Every Wednesday, EnerCom’s Oil & Gas 360® will deliver media stories, company updates, and research commentary covering the crude oil spectrum. The theme for this week: Crude Reactions to Obama’s Re-election.
CRUDE OIL INVENTORY/’000 bbls (Week Ended 11/2/12)
Current: 374,847
Actual Build/(Withdrawal): 1,766
Economist Average Estimate: 1,464
Previous: 373,081
Click here for the chart with five year averages.
IN CASE YOU MISSED IT
*Harsher energy regulations coming in Obama’s second term – Reuters
Energy companies likely will see more regulation in President Barack Obama’s second term, with less access to federal lands and water even as the administration promotes energy independence. With a pledge to cut oil imports by half by 2020, Obama during the campaign advocated what he called an “all of the above” approach to developing a range of domestic energy sources. He said, however, that he would roll back subsidies for oil companies and reduce the nation’s reliance on oil by mandating production of more fuel-efficient vehicles. “You are going to have less access to federal lands and tougher government agencies,” said Dan Pickering, chief investment officer at TPH Asset Management in Houston. Obama’s energy strategy over the last four years has shifted away from focusing on climate change after a bill establishing a cap-and-trade system to curb carbon emissions died in the Senate in 2010 after a bitter partisan fight. The president’s green policies also suffered a major setback when solar power company Solyndra collapsed last year after receiving a $535 million loan guarantee, unleashing a political firestorm. – Read More
*Energy group API welcomes Obama’s victory – UPI
A U.S. energy trade group congratulated U.S. President Barack Obama on his re-election but pressed him to do more for domestic energy security. “Right off the bat, the president can approve the Keystone (XL) pipeline and put thousands of Americans to work immediately,” American Petroleum Institute President Jack Gerard said in a statement. TransCanada aims to build the Keystone XL pipeline project to deliver Canadian crude oil to refineries along the southern U.S. coast. Billed as a source of economic growth, critics have expressed concern about the environmental safety of Canadian crude, which is seen as more harmful than conventional oil. Obama clearly defeated Republican challenger Mitt Romney and secured a second term during Tuesday’s election. In terms of natural gas, Gerard said the country has “an unprecedented opportunity” to strengthen the national economy and bolster energy security by exploiting shale natural gas. API recently questioned a U.S. government study that found chemicals associated with shale natural gas development had found their way into ground water aquifers. The United States is a world leader in shale gas, though advocacy groups have expressed concern about the long-term environmental consequences. – Read More
*Vietnam Moves on Oil Refinery and Nuclear Plant – Wall Street Journal
Vietnam said it agreed with foreign investors to begin construction of a long-delayed oil refinery, while also stepping up plans to build the country’s first nuclear-power plant jointly with Russia. Until recently the developing Asian nation was favored by global investors, but they’re increasingly uneasy as confidence is undermined by surging inflation, corruption scandals and a banking sector threatened by bad debts, mostly owed by the vast state-owned sector. Economic growth is expected to slow this year to 5.2%, the weakest in 13 years. Plans to build Vietnam’s second oil refinery, with a price tag of $8 billion to $10 billion, have been held up for years by financing issues between the Vietnamese government and the two main partners, Japan’s Idemitsu Kosan Co. 5019.TO -1.16% and Kuwait Petroleum Corp. Banks had been unwilling to lend without underwriting from the Vietnamese government; talks intensified after the government agreed in August to help underwrite some of the project. – Read More
*Iraq struggles to sign up oil buyers for 2013 term deals – Reuters
Iraq is struggling to find buyers for all its 2013 oil output on term contracts, industry sources said, as foreign refiners complain of high prices and variable quality from the world’s fastest growing crude exporter. Tough contract negotiations between Iraq’s State Oil Marketing Organization (SOMO) and buyers in Asia, Europe and the United States are underlining how well the global market is supplied, despite diving exports from neighbouring Iran. “Iraq was hoping to sell larger volumes but I don’t think they’ve succeeded yet,” said an industry source with a buyer of Iraqi crude, who declined to be identified because the talks are commercially sensitive. – Read More
*Brazil lower house passes oil royalty bill, clouds rights-sale outlook – Reuters
Brazil’s lower house of Congress passed a controversial oil and gas royalty bill on Tuesday, setting up a possible confrontation with President Dilma Rousseff who may veto the measures, stalling efforts to sell new petroleum exploration rights The bill, already passed by the Senate and which lower house lawmakers approved by 286 to 124, raises royalties on future offshore oil development in the country’s most promising “subsalt” region. It also aims to divide oil royalties more equally for existing and future oil fields among the country’s 27 states and more than 5,000 municipalities by slashing payments to the biggest producing states and municipalities that now receive the lion’s share of royalty revenue. Rousseff has voiced her strong opposition to any bill that would alter existing contracts. Changes could lead to court challenges creating legal risks for the industry and hindering plans to hold Brazil’s first oil rights auctions in more than four years in 2013. – Read More
*Oil Rises Most in a Month on Fuel Supply Concern – Bloomberg
Crude rose the most in a month on forecasts that U.S. gasoline supplies dropped after Hurricane Sandy forced the shutdown of East Coast refineries and as Americans went to the polls to pick a president. Futures climbed to a two-week high after a Bloomberg survey showed supplies of the motor fuel probably decreased 1.5 million barrels last week. Hess Corp. (HES) and Phillips (PSX) 66’s New Jersey refineries remained shut after Sandy. U.S. voters decide today whether to return Barack Obama, a Democrat, as president or elect his challenger, Mitt Romney, a Republican. “Clearly there is a short-term shortage of gasoline on the East Coast because of the closure of refineries, terminals and pipelines,” said Julius Walker, global energy markets strategist at UBS Securities LLC in New York. “These problems should be short-lived. In the oil market, you also have some sentiment about the election affecting trading.” – Read More
*Oil falls as sluggish demand, ample supplies put pressure on crude prices – Fox News
Oil prices retreated Wednesday after a big jump the day before, weighed down by the outlook for ample supplies and weak demand. Benchmark crude for December delivery was down 53 cents to $88.18 per barrel at late afternoon Bangkok time in electronic trading on the New York Mercantile Exchange. The contract rose $3.06, or 3.5 percent, to finish at $88.71 in New York. U.S. benchmark crude oil prices are expected to be almost 5 percent lower in 2013 than previously forecast amid a sluggish economy, the U.S. Energy Information Administration said in a report. U.S. daily oil production is projected to rise 8.2 percent from 2012 and the highest since 1993, the EIA said. – Read More
RESEARCH COMMENTARY
*Wells Fargo Securities (11.5.12)
E&P: Oil As An Inflation Hedge?
Summary. As the Federal Reserve has sailed the US economy into unchartered monetary policy, there is much discussion about how to wind down liquidity-boosting efforts without the central bank losing its grasp on inflation. We are not necessarily calling for rampant inflation, but for those fearful of a “messy” exit from Operation Twist/QE-Infinity, we thought it would be helpful to look at various asset classes and how they have correlated to inflation in the past. To no surprise, crude ranks high on the list, right up there with the typical inflation safe-haven, gold. This makes sense from both an economic decision standpoint and from a weakening USD standpoint. A variable this time around is that central banks around the globe are all tilting towards the reflation theme, so the USD, relative to other currencies, may not fall as much as in the past when the Fed is acting alone.
The Potential for Inflation. We are not choosing a side on the inflation argument in this note, but rather entertaining the idea of the potential for inflation and examining various assets that offer better protection in a rising price environment. Wells Fargo’s 2013 CPI estimate is 2.5%, slightly above the median 2.0% and the Fed’s supposed comfort zone. Although the 2yr break-even (BE) rate, a measure of expected inflation using market-based prices, has come down as of late, the 10yr BE is holding steady around the 2.5% mark. While not outrageously high, the 10yr BE has seldom traded near north of 2.6% in the past decade. Further, Fed is deemed to have control until it doesn’t — that is to say, the Fed’s credibility (and in this case, willingness) to fight inflation can be seen as one of the primary tools to keep inflation at bay. QE-Infinity, which pumps liquidity until the unemployment ticks down to a subjective level, seems to tilt the central bank’s stance away from price stability.
Oil as a Safe Haven Among the assets we looked at, over a 2 year time-horizon both WTI and Brent have shown relatively high levels of correlation to CPI — this is no surprise, as CPI is in part driven by energy costs. There is less correlation between energy commodities and core CPI, as this measure strips out energy costs. 2yr and 10yr inflation expectations (BE’s) show high correlations to both WTI and Brent, although again, there is some degree of future energy costs inherent in these measures. Natural gas — driven by smaller, domestic supply/demand — has a low correlation to inflation over the past two years.
Takeaways. We’ve heard from several individuals on the private equity side that oil & gas producing properties — and by extension, E&P’s — are a good investment during periods of inflation. No doubt a bit of bias in there as all the PE groups we spoke with were on the oil/gas side, but our analysis does support their statement. We continue to favor oil over gas for fundamental reasons, but for those worried about inflation, this analysis adds to the argument. The relationship to inflation may also drive additional transactions from the PE side, as funds look to invest committed capital before the expiration of respective investment periods.
*Macquarie (11.6.12)
Brent gained nearly 2%, as stronger US gasoline futures helped oil rally. Expectation that a large unit overhaul at BP’s Whiting, Indiana, refinery will raise inventories at Cushing put pressure on WTI, while rising tension in Saudi Arabia’s neighbour Yemen and ongoing violence in Syria provided support to Brent prices and hence widening arbs. Investors were mostly cautious the day before Americans choose a president and as Greece headed into two key votes to secure further rescue funds. December Brent closed the day up $2.05 to settle at $107.73 a barrel. December WTI closed the day up $0.79 to settle at $85.65 a barrel.
Markets are trading sideways to slightly higher before the Presidential elections today. As voters decide today between giving President Obama another four years in office or replacing him with Republican candidate Mitt Romney, the key economic item is the so-called fiscal cliff of more than $600 billion in 2013 that the newly elected president will have to address. Brent is trading higher this morning backed by a weaker dollar and uncertainty around the North Sea loading program for December. December schedules are expected to show a significant increase in volume from unusually depressed volumes in November. The Brent program already shows a modest increase to seven cargoes, from six in November. But more influential would be some clarity around the Forties program which has been delayed in both October and November, causing the arb to trade wider and the spreads to strengthen.
*Bank of America Merrill Lynch (11.1.12)
Crude draw, gas build, but largely irrelevant post Sandy
This week crude saw a larger than expected draw of 2.0mm while gasoline built in-line. But given that data is compiled through Sunday, this week’s stats are largely irrelevant, as they do not account for the impact of Hurricane Sandy on the East Coast. That said, ahead of the storm imports remain low. At the same time, PADD 1 saw draws in gasoline and distillate. Both products remain at seasonal lows and with PSX’s Bayway refinery and HES’s Port Reading still closed, we do not foresee the inventory situation getting any better in the near-term. However the bigger unknown, and probable offset is disruptions to demand. The only thing certain for now is that the next few weeks stats will be messy.
Refiners could continue to lag near-term
Seasonal margin weakness and associated sector performance remains a headwind. Margins have already swung into retreat while resumption of NSea production and pending infrastructure starts present risks to Brent relative to WTI. One positive for refiners is heavy crude discounts, be it in the Mid-Con (WCS $30 below WTI) or Gulf Coast (Maya ~$16.50 below Brent) have widened recently along with Bakken, which has moved to a discount vs WTI on storm related issues. With this backdrop our preference remains those names with meaningful Gulf exposure that can exploit a gathering trend that sees the mid con crude advantage gravitate towards the US Gulf as infrastructure solutions debottleneck supply in coming months.
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