Russian production in an attempt to create amore effective influence in balancing the global oil market. But even that now seems like an adendum in support of the Aramco IPO.

Both the IEA, the EIA and OPEC forecast for 2020 oil markets is negative with supply outstripping demand creating a bearish outlook with the only tool available to counter this OPEC's ability and willingness to make further deeper production cuts. That is a difficult proposition for many member states given that it not only marks a reduction in OPEC's global marketshare, it supports the continued production and expansion of Shale and non OPEC supply growth at their expense.

There is a clear policy disconnect in OPEC between the African producers such as Nigeria, Angola and the DRC and the Saudis, the UAE and their new found BBF, the Russians whos socio-economic and political objectives are vastly different. If the truth be told OPEC’s smaller members have been marginalised, their voices have been diminished as Saudi Arabia prioritises its partnership with Moscow and the Aramco IPO above all else. The unlikely partnership between Saudi Arabia and Russia is causing a great deal of consternation within OPEC and forcing member states to consider their positions within the group.

Despite the Saudis assidious grooming of OPEC members for over a year in order to create the best possible environment for their much anticipated IPO, If and when such an IPO is successful how does a company that, though not officially directly owned or linked to the Saudi government, but has always been an instrument of the Kingdom’s geopolitical and economic power, reconcile its disparate obligations. Aramco’s production and investments have always been clearly linked to the future of Saudi Arabia and the geopolitical stakeholders it represents. Aramco's transformation to listed oil giant will require a serious cultural change in attitude, management, priorities and objectives.

How will OPEC respond to its de-facto leader morphing from a national oil company into an oil major? Aramco will have to act differently when addressing the market as a matter of commercial necessity. Shareholders, even from countries that are really inclined to address global warming issues, will still want to see rising profits and a steady dividends. In this increasingly difficult environment, Aramco will have to deliver to the Saudi state, create shareholder value for its new investors all whilst maintaining its leadership position in a truculent OPEC riven with contradictory and contrasting objectives.

It is inconcievable that a stock market listed Aramco would be allowed to shape OPEC strategy, putting the Saudis inevitably on a collision course with the rest of OPEC’s agenda. Similarly shareholders are unlikely to allow Aramco’s production volumes to be determined by OPEC Joint Ministerial Monitoring Committee (JMMC). On the other hand, if Aramco decides not to comply with OPEC, it will render the cartel powerless and to all intents irrelevant. At present Saudi officials are vehemently denying that OPEC is being threatened, but what is clear is that Aramco cannot ride two horses and it is more likely OPEC be thrown under the proverbial bus by the Saudis than Aramco shareholders.

The net effect of the Aramco IPO will be to reduce the ability of OPEC to effectively influence global oil prices. It becomes less able to control the flow of oil and in what appears like, certainly in the medium term, far too much production. OPEC fulfills no meaningful function beyond balancing the oil market by maintaing price benchmarks. Many commentators argue that there will be a time that demand once more oustrips supply but not for a while (peak oil). It is difficult to reach any other conclusion that OPEC is on the road to irrelevance and has effectively outlived its usefulness.

For a country like Nigeria there is an absence of a tangible upside in its OPEC membership. If there are any benefits, they seem elusive. Despite their best efforts, oil to the African producer is the basis of their market economy. To the extent that OPEC intervention in the market will have very little effect on pricing in the future, it is time for Nigeria to take back control of its own oil. The challenge for Nigeria and other African producers is to create strategies which provide marketshare and access to growth markets.

 

 

Published in OIL MARKETS

Iran’s oil Minister Bijan Namdar Zanganeh told reporters in Tehran today that an oil field whose discovery President Hassan Rouhani announced over the weekend adds only 22.2 billion barrels to the country’s estimated crude reserves. Out of the amount at the site, only a tenth, 2.2 billion barrels can be extracted due to technological limitations.
President Hassan Rouhani had claimed only on sunday whilst speaking live on state television from the central city of Yazd, a new oil field had been discovered with reserves of over 53 bilion barrels. He announced that the new field would increase Iran's current proven reserve of 150 billion barrels by about a third to over 200 billion barrels. The field was said to be located in the country's southern Khuzestan province.

He went on further to gleefully lash the Trump Administrationm "I am telling the White House that in the days when you sanctioned the sale of Iranian oil, the country's workers and engineers were able to discover 53 billion barrels of oil," he said, according to the semi-official Fars news agency.

Rouhani's announcement came only days after Iran announced it would begin enriching uranium, marking another breach of the 2015 JCPOA. The Islamic Republic is under crushing US sanctions targeting its energy sector, and more specifically preventing Iranian oil from reaching international markets. In the wake of the 2015 nuclear deal, Iranian oil had once again become a major source of revenue for the country. US President Donald Trump's decision to unilaterally withdraw from the deal and later sanction Iranian oil has put Tehran under huge economic pressure to find new solutions. European signatories to the deal have been ineffectual in providing a solution that will save the JCPOA from outright collapse.

Oil reserves normally refer to crude that can be technically and economically extractable. Figures can vary wildly by country due to differing standards, though it remains a yardstick of comparison among oil-producing nations. Iran currently has the world's fourth-largest proven deposits of crude oil and the world's second-largest deposits of natural gas. OPEC which Iran is a member use proven reserves in the calculation of production quotas.

Despite the clarification from the Oil Minister the new oil field could become Iran's second-largest field after one containing 65 billion barrels in Ahvaz. The field is 2,400 square kilometres (925 square miles), with the deposit some 80 metres (260 feet) deep, according to the semi- official Tasnim news agency.

Rouhani's announcement was always regarded as a political statement which gave only a vague indication as to how much of the reserves were recoverable or oil in place which is entirely different. Todays announcement by the oil minister has clarified the headline and put the find into perspective.

There were many commentators intrigued by the timing of the annoncement and were quick to interpret it as an act designed to detrimentally effect the inpending Saudi Aranco IPO; to sabotarge it. Iran employing their own commercial counter-measures to weaken the future oil price outlook and the IPO price valuation. Saudi Aramco have maintained that it is one of its priorities to provide investors with a sustainable dividend during volatile crude oil price cycles, over supply makes this very difficult. The Iranian objective with the annoucement is to firmly establish that as the dominant market sentiment.

 

Published in OIL MARKETS

It has been reported that Nigeria has agreed to cut its  production of crude oil and condensates  in an effort to assist Saudi Arabia, the de facto leader of OPEC, with the Saudi Aramco's IPO. According to the Wall Street Journal Nigeria not only  agreed to the cut production and comply strictly with its OPEC quota but promised to use its influence  to push  other African members to follow suit in an attempt to increase global oil price benchmarks

Aramco launched its IPO plans on Sunday, and it is due to go public in December. Aramco's growth relies upon oil prices staying around $65 a barrel, according to a document prepared for investors seen by the Journal.

OPEC is a group of 14 oil-producing nations, which produce about 30% of the world's oil. Its African members include Algeria, Angola, Equatorial Guinea, Gabon, Libya, Nigeria, and the Democratic Republic of the Congo.  Saudi Aramco is due to go

public on December 11, listing a small portion of its shares on the Tadawul All exchange based in Riyadh, after kicking off the process on Sunday. It's expected to a mammoth public offering and could value the company at up to $2 trillion.

Saudi Officials targetted an IPO of circa $2 trillion, that remains to be seen- Bank of America's low valuation was around $1.2 trillion though $1.5 Trillion seems a more realistic estimate. In any event  it would still be the largest public offering ever, adding to the fact Aramco is currently the world's most profitable company.

For the first half of 2019, it posted a net profit of $46.9bn, almost all of which was paid out in dividends to the Saudi state.

Any company that profitable will attract a high price. By comparison, for the same time period, Apple, the world's largest company by value currently, posted a net profit of $21.6bn, and Exxon Mobil, the largest listed oil company, made $5.5bn.

On Tuesday, OPEC released its World Oil Outlook for 2019 and it said that it saw its own production falling, while saying American shale oil production will overtake OPEC output by 2024. In the last year, OPEC cut its oil production by 1.2 million barrels a day, after forming an agreement with Russia in December, leading to price rising about 17% since January.

The Saudis have constantly repeated the mantra that they would do whatever it takes to balance the market and are also keen to demonstrate to investors that as the de-facto head of OPEC they have the ability to create production policy and move markets.  That their influence in the cartel remains undiminished and such influence can be put to such use as to create favourable financial outcomes for potential investors in Aramco. They have chosen to  produce 400,000bpd beneath their OPEC  quota keeping their production under 10 million bpd in a prolonged attempt to drain OECD  inventories.

 

Pricing the Aramco IPO will be complicated and global  oil prices will have a important part to play. The Saudis long term objective and reason for selling Aramco is to diversify out of oil at a time  the future of hydrocarbons is becoming  progressively uncertain. The proceeds of any sale will be used to invest in infrastructure and create new forward looking sustainable sectors in the Saudi economy for when the call for oil diminishes. It will be interesting to see whether other national oil companies follow suit

Published in OIL MARKETS
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