Monday, August 24, 2015

Analysis: Get Used to Cheap Oil, Derivatives Markets Say




London. Oil prices will stay low for years to come, derivatives markets say, keeping a lid on inflation and helping boost global growth.

Oil has more than halved in value over the last year, thanks to huge oversupply, and many oil companies, particularly in the United States, say they may soon have to rein in production, tightening supply, unless the market recovers.

That has led many analysts to predict that oil - on average around 5 percent of companies' costs - will see price rises later this year or in 2016, pushing up inflation.
But oil derivatives tell another story.

Contracts for delivery of crude oil in the future on the big commodities markets such as the New York Mercantile Exchange and the InterContinental Exchange show the price of oil in five years' time has collapsed in recent months.

US crude now costs around $42 a barrel for delivery next month, and only about $20 more for delivery in 2020.

Prices of oil for future delivery are usually much more stable than volatile near-term prices, holding their value even when the spot market crashes.
But the recent oil-price rout looks different.

Prices for all futures months for years to come, also known as the futures price "curve", have come down sharply.

"The curve is saying prices will stay low for some time," said Amrita Sen, oil analyst at consultancy Energy Aspects.

Futures prices are not forecasts, not least because liquidity tends to be low for long-term forward contracts.

But they are good indicators of sentiment because they are a market where speculators bet on forward prices, and also allow large producers and consumers to hedge future business.

Analysts say the futures curve is saying the current collapse in oil prices will be sustained because it has been driven by massive oversupply that is likely to persist.

Oil prices have collapsed over the last year as Saudi Arabia and other members of the Organization of the Petroleum Exporting Countries have increased production to try to protect market share from competitors such as US shale oil drillers.

"No recovery"

The global crude oil benchmark, North Sea Brent, fell to almost $45 a barrel in January from above $115 six months earlier. Prices then rallied but have since plunged towards lows not seen since the financial crisis and long recession that started in 2008/9.

US oil production has risen by more than 4 million barrels per day (bpd) over the last five years, 
thanks to new shale extraction techniques such as "fracking", eroding OPEC's sales.
World oil production is now around 3 million bpd higher than demand, filling oil storage tanks from Houston to Huangdao.

And as prices have fallen, many oil producers have hedged their future oil production using derivatives, selling futures contracts for oil that will be pumped in 2016, 2017 and beyond.
This has helped pull down forward prices as nearby spot prices have collapsed, dragging the whole futures curve lower.

In 2008/9, forward futures held up fairly well. Contracts for US crude oil five years ahead traded as much as $30 above prompt prices, keeping the futures curve in a steep downward slope known as a "contango".

Now that slope is much less steep, with the five-year futures spread under $20.
"There is an imbalance today compared to 2008. We have 3 million bpd more producer hedging from shale guys," said Sen at Energy Aspects. "That will necessarily pressure the back."

Seth Kleinman, head of energy research at Citigroup, agrees:

"The big move in the back of the [futures] curve reflects that, unlike in 2008/9, this is not a short-term demand-led dip, but is really a structural supply-led drop," Kleinman said.
The weakness of forward oil futures also reflected much less demand from speculative fund managers, he said.

"The back end is all about flow and the weakness reflects ... less commitment from hedge funds that the bull story will win out," he added.

Other derivatives paint a similar story, with aggressive oil put options - contracts giving the right to sell oil at a particular level in the future - appearing as low as $35 and even $30 a barrel for US crude.

"Many analysts say oil prices can't stay this low for very long, but that is not what futures markets tell us," said Olivier Jakob at Swiss consultancy Petromatrix in Zug.
"They show no recovery in prices any time soon."

Reuters

Saturday, August 22, 2015

Oil Near Six-Year Low on Japan Data, Oversupply



London. Oil prices fell towards six-year lows on Monday after data showed Japan's economy contracted and producers in the United States added drilling rigs for a fourth straight week despite a recent rout in prices.


Japan's economy, the world's third biggest oil consumer, shrank in the second quarter from a year earlier, adding to fears that slowdowns in Asia's biggest economies will weigh on oil demand.
The global oversupply picture was exacerbated by another weekly jump in US oil rig additions, hinting at growing production, and news that Oman produced a record-breaking 1 million barrels a day in July.


US crude, or West Texas Intermediate (WTI), for September was trading 70 cents lower at $41.80 a barrel at 0830 GMT, close to its lowest level in more than six years.
Brent for October was down 60 cents at $48.59 a barrel, still a few dollars shy of its six-year low of $45.19. The September contract expired on Friday.

"The oversupply story remains well intact, which fuels the bearish sentiment," said Carsten Fritsch, senior oil analyst at Commerzbank in Frankfurt.

Production by the Organization of the Petroleum Exporting Countries is running well above demand filling stockpiles worldwide. Iran is expected to increase its oil exports once Western sanctions are lifted after ratification of a recent nuclear deal.

Many analysts expect prices to remain depressed as bearish factors hinting at sustained oversupply are set to persist.

"The end of the summer driving season and the start of refinery maintenance season will weigh on near-term demand and pressure prices," said Societe Generale oil analyst Michael Wittner.

"Oversupply, high stocks, and seasonal weaknesses are outweighing record demand growth," he added.

Demand for crude oil is set to fall in the next few weeks as refineries start annual maintenance. A number of European refineries will close for maintenance in September and October, including Royal Dutch Shell, Statoil and Total .

Citigroup has cut its crude oil price outlook citing weak market fundamentals, including an increased supply from OPEC and challenging demand growth in China and emerging markets.

The Wall Street bank lowered its base case Brent price forecasts to $54 per barrel for 2015 and $53 in 2016 from $58 and $63 respectively.

Reuters

Friday, August 21, 2015

SKKMigas Approves Developments of Central Java Gas Fields Worth $2.06b



Jakarta. Upstream oil and gas regulator SKKMigas has approved revised plans of development for the Tiung Biru and Jambaran gas fields in Central Java, with total investment worth $2.06 billion and projected outcome of nearly $13 billion.


SKKMigas chief Amien Sunaryadi said in a statement that the regulator had handed over the PoD revision approval to the contract holders of the gas fields, Pertamina EP Cepu, Pertamina EP, ExxonMobil Cepu and Blok Cepu PI (participating interest) cooperation board on Monday.

“We aim for the gas fields to start production of 227 million cubic feet of natural gas by the first quarter of 2019 and reach peak production of 315 million cubic feet by 2020,” he said.

Amien said the development plan included six development wells and construction of gas processing and supporting facilities.

The total investment needed in the gas fields is projected at $2.06 billion, comprising $279.5 million for wells and $1.78 billion for production facilities.

Amien said the gas produced from the sites would be for domestic use.

The revised PoD assumes a gas price of $8 per million British thermal units (MMBTU) per day, which would value the output from the fields through the end of the contract in 2035 at $12.97 billion.

Of that figure, the government will get $5.95 billion, the contract holders $3.18 billion, and the rest will go toward cost recovery.

“For the development of the gas fields, the contractors are given investment credit incentives of around 15 percent out of the capital investment cost,” Amien said.

GlobeAsia

Wednesday, August 19, 2015

Analysis: Get Used to Cheap Oil, Derivatives Markets Say



London. Oil prices will stay low for years to come, derivatives markets say, keeping a lid on inflation and helping boost global growth.


Oil has more than halved in value over the last year, thanks to huge oversupply, and many oil companies, particularly in the United States, say they may soon have to rein in production, tightening supply, unless the market recovers.

That has led many analysts to predict that oil - on average around 5 percent of companies' costs - will see price rises later this year or in 2016, pushing up inflation.
But oil derivatives tell another story.

Contracts for delivery of crude oil in the future on the big commodities markets such as the New York Mercantile Exchange and the InterContinental Exchange show the price of oil in five years' time has collapsed in recent months.
US crude now costs around $42 a barrel for delivery next month, and only about $20 more for delivery in 2020.

Prices of oil for future delivery are usually much more stable than volatile near-term prices, holding their value even when the spot market crashes.
But the recent oil-price rout looks different.

Prices for all futures months for years to come, also known as the futures price "curve", have come down sharply.

"The curve is saying prices will stay low for some time," said Amrita Sen, oil analyst at consultancy Energy Aspects.

Futures prices are not forecasts, not least because liquidity tends to be low for long-term forward contracts.

But they are good indicators of sentiment because they are a market where speculators bet on forward prices, and also allow large producers and consumers to hedge future business.
Analysts say the futures curve is saying the current collapse in oil prices will be sustained because it has been driven by massive oversupply that is likely to persist.

Oil prices have collapsed over the last year as Saudi Arabia and other members of the Organization of the Petroleum Exporting Countries have increased production to try to protect market share from competitors such as US shale oil drillers.

"No recovery"

The global crude oil benchmark, North Sea Brent, fell to almost $45 a barrel in January from above $115 six months earlier. Prices then rallied but have since plunged towards lows not seen since the financial crisis and long recession that started in 2008/9.

US oil production has risen by more than 4 million barrels per day (bpd) over the last five years, thanks to new shale extraction techniques such as "fracking", eroding OPEC's sales.
World oil production is now around 3 million bpd higher than demand, filling oil storage tanks from Houston to Huangdao.

And as prices have fallen, many oil producers have hedged their future oil production using derivatives, selling futures contracts for oil that will be pumped in 2016, 2017 and beyond.

This has helped pull down forward prices as nearby spot prices have collapsed, dragging the whole futures curve lower.

In 2008/9, forward futures held up fairly well. Contracts for US crude oil five years ahead traded as much as $30 above prompt prices, keeping the futures curve in a steep downward slope known as a "contango".

Now that slope is much less steep, with the five-year futures spread under $20.

"There is an imbalance today compared to 2008. We have 3 million bpd more producer hedging from shale guys," said Sen at Energy Aspects. "That will necessarily pressure the back."

Seth Kleinman, head of energy research at Citigroup, agrees:

"The big move in the back of the [futures] curve reflects that, unlike in 2008/9, this is not a short-term demand-led dip, but is really a structural supply-led drop," Kleinman said.

The weakness of forward oil futures also reflected much less demand from speculative fund managers, he said.

"The back end is all about flow and the weakness reflects ... less commitment from hedge funds that the bull story will win out," he added.

Other derivatives paint a similar story, with aggressive oil put options - contracts giving the right to sell oil at a particular level in the future - appearing as low as $35 and even $30 a barrel for US crude.

"Many analysts say oil prices can't stay this low for very long, but that is not what futures markets tell us," said Olivier Jakob at Swiss consultancy Petromatrix in Zug.

"They show no recovery in prices any time soon."

Reuters

US Gives Shell Final Nod to Drill for Oil in Arctic




Washington. The Obama administration granted Royal Dutch Shell final clearance on Monday to resume drilling for oil and gas in the environmentally fragile Arctic Ocean for the first time since 2012, a move green groups vowed to fight.


The US Department of the Interior permit allows Shell to drill in the oil-rich Chukchi Sea off the northwest coast of Alaska. Shell interrupted its drilling program in the region in 2012 after suffering a series of mishaps, including losing control of an enormous rig, from which the Coast Guard had to rescue 18 workers.

Harsh conditions in the Chukchi have discouraged other oil companies from drilling there.

The go-ahead for Shell comes after repairs were completed to the Fennica, an icebreaker the company leases that carries emergency well-plugging equipment. The ship had suffered a gash in its hull after hitting uncharted shoals off southern Alaska.

Damage to the Fennica had stalled Shell's program, which the Interior Department had previously issued a permit for.

Shell obtained the leases in the Chukchi during the administration of former President George W. Bush. Since then it has spent about $7 billion on exploration in the Arctic, though oil production is at least a decade away.

The Arctic is home to what the US government estimates is 20 percent of the world's undiscovered oil and gas.

Shell's determination to drill there has spawned waves of protests and funding drives by environmentalists who want to protect whales, walruses and polar bears in a vulnerable region that scientists say is changing rapidly due to global warming.

Late last month, 13 Greenpeace activists hanging from a bridge in Oregon temporarily blocked the freshly repaired Fennica from reaching the Pacific Ocean to return to Alaska.

President Barack Obama "must change the course on Arctic drilling set eight years ago by former President George W. Bush and not perpetuate it," said Michael Brune, head of the Sierra Club, the country's oldest environmental group.

The club urged Obama to cancel sales of oil-zone leases scheduled for 2016 and 2017 and to remove the possibility of drilling in the Arctic Ocean.
Later this month, Obama will visit Alaska to speak at a conference on the Arctic and tour areas threatened by climate change.

Curtis Smith, a Shell spokesman, said the company "looks forward to evaluating what could potentially become a national energy resource base."

Shell is not releasing a timetable for its drilling program.

Reuters

Tuesday, August 18, 2015

US Crude Oil Dips Below $42 on High US Stocks, Asia Economy Worries




Oil prices initially rose in early Asian trade following a sharp and sudden fall below $42, but dipped back under that level to trade nearly a third below their 2015-highs in May.

Prices already tumbled more than 3 percent on Thursday as data showing a big rise in key U.S. stockpiles intensified concerns over a growing global glut.

US crude was trading down 27 cents from its last settlement at $41.96 a barrel at 04:23 GMT. Brent futures were trading at $49.23 barrel, virtually flat and still some way off from their 2015-low of $45.19.

Goldman Sachs said that a weaker Chinese yuan was putting more downward pressure on commodity markets.

"The CNY (yuan) devaluation has been important for commodity markets and we believe it signals that global macro conditions have changed," Goldman Sachs said in a note to clients.

"Even China has now joined the negative feedback loop that is running between commodity deflation, growth and deleveraging trends... (and) we believe the net commodity market effects are bearish," it added.

Analysts said that prices could fall further.

"The lowest crude prices in six years might not be enough to put the brakes on the US supply growth. US shale players are actively cutting cost and some players are profitable at less than $30 per barrel," ANZ Bank said.

On the demand side, China's crude oil imports have so far remained strong as authorities take advantage of low prices to build up strategic reserves and consumers kept spending despite the slowing economy.

Yet there are signs of weakening, with the devaluation of the yuan potentially denting fuel imports.

China's implied oil demand fell in July from the previous month amid a continuing drop in the nation's vehicle.

And China's slump may be spreading across Asia. Japan's economy likely shrank in April-June as exports slumped and consumers cut back on spending, a Reuters poll showed.

China's economic slowdown and its impact on its trade-reliant Asian neighbors have also heightened the chance that any rebound in growth in July-September will be modest, analysts said.

Reuters
 

Monday, August 17, 2015

Govt to Bump Up CNG Price to Lure Private Investment




The government will revise the price of CNG, known locally as BBG, from the current Rp 3,100 (20 cents) to between Rp 4,000 and Rp 4,200 per liter of premium gasoline equivalent (LSP).
I Gusti Nyoman Wiratmaja, director general of oil and gas at the Energy and Mineral Resources Ministry, said the current price is not attractive to private investors because of the small margins.

Wiratmaja said Energy Minister Sudirman Said had approved the revision. The price, however, must be 60 percent lower than RON88 gasoline, known as Premium.

"If the price gap is 60 percent higher than premium, it will be difficult to compete with gasoline. 
Therefore, the price must be below that of Premium," he said.

The ministry will discuss the BBG price revision with the Coordinating Ministry for the Economy, but the price will ultimately be determined by the Energy Ministry.

Wiratmaja said Indonesia needs a lot more SPBGs now that car manufacturers such as Toyota and Hino plan to start selling vehicles that come with a converter kit installed.

The government, he said, had formed a team to realize the mass production of CNG-fueled vehicles.

The government also aims to boost numbers of CNG-fueled taxis, Wiratmaja said, adding that taxi companies buy around 10,000 new cars each year.

"Our target is that the CNG-fueled vehicles are in the market by the end of next year because 

Toyota says it needs a year for mass production," he said.

He added that the government will build new SPBGs every year. The ministry aims to build 22 new SPBGs this year, adding to the current 54 stations.

InvestorDaily