Items filtered by date: August 2019

Saturday, 31 August 2019 22:01


Oil futures closed lower  after reports emerged that Russian Energy Minister Alexander Novak said Russia’s oil output cuts in August will be slightly smaller those agreed to under the deal between OPEC and non-OPEC producers.

RIA and Interfax news agencies quoted Russian Energy Minister Alexander Novak as saying he will discuss the agreement and the state of the oil market at OPEC's Joint Ministerial Monitoring Committee meeting on Sept. 12

As for OPEC, the group is facing a weaker demand outlook due to slowing global growth. In July, OPEC ministers agreed to a nine-month extension Opens a New Window.  of its previous deal to cut production. That deal reduced production by 1.2 million barrels per day starting Jan. 1. After July’s meeting, the deal was extended through March 2020

OPEC oil output rose in August for the first month this year, with members of the group pumping 29.61 million barrels a day, up 80,000 barrels a day from July’s revised figure, according to the results of a Reuters survey reported Friday.


Earlier this week, OPEC’s Joint Ministerial Monitoring Committee, which monitors OPEC and non-OPEC member compliance with the cuts, pegged overall conformity at 159% in July, up 22% from June.

Monday saw the US benchmark WTI crude for  October delivery  fall $1.61, or 2.8%, to settle at $55.10 a barrel on the NYMEX. It’s been a tough August for crude, with the commodity slipping into a bear market. Front-month prices for the U.S. benchmark suffered a 5.9% monthly decline, according to Dow Jones Market Data.

The effect of Russian oil production on market sentiment has never been more pronounced. Whilst the market has always acknowledged Russian oil production, the announcement of slightly higher production figure now seems to have a similar effect to an EIA  crude inventory report. Advance notification of such information could be financially very lucrative in the right hands, certainly if the intention was to short the market.

Forecasted contracting demand for  global oil has made any unexpected increase in production a fundamental reason for  declining crude  oil benchmarks. It now seems clear that  Russian  oil production has the ability to swing the market

Published in OIL MARKETS

In June, I wrote an article about an  impending tragedy ( READ REPORT)set to befall  an unwitting and unsuspecting  Nigeria led by a bunch of somnambulant muppets that masquerade as political leadership. The litany of how Nigeria has arrived at this point is a shocking narrative of incompetence, misconduct in public office, recklessness, ineptitude and a complete and utter abrogation of responsibilities.

It is only now, after the horse has well and truly bolted, that the Nigerian government appear to have woken up to the fact that it has had a $9.6 billion arbitral award confirmed against it. The claimant, process and industrial developments Ltd (P & ID), setting aside for a moment the fact that Nigeria is currently technically insolvent, has obtained  a  liability order of such quantum it simply cannot pay.

 To most the award seems  spectacular and  more in line with an Investor State Dispute Settlement (ISDS). Yet the quantum of the final liability award was as a direct consequence of Nigeria’s tardiness and incompetence. More specifically the Nigerian Governments failure to  challenge facts, assumptions and calculations provided by the Claimant and of providing alternative evidence to the Tribunal.

P&ID  estimated that the project would produce a net profit of $5 to $6 billion over a 20-year period. They based their Income projections on a number of assumptions. Namely relating to the expected yield of Natural Gas Liquids  (NGLs) and the forecast  price of LNG. P&ID further  estimated capital expenditure at $580 million and operational expenditure at around $60 million per year. These estimates combined to create an  exponential outcome that many see as exaggerated, inflated, wildly  over optimistic and grossly unfair. They also got away with  using  a discount rate of 2.65% based on US Treasury yield to represent  the time value for calculating the net present value of their award.

The Nigeria Government argued amongst other things that since  P&ID had not performed its own obligations under the contract it should only be  entitled to nominal damages and furthermore in a bemusing and peculiar argument, any calculations would need to reflect the disruptive activity of militants in the Niger Delta which would have the effect of reducing profits by up to 50%.

They went further to  argue  that any  damages should be limited to a period of 3 years as P&ID had a duty to mitigate  its losses by pursuing other investment opportunities. They adopted a discount rate  for discounted cashflow calculations of 7% apparently  to reflect the risk of investing in Nigeria.

The Defendants arguments were feeble and unconvincing and were dismissed by the Tribunal. The Government did not challenge P&ID’s figures or provide alternative estimates or forecasts, a woeful and fundamental lapse, which as we scrutinise the Government failures in this saga  will become a recurring theme, allowing  the tribunal to accept P&ID’s figures for damages.

On that basis it awarded $6.6 billion in damages  with pre and post-award interest of 7%. The rate of  interest  adopted as being the sovereign debt rate for Nigeria investment.


 The  Nigerian Government  now seek to appeal the judgement and apply for a stay of execution to forestall the enforcement order while the set-aside request is considered. A set-aside request can be obtained fairly quickly. Given the paucity of options available to the Nigerian government, it would seem this should be the logical course of action.

Yet in the UK we are advised by  legal experts that Nigeria would have to apply to set aside the order for enforcement and that may be difficult to achieve. As a set-aside request would have to prove there was an error in the ruling despite the judge’s decision  not being legally controversial.

Lawyers representing the Nigerian government have also argued the award should not be enforced because England was not the correct place for the case, and even if it were, the amount awarded was “manifestly excessive”.

Yet again the decision on the UK as the seat of arbitration was made in 2016, and the arbitration award was made in 2017. The Nigeria Government had 28 days in each case to appeal. It ultimately appealed the former decision, but inexcusably only several months after the  deadline for doing so had expired and the  judge dismissed it. Equally  unforgivably It couldn’t be  bother to  appealed the latter decision.

The irascible Nigerian ‘dis’ Information Minister Lai Mohammed has sought to assure Nigerians  there was no imminent threat to Nigeria’s assets while the case was underway. But once the court makes its judgment into an order, which is expected in September, P&ID could start targeting assets.

The Nigeria government have ultimately and finally fallen foul of its own  proclivity to disregard the sanctity of  contracts which they repudiate at will with no consequences and scant regard. It is a harsh lesson that may well bankrupt the country and extend the already extreme poverty which exists in a country that has the largest number of people living in extreme poverty on the planet.

This is a catastrophe of the Nigerian Governments own making, but the Ministry of Petroleum Resources specifically. The Ministry is a well-known byzantine labyrinth of larceny and theft. The Nigerian Ministry of Petroleum Resources has been at the centre of most of the largest scandals in Nigeria’s history and is a firmly established  hotbed of malfeasance and corruption.

Though I suspect this particular calamity has its origins in the profane and thoroughly rotten relationship that exists between elected politicians in Nigeria and the shadowy obscure ‘Cabal’ which is omnipresent in every administration. A hidden oligarchy that supports the kleptocracy that masquerades as a democracy.

 The Nigerian President and Minister for Petroleum, has now belatedly instructed EFCC, the financial crime police to investigate the transaction. The Government strategy of seeking to identify culprits to criminalise may be counterproductive. In theory P&ID have the right to seize Nigerian assets, but the settlement will in all likelihood be a negotiated one. Any such negotiations will have to be conducted in ‘good faith’ in order to arrive at a solution. P&ID have already stated that such an action by the Nigerian Government will not make their   legal obligation go away.

Under the Jonathan administration, Nigeria negotiated an out-of-court settlement with P&ID for a far smaller sum reputedly $850m. However, he  left the payment to the incoming Buhari administration, which in an act of blithe  folly  set aside the settlement and asked its lawyers to return to litigation. It is unclear as to what the end game was and what if any advice  was sought and from whom.

Jonathan assumed office in February 2010 and the allegation is that he was left in the dark as the deal had by then already been set in motion by Rilwanu Lukman, the Minister of Petroleum in his predecessors, President Umaru Musa Yar’Adua’s Administration. All this at a time when the cabinet and close allies of the late president had yet to recognise Johnathan’s presidential authority.

When Goodluck Jonathan Administration eventually took control of government,  it is not difficult, if you understand Nigeria,  to see  how the new regime with a ‘cabal’ comprised of different actors neglected  any previous contract awards. It is a sad truism that the most compelling reason in Nigeria to give Executive office holders two terms, is that it makes it more likely for projects to be successfully completed.  It was only the inevitability of a huge arbitral award against Nigeria which forced the Johnathan Administration into negotiations with P&ID

Many commentators believe the  same Yar’Adua   cabal has reincarnated  and   coalesced around President Muhammadu Buhari.

The normally dozy Attorney General of the Federation (AGF), Abubakar Malami whose tardy performance in this matter has gone a long way in exacerbating  the sorry mess Nigeria finds itself,  says without irony  he will prosecute everyone linked to the judgement debt.

Published in OIL MARKETS

The crude oil market is hostage to a global economy which shows every sign of entering into a recession in 2020. Yet the volatility it experiences seems mostly on weekly US inventory numbers but more extraordinarily  as  a consequence of a bombastic and self-serving US President.  Concerns about trade will continue to persist as long as the market cannot confidently rely on the veracity of the information it receives, and most recently the information President Donald Trump provides. For the self-appointed  No1 combatant  of “fake-news”,  President Trump now seems to be firmly ensconced as its foremost purveyor .

Recently trade concerns resurfaced after China’s  Foreign Ministry claimed it was unaware of any telephone conversation or calls between the United States and China on trade. It later urged the US to correct its” wrong actions and create conditions for talks”

Speaking at the G-7 summit in Biarritz President Trump had said he was optimistic about the prospects for a trade deal with Beijing. He said China had contacted his trade team overnight. Last Tuesday, to suggest both sides “get back round table”. President Trump went on to say he had great respect that China called,” they want to make a deal”. All this came after Pres Trump        had referred to the Chinese Premier, as both a foe and an outstanding leader had great respect for too.

But Trump has form for inventing telephone calls as he did earlier in the year when he boasted he had spoken with OPEC on the phone and they were going to bring prices of oil down in response. So many are the incidences of his blatant deceit, they no longer seems to come with any admonishment or shame.  

The American President’s  oft contradictory and vacillating statements have had  huge impacts on financial markets as actors attempt the baffling task of  interpreting  his rhetoric. Trump tweets are now a firmly established factor in gauging market sentiment. The ability to accurately interpret these messages can be the difference between profit and loss. The dramatic swings create unexpected and unpredictable moves in the direction of the market, depending almost entirely on the mood of the President. Perhaps a statistical function as an addendum to a risk metric should be created to capture this new variable.

It does not help that most of these comments are hyperbolic in  nature and made outside normal trading hours, quite frequently nocturnal. President Trump insists that is the way he negotiates, he goes on to say it has held him good stead over the years, and is doing even better for the country. Many observers would disagree, his Trumpian play book, a mix  of destructive disorder, bromance and poker have not served him well, which would be quite plain If his business record was  put under any degree of scrutiny. Most sensible analysts react to Trump tweets with extreme caution. It is now conventional wisdom amongst most traders and investors that it is a fool’s errand to try and trade on headlines created by Donald Trump.


Despite President  Trump, suggesting he might be having second thoughts over the US-China trade war, he went on to crash the renminbi to a new 11 year low along with stock markets in the Asia-Pacific by stating his intention to slap even higher tariffs on Chinese goods. Demonstration if needed of his ability to move markets. The use of such power needs to be judicious and responsible.


Not for the US President. In what has now become a familiar refrain The White House later came out to clarify President Trump’s statement. They stated that it had been greatly misinterpreted and it was his intention to pursue an even more aggressive trade policy toward China and that his regrets were not raising the tariffs even higher.

But there is an even more substantive issue which has not attracted a great deal of scrutiny thus far. In the event that insiders have prior knowledge of a contradictory Trump statement, such knowledge would be of immeasurable commercial value. If I had prior knowledge that President Trump was to make a statement to the effect he was completely removing all triffs from Chinese imports to the US, I would make a fortune, as would any trader. Is there a method to his contradictory statements which are concieved to move the market in a certain direction, for example shorting futures and commodity positions. Clearly there is no evidence to support this theory, but the frequent contradictory and conflicting announcements certainly warrant further scrutiny. It should not be the case any more than the Chairman of the Fed being allowed to make rash comments. it is an  issue that neither the SEC or the CFTC are equipped to handle.

Published in OIL MARKETS

In years to come it may well be called “Trumponomics”, it may well be taught in colleges too, Its effects are unclear,  though most economists see them as calamitous. Now just at the wrong time for Trumponomics,  it is reported that the  U.S. manufacturing purchasing managers index (PMI) declined to  49.9 in August, the lowest level for almost a decade. A reading above 50 indicates growth in the manufacturing sector, which accounts for about 12% of the U.S. economy. It is clear the cacophony created by Trump around trade war has weighed heavily on activity as investment wanes.

The latest manufacturing PMI reading signalled the sharpest order book downturn in ten years. Export sales during August 2019 were also at their lowest since August 2009. According to Tim Moore, an associate economics director at IHS Markit, “August’s survey data provides a clear signal that economic growth has continued to soften in the third quarter.” He added, “Manufacturing companies continued to feel the impact of slowing global economic conditions, with new export sales falling at the fastest pace since August 2009.”

The services sector PMI reading also fell to 50.9 from July’s 53.0. This was also below economists’ expectation of 52.9. It was one of the most concerning aspects of the latest data, as new business growth slowed down to its weakest level in a decade “driven by a sharp loss of momentum across the service sector.”

 Though it must be said the US is not alone in the contraction of manufacturing index PMI’s. China has had contraction for 4 straight months as have the EU.

On a weekly-average basis, both Brent and WTI gained slightly; however, both crude benchmarks ended the week lower than they began it. Brent increased $0.62/bbl to average $59.87/bbl (only slightly below our $60/bbl forecast) while WTI increased $0.23/bbl to average $55.55/bbl.  There are concerns that China prepared to tough it out with the US.

President Trump has  claimed  that Chinese officials have reached out in a desire to resume trade negotiations. The market has become increasingly wary of President Trumps claims and since the Chinese have not confirmed his statement it is well worth discounting. The Chinese at least publicly have always maintained they would prefer a negotiated trade deal and not an escalation. Only last week Trump was railing at US firms doing business in China, ‘ordering’ them back to the US .  The Trump Administration is pursuing a policy of ‘decoupling’ the US economy from China and ending any interdependency the countries might have. The trade war with China only sees signs of escalation as Trump has vowed to change the worlds trading system to favour the US against a determined, focussed and motivated China.

President Trump has made the return of US manufacturing jobs and their protection the cornerstone of his ‘make America Great Again’ policy. A policy many would argue put him in the White House. Yet along with yield curve inversion concerns, the contraction in US manufacturing has  increased the market’s concerns regarding an upcoming recession. Perversely it would seem that President Trumps policy of restructuring the US trade by initiating a trade wars against China has quite the opposite effect

Published in OIL MARKETS

Nigeria has reaffirmed its unwavering commitment to OPEC production cuts  by increasing production of its own oil to its highest output levels  since 2015. The production cuts  were agreed upon under the Declaration of Cooperation (DoC) between member States of the OPEC and Non-OPEC Countries at the last Ministerial Meeting of what is known as OPEC+, held in Vienna on July 2, 2019

Other member states not least Saudi Arabia would be right to  question Nigeria’s commitment to the grouping’s policy . Certainly after shouldering the largest burden of the cuts meant to rebalance the demand supply equilibrium in global crude oil markets by draining OECD inventories. According to released production figures  Nigeria remained the largest culprit  in breach of its quota,  surpassing it by over  240,000 barrels per day  (bpd) at 1.93M bpd in July. According to Platts’ data, Nigeria’s production output rose to 1.97M bpd in June, up from the 1.69M bpd quota under the cut agreement.

The Nigerian Government  has based its budget on an oil price of $60/b, a benchmark that now seems slightly optimistic given the bearish sentiment caused by the US-China trade war and an overall slowdown in global economic growth. But the figure was crucially based on producing 2.3M bpd of crude oil and condensates.

Nigeria currently benefits from the lack of clarity on how condensates are defined by OPEC. Though  the definition is based on that of  the American Petroleum Institute, that definition  focusses only on whether the oil was a gas when extracted. Once liquefied  there is no widely agreed definition. Nigeria does indeed produce quite a bit of condensate, but apart from Akpo it is rarely measured because it is mostly blended with  crude streams.  The other condensate grade Oso production  has declined so substantially,  that it is also blended into the Qua Iboe crude stream.

Nigeria’s Increase in  production has come as the Total SA operated ultra  deep water Egina has come on stream. It currently produces over 200,000 bpd.  NNPC the national oil company has made it clear  output from the  Egina field would be classified as condensate. This would exempt its production from OPEC quotas.

The NNPC’s Group Managing Director  said “ with our partners, we are driving the national aspiration to grow the national reserve to 40 billion barrels by 2025 and improve crude oil production to three million barrels per day.

Increased reserves will give Nigeria a higher quota in the OPEC but until such a time the bait and switch with condensate is an economic necessity. Whilst actual figures for Nigerian condensate production is sketchy, NNPC claim to produce about 400-500,000 bpd.  In March the GMD of NNPC when addressing the Senate Committee on Finance on the 2019  – 2021 Medium Term Expenditure Framework (MTEF) confirmed the production target of 2.3M bpd included condensates which would amount to the difference between the OPEC quota of 1,69M bpd and the 2.3M. That would mean Nigeria classifying over 600,000 bpd or 25% of its petroleum production as condensates to exist within current quotas.


Clearly Nigeria will not be able to get away with classifying any production over the OPEC quota as condensates despite NNPC’s best efforts. Many secondary sources used by OPEC such as S & P  Global Platts currently classify the Agbami grade as crude oil and not condensate which harbours the potential of significant disputes between OPEC and Nigeria going forwards.

Given the bleak outlook of a trade war that seems to be on escalating trajectory, the continual downward revisions in crude oil demand through 2020 and the increase in tight US shale, it seems likely that OPEC may have to cut by another 1.4M bpd to keep the market from crashing into a bear pit.


This would require further cuts to OPEC quotas amid a tumbling crude oil price. It is unlikely that Nigeria will escape such a cut and increased scrutiny over compliance and  the definition of condensates.

Published in OIL MARKETS


OPEC member states are bracing themselves for a bleak bearish outlook in the short term despite their best efforts to support crude oil benchmarks with supply cuts. The bearish outlook is due to an anticipated slow down in global growth amid the U.S.-China trade dispute with a no-deal Brexit further weighing heavily on bearish sentiment. In the event that the trade dispute remains unresolved it is highly likely OPEC+ will be moved to extend the production cuts into 2020. OPEC have stated their determination to ensuring the market is balanced and stated they will be closely monitoring the market in the coming months in an effort to maintain market price stabilty.

OPEC stated in their most recent report that their policy to support prices through supply cuts has been giving a sustained boost to U.S. shale and other rival supply, and the report suggests the world will need less OPEC crude next year. The demand for OPEC crude is forecast to average 29.41 million bpd next year, OPEC said, down 1.3 million bpd from this year. Still, the 2020 forecast was raised by 140,000 bpd from last month’s forecast. OPEC reported its oil output fell by 246,000 bpd in July to 29.61 million bpd with the Saudis making deeper cuts than its quota under the agreement (9.58 million bpd). This still puts OPEC production above the 2020 demand forecast. The report suggests there will be a 2020 supply surplus of 200,000 bpdin the unlikely event that OPEC keeps pumping at July’s rate and other things remain equal.

The global balance of supply and demand is tighter than it appeared a month ago. OPEC raised its assessment of consumption for this year and next by 50,000 barrels a day, and trimmed projections for non-OPEC supplies by 40,000 barrels a day for 2019 and by 90,000 a day for 2020. Consequently though oil inventories in OECD nations have risen above 5 year average levels, global stockpiles should decline this quarter by an average of 2.1 million barrels a day. OPEC is pumping about 29.6 million a day, compared with a daily requirement of 30.28 million.

Crude prices have fluctuated this week, caused by the fractious events between Washington and Beijing as President Donald Trump imposed 10% tariffs on $300 billion of Chinese imports. A Saudi official speaking anonymouslyintimated that the Saudis had sounded out its partners on potentially stepping up their efforts and are open to all options. The Saudis, Russia and other key members of the coalition will meet to review their strategy in Abu Dhabi on Sept. 12. Nobody in OPEC wants to see sub $50 oil

Published in OIL MARKETS

As Donald Trump’ presidency unfolds, he continues to discover artful mechanisms of how to apply his authoritarian instincts to the constitutional power he possess.  His sole objective to circumvent  constitutional restrictions which foil his ability to operate as Putin or MBS to his benefit and to the detriment of others. An increasing number of events has recently revealed just how Trump is accruing authority, abusing his power, threatening to violate the law, thwarting the checks on his office, and undermining US institutions empowered by by Congress.


China have been labelled currency manipulators by an acquiesent and previously rational US Treasury department full in the knowledge that the recent depreciation of the yuan below the historical benchmark of 7 to the US$ was neither an act of intervention by the Peoples Bank or met the firmly established criteria for currency manipulation. The task of evaluating currency manipulation is the sole preserve of US Treasury Departmentand its decision to label China a manipulator has weakened the credibility and robbed the US Treasury Dept of its proffessional integrity. It is yet another example of Trumpian destruction of established rules of engagement, most of which were authored or sponsored by the US.

For a little over a decade from 2003 China kept the renminbi substantially undervalued. The Chinese authoriy's policy was to frequently intervene to slow down the currency’s market-driven appreciation. During this period the renminbi still appreciated by over 30% against the US dollar. It is that period which has been used by the Trump Administration to create the myth which if oft repeated and endorsed by US institutions seems to morph into an a priori truth. The facts establish a very different narrative. The Chinese actively intervene to slow downthe depreciation of the currency. In 2015 and 2016, the People’s Bank of China spent in excess of $1 trillion in foreign-exchange reserves in an effort to prop up the exchange rate – by far the largest intervention in history to support the value of a currency.

After a year of being barracked, pestered and threatened Jay Powell the Chairman of the Federal Reserve finally caved in to Trump's demand to reduce interest rates. Trump was unimpressed. Though the move was widely anticipated it was universally regarded as uneccessary. Powell stated the rate cut was to ward off down side risk but with unemployment low, consumers still spending and the stock market doing well the only possible downside risk is the global economic slow down provoked by Trumps own policies. He went on to explain further "The ongoing uncertainty is making some companies more cautious about their capital spending,”. He also cited weak manufacturing and business-investment data a coded subliminal dig at Trump's 2017 tax cuts which were supposed to boost these sectors.

Lowering the target range for the benchmark rate a quarter point to between 2% and 2.25% was the very least the Fed could do in capitulating to Trumps demands whilst limiting the risk of igniting inflation or creating asset bubbles caused by expanded corporate borrowing ( though inflation is still below the FOMC 2% target). But it also announced the premature end of quantative tightening (QT) without achieving its stated objective of reducung the Fed balance sheet to $3.5 trillion down from $4.5 trillion.

These actions lead to legitimate questions about the FOMC's independence and are a further example of President Trumps policy of compromising the integrity and undermining the ability of the institution to act imdependently and without undue political inteference. The essence of the Trump Administration is an authoritarianism of the sort which conflates genuine policy differences with loyalty to the President. A President that is busy damaging the long term inyerests of the United States globally.

Published in OIL MARKETS

Whilst large European oil companies have resisted every attempt by the EU to get them to engage with the INSTEX mechanism to trade with Iran, China has no such compunctions. The New York Times recently published an article, after  claiming to have received  information from multiple sources alleging  that China has been receiving oil shipments from a larger number of Iranian tankers than was previously known.

Historically China imported about 500,000 bpd, though in recent times it has been set at about 360,000 bpd. But it is difficult to arrive at a definitive figure.

The Trump Administration has already imposed sanctions on Zhuhai Zhenrong, a Chinese state-owned enterprise, and its top executive Li Youmin, But in all reality it will have to impose sanctions on the Peoples Bank of China which I unlikely

US sanctions are not legal just another example of  them  asserting extra territorial jurisdiction. China had made it very clear that US sanctions regime would not determine their strategic or commercial interests. But to hear American politicians speak you wouldn’t think so. Senator Marco Rubio said  "While I'm glad the administration sanctioned an initial round of Chinese actors, it must step up strong enforcement to deter Chinese and other foreign actors from violating US sanctions against Iran," He went further "The Iranian regime has blatantly shipped millions of barrels of oil to China."

A Chinese Foreign Ministry spokesman,  Geng Shuang, said on July 19 that the Trump administration's "maximum pressure" campaign against Teheran was the "root cause of the current tensions" involving Iran and that Washington should "correct its wrongdoing" . He had earlier gone further “The U.S. is operating outside its jurisdiction in unilaterally imposing the sanctions”

The  unanimous UN Security council resolution 2231 underlines “promoting and facilitating the development of normal economic and trade contacts and cooperation with Iran” as an essential part of the JCPOA and calls upon all member states to support its implementation, including to ensure Iran’s access in areas of trade, technology, finance and energy, and refrain from actions that undermine it.

The US  undertook to refrain from any policy intended to directly and adversely affect the normalisation of trade and economic relations with Iran. Yet a rampaging Trump motivated by his pathological urge to repudiate anything previous President Obama did has set the US on course for conflict with Iran. But he needs a Western ally to form a coalition. Cue John Bolton the NSA and his trip to the UK. He has come to recruit Boris and drive a wedge between a Brexit bound UK and the EU. He will urge the UK to re-align its position on Iran with the White House. As the UK seeks to find a place in the world post brexit the hard Brexit Tory government will be susceptible to an American overture. I would not be surprised in the coming weeks to see a flottila of UK/US naval vessels steaming through the Straites of Hormuz.

Published in OIL MARKETS
Monday, 12 August 2019 13:24


 US Shale has become the Ponzi scheme of our times. How much longer can it survive and in what guise?. The long term financial viability of shale amid another dreadful slew  of earnings reports that have come out over the last couple of  days is in a state of  dire qualm. these setbacks whilst not entirely unexpected  have yet again staggered the industry   and sparked a share price collapse which has  seen what appears to be a terminal loss of investor confidence. Shale has been pounded by a series of poor financial results from several drillers at a time when the oil outlook is significantly deteriorating.

 According to the Wall Street Journal and Wood Mackenzie, a random basket of 7 shale drillers posted a combined $1.58 billion in negative cash flow in the first quarter, four times worse than the same period a year earlier. The trend is far from reassuring against the backdrop of an industry that has run up almost $300 billion in negative cashflow.

 Last week, Concho Resources admitted they had failed in a gamble to increase capital efficiency, an experimental  23-well project, suffered poor results because the wells were packed too closely together. The company’s share price plunged by more than 22 percent and profits have fallen by 25% despite production increases. It is becoming increasingly obvious to  investors  that  Concho Resources, and other shale drillers like it, are unable to produce as much oil as expected from a given level of spending. Concho was valued at more than $23 billion as recently as the spring of 2018 and having since acquired the $7.6 billion purchase of RSP Permian Inc., now has a market cap of less than $16 billion.  Concho has now conceded that it will  slash spending and slow the pace of drilling in the second half of the year.

 At the start of  the  year the company had 33 active rigs. In the second quarter that fell to  26 rigs , it now has  18.  tim Leach the companies CEO said “We made the decision to adjust our drilling and completion schedule in the second half of the year to slow down and not chase incremental production at the expense of capital discipline,” . He went on further in seeking to reassure investors that the company is  aiming for “a free cash flow inflection in 2020.” His comments can only be interpreted as further confirmation of the inherent implausibility of shale economics.

 Whiting Petroleum had an even worse week. Its stock melted down on Thursday, losing over a third of its share value  after reporting a quarterly loss that was  far  lower than forecasts. The company announced that it would cut its workforce by a third and scale back its production targets for the year.

 For Whiting, the elimination of 254 jobs is estimated to  result in $50 million in annual cost savings. Chief Executive Officer Brad Holly said in a statement  “We aim to be as efficient as possible and that is why we made the difficult decision to reduce our workforce in order to realize significant annualized cost savings,” . Which begs the question as to why the company has hitherto operated with excessive staffing costs. Whiting joins joins other shale drillers  Pioneer Natural, Laredo Petroleum Inc and Devon Energy Corp. in drastically reducing  headcount as investors increasingly focus on general and administrative budgets with Executive compensation can amount to as much as 20% of general and administrative costs.


Add Oasis Petroleum, which plunged by more than 30 percent on Wednesday, after the company said it would probably spend a little bit more than previously expected, and might produce a little bit less. The Shale narrative could not be clearer. At current global oil prices it cannot be profitably produced and the more produced the lower  the global market price drop.


  Pioneer Natural Resources  President and CEO Scott Sheffield one of the larger producers in the Permian and widely considered one of the stronger companies, warned about the future of drilling. “Rig count and Tier 1 acreage is being exhausted at a very quick rate,” he told analysts on an earnings call on August 6, referring to the Delaware basin, which has seen a surge of activity most recently.

 “I am lowering my expectations of the Permian, reaching 1 million barrels of oil per day growth annually as it did in 2018,” Sheffield said. “I'm still convinced the Permian will reach 8 million barrels a day at a much slower pace with the Midland Basin as the only growing basin in the U.S. past 2025.”

 The prediction echoed that of Goldman Sachs, which said that the poor results from Concho Resources regarding well density could be a harbinger of broader problems with the future of shale. That would likely mean WTI would be under $50, which he says is just too low for shale companies to be making money. If oil was stuck at those low levels, you would “see a significant fallback in Permian growth,” Sheffield told investors.

 Just a the time President Trump decided to slap on a 10% tariff on all Chinese imports to the US and further weaken sentiment in crude oil markets by pushing the long term outlook bearish. Despite OPEC's best efforts to drain global crude inventories, they are at a record high. The market is fully able to absorb any short term supply shocks created by any geopolitical infraction. The US-China trade war will damage global economic growth and the call for crude oil. It now seems far more likely that the deal maker in Washington is more likely to face a recalcitrant China prepared to deepen and broaden the trade dispute. That is bad new for global energy stocks but dreadful news for Shale. Global benchmarks have lost over 20% since April highs and the reduction in demand forecasts could see WTI dropping beneath $50 per barrel in September.

 I have long argued the fundamental characteristics of shale production, the need for high capex to maintain production rates, the failure to generate positive EROI and the inability to generate free cashflow to compensate bond holders or equity participants will consume the  industry. The true cost of profitable shale production now sets the floor for conventional oil prices as it will increasingly mark the point that shale drillers can no longer operate.








Published in OIL MARKETS