Oil & Gas - Markets, Prices and Outlook

In reply to emptyend (post #18)

Some of you will remember me showing charts like this:

This is the price of front month WTI oil contracts expressed in sterling terms. As such I would argue that it is quite a good proxy for the relative valuations of sterling-quoted (ie UK) E&Ps....because it ought to roughly mirror their profitability assuming that production costs stay steady.

As you can see, the sterling price of crude is now back to the levels it was at in Jan/Feb 2008. In fact it has only been higher than current levels for the four months from March to June in 2008.

So it is interesting to look at the price histories of half a dozen of the larger E&Ps: What that chart shows is that, yes indeed, the share prices of CNE, BG, DNX and PMO have all roughly returned to where they were in early 2008 (and indeed are surprisingly tightly-grouped in having done so!!). The two standout exceptions to this patterns are:

a) Tullow - which has doubled relative to the peer group....almost all of this doubling taking place since last December as drilling success has continued and bid speculation has mounted. And

b) SOCO - which is down by a third relative to the peer group....and again this laggardly performance has virtually all taken place over the same period since last December.

One wouldn't think that SOCO was the only stock in the sector which has had interest from a bidder for most of its assets during this whole period.... ;-/

Notwithstanding the curiosity (for me!) of these exceptions, the share price performance of the other four stocks goes a long way to validating the use of the WI-GBP chart as a sector proxy, IMO.

ee

In reply to emptyend (post #20)

the share prices of CNE, BG, DNX and PMO have all roughly returned to where they were in early 2008 (and indeed are surprisingly tightly-grouped in having done so

The grouping of those four really is remarkable.

I suppose a neutral, trying to understand how the divergences in your chart has come about, might ask if there's a problem with the start date - was SIA trading at an inflated calue back then? And if so, then maybe what the rest of the graph shows is simply a correction.

Looking at the curves as a log analyst might (!), they appear to be more-or-less 'on-depth' with one another - which is to say that the peaks and troughs are largely in the right places.

Resetting the chart with Sep 08 as the base shows SIA finishing in the same tight group as the others (except TLW of course). What's interesting here is that SIA tracks CNE almost perfectly for most of 2009! But also suggests that SIA was being held artificially high for the last few months of 2008 - and perhaps there were expectations back then which weren't fulfilled in the timescales expected by some holders?

It would be interesting to look into it a little further - and of course, picking the base date is always key factor in drawing these charts. I wondered if there was a way to get your WI-GBP chart as an overlay to help choose a good start date? I've fiddled about a bit and couldn't find a way!

SW10

suggests that SIA was being held artificially high for the last few months of 2008 - and perhaps there were expectations back then which weren't fulfilled in the timescales expected by some holders?

yes - fair point SW10  ;-(

also re the sensitivity to start dates 

My main point though was that the sector median seemed to be right back where it was.  I might also have wondered, though, whether the dramatic outperformance of Tullow is of a scale that is justified by fundamental news over the period.

rgds

ee

Hi ee,

I suspect one of the reasons that weekly US inventory figures are heavily monitored by speculators or analysts is because of the comprehensive published data. Other countries' data are not so reliable. When US sneezes, the whole world sneezes, too. Extrapolating demand in the US would at least give reasonable estimates for other parts of the world.

rgds,
fb

Perhaps worth pointing out, having had a few days of wobble and uncertainty over growth prospects etc, that oil prices this morning are back to closing in on $80 again ($79.65 as I write). It feels like a strong start should be in order for the oil sector......especially with the FTSE futures at +43.

Bloomberg was yesterday expecting a rise in US stocks when the DoE report comes out - but in fact the API figures last night showed a 3.3mn bbls fall.

Anyone's guess though, I suppose....since I started writing this someone has tonked the futures back to $79.35......

ee

So are there any facts to contradict the (rumoured) IEA view prominently featured in this morning's FT?: http://www.ft.com/cms/s/0/b93be716-c981-11de-a071-00144feabdc0.html

Watchdog forecasts gas glut

 

The world faces a natural gas glut that will cool prices, says the International Energy Agency, raising the prospect that Russia’s grip over Europe’s energy security will loosen.

In a draft version of its World Energy Outlook (WEO), to be published next Tuesday, the rich countries’ energy watchdog says that “global gas markets have evolved from a seller’s market, driven by tight supply and demand, to a buyer’s market as demand weakens while new supply comes on stream”....

 

...In the report, the IEA expects overcapacity of gas pipelines and liquefied natural gas terminals to reach at least 250bn cubic metres by 2015, more than four times the spare capacity in 2007. For the US, the gas glut will force companies to scrap plans for new LNG import terminals and mean that much of its existing capacity will be underused...

 

...The watchdog says that environmental policies to limit carbon dioxide emissions to prevent global warming, far from supporting demand for gas, would cause gas demand to peak in the early 2020s. Industry executives have promoted gas as an low-carbon alternative to coal for power generation...

There is also this article: http://www.ft.com/cms/s/0/114e6ac2-c97e-11de-a071-00144feabdc0.html

... If environmental policies are put in place to stabilise greenhouse gases at levels that scientists believe will give the world a good chance of avoiding a sharp rise in temperatures, they will have a significant effect on gas demand, the IEA believes.

Increases in energy efficiency and faster growth in renewables such as windpower and nuclear energy would reduce gas consumption by 5 per cent by 2015 and 17 per cent by 2030 compared with the business-as-usual scenario.

If demand were to fall in this way, the US would become largely self-sufficient and Europe would rely less on Russian gas, long an area of acute anxiety among European Union officials.

 

If environmental policies being discussed today were passed, demand for gas in Europe would not recover to 2008 levels of 542 billion cubic metres until 2020 and would fall away to 525bcm by 2030, prompting a drop in imports from Russia and the Middle East...

 

Hmmmm....

Mark

Quiet season, but GOM hurricane forcing shutdowns......

But already weakend so shouldn't see much if any damage.

http://www.ottawacitizen.com/news/Hurricane+weakens+path+Gulf+Coast/2201575/story.html

U.S. oil companies were shutting production and evacuating workers from the Gulf in the face of Ida.......

.........The Louisiana Offshore Oil Port, the only terminal in the United States capable of handling the largest tankers, stopped unloading ships due to stormy seas.

Today's UK Guardian newspaper is claiming an exclusive:

The world is much closer to running out of oil than official estimates admit, according to a whistleblower at the International Energy Agency who claims it has been deliberately underplaying a looming shortage for fear of triggering panic buying.

The senior official claims the US has played an influential role in encouraging the watchdog to underplay the rate of decline from existing oil fields while overplaying the chances of finding new reserves.

The allegations raise serious questions about the accuracy of the organisation's latest World Energy Outlook on oil demand and supply to be published tomorrow – which is used by the British and many other governments to help guide their wider energy and climate change policies.

In particular they question the prediction in the last World Economic Outlook, believed to be repeated again this year, that oil production can be raised from its current level of 83m barrels a day to 105m barrels. External critics have frequently argued that this cannot be substantiated......

...rest of the article worth a read too. Lets see if the oil markets pick the story up!

ee

...ps.....I may be trying to make something out of nothing, but I happened to watch the start of Ed Miliband's statement to the House of Commons about nuclear energy yesterday at about 4pm. He seemed unusually flustered and in a hurry and appeared to be watching the clock...... I just wonder in retrospect whether he might have heard that the cat was out of the bag? Certainly he was laying huge stress on there being no option to nuclear if the lights are to be kept on!

ee

Interesting article.

Perhaps he'd also already watched tomorrow's episode of Spooks, albeit it suggests the UK has more gas storage than I understand is actually the case.

Cheers, Martin

Perhaps he'd also already watched tomorrow's episode of Spooks, albeit it suggests the UK has more gas storage than I understand is actually the case.

Obviously written by an Encore shareholder  ;-)

I wonder how many of the current series will be about energy issues.....

ee

ee

LOL. I don't have any EO. shares.

Each episode is first being shown on BBC3 on Friday at 9 p.m. before being repeated the following Wednesday on BBC1

Apologies for being somewhat O/T.

Cheers, Martin

On a Oil and Gas note Milliband has not set foot in Aberdeen since taking office. The agenda is Nuclear.

2 short links on this with a regional perspective:

http://www.pressandjournal.co.uk/Article.aspx/1470680 and

http://www.pressandjournal.co.uk/Article.aspx/1471542

Sir Ian Wood made the point that the UK O&G industry could bail the uk out of its current hole.

I think the O&G inductry in this country is viewed by politicians as a old fashioned & dirty business.

In reply to flyinghorse (post #31)

I think the O&G inductry in this country is viewed by politicians as a old fashioned & dirty business

Au contraire mon ami, I think that Brown and Darling view the O&G business as a pure cash cow, hence their repeated assaults on the industry via tax (and the subsequent plunge in investment - good call eh?)

In reply to DJP, I think we sing from the same hymn sheet.

Si vous avez lu le premiere lien,Westmister aime l'argent de mer du Nord je crois.

Flyinghorse

Latest IEA Outlook - here are the links

powerpoint presentation for the press

executive summary

fact sheet

IEA home page

Thanks to Sawney in the other place for pointing those out

FWIW I've scanned the material above and IMHO the most striking bits of the whole thing are this bit of the executive summary....

...Oil demand (excluding biofuels) is projected to grow by 1% per year on average over the projection period, from 85 million barrels per day in 2008 to 105 mb/d in 2030. All the growth comes from non-OECD countries: OECD demand actually falls. The transport sector accounts for 97% of the increase in oil use. As conventional oil production in countries not belonging to the Organization of the Petroleum Exporting Countries (OPEC) peaks around 2010, most of the increase in output would need to come from OPEC countries, which hold the bulk of remaining recoverable conventional oil resources....

and slide 16 of the press conference presentation

These tell us some extremely interesting things, whilst failing to make them clear

1) for non-OPEC reserves, Peak Oil arrives next year.

2) Global oil supply will need to increase from today's 85 million bopd to 105 million bopd in 2030 - a net increase of 24%

3) Most of the incremental 20 million bopd will have to come from OPEC

4) OPEC will have to find a way of increasing production from today's level of 36 million bopd to around 52 million (base case) or 47 million in what is called the 450 scenario

5) The target for OPEC increases amounts to 44% (base case) or 30% (450 scenario) compared with current levels of production

6) Remember that before production can be increased, depletion needs to be replaced. That means OPEC needs to replace its depletion AND add the additional production specified above - that implies OPEC bringing on stream new production which represents somewhere between 80% - 95% of its current production in the next 20 years.

IMHO this goes beyond wishful thinking - it's ludicrous over-optimism

In reply to tournesol (post #34)

I'm increasingly convinced that when it comes to oil reserves in particular, we have to distinguish between public pronouncements which as you rightly point out are frankly absurdly optimistic and action being taken by governments to secure the dwindling oil supplies that remain. In the case of the US and its allies, the focus has been on regime change in the Middle East, and to a lesser extent securing contracts in Africa, whilst the Chinese are using their money to buy up reserves (e.g. recent purchase of Addax, deals in Angola etc.). The Chinese strategy would seem more productive per dollars spent, but the US / UK strategy has also reaped some dividends (see for example this recent FT article on Iraqi oil deals going to US / UK majors). Reassuring public pronouncements are presumably intended to stop panic buying - the UK petrol blockades of 2000 showed how quickly this could cripple industrial economies - and quite probably as politicians remain in denial and/or realise just how explosive the oil supply situation is.

Jackalope, you say

action being taken by governments to secure the dwindling oil supplies that remain.

The proposition that political influence over oil producing states provides protection (or is might conceivably provide protection) against high oil prices or supply shortages is IMHO completely mistaken.

Oil is bought and sold at whatever price the world market determines. Whether US troops are in Iraq or not makes no difference at all to the price paid by ExxonMobil for a tanker cargo of crude. If Iraqi oil were taken off the market and sold to China there would be no lasting effect on the global PoO to which the US (and we) are exposed. The price reflects supply and demand, the global balance between these factors and the strength of marginal production/demand.

We cannot imagine that we can ever get into a position where a friendly regime lets us have our oil at mates' rates. The price we pay is more or less the same as the price the Chinese pay, or the Russians, or anybody else. It does not matter which barrel goes where, what matters is how much gets produced in total and how much demand there is in total.

Other commodities do not have global transparent markets operating on spot prices, so the same cannot be said of them. Gas transport is mostly constrained by the fixed infrastructrure of pipelines and terminals. As a result it is mostly sold on fixed rate long term contracts. The underlying prices vary very substantially because of differences between the many localised markets. In some places there is an excess of gas and prices are very low. In some places gas is stranded without infrastructure and is effectively worthless.

Uranium is an example of a mineral commodity where the majority of production is sold on long term contracts which never go anywhere near the open market. There is a spot price, but that is substantially lower than the prices embedded in many long term contracts. For uranium buyers what is important is not lowest price in the short term, it is security and reliability of supply in the long term.

If you posited the idea that governments made efforts to "secure" supplies of gas or uranium, I could follow the line of your argument. But as far as oil is concerned, the open globalised market and the transportability of the product means the idea is a non-starter.

Oil is bought and sold at whatever price the world market determines. Whether US troops are in Iraq or not makes no difference at all to the price paid by ExxonMobil for a tanker cargo of crude.

The bold is SO UNTRUE and you know it RG. Are you telling me having US troops in Iraq which is one of top Opec producers will not have an impact on the price of Crude? It is like saying If the US were to attack Iran then the Oil price would not rise. Go and read about the 1970s Oil price shock if you don't believe me. If there is a war in any of the major oil producing countries then I expect it to impact Oil prices. Do you not think there will be some form of disruption to supply?

How safe would you feel filling up your tanker near a Jetty where bombs are going off? Do you not think it would be difficult to Explore for Oil in war zones or even develop fields and carry out maintenance? What about pipelines being blown up? You only need to look at the disruptions that have occured in the last few years in Nigeria to understand where I am coming from.

The price reflects supply and demand, the global balance between these factors and the strength of marginal production/demand.

That comment is not something set in stone. You only need to look at the 2008 spike to realise that, as well as the level of speculation and buying of paper contracts.

The price we pay is more or less the same as the price the Chinese pay, or the Russians, or anybody else. It does not matter which barrel goes where, what matters is how much gets produced in total and how much demand there is in total.

Nonsense. Are you trying to tell us that selling Oil produced in the North Sea is not more expensive to transport to China then it is for the UK to consume? In every physical Oil transaction there is a cost known as Freight. People carry out transactions with each other that includes the cost of Freight and in some cases Insurance. Not everyone pays the price listed on Nymex or Ice. One can tailor contracts with counterparties to obtain discounts or in some cases premiums depending on the tems of the contract. The prices listed on exchanges are there for guidance, they are in no way absolute.  

What about Crude that trades at a discount to Brent? There are various types of crude of different quality that produce products in various proportions and I can assure you the different types of crude do not all trade at the same price. They trade at premiums and discounts and these diffs can vary.

I've decided to bite my lip....