Category Archives: On the cover

On the cover

Oil and Gas Views

Energy, On the cover, Sin categoría

2012_demand_scen

Short term I expect oil to consolidate in these levels, but no fundamental change in global economic outlook to become bearish. Inventories keep drawing, and even with Distillates at uncomfortably high levels, any tick up in demand will quickly absorb excess capacity. Global demand estimates have been revised upwards along with World Bank global GDP estimates for 2010, while capex cuts continue to affect supply, with reserve replacement below 100% since 2004 and decline rates reached 6% in 1H2009. The 10 month contango in oil, with end 2010 at $70/bbl going all the way up to $87/bbl supports this view.

Near-term risk on downside would be if the US$ dollar was to appreciate but financial players are not hugely net long so risk not that substantial.CFTC data shows net long positions in crude at 39,370 contracts, in line with 2006 levels.

Longer-term, downside risk from any reduction in OPEC compliance is offset by likelihood that non-OPEC supplies will disappoint as the year unfolds.Additionally, Iran and Venezuela break-even oil prices are at high end of $50/bbls, so they have a vested interest in keeping compliance to avoid losses.

As for natural gas, the impact of surplus LNG will continue to weigh on the market. LNG’s depressing price impact has been limited (interestingly, YTD LNG volumes are below 2008, so the glut is probably overstated). Meanwhile Continental storage is refilled and pipeline deliveries are moderated. However, by winter the full effect of the surplus is likely to be dragging the 12 month strip down to low 40s p/therm (current 48p/therm).

Oversupplied US gas market likely to keep prices depressed until there are clearer signs of the likely reduction in US domestic production. Medium-term, 12 month strip around $6.5-7.0/mmbtu seems justified (against $6-6.5/mmbtu currently) as domestic production cuts and economic recovery tighten the domestic market, but the oversupplied LNG market restricts any upside.

I expect the effect of the Gas rig count drop to level below 625 and capex cuts in US gas production to show some impact as from September, but even so supply remains more than adequate short-term.

Asian gas prices to remain largely immune from the LNG surplus, and settle at an oil linked $8-9/mmbtu.

Global Oil Production Stats

Energy, On the cover, Sin categoría

Interesting table from our friends at The Oil Drum. Only 14 of the 54 oil producing nations in the world are still increasing their oil production. Considering 2008 saw a global all-time-high in exploration and production expense, could provide some food for thought in terms of geopolitical risk changes (see which countries are depleting more rapidly) and where the new areas of resources could be coming from. To be considered past-peak, a producer’s current (2008) production has to be at least 10% less than its best year, and the best year must have occurred prior to 2005.

  • CountryPeak Prod.2008 Prod.% Off PeakPeak Year
  1. United States112977337-35%1970
  2. Venezuela37542566-32%1970
  3. Libya33571846-45%1970
  4. Other Middle East7933-58%1970
  5. Kuwait33392784 -17%1972
  6. Iran60604325-29%1974
  7. Indonesia16851004-41%1977
  8. Romania31399-68%1977
  9. Trinidad & Tobago230149-35%1978
  10. Iraq34892423-31%1979
  11. Brunei261175-33%1979
  12. Tunisia11889-25%1980
  13. Peru196120-39%1982
  14. Cameroon18184-54%1985
  15. Other Eur/Eurasia762427-44%1986
  16. Russian Federation114849886-14%1987
  17. Egypt941722-23%1993
  18. Other Asia Pacific276237-14%1993
  19. India774766-1%1995
  20. Syria596398-33%1995
  21. Gabon365235-36%1996
  22. Argentina890682-23%1998
  23. Colombia838618-26%1999
  24. United Kingdom29091544-47%1999
  25. Rep. of Congo 266249-6%1999
  26. Uzbekistan191111-42%1999
  27. Australia809556-31%2000
  28. Norway34182455-28%2001
  29. Oman961728-24%2001
  30. Yemen457305-33%2002
  31. Other S. America153138-10%2003
  32. Mexico38243157-17%2004
  33. Malaysia793754-5%2004
  34. Vietnam427317-26%2004
  35. Denmark390287-26%2004
  36. Other Africa7554-28%2004
  37. Nigeria25802170-16%2005
  38. Chad173127-27%2005
  39. Italy127108-15%2005
  40. Ecuador545514-6%2006
  41. Saudi Arabia1111410846-2%2005 / Growing?
  42. Canada33203238-2%2007 / Growing
  43. Algeria20161993-1%2007 / Growing
  44. Equatorial Guinea368361-2%2007 / Growing
  45. China37953795-Growing?
  46. United Arab Em.29802980-Growing
  47. Brazil18991899-Growing
  48. Angola18751875-Growing
  49. Kazakhstan15541554-Growing
  50. Qatar13781378-Growing
  51. Azerbaijan914914-Growing
  52. Sudan480480-Growing
  53. Thailand325325-Growing
  54. Turkmenistan205205-Growing
  • Peaked / Flat Countries Total-49597-60.6% of world oil production
  • Growing Countries Total-32223-39.4% of world oil production

"Hoarding" and short term oil price volatility

Energy, On the cover, Sin categoría

CONTANGO JULY

The recent pullback in front-end oil prices is likely to remain for a short period of time. Hoarding is to blame. The Chinese government revises petroleum product prices every 30 days or so. The required increases in the past months has led to the phenomenon of “hoarding”, as participants in China buy large quantities of oil in anticipation of a price increase to match international prices. This practice has led to an increase in oil purchases of 3million barrels per day from May to June, which justified the increase to $68/barrel. Once this “hoarding” cycle is over, the recent pullback is easily justified. Hard to envisage a large increase in short term demand to offset this extraordinary buying activity, but there is certainly a “short covering” effect likely to cushion the fall. Oil has not risen to stratospheric levels and is still in reasonable levels considering average production costs, so the funds that have shorted into the hoarding cycle will likely unwind their trade gradually.

Calling the bottom on power prices in Europe

Energy, On the cover, Sin categoría,

Although overcapacity in Europe plus excessive renewable installations remain the biggest threat to power prices, and a quick price recovery seems highly unlikely, these are the main reasons why i believe we could be reaching a bottom:

  • . I believe CO2 has reached a very strong support level at €13/MT. Utilities keep adding to their hedges at this level despite demand concerns. Even with -1% demand in 2010-2011 a CO2 price of €12-13/MT is widely accepted as a solid risk-reward price (basically the NPV of 2013 €23/MT with a 10% discount).
  • . I believe demand is showing some small but encouraging signals of bottoming. We have seen encouraging data from the countries with highest overcapacity like Spain and Italy. Demand data for Spain for June is down only 2.7%, versus down 8% in May. This is temperature and working days adjusted, so not influenced by external factors. Same trend was seen in Italy with June figures only down 3% adjusted.
  • . Capex cuts could reach 15% in 2010. Moody’s and S&P are demanding (expecting) power capex cuts in 2010 to reach up to 15% in Europe’s rated power groups. I had a chat with Neil Bissett from Moody’s yesterday in which they believed that generation companies should start thinking about moving closer to more cyclical company-type of gearing. That is c30% net debt/nd+equity!. Not only large groups are facing higher pressure to control capex and gearing, but smaller power companies are likely to be unable to finance agressive growth plans in current conditions. The effect is likely to be evident in 2011 and will hopefully bring reserve margins to tighter levels in Europe.
  • . Gas prices look well supported into summer by ongoing Norwegian supply discipline (and more worryingly, inability to offset decline) and revamped Russia-Ukraine dispute risk. However, winter looks uncertain. The gas market is the key uncertainty to this picture as it looks awful considering LNG.
  • . …But maybe the threat of LNG could be less agressive. You know me, I always trust Exxon, and so far it works. BP, Exxon and BG are seeing enough Asia demand to close large long term contracts. Additionally BP believes through TNK that Russian gas production could be peaking as reserves could be overstated. Exxon wants LNG in the US for two reasons: a) lower US gas prices benefit them and b) lowers the valuation of gas assets which they would takeover gladly.
  • . In coal we are seeing supportive data from recent broker comments of a tender for met coal out of Australia completed recently at US$132/t, which is the first deal above the benchmark price of US$129/t. Spot prices have rebounded from US$115–118/t last month, due to months of strong purchasing activity by the Chinese. Strong Chinese steel production, signs of an end to steel destocking in the world ex-China, as well as infrastructure constraints in Australia (Dalrymple Bay vessel queues up from 25 to 40 ships), have contributed to the move upwards.