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 geopolitical risk? Check. Middle East geopolitical risk? Check.
But commodity prices, and in particular oil prices, are doing nothing: 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
The summer silly season is nearly upon us, so what chance a reprise of this Daily Mail classic?
From November 2009 when Britain’s tabloids met contango with predictable consequences: Read more
The curious case of vanishing volatility deepens, with the latest installment coming by way of the oil market.
From Harry Tchilinguirian’s team at BNP Paribas, this is apparently what the death of volatility looks like:
A quick little follow up to our previous “crude wall” post.
It’s worth stressing that since the beginning of the year crude stocks in Cushing, the delivery point for WTI crude futures, have staged a remarkable reversal. Read more
These two charts come from Citi’s commodities research team:
They’re important. The reason being…well, we may have become used to talking about Saudi America, but we haven’t yet figured out the longer term consequences of America’s oil production resurgence. 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
Take yourself back to the heady oil price days of early 2008. Imagine a rogue voice reassuring the market to “fear not, one day soon the US will be saturated in the black oozey stuff”.
What would the market have made of such a concept? Would such a voice have been dismissed as a loon? Very possibly.
And yet, less than six years later comes the following warning from Goldman Sachs: Read more
This is painfully ambiguous parsing of doctrine. Still, it is the Church of England.
We think this statement is the Church moving a bit closer to supporting fracking in Britain (as Cuadrilla scales back drilling in leafy Balcombe)… Read more
Much hoopla on Monday from the FCA, Britain’s newly-fashioned regulator, as it meted out a $903,176 fine to Michael Coscia, a dirty HFT operator caught manipulating crude oil futures back during the autumn of 2011.
We learn that…
Between 6 September 2011 and 18 October 2011 Coscia used an algorithmic programme of his own design to instigate an abusive trading strategy known as “layering”. During this time, Coscia placed thousands of false orders for Brent Crude, Gas Oil and Western Texas Intermediate (WTI) futures from the US on the ICE Futures Europe exchange (ICE) in the UK.
Full details are available in the final notice, but you’ll want to click on the image below for an “animated example of Mr Coscia’s trading…” Read more
Hooray, the final version of the Iosco ‘Principles for Financial Benchmarks’ is out. It’s dull.
At least given the stakes: moving Libor — and a great deal of basic pricing in finance beyond it — towards a basis in actual transactions. Read more
The fixed income team at Credit Suisse have a good note talking about what’s really driving WTI backwardation. Small hint, they don’t think it’s much to do with Egypt.
They put the backwardation down to three things. Read more
… and it’s all because, the lady loves shale oil.
Well, what we mean is that finally, the surplus stock of crude trapped in America is having a price effect beyond borders because logistical constraints have been removed and storage incentives have started to disappear. Also, because graphs like these can no longer be ignored.
The result: a major narrowing in the WTI-Brent spread. Read more
It’s been our mantra at FT Alphaville for a while, but finally someone from the ‘serious’ analyst space seems to agree with our hypothesis that commodity collateralisation — incentivised by low rates and excess liquidity — is having a larger impact on inventories and commodity prices than most people appreciate.
Here’s an extract from one of oil market veteran Philip K. Verleger’s recent articles on the relationship between interest rates and inventories (our emphasis): Read more
FT Alphaville was cordially invited to talk about the collateralisation of commodities at two separate conferences this past month. We thank IHS Global and the Association des Economiste Quebcois for the opportunity.
The crux of our argument was that you can’t really understand what’s going on in commodity markets unless you appreciate that commodities are no longer a pure consumption-based market. Read more
John Kemp at Reuters has been following the interesting case of light sweet fatigue in the oil market.
As he first noted on Tuesday, a surge in shale oil production alongside a big increase in modern refinery capacity is increasingly undermining the value of sweet crude in the market. Read more
We suggest watching this story…
It looks like EU competition regulators paid some unannounced visits to oil company offices around Europe on Tuesday — note the reason: Read more
WTI crude prices are on the rise, but only at the expense of Brent’s premium. The spread between the two crude grades shrank below $8 this week, its lowest since January 2011.
But what’s really striking is the rise in US crude output, which has risen 57,000 barrels a day to 7.37m — its highest level since February 1992.
If one chart speaks a thousand words in this regard, it’s the following one from the American Enterprise Institute’s Carpe Diem’s blog, charting data from the US Department of Energy: