Those looking to intensively scrutinise and analyse Opec’s non-cutting decision would do well to check out the public statement from the cartel which can be found here.
In any case, here is the key par to take note of (our emphasis): Read more
Some wise comments from our esteemed FT colleagues on Opec’s price war:
Cutting production only makes sense if there is strong reason to believe that the glut is temporary; and even then it makes better sense in low-cost fields, where not too much capital is tied up, than in high cost ones. Unless, of course, the oil price falls below the operating cost of a high cost field. That is thought to be about $7 a barrel in the North Sea. That is the economic reason why everything depends on Opec, which still controls much of the low-cost oil in world trade.
For the moment, most observers are betting that Opec is bluffing about a price war (which would in any case be the correct strategy) but this begs the question of maintaining internal discipline which is already frayed. Gulf peace and the addition of 2m barrels a day of Iranian supplies, could be the last straw.
We’re all about unexpected consequences of “liquidity illusion-syndrome” these days, so it was exciting to discover a liquidity-focused assertion from Citi’s Edward Morse and team on Monday about the recent oil price decline, one that ties together a few ideas about how commodity markets relate to bank intermediation.
As a reminder, we have postulated that much of the decline is less related to sudden spot imbalances as it is to the curve’s “definancialisation”. The connection Citi has now made is between the commodity sell-off and regulatory burdens placed on banks’ commodity operations.
It adds to a discussion developed in an April paper by David Bicchetti and Nicolas Maystre, which questioned whether the recent correlation reversal in commodities was indeed connected to the closure of banks’ commodity departments. Read more
Imagine the scenario. It’s 2025 and the volume of home-produced oil is so great that the US is near energy independent as far as crude imports are concerned.
With that energy independence, the amount of dollars flowing out of the US and over to net energy producers (and traditional dollar reserve hoarders) such as Saudi Arabia, Russia and Mexico has come crashing down.
So how would such a dollar-flow contraction affect the global economical and political balance?
According to Citi’s credit team, it would likely affect things a lot. Especially so in the credit markets. Though, what’s really interesting … they believe the effects of a petrodollar shortage may already be showing up in credit markets. Read more
A quick follow-up to our Nigerian fuel scarcity story from Monday, which highlighted the country’s growing exposure to potential fuel shortages if and when oil prices continue to descend, and as the national currency weakens.
As already noted, Nigeria may be a net oil exporter, but the country remains dependent on product imports to keep its economy ticking over. Those products are imported by local companies from international oil trading intermediaries, and distributed at prices which are further subsidised by the government. Read more
Nigeria’s fiscal exposure to falling oil prices is amongst the most acute within the Opec group.
But as Standard Bank analysts note on Monday, whilst the country’s central bank has shown it is prepared to defend the currency ahead of all-important national elections in February, its ability to do so diminishes with every dollar that the Brent crude price loses:
The CBN is clearly struggling to balance constraining upside USD/NGN pressure with limiting the depletion of FX reserves. At present, the CBN is intervening in the interbank market just below the prevailing rate rather than protecting a line in the sand.
The CBN has also recently shifted the RDAS rate higher and we suspect may move it to the upper end of 155 +3% band in coming weeks.
Our core scenario remains that there will not be an official shift in the RDAS central rate until after the elections in Feb 15. The ability of the CBN to achieve such an outcome clearly diminishes, the lower the oil price goes.
What’s an oil power to do when the commodity it owes its power to is on the wane?
One strategy, of course, is to devalue your currency so as to help the competitiveness of whatever exports you have left, and focus on the so-called strategy of import substitution – buying more of your own stuff and pretending that, heh, you just don’t care. As Deutsche Bank’s Yaroslav Lissovolik notes on Friday it is a strategy that has worked for Russia in the past, namely in 1998 and 2008. Read more
A while back we proposed that oil prices are more interest-rate sensitive than most people appreciate.
The logic goes as follows.
When interest rates are low it makes more sense for producers and commodity owners to hold their wealth in commodity-form rather than in money-form — especially if speculators are prepared (via the forward curve) to compensate them for the cost of storing these commodities in terminals, tanks or even in the ground.
Low interest rates thus support commodity prices because they encourage commodity owners to sell only what they need for financial liquidity purposes and little more, a fact which naturally keeps the market tight. Read more
There was a time when light sweet crude was considered the best of the oil-grade bunch.
Easy to process and especially suitable for making gasoline — the fuel of choice for the world’s automobiles — it quickly became the global benchmark for oil prices everywhere.
The only problem for the industry was that there was never enough of it about. A fact which ended up providing the market with a hell of an incentive to find better ways of processing inferior crude types.
Which is exactly what happened next. Read more
In their latest oil note, Goldman Sachs describe the oil market as having a “dominant firm/competitive fringe” structure, in contrast to say a monopolistic or perfect competition structure.
This is basically the description of an oligopoly, in which a dominant firm (for decades, Saudi Arabia) only differs from a monopolist in one key aspect… Read more
Earlier this month Goldman Sachs put out a note arguing that whilst their overall view was still bearish, the oil price sell-off thus far had been too much too soon.
The spot market fundamentals, they noted, were in balance — meaning that if anything was driving a “change” in demand it was curve repositioning, mostly by overly anxious speculators who had decided an exit was warranted despite the balanced fundamentals.
This, however, is no longer Goldman’s view. Read more
Ever the market-moving contrarians, Jeff Currie and team at Goldman came out with a note on Thursday doing for oil markets what Bullard and Haldane have been doing for markets in general.
When it comes to the oil price decline it is, they say, too much too soon. And, critically, the issue is on the expectations side NOT on the current market supply side:
The recent sell-off in oil has been mostly driven by positioning based upon expected fundamental shifts as opposed to currently observable shifts. While looking into 2015 we have sympathy for these medium- to longer- term bearish views that have driven prices lower, we believe it is too much too early. Prices have also likely overshot to the downside particularly as the lower we go the tighter the near-term balances become. This leaves us near-term constructive despite being bearish as we look further out.
That Saudi Arabia and the Opec cartel were going to be “disrupted” by North Dakota millionaires was hardly difficult to foresee.
What was always harder to figure out, however, was how Saudi would react. Would Opec’s most important swing-producing state cave in and give up on market share for the sake of price control? Or, conversely, would it be more inclined to follow along the lines of the Great UK Supermarket Price War, and enter a clear-cut race to the bottom?
So far, it seems, the strategy is focused on the latter course. Which means people are finally beginning to wonder just how sustainable a path that really is.
More so, to what degree does such a price war potentially disrupt the average break-even rate for the entire industry and compromise energy security more widely? What exactly happens to prices when the cartel effect is stripped out? Read more
This little chart is becoming a major headache for the world’s biggest oil producers:
In our last post, we referred to John Kemp’s argument that cash-flows in the shale drilling sector are not a good indicator of shale’s long-term commercial sustainability.
This, he argued, was due to the regular conflation of gas and oil in the metrics, justified by the fact that most companies produce some variety of both. In the last few years, however, producers have shifted their efforts increasingly towards oil production — due to the better margins — improving cash-flows as a result.
And that, in some way, is the great thing about the technology. Switching between carbon fuels is much easier than with conventional upstream projects. (Not to put everything in bitcoin terms, but it’s a bit like switching processing power to mine dogecoin instead of bitcoin whenever the margins are more cost effective.)
Nevertheless, peak oilers still contend shale isn’t long-term sustainable because of the rapid decline rates for wells. These, they claim, are being depleted much more quickly than conventional wells, speaking of the problem in hand. Read more
The FT’s Ed Crooks reported this week that fears over the long-term health of America’s shale industry could be put to rest thanks to news that independent oil and gas companies have now substantially improved their financial positions.
From the story:
Cash earned from operations by 25 leading North American exploration and production companies is expected in aggregate to exceed their capital spending next year for the first time since 2008, according to an analysis by Factset for the Financial Times.
As Crooks recounts, the longstanding fear was that the industry was shaping up to be a Ponzi scheme, relying on nothing more than excitement over shale to continuously attract new investment, with every likelihood that things would cave in on themselves once the financing for more drilling ran out.
Thanks to a shift to more profitable oil extraction over less profitable gas, however, it now looks like shale companies’ finances have improved enough to make the business sustainable. Read more
Russia’s ESPO crude blend determines the key compensation rate for Russian oil production.
As analysts at JBC Energy note on Monday, however, the crude now trades at its weakest differential to Dubai crude — the benchmark it is most commonly compared to — since it became an established blend on the market in 2010.
Whilst the analysts are quick to point out that there are legitimate fundamental reasons for the weakness, it should not go unnoticed that some regular ESPO customers seem to be missing from the market. Read more
Try banging that header above into Google. Prior to this post hitting pixel, you would have just got….
As we alluded to earlier, there is a battle taking place in the oil markets at the moment.
On one side there are conventional oil producers like Opec members desperate to stop oil prices from following the declining trajectory of the wider commodity complex. On the other side there are the new US shale oil producers, who — due to the US export ban — are unable to capture the full earnings potential of their production (on account of an inability to tap foreign bids directly).
The problem for Opec types is that the break-even rates they seek to defend are now too high to prevent the new class of producer from being incentivised to keep producing. This despite the fact that the export bottleneck only ends up transferring much of the profitability to the refining sector instead of the US producer. Read more
We’ve argued before that the 2005-2007 commodity bull-run could have been the product of an unwitting self-manufactured squeeze, as the industry rushed to monetise as much inventory as possible to benefit from higher than usual interest rates and as inventory levels dropped. (All pretty much unwittingly, of course.)
As prices increased, the economy choked. Read more
Here to explain why refiners in Asia aren’t getting giddy about the Iran deal are some analysts accompanied by an angry Congress, angry Israel, angry Saudi, OPEC, existing sanctions, such as the ban on exports to the EU, and a large implicit counterfactual – without a deal, sanctions would have tightened further. Read more
Oil prices continue to decline, with WTI currently leading the charge:
A tale of Reliance. Or of cracks. Or of regulation. Take your pick but this is simply pointing out that global refining margins are still in the doldrums (with recent GRMs low even by post-2008 standards) and that Europe’s refiners are likely to take the biggest kicking. Read more