The Price Factor: Oil and Terrorism

The entrance to the currently blockaded Zueitina oil terminal in Libya.
The entrance to the currently blockaded Zueitina oil terminal in Libya.

There is a general consensus among oil analysts: the excess supply of oil on the market will subside by the end of 2016. The global demand for oil will increase by 1.2-1.5 million barrels per day, according to BP, the International Energy Agency (IEA), and the Energy Information Administration (EIA). Since the beginning of this year, there has been a significant decrease in shale oil production in the United States. Oil deliveries to the world market are also affected by the militant attacks on production and transport facilities in Nigeria.

Alarming messages are coming from other corners of the world. In late July, ISIS seized two oil infrastructure sites in northern Iraq, killing five workers and destroying the largest oil station that pumped 55,000 barrels of oil to Northern Kurdistan. At the same time, the US resumed their bombing campaign of Libya. According to Pentagon press secretary Peter Cook, the US Air Force bombed Sirte, which has been controlled by ISIS since June. There are about 2,000 militia fighters concentrated in the area around Sirte. It is reported that the strikes are being carried out at the request of the US government.

Before the new bombing campaign, there had been several loud statements on building up Libya’s oil industry, increasing exports from 332,000 barrels per day in July to 900,000 barrels per day by the end of the year. However, Libya’s National Oil Company hasn’t been able to ramp up production since exports through the ports of Ras Lanuf, Zawiya, Zueitina, and Ed Sider have been blocked by militants and local rival groups since 2013.

Analysts estimate that the total export capacity of these ports to be 860,000 barrels per day. According to BMI Research, it is possible for Libyan oil ports to come back online, but they will require significant reconstruction. Maintenance work at Es Sider has already begun. In addition, the country has lost its biggest oil customers. In terms of increased competition between oil producing countries, at present it will not be easy for Libya to come back on the market.

However, before the military operations started again, Bank of America predicted that oil prices would return to between $35-40 per barrel if the conflict in Libya was settled and the country’s full production and export capacity resumed.

Prior to the overthrow and eventual killing of Muammar Gaddafi (coincidentally in the Libyan city of Sirte) and the ensuring civil war, the country was producing up to 1.65 million barrels of oil per day. According to Douglas Westwood, Libya is home to some of the world’s largest proven reserves of liquid hydrocarbons. Oil is the main source of income for countries in Northern Africa, and before the blockade of the ports and exports, contributed 97% of foreign exchange earnings and amounted up to 80% of GDP.

Maria Kutuzova

Did a Crude Oil Combustion Kill the Dinosaurs?

csmonitor
Photo from CSMonitor

 

There has long been a consensus among palaeontologists that the mass extinction of the dinosaurs was triggered when a 6-mile wide asteroid hit the Earth 66 million years ago.

The narrative has been that the asteroid, slammed into the present day Yucatan Peninsula and set off volcanic eruptions, earthquakes, tidal waves, and eventually a large dust cloud that blocked the sun, ceasing photosynthesis, first killing off the herbivores dinosaurs, then the carnivores.

However, it has remained a scientific mystery why the cataclysmic event wiped out the dinosaurs, but not other animals, such as crocodiles and frogs.

Now, a new theory has emerged to explain the sudden and mass extinction, and it involved crude oil.

The study by Professor Kunio Kaiho and his team of researchers at Tohoku University, suggests that the extra-terrestrial object slammed into an oil reserve in the Yucatan, triggering a burning inferno that shot a massive amount of fine black carbon (also known as soot) into the atmosphere, forming a smoke cloud that plunged the Earth into darkness. The large dust cloud turned vast regions of the globe into deserts.

Both theories share the same “cloud of darkness” basis, but Kaiho’s study focuses less on Co2 spewing volcanoes and more on the sedimentary organic molecules.

The Japanese team examined the powdery black carbon substance, which is about a million times more light-absorbing than carbon dioxide.

Rocks at the impact site of the crater were already known to contain oil elements. In fact, a drilling expedition by the Mexican oil company Pemex in the 1950s helped lead to the discovery of the crater later in the 1980s. In present day Mexico, the region is still oil-rich.

To balance the study, Kaiho and co. took samples soot samples from rocks both nearby the impact site (in Haiti) as well as on the other side of the world (in Spain).

The chemical composition of both samples bore molecular similarities, indicating they originated from the same crude oil incineration.

Kaiho’s research suggests that the asteroid may have incinerated and sent up as much as three billion tons of soot into the sky, causing colder climates at mid-high latitudes, and drought and milder cooling at lower altitudes.

The findings were published in Scientific Reports.

What Brexit Means for Oil and Gas

103411959-GettyImages-289984-001.530x298

Nearly a week after the UK voted in favor of leaving the European Union, the post-Brexit hangover has begun to sink in: the sterling is at a 30-year low, the country’s credit rating has been bumped down, and the overall financial and political future of a Britain outside of the EU remains uncertain.

Here at Neftianka, we are more concerned about the ramifications for the oil and gas industries, which incidentally, are closely linked to the economic and financial situation in Great Britain. Here are observations on how Brexit will affect oil and gas

Cheaper oil for the rest of the world, more expensive for Britain

Crude oil prices plunged more than 7% in the past week since the referendum. Brent slipped down to $48.41 per barrel and WTI towards $47.00.

Cheaper crude prices usually translate to less expensive petrol a the pump, but UK residents won’t get to cash in.

Brexit sent the British pound into a tailspin, losing more than 10% of its value on June 25, 2016, when final results from the previous day’s referendum came in. The British pound is seen as an unknown risk, so investors are stashing their money in traditional safe investments such as the U.S. dollar or gold.

Since oil is bought and sold in dollars, a stronger greenback (which increased by more than 1.5% in the last week) means that British oil traders and retailers need more pounds to buy one dollar. Analysts believe that petrol prices in the UK will increase to £ £1.25 per liter, a 2p to 3p price increase.

Bad for consumers, but good for producers

While an average Brit suffers from higher petrol prices, oil and gas companies may feel some relief from the Brexit and weakened sterling.

A weaker pound is good for the energy sector. The weaker UK currency will reduce costs since operation costs, such as labor, are paid out in pounds, but oil is sold in US dollars.

Russian oil companies were able to weather the oil price crisis for the very same reason: the weak ruble significantly lowered costs in dollar terms.

Perhaps the weakened sterling will slow down the layoffs of oil industry jobs, which have been aggressively slashed since oil prices began collapsing in mid-2014. By the end of this year, an estimated total of 120,000 jobs will have been lost due to the pricing rut.

North Sea oil and gas

The majority of the UK’s offshore oil and gas fields are territorially part of Scotland, which after the pro-Brexit vote, pledged to hold a second independence referendum in order to remain part of the EU.

This would give Scotland 96 percent of annual oil production and 47 percent of natural gas production, according to Bloomberg.

The North Sea represents a large source of oil output at roughly 1 million barrels per day, however, fields are drying up which makes extraction more costly (but a weaker pound could help with this). According to the latest (June 2016), BP Statistical Review of World Energy, the UK currently has 0.2 trillion cubic meters (7.3 trillion cubic feet) of recoverable gas and 2.8 billion barrels of recoverable oil reserves.

Newfound independence wouldn’t be an overnight success for the new Scottish oil industry: the political uncertainty would make investors uneasy about projects in the region.

Kashagan Oil Field: What Went Wrong

cover photo 2?

Kazakhstan’s largest oil project Kashagan, scheduled to come online three years ago, still hasn’t produced a single barrel of oil. Now officials say production will begin in October, with the potential to double the country’s oil output. A successful launch could turn around the nation’s economy, another failure would be the latest blow to the slowing oil industry. 

The world’s tenth largest country by land mass, Kazakhstan is a land of contradictions: snow-capped mountains that stretch to China, arid steppe where only horses and their herders roam, oil-rich, yet less than a fourth of the population own a car that runs on the oil extracted from the ground.

After Russia, Kazakhstan is home to the largest volume of liquid hydrocarbons in the former Soviet Union. According to Kazakhstan’s energy ministry, prove oil and gas condensate reserves total nearly 39.8 billion barrels (about 5.3 billion tons).

Oil production has tripled since Kazakhstan achieved independence from the Soviet Union in 1991, and since 2010, Kazakhstan has been producing around 80 million tons of oil per year. This helped the Central Asian country to become the world’s 18th largest oil producer, behind Algeria but ahead of Colombia.

Kazakhstan ships its crude to neighboring Russia and China, as well as to the Netherlands, France, and Italy. However, the country is not yet self-sufficient, and doesn’t produce enough to cover domestic market demand for oil products.

While Kazakhstan has no dearth of extractable hydrocarbons, its aging and depleting fields threaten a dramatic drop in production.

According to OPEC, output declined to an average of 1.34 million barrels a day in March, compared to 1.61 million bpd in January and February, or 1.72 million bpd in 2014. The oil cartel (to which Kazakhstan does not belong) estimates overall production in 2016 will average 1.56 million barrels per day.

Standing alone, 1.56 million barrels per day is an impressive figure, but with proven oil reserves nearly as large as the U.S. – it is less so. In comparison, the US produces 8.68 million bpd, and Russia 10.6 million bpd.

Waiting for a Kashagan Miracle

Astana is placing its hopes to increase production Kashagan, the second largest field in the world with recoverable reserves estimated at 10-13 billion barrels, and over one trillion cubic meters of natural gas reserves.

Located 80 kilometers off the coast of Kazakhstan in the Caspian Sea, ground was broken on the Kashagan project more than 15 years ago with the expectation it would produce at least 90,000 barrels per day. So far it produces zero.

Kashagan oil field, the biggest energy discovery in the past 30 years
Kashagan oil field, the biggest energy discovery in the past 30 years

At more than 2.5 miles below the seabed under very high pressure (770 pounds per square inch), the oil isn’t easily accessible, and presents a magnitude of complicated engineering challenges.

The field has the potential to produce more than 58 million barrels of oil per year, which would more than double the country’s crude production, making it a top 10 global oil exporting nation.

The sheer potential attracted an array of foreign oil giants: Italy’s Eni, Royal Dutch Shell, Total, ExxonMobil (16.8% share each) Japan’s Inpex (7.6%), and China’s CNPC (8.4%). ConocoPhillips sold its 8.33% stake to KMG for $5.4bn in 2013, which in turn sold it to China’s CNPC. Kazakhstan holds a 16.81% stake in the project through KazMunayGas and the national sovereign wealth fund Samruk-Kazyna. In total, more than $50 billion has been invested into the project, compared to the original estimated cost of $10 billion.

The cold climate freezes the shallow water in the winter season, which makes conventional drilling practices impossible. To add to that, the reservoir contains a highly toxic, corrosive hydrogen sulfide.

After more than eight years in delays, drilling finally began on September 11, 2013. Production was halted 13 days later, after cracked pipelines that running to the onshore caused a gas leak. After a leak on the gas pipeline running to the Bolashak onshore processing facility. The Kazakh government has said that produced will start again this October.

For the last three years, Kazakhstan has been missing out on billions in oil revenue.

Soviet and Post-Soviet Fields

Other oil fields in Kazakhstan are unable to make up for the lost oil production at Kashagan.

Out of the 15 sedimentary basins on the Kazakh territory, only 5 are used for commercial purposes. The two biggest oil and gas fields, Tengiz and Karachaganak (with an estimated 1.35 trillion cubic meters of gas and 1.2 billion tons of oil and liquid condensates) account for about half of the country’s oil production. Discovered in 1979, these two fields have been developed by western investors over the last 20 years. But as the fields’ resources dry up, it becomes more expensive to extract the remaining crude from the ground.

Kazakhstan’s oil industry runs on increasingly costly and aging infrastructure built during the Soviet Union.

1987: Workers celebrate the first million tons of oil produced from the Kumkol field.
1987: Workers celebrate the first million tons of oil produced from the Kumkol field.

Post-Soviet discoveries such as Kumkol North and South are estimated to collectively hold 300 million barrels of proven oil reserves, however, Wood Mackenzie believes that production at these fields reach will their peak of 72,500 bpd in 2017.

The Zhambyl field, which is located in the northern section of the Caspian Sea, is estimated to contain more than 880 million barrels of oil.

The View Forward

Kazakhstan first discovered oil in 1988, first producing the product as an independent nation, then under the Soviet Union, and now again in its own right. With over 30 billion barrels of recoverable crude, it’s unlikely the current Kashagan problem and production rut will spoil long-term prospects.

Wealth from energy has significantly boosted the country’s economy under the leadership of President Nursultan Nazarbayev, who has ruled the country with an authoritative, yet benevolent, manner since independence (last 25 years).

Nursultan Nazarbayev, at the time the Secretary of the Communist Party of the Kazakh SSR, visiting a refinery in the Caspian Sea port city of Guriev (now Atyrau) in 1984.
Nursultan Nazarbayev, at the time the Secretary of the Communist Party of the Kazakh SSR, visiting a refinery in the Caspian Sea port city of Guriev (now
Atyrau) in 1984.

Energy drives the economy of the landlocked Central Asian country: oil alone accounts for 25% of GDP.

Situated between Russia and China, Kazakhstan is geographically surrounded by economic crisis. The recession in Russia, which really only began to fully manifest itself when oil prices began to slide in the second half of 2014, quickly spilled over to Kazakhstan as the two economies are closely linked. To the south of Kazakhstan is Uzbekistan, Kyrgyzstan, and Turkmenistan, all reeling from Russia’s rupture.

GDP, which only expanded 1.2 percent after 6 percent growth in 2013 and 4.1 percent in 2014. The spillover recession from Russia has also battered foreign investment to Astana by nearly half.

Photos from http://vasi.net/

Louise Dickson

Finding a Global Energy Balance – BP Economist

13441776_10154160705838614_1045886350_o

BP Chief Economist Spencer Dale presented his company’s 65th edition of the Statistical Review of World Energy June 2016 in Moscow on June 10 at the Institute of World Economy and International Relations. BP has been producing the report since 1952, and the study has established itself as an authoritative source in the energy industry.

The report, which in its inaugural year, only reported on oil – now focused on the three primary global energy sources – oil, coal, and natural gas.

Oil remains the most widespread used energy in the world – in 2015 it accounted for 32.9% of total energy consumption. In 2015, it even saw its market share rise, for the first time since 1999. After oil, coal is the second biggest fuel, with 29.2% share in the energy balance, but it saw its market share decline in 2015. Natural gas made up 23.8%.

Dale’s main message for the upcoming year is to expect another year of strong growth in demand, and a continued shift towards low-carbon fuels, as well as renewables.

According to the report, global demand for primary energy only amounted to 1%, which is significantly lower than the average in the past decade (on average 1.9%).

Dale said this reflects an overall slowdown in the global economy and consequential slower growth in energy consumption, most notably in China.

Oil

“On the demand side, we are in a world where demand is in a period of transition. Over the last 10-15 years, we have seen very strong growth in global energy demand, much of that driven by China,” he said.

China’s economic boom days are over, and as Dale put it, “the days of double-digit growth and industrialization are behind us”.

Even if there is a massive increase in demand – from China or elsewhere – the massive amount of oil inventories will offset any oil price surges.

Screen Shot 2016-06-17 at 2.10.51 PM

For example, even if demand grows to a point where there is a shortage of oil, prices won’t suddenly snap back.

Dale explained: “If you have a shortage of a 1 million barrels per day, but we have a surplus of 500-600 million barrels, simple arithmetic tells you that it could easily take 12-18 months before stock levels are back to normal levels, and it’s only when you work off that significant stock overhang, will the oil market come back to balance.”

Technology is also changing the energy balance, the report says, referencing developments in both shale oil in the US, as well as renewable energy sources worldwide.

“On the supply side, we are surfing a technological wave. Over the last few years, we have seen rapid gains in technology advancements and productivity gains, which are increasing the types and abundance of energy supplies,” said Dale.

oil market

As our readers know very well, oil prices in 2015 dropped drastically. In dollar terms, the largest drop on record, and the sharpest fall in terms of percent since 1986. Prices rose slightly in early 2015 as US shale producers nixed production, but increased production by OPEC countries, especially Iraq and Saudi Arabia (account for ~90 percent of increase production) caused a sharp drop in prices overall.

We are “truly in an age of plenty in terms of supply,” Dale noted.

The growth rate of world oil production for the second year in a row outpaced global consumption growth. Production grew by 2.8 million barrels per day, or 3.2%, the highest rate since 2004. Production in Iraq (750,000 barrels per day) and Saudi Arabia (510,000 barrels per day) rose to record levels, which pushed OPEC production up 1.6 million barrels per day to 38.2 million barrels per day, even outpacing the previous record set in 2012.

“You do not need a PhD in economics to know if supply grows by 2 million barrels a day, and demand grows by 1 million barrels a day – what will happen with oil prices – and sure enough, prices fell,” said Dale.

Natural Gas

“The big picture story on natural gas is one where global production continued to grow strongly, but demand outside of the power sector was relatively muted, and these two things together causes gas prices to drop sharply around the world,” said Dale.

There is still a large variation across countries and markets.

“On the supply side, the US remained the global powerhouse for natural gas, accounting for around half of the entire increase in global production last year,” according to the economist.

Overall, BP sees three general themes from the gas market:
1) A gas increase share within power sector, especially in the US, even pricing out coal;
2) LNG overall increased, though demand from Asia decreased, and increased in Europe, North Africa, and the Middle East;
3) In order to retain market share, Gazprom responded to increased competition by lowering European prices

The rise of LNG is increasingly influencing prices. For example, a drop in demand for LNG in Asia affected prices in natural gas in Europe.

Screen Shot 2016-06-17 at 2.11.17 PM

Other interesting points of the presentation:
– Gas overtook coal in US power sector – first time ever
– Renewable energy – solar energy has increased 60-fold in the last 10 years

Race to the Bottom: Forbes Top 25 Oil and Gas Companies

oil companies

Every year, Forbes magazine publishes an annual ranking of the 2000 biggest companies in the world based on four metrics: revenue, profits, assets, and market value.

This year’s list included energy majors such as ExxonMobil, PetroChina, Chevron, Total, as well as Russian state-owned giants Gazprom and Rosneft.

The majority of companies (500+) were from the USA, while Chinese companies occupied the top three places.

Oil and gas companies maintained their top places in the rating, despite a tumultuous year of oil prices and mass layoffs and bankruptcies in the energy industry in 2015.

ExxonMobil kept its title of largest oil and gas company worldwide. However, in April 2016, the energy giant lost its coveted AAA credit rating for the first time since the Great Depression due to the effects of low oil prices. This year, it slipped to 9th place in the Forbes 2000 ranking.

ExxonMobil held one of the top three spots since the poll was introduced in 1955 until at first sparring with General Motors and then later Wal-Mart for the top place. The last year that the Irving, Texas-based company was the biggest company was in 2012.

Despite the slowdown in the Chinese economy, the largest global corporations were Chinese banks: Industrial and Commercial Bank of China (ICBC), China Construction Bank, and Agricultural Bank of China, which have held the top three positions since 2014. Bank of China slipped to 6th on the list to 4th place, which it ceded to Warren Buffet’s Berkshire Hathaway, followed by American banks JPMorgan Chase in 5th and Wells Fargo in 7th. Apple secured 8th place, while Japan’s Toyota Motors held onto its 10th place position to break up the America-Chinese domination.

While Chinese and American banks topped this years’ list, oil and gas companies retreated in their ratings.

After ExxonMobil in 9th place, the next energy company was PetroChina (the second largest oil and gas company in the world) in 17th place, and US company Chevron in 28th place, dropping 12 spots since last year.

The list shows that both private and state-owned energy companies are feeling the burn from the oversupply in the world market in the last year. Private companies have been forced to delay projects as well as lay off thousands of staff, while state-owned companies in the so-called petrostates – those whose economy depends on the sale of hydrocarbons- also lost their leadings positions in the global economy.

As for Russian companies, Gazprom can be found in the 53rd spot, having dropped 26 positions, and Rosneft is in 75th place, having fallen 16 spots.

One oil and gas company that is notably absent from the top of the list is BP, which currently occupies the 370th place on the list. The spectacular drop is due to the massive fines the company paid following the Deepwater Horizon oil spill in 2010. In order to pay out more than $20 billion in a settlement, the company began to actively sell assets and cut spending.

Despite the downward trend in global oil prices, the oil and gas sector is still recording huge projects. Combined, the world’s top 25 oil and gas companies sold more than $2.6 trillion in products, and income revenues were $81 billion.

World’s Top 25 Oil and Gas Companies

Ranking Among Oil and Gas Companies Company Forbes Global 2000 Ranking
1 ExxonMobil 9
2 PetroChina 17
3 Chevron 28
4 Total 30
5 Sinopec 31
6 Shell 50
7 Gazprom 53
8 Rosneft 75
9 Reliance Industries 121
10 Lukoil 122
11 CNOOC 134
12 Phillips 66 141
13 Schlumberger 176
14 Valero Energy 182
15 ONGC 220
16 Marathon Petroleum 234
17 Surgutneftegaz 242
18 SK Holding 247
19 Gas Natural Fenosa 287
20 PTT PCL 337
21 Transneft 361
22 BP 370
23 Indian Oil 371
24 Eni 409
25 Petrobras 411

 

Data from Forbes Global 2000

Russia-China oil friendship blossoms, Saudi Arabia left behind

oil-pipeline-russia-china

As of April, Russian oil shipments to China hit a record high, again beating out Saudi Arabia as the largest exporter to China.

Beijing bought 1.17 million barrels oil per day (bpd) from Russia in April, surpassing the previous record of 1.13 bpd set in December of this year, Reuters reported citing customs data released Monday.

This is the second time this year that Russia has topped Saudi Arabia in oil exports to China.

Saudi Arabia’s April imports dropped to 1 bpd, a 21.8 percent drop year on year. Russia’s oil shipments to China increased 52.4 percent in April, compared to last year.

The result of the surge in Russian exports likely involves a middleman trader who bought the product when oil prices were lower and is now up selling it.

“The record high import volumes from Russia were likely fueled by independent refiners, who are storing oil that they had earlier purchased at lower flat prices,” a trader with a Chinese company told Reuters.

Now that oil prices have recovered to over $50 per barrel (the first time in 6 months) China may not be as keen to buy as much from its resource-rich neighbor.

Russia is counting on China to become its biggest energy customer as demand from Europe weakens along with diplomatic relations.

The trend plays well into Russia’s narrative of ‘pivoting’ towards China after being shut out of Western markets due to sanctions.

Russia is happy to play second fiddle to China in challenging the economic and political hegemony of the West. Beijing is now the go-to source for major financing projects, such as the Yamal LNG project, or the pending energy partnerships with Gazprom and Rosneft.

In exchange, Russia is giving China what it wants – assets in Russian oil fields and projects. Most recently, Rosneft, Russia’s top crude producer, has been in talks to sell nearly 50 percent stake in the company’s second-largest oil field, located in eastern Siberia, to China.

Russia to (re)privatize state-oil company Bashneft by June

bashneft pic

Russian President Vladimir Putin has approved the privatization of state oil company Bashneft, RIA Novosti reported on Tuesday.

“There is such a possibility. I believe that this is one of the three assets which is most prepared (for privatization),” TASS quoted Russia’s Finance Minister Alexey Ulyukaev as saying.

The government currently owns a majority (50% + 1 share) in Bashneft, one of Russia’s more efficiently run oil companies. The regional government in the Russian republic of Bashkortostan holds a 25% stake.

In 2014, the Russian government re-nationalized Bashneft, then the country’s fifth largest oil company, after accusing the CEO of illegally privatizing the company’s assets back in 2009.

The privatization of Bashneft would help the Kremlin raise cash to fill the gap in budget revenues, which have been hit hard by low oil prices. The Russian government has been vocal about the privatization of state companies since Medvedev’s presidency from 2008-2012, but the ideas haven’t been put into practice.

Other oil companies on the privatization State-owned oil transportation monopoly
shortlist are Rosneft, Russia’s largest oil producer, and Transneft, the state-owned oil transport company. The Kremlin owns 69.5% of Rosneft and 100% of Transneft, so there is an option to simply lower the government’s stake in these companies, and still retain a controlling stake.

Bashneft produces, refines, and distributes oil and petroleum products both in Russia and abroad. A majority of output is sourced from Russia’s Ural and Volga regions, as well as Western Siberia.

Where is Oil Going? Keep an eye on Kuwait, Libya, and Saudi Arabia: Interview with Saxo Bank’s Ole Hansen and John J. Hardy

Ole S Hansen2
Ole Hansen, Head of Commodity Strategy at Saxo Bank

It’s the question on everyone’s mind: is oil going to recover, and if so, when? Doha disappointed bullish commodity investors after the OPEC alliance failed to agree on an output freeze to tighten the oversupply of crude oil, and the price dropped below $40 per barrel.

To get to the bottom of this question, Netianka interviewed Ole Hansen, Head of Commodity Strategy at Saxo Bank, as well as his colleague John J. Hardy, who is the Head of FX Strategy, to gain some insight on how the currency market is affected by crude prices.

Neftianka: What factors influence the situation on the oil market today? Please, share your vision for the commodities market trends in Q2.

Ole Hansen: The main factors impacting oil markets at the moment are higher prices. The rebalancing process is well underway, especially in North America where the high-cost US and Canadian producers are forced to cut production. Global demand continues to rise and together with the slowdown in non-OPEC production this will help support the price over the coming months. Capex cuts worth billions of dollars has created a situation where the market focus eventually will shift from oversupply to lack of supply. In the very short term, the oil worker strike in Kuwait has been a major supporting factor as it has removed more than 1.5 million barrels of daily production. A faster than expected increase in production from Iran, and a stabilizing Libya raises the prospects of barrels returning from Libya which used to produce 1.6 million b/d and now only adds around 300,000 barrels to the market.

Following the failed Doha meeting, there is a risk that the power structure in Saudi Arabia has changed, thereby increasing the political impact on oil prices. If Saudi Arabia turns its oil weapon on Iran and begins increasing production, as threatened, a revisit to the low $30s cannot be ruled out. In the very short term, a record long speculative position in Brent crude could have a significant negative impact on the price if events trigger a need to reduce exposure.

We expect crude oil to be range bound between 35 and 45 this current quarter, before moving higher in the second half towards $50 by year-end. Even if we see the market start to rebalance we still have an overhang of 100s of millions of barrels of oil in storage, which needs to be reduced. This will add supply over the coming months, especially as the contango begins to contract. A smaller contango reduces the profit oil companies will make, and from putting cheap spot crude in storage and selling it at a higher future price.

What will be the dynamics of oil and energy companies’ shares in these conditions? Which of them is worth investing in today?

Ole Hansen: Energy companies are starting to breathe again after having been under severe pressure during the sell-off. Renewed investments, however, will require higher prices than what we currently have. On that basis, further cost reductions will be seen over the coming months, unless we have an unexpected sharp recovery.

There will be some great investment opportunities among US shale oil producers, once the price rallies. Oil from these will be needed in a few years’ time as many other countries, including Russia, are getting close to being maxed out in terms of production capacity.

John Hardy
John Hardy, FX Strategy at Saxo Bank

What will be the dynamics of the ruble and dollar in the short term?

John J.Hardy: An ugly slowdown in global trade and higher rates from the Fed to tamp down inflation from tariffs could actually (and somewhat ironically) lead to a stronger US dollar, particularly if US consumption is pinched off and the US current account deficit goes into a large surplus.

The very dovish March FOMC meeting had everyone calling the end of the USD bull market. It may not be over yet, however –merely delayed. The US is the major economy best positioned in case of a crisis as its banking system is least vulnerable and it is well-positioned if the recovery picks up again as well on the prospects for policy divergence.The market has seen an absolutely head-spinning Q1 with first a massive drop in global risk appetite on concerns over a Chinese devaluation, fears of Fed tightening and financial conditions in Europe. This then suddenly yielded to an even larger rally in sentiment as China declared its intent not to do a large devaluation, the Fed turned dramatically dovish (clearly more to shore up confidence and global liquidity as US economic conditions were not sufficiently weak to warrant the Fed’s change of tune) and the ECB’s new measures calmed financial conditions in Europe. So the strength in the ruble this quarter has mainly been a function of the above, and added to that that relative stability and even strength in oil prices, which have removed the fear for now, at least, that they will continue to spike lower.

The very dovish March FOMC meeting had everyone calling the end of the USD bull market. It may not be over yet, however –merely delayed. The US is the major economy best positioned in case of a crisis as its banking system is least vulnerable and it is well-positioned if the recovery picks up again as well on the prospects for policy divergence.The market has seen an absolutely head-spinning Q1 with first a massive drop in global risk appetite on concerns over a Chinese devaluation, fears of Fed tightening and financial conditions in Europe. This then suddenly yielded to an even larger rally in sentiment as China declared its intent not to do a large devaluation, the Fed turned dramatically dovish (clearly more to shore up confidence and global liquidity as US economic conditions were not sufficiently weak to warrant the Fed’s change of tune) and the ECB’s new measures calmed financial conditions in Europe. So the strength in the ruble this quarter has mainly been a function of the above, and added to that that relative stability and even strength in oil prices, which have removed the fear for now, at least, that they will continue to spike lower.

The market has seen an absolutely head-spinning Q1 with first a massive drop in global risk appetite on concerns over a Chinese devaluation, fears of Fed tightening and financial conditions in Europe. This then suddenly yielded to an even larger rally in sentiment as China declared its intent not to do a large devaluation, the Fed turned dramatically dovish (clearly more to shore up confidence and global liquidity as US economic conditions were not sufficiently weak to warrant the Fed’s change of tune) and the ECB’s new measures calmed financial conditions in Europe. So the strength in the ruble this quarter has mainly been a function of the above, and added to that that relative stability and even strength in oil prices, which have removed the fear for now, at least, that they will continue to spike lower.

Which factors determine the dynamics of EUR today?

John J.Hardy: The market suspects that the ECB has given up on proving its “currency warrior”chops on the limitations of pursuing ever more negative rates. At the same time, fresh QE measures are met with a shoulder shrug, as easy credit does not stimulate demand.

Meanwhile, the political will to act on the fiscal side remains nonexistent. Not sure where this leaves the euro except a bit sideways for Q2 with downside risks further out from the wake of a Brexit and our theme of the breaking of the social contract and EU political challenges dead.

Norway’s Barents Sea Prospects: Jarand Rystad

Neftianka sat down with Jarand Rystad, Managing Partner of Norwegian consultancy Rystad Energy, to discuss everything from new offshore developments in the Arctic to when he thinks we will see $100 per barrel oil again. Maria Kutuzova conducted the interview on April 13, 2016.

Maria Kutuzova: Jarand, tell us about your Oil Macro Outlook. Could low oil prices help to get a bigger market share for main producers in the Middle East, North America, or in Russia. Who are the winners or losers in this situation?

Jarand Rystad: Currently, I think all are losers in the sense that the oil price is so low that there isn’t really any profit left for investors or for the government. But of course, the whole situation started because US shale was gaining a lot of market share since they found this big new resource of new oil and invested very heavily in that from the years of 2011 to 2014, and then they have been able to grow their market share very significantly.

When this happened, at the same time, demand was weaker in 2014, and we had a situation of a huge oversupply. Instead of protecting the oil price, this time Saudi Arabia decided to protect their market share and start a volume war- which was a key cause of the oil price collapse.

After that, Iran was invited back to the international community and sanctions were lifted, and Iran, also supported by Russia, they didn’t want to lose their market share, so that’s why they also joined the volume war. So Russia, Iran, and Saudi Arabia are defending their market share.

As I said, currently everyone is a loser, but maybe in the long-term, these nations that sustain the low oil price the low oil price the longest with high production levels, will of course gain market share, and hopefully they make a profit. If the cycle turns, which it is very likely it will do, because it is a cycle, it means that it’s not a structural shift in the oil business- that demand has gone away, it’s just that we have overinvested and too much oil in the market these days.

What are your prospects for oil at low prices? When will we see $100 per barrel again? Do we see the light at the end of the tunnel?

Yes, I think so. As I just said, this is a commodity industry and this is a commodity cycle, so eventually the oil price will return because we are currently investing far too little into future oil. So after a few years, we will have too little oil in the market, and the consequence will be that the oil price will really increase. So my title for what I will talk about here for this information sessions is, “When will we see a 3-digit oil price again?” And I think Michael Glusseon thinks that we will be back at this level by 2020.

What does it mean: areas of exploration and production spending in 2016 and beyond?

First of all, all of our companies this year are doing whatever they can to cut costs – that is priority number one. And they don’t launch many new projects, they just try to limit spending as much as possible. Because investors expect them to limit the losses due to the very low oil price – so this is the main focus. Exploration is cut again – 30% like last year – so versus the prices in 2014, many companies have more than halved their exploration budgets.

And in terms of new field development, only the best, biggest, most robust fields are really developed these days. But one example, a field that is really having high-speed these days is the big new discovery in Norway called Johan Sverdrup, which is more than 2 billion barrels oil field with four big platforms and this is being and this is being developed now at full-speed by Statoil.

I just mentioned Johan Sverdrup, which is the biggest offshore development at the moment, but we also have 3 big discoveries in the Barents Sea over the last 5 years, called the Johan Castberg, Alta, and the Wisting field. And all of these fields I believe will be developed, they will be finally approved for development in the next 3 years, maybe even one of them already next year. And I think this is very interesting for Russia because it shows that even in the Arctic waters, it’s a big interest to develop big new fields. There are some challenges related to ice and distance, but I think the companies have good plans to overcome these challenges. So these are the most exciting new things that are happening.

Also on the exploration side – and the Barents Sea is very exciting – because it’s the 23rd concession round, where you have a lot of blocks in the eastern part of the Barents Sea that will be awarded in a few months. And that will be very exciting to see. 26 companies are participating in this round, including some Russian companies, so I think there are high expectations for that. Also for the Norwegian Sea and the North Sea in the southern part of Norway, there is steady activity, several new fields are going to come on stream soon (development starting in 2012). So they will come into the market now – Edvard Grieg, Martin Linge, Aasta Hansteen – some of them are a bit delayed, but this will also increase the production capacity of Norway. Exploration-wise, 2010-2014 were very good years, but 2015-2016, unfortunately, has not been that successful.

What is your forecast for renewables?

I think it’s very important to have a focus on renewables and to build both solar, and in some places wind power. There has been a boost in investments for some years due to subsidies, in many countries that is reduced when you take away the subsidies. But of course from a climate perspective it’s very important to see a strong roll-out, and solar is currently competing well in countries with a long of sun, high-power prices, and not too much dust or desert conditions in the area, because it actually pollutes the solar panels. A market like Africa is very competitive in solar. I think solar panel prices have to go further down to see this as a general global rollout. But I think we will see double digit growth for many decades going forward, which is also very important to sufficiently fast enough replace coal as a source of power production. I think and hope it will grow, but it still won’t replace gas or oil over the next many decades.