• Category Archives Oil and Gas
  • The Doha Oil Conference: A Bridge Too Far

    The recent conference in Doha, the Qatari capital, convened by some eighteen major crude oil producers ostensibly to re-balance global supply ended without a consensus and was adjourned sine die. Conferees included both members and non-members of the Organization of the Petroleum Exporting Countries, OPEC, including Russia. Crude oil prices fell significantly in the immediate aftermath ― U.S. futures falling as much as 6.8% in Asian trading ― but recovered somewhat, on news that a sector strike in Kuwait substantially curtailed the country’s oil production. Fund managers that bet on a supply freeze may see their portfolios severely affected and may be poised for a selloff. According to Commodity Futures Trading Commission, net-long positions on both West Texas Intermediate and Brent crude oil grades increased significantly in the lead up to the Doha conference.

    An earlier accord saw Saudi Arabia and Russia, two of the world’s highest-volume producers, as well as Qatar and Venezuela freeze output at January’s near-record levels. The deal, which left some investors sanguine about a consensus in the lead up to Doha, helped lift oil prices from about US$26 per barrel ― near twelve-year lows ― to just over US$40 per barrel. But the outcome of that conference was presaged. Any idea that the conference would be fruitful was always fatuous. Long-standing religious, ideological and geopolitical differences between two of OPEC’s highest volume producers, Saudi Arabia and Iran, scuppered the deal.

    Three critical points are informative:

    Questionable Exercise

    There was an inherent futility in that Doha conference. The major oil producers were already producing at near-peak capacities, so freezing output at such levels would have done little to curb the massive supply overhang. Oil Production - Russia, Saudi ArabiaEven if a supply freeze accord were reached, no protocol was envisioned ― neither is any in existence ― for monitoring producers’ compliance. Moreover, if breaches were determined, one wonders what sanctions would be prescribed and what capability there would be to enforce such. OPEC members routinely exceeded their production quotas when they were apportioned, and largely to no effective penalty.

    Previous production accords in 2001 and 2008 were quick to fizzle out. In 2001 for example, Russia was widely blamed for breaching the accord brokered by Saudi Arabia, between OPEC and the non-OPEC producers Mexico, Norway and Russia. Given the exigencies of the day, it is doubtful if any output freeze accord in Doha would have been maintained. Continue reading  Post ID 470

  • Crude Oil Prices: Why A Sustained Rebound May Still Be Further Ahead

    Global crude oil prices have recovered somewhat ― even if tenuously ― from the lows of just a few weeks ago, but they are still only about 30% of their values for the same period two years ago.

    While it is unclear just how long it will last, the low oil price regime has failed to bring any significant growth to the global economy and has left many producing companies struggling with dwindling revenues, even bankruptcy. In addition, the often-observed correlation between oil prices and share prices only adds to current market uncertainties.

    Spot Crude Oil Prices

    The current low oil price regime is driven in the main, by a lingering oil imbalance ― excess of supply over demand ― and a sluggish global economy.

    Oil Imbalance

    Facing substantial loss of market share due to the tight oil boom (mainly U.S. shale oil and to some extent Canadian tar sands), major producing countries such as Saudi Arabia and Russia, which have lower production costs also turned on the spigots to their massive oil casks. The result has been the current supply overhang, which is being exacerbated by Iran’s insistence ― after her recent emergence from a restrictive sanctions regime ― on speedily attaining her pre-sanctions production level.

    The global oil imbalance has been on an upward trajectory since 1Q 2014. It is informative that this positive imbalance is not driven by falling demand but by the growth in supply superseding that in demand. Unless this differential growth rate is properly addressed, that imbalance, and therefore the low oil price regime will linger. Continue reading  Post ID 458

  • Crude Oil Prices And The Lingering Uncertainty

    Crude oil prices have plummeted by more than 70% over the past 20 months, to twelve-year lows. The impact on both producing companies and countries has been significant. Major oil and gas companies have seen large dips in profits. In 2015, BP suffered its largest annual loss in two decades while ExxonMobil, Royal Dutch Shell and Chevron had 50%, 80% and 76% decline in earnings respectively, for the same period. ConocoPhillips cut its dividend by about 66%. Revenues for members of Organization of the Petroleum Exporting Countries, OPEC, are expected to slump to about US$400 billion from US$1.2 trillion in 2012. Azerbaijan and Nigeria are mooting emergency loans from the International Monetary Fund, IMF, while many analysts are expecting a Venezuelan default on her foreign debt. Even Saudi Arabia’s fiscal reserves fell to a four-year low last year.

    Market Uncertainty

    While the current turmoil in the global economy derives from concerns about the health of the global economy, the impact of oil prices contributes in no small measure. As China, a major energy ― especially oil ― consumer transitions from an emerging market to a developed one, a marked reduction in her growth rate may be the new order. During her years of steep economic growth, China was an export destination for commodities from countries such as Russia, Brazil, Chile and Nigeria among many others.  The downturn has meant falling demand for these commodities and with falling oil demand has come falling oil prices. The current capital flight estimated at tens of billions of dollars per day, is a testament to the country’s influence on global markets.

    S&P 500 vs S&P 500 Energy

    While the shale producers in the United States have shown unexpected resilience in the face of low oil prices, it is doubtful if the debt-ridden operators can sustain operations at current crude oil prices. WTI (CL1:COM) closed US$27.32 on Thursday. Continue reading  Post ID 449