We’ve been reading a lot lately about the potential for cheap natural gas to replace oil-derived transport fuels in the US — and perhaps globally.
Much of this excitement overlooks some fundamentals of energy and commodities in general and the US natural gas sector in particular. The short version is that energy markets are incredibly difficult to predict, and adding interactions between energy sources only adds to the uncertainty. Read more
From BNP Paribas’s Harry Tchilinguirian and Gareth Lewis-Davies on Friday.
The latest crude and product stock position in the United States: Read more
Is Saudi Arabia having to again resort to Jedi mind tricks? Does the central bank of oil still have such a big problem with its policy transmission mechanism that it can’t weaken prices by production alone — and what effect is this having on world trade?
From today’s FT: Read more
People are still scratching their heads over what possibly sparked crude oil’s sell-off in the middle the US trading day on Monday.
Explanations in contention include: fat fingers, SPR talk and general illiquidity due to the Jewish New Year. Read more
The IEA’ September Oil Market report paints an interesting picture of developments in the global refining industry. In short, having restructured intensively over the past few years — by closing off a lot of unprofitable capacity — the industry is now in a position to respond to the product tightness it itself created (as a result of its restructuring).
Which is important because product tightness persists despite an overhang of crude in many regions. Read more
The US is going to be free from the tyranny of imported crude oil soon, according to just about everyone. This is thanks to the wonders of shale gas extraction technologies being applied to sizeable and mostly untapped shale oil reserves. Previously marginal resources can now be economically extracted. Even the Europeans are getting excited about it. It’s a game changer.
You can probably guess what’s coming next… Read more
China buys two North Sea oil fields on the same day. Coincidence — or a sign of change coming to the oil market’s biggest benchmark?
In addition to Sinopec’s $1.5bn acquisition of a stake in Talisman… Cnooc’s $15bn play for Canada’s Nexen (at a 61 per cent premium to the share price!) might give the state offshore oil company a major bridgehead into the setting of the Brent crude price. Read more
Bernstein’s energy analysts have looked at the upstream costs for the 50 biggest listed oil producers and found that — surprise, surprise — “the era of cheap oil is over”:
Tracking data from the 50 largest listed oil and gas producing companies globally (ex FSU) indicates that cash, production and unit costs in 2011 grew at a rate significantly faster than the 10 year average. Last year production costs increased 26% y-o-y, while the unit cost of production increased by 21% y-o-y to US$35.88/bbl. This is significantly higher than the longer term cost growth rates, highlighting continued cost pressures faced by the E&P industry as the incremental barrel continues to become more expensive to produce. The marginal cost of the 50 largest oil and gas producers globally increased to US$92/bbl in 2011, an increase of 11% y-o-y and in-line with historical average CAGR growth. Assuming another double digit increase this year, marginal costs for the 50 largest oil and gas producers could reach close to US$100/bbl. Read more
Reuters cites ‘two British sources’ that the UK will cooperate if the US unleashes crude from the Strategic Petroleum Reserve, and one source that it expects a request shortly.
In the market, the Brent price tanks. Read more
Major world powers including China and the US are ready to reopen talks with Iran on its nuclear programme a year after they were broken off, the FT reports. Brent crude prices fell two per cent after the announcement. Diplomats from the US, Russia, China, the UK, France and Germany will meet Iran’s top nuclear negotiator next month, although many observers are sceptical that Iran will accept ‘confidence-building measures’ such as a halt to advanced uranium enrichment. US President Barack Obama sought to cool tensions on Tuesday, criticising American politicians “beating the drums of war”, Reuters says. Read more
In case you missed it earlier on Thursday…
IOSCO (the umbrella securities regulators’ body) has published a report asking for comments on regulating a rather key cog in the physical market for oil. ‘Functioning and Oversight of Oil Price Reporting Agencies’ may sound a bit dry, but we think it could really ruffle some feathers in oil trading if the report’s ideas gain traction. Read more
Brent crude priced in euros rose to an all-time high on Thursday, adding another threat to eurozone growth, Reuters reports. But it is Asian buyers’ increasing unwillingness to pay up for Brent which may offer a clue that the current rally is about to crack, Reuters columnist Robert Campbell says. Increased Saudi Arabian supplies may be assuaging Asian demand. In the meantime, investors faced with price spikes in both euro- and sterling-denominated crude are scrambling to find “oil hedge” currencies, the FT says. Read more
Supply fears over Iran sent oil prices above $121 a barrel in Monday trading, the FT reports. Brent for April delivery rose to its highest level since June, with geopolitical tensions in Yemen and South Sudan also threatening disruption to the market. Total’s chief executive has nevertheless insisted that the world could easily replace the 0.7m barrels of oil a day that Iran exports to Europe and Japan. An International Energy Agency official has also said that alternative supplies are available, the WSJ reports. Crude’s current “price spike” mirrors fears over Libyan oil in 2011 — but that year, prices then posted a record one-day in fall in May, John Kemp warns in his Reuters column. The enormous weight of long positions in crude — 7.3 for every one short — provides a warning of another sharp reversal, Kemp says. Read more
On Tuesday authorities in China decided to move the ceiling on fuel prices upwards in response to price movements in international markets, the WSJ reports. This is a continuation of a balancing act between shielding consumers from the vulgarities of markets while also trying to rein in any increases in energy consumption and encourage fuel efficiency. The price increases are in the range of 3.3 to 3.6 per cent. The move is also an indication of decreased concerns about inflation. Bloomberg reports that the increase in the ceiling is the first such move in ten months. China Petroleum and PetroChina had urged the government to do so in reaction to increases in the price of crude. Read more
Iran’s oil minister said on Sunday that oil sales to “some countries” would be halted soon, amid pressure from the parliament that the government should pre-empt a looming European embargo, the FT reports. “Iran has a market for its oil exports even with cuts [in sales] to Europe and will face no problem in this regard,” Rostam Ghasemi told local journalists. But the Iranian parliament failed to pass a proposed law over the weekend that would have banned oil exports to the European Union, apparently because of differences between the legislative body and the government of Mahmoud Ahmadi-Nejad. Emad Hosseini, spokesman for the Iranian parliament’s energy committee, said consultations were being held with concerned officials in the government, “to see where we stand and in what situation the contracts are”. The talk of a pre-emptive ban, even if approval of the bill has been delayed, has already affected the physical crude oil market, traders and analysts said. Read more
Bank of America Merrill Lynch’s commodities analysts have picked up that Brent crude — when priced in euros — is uncomfortably close to its July 2008 peak.
And they’ve added some interesting points: Read more
For the long haul, that is.
So, Saudi Arabia is now effectively targeting $100/barrel crude oil, instead of the $70 – $80 price range of the past several years. This is significant because Saudi Arabia is the only country that can (in theory at least) ramp up its oil production quickly if prices spike (say, in the event of an Iran-related affair). Read more
Saudi Arabia is aiming to keep oil prices at about $100 a barrel, a third above its previous public target, the FT reports. Ali Naimi, the Saudi oil minister, on Monday for the first time said the world’s largest oil producer aimed to keep oil prices at the triple-digit level, in an interview with CNN. The revised target is in part a reflection of rising public spending in the wake of the Arab spring. “The Saudis need to spend more money to keep their citizens quiet and prevent protests,” said Carsten Fritsch, oil analyst at Commerzbank. Bill Farren-Price of consultants Petroleum Policy Intelligence added that there was a “consensus” within Opec that $100 a barrel was the appropriate price level for its members’ fiscal requirements and the need to invest to boost supply. “The context is an industry where a lot of new investment is predicated on that kind of price level.”
Nigeria’s president Goodluck Jonathan and labour unions failed in overnight talks to reach a compromise over the removal of fuel subsidies that has raised fears of a shutdown of Nigeria’s oil industry, Reuters says, citing union and presidency sources. Mr Jonathan was expected to make a public address later on Monday and unions declined to comment until he had spoken. Unions said Sunday that nationwide strikes and protests would resume Monday if no agreement was reached in Africa’s second-largest economy and number one crude producer. Unions representing oil industry workers have said they will shut oil output if talks reach deadlock. Read more
The US has slapped sanctions on three firms including a major Chinese oil trader for selling refined oil products to Iran, just days after US Treasury secretaryTim Geithner travelled to Beijing to press for Chinese support on Iran sanctions, reports the FT. The US State Department announced late Thursday night that penalties would be imposed on China’s Zhuhai Zhenrong, the Singapore-based oil trader Kuo oil, and the UAE-based independent oil trader FAL. While the measures are unlikely to have a big immediate impact on these three companies, they send a strong warning signal to energy companies working in Iran at a time when the US has been canvassing Asian countries for more support in isolating Tehran. Read more
European refiners have started to sever links with Iran, stopping spot purchases of crude ahead of a EU meeting later this month that could impose a full oil embargo on Tehran, the FT reports, citing unnamed industry executives and oil traders. The sources said that some refiners have either stopped or reduced new purchases of Iranian oil, although they continue to receive monthly oil supplies under earlier long-term agreements, or term contracts, that they cannot break without incurring penalties. “We continue to buy under term contracts but don’t deal with them any longer on spot transactions,” an official at a southern European refiner said. Other refining officials and several oil traders confirmed a reduction in spot deals. Traditionally, refiners buy two-thirds of their oil under term contracts and the rest on the spot market, although the precise split varies from company to company. In the event of an embargo, European refiners could declare force majeureand cancel their term contracts without penalty. David Greely, head of oil analysis at Goldman Sachs in New York, wrote in a note to clients that refiners were cutting back on Iranian purchases in response to new US sanctions and anticipation of an EU embargo. Meanwhile the WSJreports Japan’s finance minister told visiting US Treasury Secretary Timothy Geithner that his country will take steps to reduce its dependency on oil imports from Iran, in contrast to a position taken in talks with China a few days ago. “We want to take actions to further reduce our 10 per cent dependency as soon as possible in a planned manner,” Jun Azumi said. Read more
Japan wants to keep importing crude oil from Iran despite rising pressure from the US to cooperate in strengthening sanctions against the Islamic Republic, reports the WSJ, citing an unnamed official at Japan’s Ministry of Foreign Affairs. The official reportedly said the country was concerned about the impact on energy prices and the possibility of a fuel shortage affecting rebuilding after the disastrous earthquake and tsunami that hit in March. The comments came a day before the planned meeting between US Treasury Secretary Tim Geithner and Japan’s Finance Minister Jun Azumi. The two ministers plan to meet Thursday morning, with a possible ban on Iranian crude oil and Japan’s currency intervention likely to be on the agenda, which a spokesman at the Ministry of Finance declined to discuss. Read more
Britain will on Thursday join the US in warning that any action by Iran to close the Strait of Hormuz would be “illegal and unsuccessful,” insisting that western navies in the Gulf must ensure the free flow of oil trade, the FT says. Amid signs that the European Union has now agreed in principle to ban oil imports from Iran this month, Philip Hammond, Britain’s defence secretary, will warn the Iranians that the UK would respond militarily if Tehran tries to close the strait in retaliation over sanctions. Meanwhile in Nigeria, the FT reports, union leaders have called for a nationwide strike from Monday to protest government plans to cut fuel subsidies. “All offices, oil production centres, air and sea ports, fuel stations, markets, banks, among others will be shut down,” the unions said in a joint statement. “We advise Nigerians to stockpile basic needs, especially food and water.” Read more
Opec ministers were edging towards a decision to keep oil output broadly steady at their meeting on Wednesday, the FT reports, moving to heal the profound differences between Saudi Arabia and Iran that led to the collapse of the previous meeting in June. The oil cartel painted a sanguine picture for the energy market heading into 2012, with Riyadh and Tehran largely agreeing on the outlook. The two countries, the two biggest producers in Opec, had clashed over levels at the group’s previous meeting in June which ended with no formal agreement on output targets. Saudi Arabia, Kuwait and the United Arab Emirates unilaterally increased production to make up for the loss of output from Libya. Read more
European geopolitical FAIL:
LONDON, Nov 11 (Reuters) – Greece is relying on Iran for most of its oil as traders pull the plug on supplies and banks refuse to provide financing for fear that Athens will default on its debt… Read more
Fuel oil: a byproduct of the petroleum distillation process, usually considered either a distillate or a residue.
Or as Wikipedia explains: Read more
Geopolitical tensions over Iran have sparked fears of oil rising as high as $200, says the FT. The price of Brent crude, the global benchmark, has rallied to almost $115 a barrel as the war of words between Israel and Washington, on one side, and Tehran over its nuclear programme escalates. Bloomberg reports US and European officials said they will seek to tighten financial sanctions against Iran as soon as possible, armed with a United Nations atomic weapons inspectors’ report that asserts Iran has conducted clandestine activities “specific to nuclear weapons”. The International Atomic Energy Agency concluded the Persian Gulf nation has pursued a nuclear warhead small enough to fit on its ballistic missiles. Yesterday’s statement is the strongest to date from the Vienna-based UN watchdog that Iran isn’t simply seeking peaceful nuclear power, as its leaders insist.
If you’re wondering what Goldman Sach’s view on crude is — it can be summed up in one neat sentence from their latest research note:
The world crude oil market remains exceptionally tight. Read more
ICE Futures Europe, the exchange home of the Brent oil benchmark, is mulling the launch of a parallel Brent contract to prevent a disconnect between the derivatives and physical markets ahead of a change in the way oil prices are calculated, the FT says. Platts, the pricing agency which acts as the de facto regulator of the Brent physical market, announced last week that it would widen the assessment period used to calculate the price of the commodity in the physical market from the current 10-21 days forward period to a new 10-25 days forward period. Oil traders said the wider assessment window – a response to falling North Sea oil production – would disconnect the physical market from the futures market, which for historical reasons is based on a 10-15 days forward period. But ICE Futures Europe, the London-based exchange, has warned market participants it would not be able to align the Brent futures contract with the new methodology in time for January. So, in informal meetings with industry participants, it has suggested it might launch a new Brent contract based on the new 10-25 days forward. This would trade for several months in parallel with the old contract. Read more