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Items filtered by date: December 2019

Tuesday, 31 December 2019 15:40


Global oil over the years has been a litany of contrasting if not oft times conflicting interests, competing in a far from free market whatever the commentariat would have you believe. As we look forward to 2020 the hopes and expectations of the market are as diverse as the participants.  Questions remain over the relevance of OPEC and the long term direction of the cartel. The Saudis have decided to cash in on their national oil company in a bid to get ahead of the curve as increasingly more producers look to diversify out of oil. The twin spectre of the ever expanding global renewable footprint and the increased efficiency of the global transport fleet, seems destined to shape a different future to the one we contemplated a decade ago.


Then there is the 'global warming' crisis which has put fossil fuels investment into full retreat. Lenders are no longer prepared to invest in fossil fuel projects at least outside of China. Add to that the clamour from investors in the shale oil boom for returns on almost a decade of production growth, profligacy and disappointment . The US has become the worlds largest producer of oil and gas, yet the industry is saddled with monumental debt. Production is forecast to increase in 2020 but far less than in previous years. Alot of that will be dependent on how much OPEC produce. Whilst the US is expected to produce about 13 million bpd in 2020 it may only achieve that rate if OPEC continue to curb their own production. There is a clear negatively correlated covarience between OPEC production cuts and Shale production. OPEC are prepared to accept this relationship on the basis that tier 1 shale acreage will be rapidly depleted and the shale boom will falter.


Non OPEC production growth in 2020 has been forecast at about 2.6 million barrels per day. Much of it coming from Brazil, Norway and Guyana and about 700,000 bpd from the US. Depending  on which agency you obtain your information demand growth for 202 is estimated at about 1.3 million barrels a day with most of it coming from the emerging market, chiefly China and India. OPEC have revised their forecast as is their wont. By undoubtedly employing a hitherto unkown algorithmic hash, OPEC now predict a 0.1% increase in global growth to 3.1%  for 2020 which equates in real terms to a 140,000bpd hike in global demand. That translates to circa 102.3 million barrels a day demand (ceteris paribus). Though we are all well aware  that all things are very rarely equal.


It remains to be seen if the much heralded phase one of the China-US trade deal will  beget a phase two. Whilst the deal might create some confidence in the market there is every indication that other WTO members including the EU may challenge its legality. There is also the issue of Iran and Venezuela, who could conceivably be joined by a truculent Iraq. Geopolitics has been the big imponderable in recent times fuelled in part by US foreign policy decision making authored by a abstruse influence. 2020 feels like it will be an interesting year.

Published in OIL MARKETS

WTI crude, the U.S. benchmark, and Brent, the global benchmark, are up around 11.8% and 10.4% this month, respectively. That puts WTI on track for a 36% gain so far this year, while Brent is up around 24%.

Trading was quiet on a Monday on the penultimate session of the year. Crude Oil futures ended with small losses, bringing  four days of modest increases in oil  price  benchmarks to an end.

WTI  crude for February delivery lost, -0.10%  on the New York Mercantile Exchange (NYMEX) it fell 4 cents, or less than 0.1%, to end at $61.68 a barrel. Brent crude for March delivery, the most-active contract, fell 20 cents, or 0.3%, to close at $66.67 a barrel on ICE Europe. Monday marked the expiration day of the February Brent contract CLG20, -0.10%, which rose 28 cents, or 0.4%, to close at $68.44 a barrel.

Both grades traded at their highest levels for most-active futures contracts since mid-September, when a drone attack on Saudi oil facilities caused crude prices to spike.

“Both the Brent and WTI oil markets have rallied nearly 20% over the past couple of months of trading to three-month highs just below $69.00 and just above $62.00 in Brent crude and WTI oil, respectively, as easing fears of slowing global oil and fuel demand growth underpinned by a U.S.-China trade agreement, increased OPEC plus output cuts, and fears of Middle East supply disruption propelled the markets to levels not seen since the middle of September,” wrote analysts at TFS Energy, in a note. “However, expectations of increased non-OPEC production growth in the coming year will likely provide resistance to rising oil prices in the coming months.”

Gains in December came after the U.S. and China announced an agreement on a “phase one” trade deal that helped soothe worries over the global economic outlook.


The Organization of the Petroleum Exporting Countries (OPEC) and its allies earlier this month agreed to cut output by 500,000 barrels a day on top of its current reduction agreement, beginning in January.

Analysts said investors are also keeping an eye on developments in Iraq after news reports said protesters on Saturday forced the temporary closure of the country’s Nasiriyah oil field.

Notably U.S. military forces conducted “precision defensive strikes” against five sites controlled by Kataeb Hezbollah, or Hezbollah Brigades, an Iran-backed Iraqi militia. The U.S. has blamed the militia for a rocket barrage on Friday that killed a U.S. defence contractor at a military compound near Kirkuk, in northern Iraq.

Published in OIL MARKETS

Saudi Aramco hit the  $2 trillion valuation on Thursday, briefly achieving the target demanded by  Crown Prince Mohammad bin Salman in 2016. It only  took a day after the Saudi state-backed oil company made its stock market debut. Aramco’s shares rose by 10% on  its first day of trading , the maximum permitted, on the first day of trading, so the company’s valuation had already increased from $1.7tn to nearly $1.9tn.

Aramco initial offering was for only 1.5%  or 3 billion shares of the companies stock, down from the 5% which they originally intended to sell to large international investors. The sale of 1.5% still resulted in the largest ever initial public offering valued in excess of $25 billion.

The Saudi authorities left no stone unturned in preparing the ground for a successful IPO. Wealthy Saudi families and investors have been enticed into purchasing stock. Local banks had their coverage ratios relaxed specifically to allow them to lend to local investors. The Saudis led by their new oil minister Prince Abdulaziz Bin Salman managed to cajole or bully OPEC into making even  deeper cuts to create the right market sentiment for the IPO. After rising above $2 trillion early Thursday, the stock closed just below that level; the Saudi Arabian Tadawul exchange where it trades is closed on Fridays.

As of the end of the week, Aramco was worth $1.96 trillion, which gives it a valuation of about 21 times expected 2019 earnings, assuming the company’s earnings trends for the first three quarters hold up in the fourth. That leaves the stock trading above most international oil companies, including Chevron (CVX) and Royal Dutch Shell (RDSA), though it trades at a discount to ExxonMobil (XOM) based on 2019 earnings. Aramco also has a lower dividend yield than its competitors. The  promised $75 billion dividend to shareholders, equates to  a 3.75% yield based on a $2 Trillion company valuation at the share price of SAR37.5 (US$10), compared with 6.5% for Royal Dutch Shell, 6.6% for BP (BP) and 5% for ExxonMobil.

Aramco has committed to paying a minimum $75 billion dividend to its investors for the next 5 years. Aramco will be under pressure to maintain its strong profitability . The best way of achieving this is through high crude prices. This is why it is vitally important that the Saudis act at all times to boost global oil prices.

There is investor hesitancy and a number of downside risks to consider . To be attractive to non Saudi investors Aramco will have to become more transparent.  It remains to be seen whether an organisation which has been such an integral Saudi economic and foreign policy tool, can act in the sole interests of their shareholders. Foreign institutions and investment funds have steered clear, the political optics are complicated by ethical considerations. Many thought the price was too high, given the relatively lower price of oil, climate change concerns and geopolitical risks associated with Aramco

The price is further distorted by the limited number of shares issued  and it will be the supply and demand of these shares which will establish the share price going forward more than the company’s results. Demand for the shares is set  to  rise as  MSCI and other index providers have indicated they are planning  to add the stock relatively soon.

The IPO was always going to be complicated to price. The international investor community was lukewarm long before the Saudis decided to abort their international road shows. The allegation has always been that the IPO has been artificially managed and does not reflect long term value. There is evidence to support this view and so in the short term investor will not feel compelled to entertain Aramco risk at this valuation.





Published in OIL MARKETS

The sporadic trade negotiations between the US and China have been paused as President Trump has agreed to a phase one agreement in principle as December 15th looms large. Trump reportedly signed off on a phase one trade deal with China, averting the December 15th deadline which would trigger  another round of U.S. tariffs on about $160 billion on imports of Chinese consumer goods. The phase one deal was always going to be about banking the easy wins. China has reputedly agreed to buy more US agricultural produce in exchange for tariff relief, the phase-one pact will also  include Chinese commitments to do more to stop intellectual-property theft and an agreement by both sides not to manipulate their currencies.


The "Trade War" has dominated the last 18 months of global oil markets. The imposition of tariffs and tit for tat reprisals has weighed heavily on global crude oil demand. Demand has slowed just at the time there is far too much crude available. The market has been sensitive to any news of progress, with Trump's tweets creating undue market volatility.  Scarred by the events of 2014, OPEC and its partners have worked tirelessly to balance the market, thus ensuring stable crude prices. Now the prospect of a phase one deal is bringing back a measure of confidence to the markets on the expectation of growth in global GDP.


There is no legal text to show yet and there has neither been a formal announcement or any presentation. But such was the effect of the Trump  tweet today, that it raised US main stock indexes by  over 1%.  Despite President Trump  repeatedly declaring progress toward a deal that would end the trade war, which has seen tariffs imposed on more than $450bn worth of US-China trade and weighed on the global economy, his tweets always seem to get a rise out of the market. Yet there is substantial criticism, much of it from China hawks within his own party.  To quote former USTR Mike Froman ," this should NOT be described as a trade agreement. It is a purchase and sale agreement that does virtually nothing to address substantive concerns of US (+rest of the world) with China's trade practices. +US farmers + consumers paid heavy price...". The US reportedly offered to halve tariff rates on about $350bn worth of Chinese goods, some of which had climbed as high as 25%.


The scepticism does not stop there with many commentators cynically asking When do we get to the final deal?, in which  Trump gets little or nothing and promptly declares it the greatest deal ever?


The simple truth is that the "trade war" is nothing of the sort, it is a proxy for an existential battle. The US objective extends to  every other domain of Sino-American relations.   Washington now seeks to dismantle its  interdependence  with China  by decoupling it from  the American economy, curb its role in global governance, counter its foreign investments, cripple its companies, block its technological advance, punish its many deviations from liberal ideology, contest its borders, map its defenses, and sustain the ability to penetrate those defenses at will. All at the same time as supporting dissidents in Hong Kong.


The US went to war with China  to stop IP theft and forced technology transfer, negotiate  changes  to  the way China’s subsidises its industries and  improve US  access to China's markets. To convert China into a libertarian free market economy: and that is the reason the trade war will never satisfactorily be resolved. The two protagonists will forge a relationship characterised by skirmishes and spats. The global oil market will continue to rely on both for demand growth, yet cheap energy is as desirable as trade deals in promoting economic activity and growth.

Published in OIL MARKETS

"Like religion, if you are believer you have to practice. Without practice, you are a non-believer. I do not assume anyone in the room is a non-believer. We are here to deliver. The market will have to trust us, the analysts will have to believe us. Without [this] we cannot deliver what we want to achieve, it is as simple as that,"

Prince Abdulaziz Bin Salman.



Meeting in Vienna, OPEC and Russia (OPEC+) decided to deepen existing cuts by an additional 500,000 barrels a day, the equivalent of a half of one percent of global production, until the end of March 2020.It is doubtful that OPEC including OPEC+ agreement to deepen production cuts through the first quarter of next year will support the market for anything but the short-term, while Brent crude prices are likely to revert to $60 per barrel by mid-2020 all things being equal. The consensus of financial commentators and analyst amid a larger output cut than expected raises 2020 Brent spot price outlook to $63 from the previous $60. Long-term price is still seen at around $55 per barrel. This commentator now forecasts WTI spot price at $58.50 per barrel with the long-term price at around $50

It would appear OPEC+ strategy seems to have evolved into using production cuts to manage short-term imbalances in the physical market rather than trying to address long term fundamentals they can excersize little control over. A sort of Keynesian approach of intervention 'managing the price peg'. These cuts can however only have a sustainable effect on the market if they mirror non OPEC supply growth. That is not a feasible proposition, not least because there is still a high level of non compliance within OPEC itself and member States are unlikely to agree. Furthermore given Saudi Arabia's short term objective to extract maximum value for the Aramco IPO this strategy serves their purpose well.

OPEC's most recent oil market outlook report forecasts a tighter than previously expected supply - demand balance. OPEC’s report came amid increasing concerns of many crude oil producers about a repeat of rising supply and falling demand – a reincarnation of the mid-2014 calamity when crude oil benchmarks collapsed.

Rystad Energy, a Norwegian consultancy, estimated the global oil market will be oversupplied by 800,000 barrels a day because of the new (non OPEC) production and slowing economic growth. Bjornar Tonhaugen, Rystad’s head of oil market research, has warned that the global Brent oil benchmark, just above $60 a barrel on Thursday, could dip into the $40-to-$50 range “if OPEC and Russia don’t extend and deepen their cuts.’’

Saudi Arabia has led the campaign to support crude prices and for good reason. For next year, the kingdom sees a wider budget deficit and projects its oil revenue at 513 billion riyals ($137 billion), a decline of almost 15% from 2019,it has been widely reported that the kingdom would need oil to trade at $89 to balance its budget in 2020. Though it has designed next year’s budget under the assumption that Brent will average about $65 per barrel, an assumption adopted by Nigeria too.

For any chance of that hapenning it will require that all OPEC members strictly comply with newly agreed output cuts. But despite the puritannical zeal of Saudi Arabia’s new oil minister Prince Abdulaziz Bin Salman, it is difficult to deter non compliance without contemplating two unedifying alternatives. Failing to make all member states "believers" would mean the Saudis could chose to produce their full quota creating oversupply and plummeting the global crude oil price. This might serve as a deterrent but it would damage the Saudis own interest and quite probably those of Saudi Aramco investors. They could also chose to look the other way and lose all credibility in the process.

The cruelest irony of course is if the OPEC cuts achieve their ultimate target objectives they could breathe life back into Shale production which in turn would widen the demand supply inequilibrum completely undermining the OPEC+ cuts . Currently anticipated growth in Shale for 2020 is forecast at around 600,000 bpd which is roughly half of the 2019 level. OPEC's biggest gamble is that by surrendering marketshare now as shale production declines marketshare will return and prices rise on the loss of shale production.

It is currently very difficult to make any predictions on the shape of the future of the oil market. Much will depend on demand side events particularly the China- US trade war but also sanctioned Iran and Venezuala. To steal a quote from Master Yoda "“In a dark place we find ourselves, and a little more, “Difficult to see, "Always in motion is the future".


Published in OIL MARKETS
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