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Items filtered by date: February 2020

Friday, 28 February 2020 20:46

NNPC FAIL NIGERIA AGAIN,TIME TO HEDGE OIL

There is reason for Nigerians to worry and it is not only the arrival of COVID-19. Oil price benchmarks are in freefall, crashing through resistance levels as if they were none existent. This week has seen Oil fall to its lowest price levels since July 2017 and barring  a miraculous cure for the COVID-19, it is difficult to see what an OPEC+ are able to do, to arrest this  downward spiral. We may soon see Brent below $45 as Libya gets back on stream.

Brent crude, the global oil benchmark which is used by Nigeria as the marker for all the crude oil grades they sell  has plummeted. It  fell as much as 4.2% today, briefly breaking below $50 a barrel, which is a level not seen since 2017. It eventually lost 3.27% or $1.66 to finish the day on the ICE at $50.07  which  puts it on track for its worst week in four years.  WTI crude ended up at $45.31, a decline of 3.78% on previous days trading.

About 12 years ago in the wake of the  recession which caused demand for crude oil to shrink in late 2008, with oil prices collapsing from $147 to  $32, I put to the Nigerian National Petroleum Corporation (NNPC) a comprehensive hedging proposal which would act as insurance and allow Nigeria downside protection against falling oil prices. The thing you would have thought any prudent actor would do without prompting.

I repeated the exercise in 2012 and over the years have sought to understand why a country that predicates its budget and entire welfare on the price of oil would not exercise  critical prudence and responsibility by unfailingly hedging their crude oil production.

Considering oil markets have been vulnerable for a while as global inventories reach record highs and the renewable footprint grows rapidly. It is not as the warning signals in a world awash with oil were not there.  Investment in fossil fuels is declining off the back of climate change and global warming concerns. The oil market outlook for 2020 forecast excessive supply growth exerting downward pressure on prices. Yet nobody in Nigeria thought it might be a decent idea to hedge their production.  Made all the  more bemusing  at a time when Mohammed Barkindo a Nigerian is the Secretary General of OPEC

At the OPEC+ meeting in Vienna next week, we may well get a plausible rendition of King Canute, quite what effect that will have on the bear market in questionable. However if the oil benchmark does not recover until after Q2, Nigeria will have another  recession and it will be deep. What is particularly galling is that nobody seems to learn from their mistakes. Nigeria are only just emerging from their last recession and are close to insolvency.

 My question to NNPC and by extension the Nigerian Government is this, is the Minister of Petroleum  doing a good job?

Published in OIL MARKETS
Thursday, 27 February 2020 15:45

OIL PRICES SLUMP AS MARKET LOOKS TO OPEC

Oil price benchmarks suffered further deterioration as the COVID-19 instigated assault weighed heavily on global markets. Oil prices slumped yet again on Thursday,  for the fifth straight day  to their lowest since January 2019. The coronavirus epidemic's  sporadic global outbreak has  intensified  fears of a pandemic that will lead to a significant economic downturn and a collapse in the call for crude oil

On thursday WTI  was trading at $46.52 a down 4.54% or $2.21 on previous session  whilst Dated Brent traded on the ICE at $50.64, down 4.11% and close to BREACHING the $50.50 resistance point.

 The fundamentals endorsed by the fact that For the first time since the start of the coronavirus outbreak, it is reported by the World Health Organisation that, the number of new  infections outside China exceed those within.

 An anticipated reduction in demand for transport fuels and the fear of economic slowdown in large economies such as Japan, South Korea and Italy, countries that have been infected by COVID-19 have underpinned the slump in oil prices in a market that was already oversupplied.

 Not even the bullish numbers  emanating from the EIA could buoy the market.  U.S. crude oil stockpiles increased by 452,000 barrels to 443.3 million barrels, the EIA report showed. This was less than the 2-million barrel rise analysts had expected. Energy futures have also taken a  huge wallop as investors sell of stocks and flee the sector.

 The market will now wait to  see how OPEC+ will react to prices that are essentially in free fall. Russia has been reluctant to cut production as every time they do US Shale benefits. It has also been also problematic determining  whether COVID-19 is just a Q1 event.  It is difficult to see if it sojourns beyond Q2 how US Shale can continue to exist with WTI price action below $46 over that term.

The Nigerian oil Minister, Timi Sylva recently confirmed that  Nigeria were prepared to do whatever it took to balance the market and boost oil prices. The real dilemma however  is Nigeria's budget is based on a barrel price of $60 but also producing 2 million barrels per day

Published in OIL MARKETS
Tuesday, 25 February 2020 17:13

NIGERIAS APRIL CRUDE PROGRAM EMERGES

COVID-19 and the consequent demand destruction is set to affect Nigerian crude as there is simply far too much oil in the market. This is making it difficult to shift cargoes and exerting downward pressure on price differentials. The falling crude price has already caused the IMF to revise downward Nigeria GDP growth. The last time oil prices collapsed it sent the country in to recession in 2014, the economy is only just emerging from that recession.

Nigeria's preliminary loading programmes for April continued to emerge, after differentials were heavily weighed down in the last trading cycle by sluggish demand in both Eastern and Western markets. A handful of Nigerian programmes were still outstanding on Monday while Taiwan took some west African crude.
Nigeria’s Bonga programme had yet to emerge, lagging behind other major grades. Schedules for a few small streams were also missing, such as Abo, Pennington and Okono. Taiwan’s CPC reportedly took a cargo of Forcados in its latest buy tender for April arrival.


* Nigeria will export seven cargoes of Bonny Light in April, with volumes set to fall to 228,000 barrels per day (bpd) from 245,000 bpd in March.
* Exports of Forcados were set at nine cargoes or 283,000 bpd in April, up slightly from 279,000 bpd in March.
* A single cargo of Yoho is due to be exported by Nigeria's NNPC on April 9-10.
* Equatorial Guinea's Zafiro is set to export two cargoes for loading on April 1 and 3.

Published in OIL MARKETS
Friday, 21 February 2020 19:54

CRUDE OIL IMPORTS CREATE CHINESE PUZZLE

COVID19 THE CHINESE PUZZLE

It is by definition complex, intricate, requires ingenuity and is perplexing. Out of a clear blue sky just as market analysts had snugly settled down with their forecast outlook for 2020, it  emerged without warning, a shock that  the market is still yet to fully comprehend. Despite the initial slump in global oil benchmarks the price of Brent  rebounded by over 10%  last week.

This week ending, West Texas Intermediate crude for April delivery CLJ20, -1.99%  on the New York Mercantile Exchange fell $1.13, or 2.1%, to $52.75 a barrel, while April Brent crude BRNJ20, -2.23% lost $1.37, or 2.3%, to trade at $57.94 a barrel on ICE Futures Europe. Coronavirus fears returned to the market as the pervading sentiment seems to be that the virus still has a course to run with no clear sign it has peaked.

With Refiners in China reported as processing 25% below seasonal averages  and an estimated reduction in transport fuel consumption of 30-40% the logical expectation would be that oil prices continued on their downward spiral. Apple Inc. have issued what is essentially an impartial  prognosis on the Chinese economy. A warning that would normally be regarded as a bellwethers. Setting aside the predictable short term spike in oil benchmarks the market experiences every time there is an US inventory build in excess of forecast, market sentiment seems to be driven by the rate and number of coronavirus infections.

There were initial reports at the beginning of the month that Chinese buyers had called a halt to West African grades, yet it seems that Chinese imports have remained fairly unabated at the seasonal rate of about 10 million barrels a day.  Some of China's biggest suppliers such as  Russia, Iraq and the Saudis have continued to export oil to China at typical rates. Though we will not know definitively until the begining of next month when China’s General Administration of Customs releases the data for February.

 The build up of oil cargoes  offshore at the beginning of February seemed to provide evidence of high refinery inventories  build as a result of low run rates and a general collapse in demand. Subsequently we have however learned that available storage has been freed up.  China’s overall crude storage is at 760 million barrels, versus a peak of 780 million barrels in early June last year which is about 65% capacity. Sources at Shandong ports have confirmed that while storage levels are high, they are working with refineries to move oil out and make way for more cargoes that are expected to arrive in the coming weeks. So in theory there is still a lot of spare capacity

 

Depending on what data the General Administration of Customs reports on crude oil imports the market will have a more precise gauge of the situation. If imports are close to seasonal averages it would confirm that China are increasing oil inventories. Such an act would be strategic yet would leave the market to ponder their motivation in a time of seeming crisis

It would only really make sense to put oil into storage if China is convinced the market was in contango and that the price of oil was bound to increase. It is a statement of confidence in their ability to spark the economy back into life, thus increasing the demand for oil. Stockpiling is a  hedge when you think future prices are going to increase.

Counterfactually,  if the General Administration of Customs reports shows a substantial decrease in imports well  below seasonal or pre COVID-19 levels for February,  it would confirm that the coronavirus is having a more detrimental effect on consumption and will continue to weigh on China’s economy for some time to come. It would also decrease the incentive for China to put oil into storage as it would send the market into prolonged  backwardation.

 

The integrity of the information emanating out of China has always been questionable. This adds to the  market's volatility.  In any event OPEC+ are well positioned to construct their own assessment of Chinese crude imports from amalgamating the member states export data. By the 5th of March there will also be significantly more trend data providing a clearer indication as to the state of the Chinese puzzle.

 

 

Published in OIL MARKETS
Wednesday, 19 February 2020 22:05

PUTIN TAKES CONTROL OF OPEC

Russia seem to have won the argument and OPEC+ will meet as scheduled in Vienna on March 5th- 6th. It could be that a resurgence  in the  Brent oil price benchmark which has seen it reach  $59.16/b as of 1719 GMT today, up 11% from the February 10th  low has alleviated the pressure .  However although the front month ICE future has rebounded it is still down over 10% year to date and far below the level most  OPEC members states  need to balance their domestic budgets.

 Russia has  been reluctant to agree to Saudi requests for members of  the alliance  to meet in  mid-February, as the effects of  the coronavirus outbreak caused oil prices to slump. Earlier in the month an OPEC+ technical  committee recommended that the  coalition deepen its existing 1.7 million b/d production cut accord by an additional cut of 600,000 barrels per day through the end of the second quarter to offset any demand impact from the COVID-19 infection.

 The Saudi energy minister Prince Abdulaziz bin Salman who reportedly spoke to the Russian energy minister Alexander Novak by phone on Tuesday acknowledged on Wednesday that he was unable to convince his Russian counterpart. Prince Abdulaziz bin Salman, never short of a quotation  had previously been quoted as  saying the price plunge in February called for decisive production cuts. "When there's a fire in your house, you call for the fire truck, not the garden hose," the sources quoted him as saying. Perhaps an oversimplified metaphor perhaps but it left the market in no doubt as to the urgency the Saudis position.

 Yet the Russian position is complex and seemingly set to become even more complicated.  The Russian news agency TASS originally quoted the Russian energy minister " Russia is now carefully studying the recommendation of the technical committee in order to assess the situation on the market and take a balanced approach based on the interest of the market as a whole". It was polite procrastination, whilst it is prudent to attempt to assess the full effect of the COVID-19 the process is open ended.

 Interestingly an impending $38-billion deal under which the finance ministry will buy state lender Sberbank is due to start in April and  is expected to lead to a stronger rouble, which is a factor that is generally disliked by oil exporters as it hits their profits.  At a meeting on Wednesday, oil companies asked Energy Minister Alexander Novak to tell central bank governor Elvira Nabiullina that they do not favour a strong rouble. It is however thought that the final decision will be Putin’s. A strong rouble would favour a production cut.

Furthermore it would appear that though the Saudis have cut back production their exports  do not seem to have dropped accordingly, so whilst other members like Nigeria are cutting exports the Saudis seem to be using reserves to maintain export volumes. The Russians have always been wary of surrendering market share to US shale

 The real issue is the fidelity of the alliance and its ability to demonstrate a unity of purpose. The  technical committee is essentially a unit which comes up with policy, if those ideas are not endorsed by both Russia and the Saudis these policy positions become just interesting suggestions. Russia has continually maintained that they are content with a lower crude oil price. Russia do not want to see an increase in US shale production facilitated by increased oil prices created by a rash OPEC+ production cut

Published in OIL MARKETS
Wednesday, 19 February 2020 15:30

COVID-19 SUPPORTS REFINERY MARGINS

A slower decline in refined product prices compared to crude oil saw refinery margins strengthen. Though Chinese refining margins stayed firmly in negative territory, with Arab Medium cracking margins averaging minus $1.84/b, up from the minus $3.98/b the week earlier.The decline in the demand for transport fuel created by COVID-19 saw the number of Chinese transport passengers for all venues down by 30%-40%, according to data released by the Chinese Minister of Transport and reported by Platts S&P .

It remains to be seen whether the return of Chinese workers to work will make an appreciable difference to refined pproduct demand.
The weaker Chinese demand is creating external inventory builds too as refined product inventories in Fujairah rose 12% week on week to reach 24.252 million barrels, according to data released last week by the Fujairah Oil Industry Zone. Inventories in Singapore also rose marginally, with gasoline and light distillates up 3% to 7.332 million barrels, while middle distillates rose 1% to 4.058 million barrels, according to Enterprise Singapore data.

Singapore cracking margins for Dubai rose to average $1.32/b for the week ended February 7, up from the minus 10 cents/b the week earlier, Platts Analytics data showed.

Refining margins in the Amsterdam-Rotterdam-Antwerp region were stronger, with Urals cracking margins averaging $6.01/b, up from the $4.88/b the week earlier. Part of the strength was due to regional refineries beginning seasonal turnarounds, lowering demand for crude and reducing product inventories.

The lower refinery output cut into inventories. ARA diesel and gasoil stocks fell 3% week on week, to 2.470 million mt last week, or 18.1 million barrels, according to Insights Global data, while gasoline stocks rose 10% to 1.12 million mt, or 9.46 million barrels.

In stark comparison margins on the US West Coast continue to top all other regions, though they showed a small reduction week on week. The cracking margin for Alaska North Slope averaged $19.08/b for the week ended February 7, compared with the $19.09/b the week earlier.

Front-month ICE Brent prices averaged $54.62/b for the week, down $4.40/b from the week earlier, and the largest weekly drop since December 2014. The NYMEX front-month crude contract averaged $50.35/b for the week ended February 7, down $2.38/b from the week earlier.

Published in OIL MARKETS
Saturday, 01 February 2020 22:51

ROYAL DUTCH SHELL SHELF BUY BACK

ROYAL DUTCH SHELL SHELF OIL BUY BACK

It has emerged that in the wake of the coronavirus Royal Dutch Shell , the world’s second-largest listed oil and gas companyhas now decided to slow down the rate of its planned share buy back. Shell embarked on a $25 billion buy back programme on July 26, 2018, the biggest ever undertaken. In a statement to the market Shell chief executive Ben van Beurden explained “We remain committed to prudent capital discipline supported by world-class project delivery and are looking to further strengthen our balance sheet while we continue with share buybacks,”

He has sought to re-assure investors as the 'macro' becomes increasingly fragile, ...“Our intention to complete the $25 billion share buyback programme is unchanged, but the pace remains subject to macro conditions and further debt reduction.”

The price shock caused by the coronavirus and the difficulty in determining the extent of its impact on the market has forced producers to adopt a much more cautious approach with their cash. Royal Dutch Shel is currently undertaking the world’s largest ever shareholder buyback, returning cash made from a 2014 takeover of gas firm BG Group.

Up until now Shell have handed back about $3 billion a quarter to its perpetual shareholders totalling about $15 billion to date. This includes most UK pension funds and millions of retail investors. Shell today said the remaining $10 billion will be given back more slowly due to tougher conditions in the oil market. It will start with just $1 billion between now and April, meaning the buyback is unlikely to be finished as promised by the end of the year and may run into 2021.


This announcement has ramifications and was received with great hostility with some investors accusing the senior management of of Royal Dutch Shell of undermining the company's credibility. Many fund managers are going to be forced to reconfigure their portfolios. The announcement saw shares to fall 4% to their lowest since 2017 immediately wiping $ off 10 billion of the company's value. It is complicated further by Shell's net profit (Net income attributable to shareholders) for 2019 came in at $16.462 billion, down 23% from the $21.404 billion of the previous year and below analyst expectations of $17.70 billion.

Whilst it is perfectly permissable to attribute the potential effect of the coronavirus as creating a challenging 'macro' environment for global oil , Royal Dutch Shell's 4th quarter profit report to December 2019 shows a 50% drop in earning from $5.7 billion to $2.9 billion after being hit by falling operating margins and big writedowns on investments in North American shale gas. All this at a time Royal Dutch Shell have seen their gearing rise from

Published in OIL MARKETS
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