The world oil market - 06/02/2016

The Day That OPEC Died: Saudis Aim to Bankrupt Cartel, Seek Oil Monopoly
The oil export alliance failed to reach an agreement to cap production on Thursday. Saudi Energy Minister Khalid al-Falih again walked away from the table as the kingdom looks to consolidate market share.

Sputnik,

2 June, 2016

The collapse in negotiations, along with a forward-looking refusal by the influential Saudi delegation to consider capping production, means a free-for-all fight for market share among the world’s oil producers that is all but certain to lead to collapsing oil prices.

Economic analysts have already raised the alarm that oil-export dependent countries like Venezuela, Algeria, and war-torn Libya, who lack access to global credit markets, will be unable to weather the storm, leading to humanitarian crises and widespread social strife.

Why is Saudi Arabia pushing for overproduction?

In February 2016, world oil prices cascaded to $27 per barrel, down from a July 2008 peak of $145 per barrel, as the Saudis ramped up oil production from a 2009 dip. In the midst of the 2008 market crash, Saudi’s top oil official, Deputy Crown Prince Mohammad bin Salman, called for the kingdom to immediately increase oil production to 11.5 million barrels of oil per day, and then to 12.5 million barrels daily by the end of 2016.

Energy market analysts initially scoffed at the aggressive move to undercut world oil prices, noting that Saudi Arabia’s own budget is dependent on a $66.70 per barrel oil price, with oil-extraction prices much higher for other OPEC countries. Market watchers predicted that Saudi Arabia would eventually push the oil alliance to cap production so as to keep prices at economically sustainable levels.

Saudi Arabia instead sought to increase market share when competitor peers were at their most vulnerable. North American oil producers, unlike Saudi Arabia, are not state-sponsored enterprises propped up by government handouts during down markets. When these US and Canadian oil resource industries fell into bankruptcy they became ripe for capture by foreign investors.

As energy analyst Marin Katusa told Radio Sputnik, Saudi Arabia has swooped into the North American energy market, through private equity firms, buying US and Canadian fracking technology and oil fields at pennies on the dollar.

Similarly, the kingdom looks to rebuff efforts by other OPEC members to expand oil market share. By pushing oil prices to their lowest level in years, the Saudis look to not only bankrupt Western oil companies, but also render insolvent entire oil producing states in order to snatch up foreign oil resources on the cheap.

Oil prices have recovered some in recent months, to $49 per barrel, due to oil disruptions in Canada after the Fort McMurray fire and oil extraction remaining offline in war-torn Syria, Iraq, and Nigeria.

Before Thursday’s OPEC meeting, Radio Sputnik sat down with Justin Dargin, Global Energy Scholar at the University of Oxford to discuss the fracturing of OPEC and the kingdom’s plans to corner oil energy markets.

Do OPEC member states face a fiscal crisis if an agreement is not reached?

"Yes, the breakeven oil price, which is the price that most OPEC member states need for their budgets to remain solvent, for most Gulf States, is between $80 and $100 per barrel, to maintain their budgetary outlays without having to go into some kind of major deficit," said Dargin. "The price currently is not viable for the long term, but I believe there is this sentiment for the OPEC members that prices may rebound in the future."

The analyst suggested that the market rebound over the past few months may be little more than an oasis for the smaller, fiscally-strapped OPEC member states, based primarily on seasonal demand changes, especially an increase in demand during the summer for air conditioning, travel, and leisure.

Dargin noted that he does not expect that market prices will recover in the near-term, citing a lack of structural changes in the market after prices collapsed to a low of $27 in February.

Can smaller OPEC member states survive these historically low prices?

"We can see already that in the case of Venezuela that they are not weathering it very well and they don’t have as much sway in OPEC as other members," said Dargin. "It will be quite hard for Venezuela and the smaller producers to encourage or force Saudi Arabia to come to an agreement."

"Many of these smaller oil producers like Venezuela and Algeria will not be able to weather the storm and it will be a very rough road ahead," he said.

The Tanker Armada Off Singapore Starts To Unload As Gasoline Goes Into Backwardation

Zero Hedge,

2 June, 2016

The story of the unprecedented build up of various commodity tankers off the coast of Singapore, as well as everywhere else, has been duly covered here as well as the reasons behind it.

  Notably, two weeks ago we cautioned that with the contango no longer leading to profitable offshore storage of oil, many shipping companies would have to start offloading their cargo, or as we recently reported, have started incurring debt to fund said storage costs in hopes of avoiding shifting storage to land:

[S]toring oil on ships can be profitable when prices for future delivery of crude are higher than in spot market, a term structure known as contango, as long as future prices are high enough to offset tanker charter costs. However, with the one-year contango for Brent futures collapsing from $7.60 per barrel in January to just $4, far below the $10 that traders say is currently required to make floating storage financially attractive, suddenly parking oil offshore leads to storage losses. The same goes for WTI. 

At a charter cost of more than $40,000 a day for a Very Large Crude Carrier (VLCC) that can store 2 million barrels, the contango is nowhere near steep enough to make it profitable to store oil on tankers for sale at a later date.

This has led to a dramatic development in the oil market: debt-funded storage. Reuters writes that the need to store oil is so strong that traders are calling up banks to finance storage charters despite there being no profit in keeping fuel in tankers at current rates.

"We are receiving unusually high amounts of queries to finance storage charters," said a senior oil trade financier with a major bank in Asia. "These queries come from traders fully aware that they will not make a profit from storing the oil. This isn't a trade play, it's the oil market looking for places to store unsold fuel," he added.

As we warned, this is a very dangerous idea, and one which only works if oil prices continue rising; meanwhile it is only a matter of time before much of the 200 million barrels in oil parked offshore have to come back on land. But while we wait for the offshore oil glut to start being offloaded, one place where tankers are already delivering their wares is in the massively glutted gasoline market.

As Reuters reports, the number of tankers storing gasoline in waters off Singapore and Malaysia is dwindling as the fuel is sold off or shifted to cheaper onshore storage because of changes in forward delivery terms. With the economics of storing the fuel on tankers no longer viable due to a stronger forward market, there are now fewer than three long-range (LR) vessels holding gasoline in the area.

According to Reuters, citing traders, by the end of this week all remaining tankers could be discharged as the fuel's owners seek to sell the gasoline or store it more cheaply onshore. "It's not economical to store gasoline on ships now compared to before unless they have no buyers or land storage," said one Singapore-based gasoline trader with knowledge of the deals. Ships recently used to store gasoline were chartered by Statoil, Total, Vitol, Gunvor and Unipec, trading arm of China state refiner Sinope.

A typical LR tanker can store 55,000 to 75,000 tonnes of gasoline, depending on the size of the ship.

The reason why gasoline cargos are now starting to be aggressively offloaded is that the gasoline market forward price curve will flip to backwardation from July, meaning lower prices for future deliveries than for those sold immediately. That contrasts with the contango structure for the first-half of the year, with future deliveries more expensive than prompt cargoes, making it attractive to store gasoline for sale at a later date. A month ago, April in the forward curve was about $1 a barrel below May, with the June price about 30-40 cents below July. This contango will flip into backwardation from July.

The current weak market is in part due to an expected fall in gasoline imports from top regional consumer Indonesia, where state oil firm Pertamina is expected to reduce imports later this year as it negotiates deals to make more of the fuel. Even if the stored fuel is not sold, traders are shifting the gasoline into onshore tanks because they estimate it costs at least $100,000 less a month to hold the fuel on land.

According to Reuters, Chinese gasoline exports are also up more than 50 percent for the first four months of the year, although going forward, China could scale back its volumes. "Maintenance in May and June, particularly at (Chinese) teapot refiners will ... lower gasoline output," analysts at BMI Research said in a note to clients this week, while strong Chinese demand would help tighten the regional market.

Perhaps, but meanwhile Chinese gasoline stocks have never been greater as the country imports tremendous amounts of gas which apparently has no end-user demand, which is forcing China to store even more of it, both on land and in the sea.

And now that the curve is about to enter backwardation, all that gasoline stored at sea is about to come back to land, and bring China's gasoline stocks to even higher record levels.

In other words, the global glut is now not only at the crude and distillate level, but also in global gasoline stocks.

It also means that contrary to conventional wisdom that Chinese end demand is driving global consumption, China is merely storing copious amounts of the refined crude production chain in land and on sea, in hopes demand comes back. So far it is failing to do that. 

And now, we await for the crude contango to tighten further and force some of the 200 million barrels of oil held at sea to come back on shore, where it will have to be promptly sold as much of the world's onshore storage is practically full.

The Untold Story Behind 

Saudi Arabia’s 41-Year U.S. 

Debt Secret

How a legendary bond trader from Salomon Brothers brokered a do-or-die deal that reshaped U.S.-Saudi relations for generations.

Bloomberg,

30 May, 2016

Failure was not an option.

It was July 1974. A steady predawn drizzle had given way to overcast skies when William Simon, newly appointed U.S. Treasury secretary, and his deputy, Gerry Parsky, stepped onto an 8 a.m. flight from Andrews Air Force Base. On board, the mood was tense. That year, the oil crisis had hit home. An embargo by OPEC’s Arab nations—payback for U.S. military aid to the Israelis during the Yom Kippur War—quadrupled oil prices. Inflation soared, the stock market crashed, and the U.S. economy was in a tailspin.

Officially, Simon’s two-week trip was billed as a tour of economic diplomacy across Europe and the Middle East, full of the customary meet-and-greets and evening banquets. But the real mission, kept in strict confidence within President Richard Nixon’s inner circle, would take place during a four-day layover in the coastal city of Jeddah, Saudi Arabia.

The goal: neutralize crude oil as an economic weapon and find a way to persuade a hostile kingdom to finance America’s widening deficit with its newfound petrodollar wealth. And according to Parsky, Nixon made clear there was simply no coming back empty-handed. Failure would not only jeopardize America’s financial health but could also give the Soviet Union an opening to make further inroads into the Arab world....[ ]

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