MARKET WATCH: OPEC expectations buoy oil prices

Sam Fletcher
Senior Writer

HOUSTON, Oct. 21 -- Crude prices continued to climb Oct. 20 in the New York market in anticipation that the Organization of Petroleum Exporting Countries will reduce production by 1-2 million b/d at its Oct. 24 meeting.

However, Nobuo Tanaka, executive director of the International Energy Agency, told a press conference in Paris that reducing OPEC's production to buoy crude prices could stifle economic development in countries such as China, India, and Brazil.

In Arlington, Va., analysts at Friedman, Billings, Ramsey & Co. Inc. cited media reports quoting the Iranian Oil Ministry as saying OPEC would be forced to cut production by 2–2.5 million b/d if global demand declines 8–10%. Officials in Qatar also were reported to peg a "suitable" oil price at $80–90/bbl. In its 2009 budget Nigeria's National Planning Commission reportedly dropped its assumed benchmark oil price to $45/bbl from $62.50/bbl in 2008. Other reports said Venezuela has drafted its 2009 budget based on a full-year average price of $60/bbl for its crude. Iraqi finance ministers are reportedly preparing a 13% year-over-year increase for the 2009 budget based on oil price assumptions of $80/bbl, although the ministry has said it would consider rewriting the budget on a $60/bbl price assumption, cutting $15 billion of the planned $79 billion in spending if oil prices fall further before yearend.

The average price for OPEC's basket of 13 reference crudes increased $1.71 to $64.63/bbl on Oct. 20.

However, two factors mitigate the price sensitivity of oil producing nations, said FBR analysts—the size of their stabilization or sovereign wealth funds and the social framework of each country. "Although conventional wisdom suggests that highly polarized political systems risk violent revolutions if they slice domestic spending, we would counter that recent actions taken by the US federal government suggest that dictatorships and monarchies are much more likely to be successful making steep cuts in the short term than market-driven democracies," FBR analysts said. "As a result, we think 'breakeven barrel price' represents a useful predictor of OPEC defection potential but does not necessarily represent a hard-and-fast limit."

Olivier Jakob at Petromatrix, Zug, Switzerland, said, "The approach of the OPEC meeting combined with some support from equities transferred into support for crude [prices], but the general trend is still of uncertainty. On the positive side, we have a tightening of the timespreads and the support of the heating oil crack; on the negative we have a gasoline crack that s going deeper into negative territory and a dollar index well supported, trying to make new yearly highs."

Speculation and "sound-bites" concerning the upcoming OPEC meeting in Vienna likely will rule the market this week. "But crude oil is standing on only one leg as it is still missing the support of gasoline while the distillate leg is exposed to the current high gas oil flows from Asia to Europe that will compete with US distillate exports," Jakob said. However, he said, "We are starting to enter the winter season, and we will start to monitor the potential for a cold front to descend into the US over the next 10 days." Jakob noted that as of Oct. 17 there were still 500,000 b/d of oil production from the Gulf of Mexico that had not been brought back on stream since Hurricane Ike.

Jacques H. Rousseau, an analyst at Soleil-Back Bay Research, said, "Gasoline inventories have risen 14 million bbl (8%) over the past 2 weeks due to higher production and very weak demand. However, we expect the pace of the increases to slow in the coming weeks since gasoline margins are near the cash break-even level in most markets outside of the West Coast (where gasoline inventories are 10% below the 5-year average for this calendar week). In total, gasoline stocks are 3% below average in the US."

However, he said, "Distillate is a totally different story. Margins remain very strong ($15-25/bbl) since inventories are 7% below the 5-year average for this calendar week (especially on the East Coast where stocks are 17% below average). Distillate remains the key variable for investors to watch, in our view."

Meanwhile, latest data from Mexico show its trend of declining production continues "with crude output down 440,000 b/d from a year ago and 305,000 b/d on average this year," Jakob said. "Exports were impacted by adverse weather and import difficulties at US ports and were 620,000 b/d lower than a year ago and on average this year down as much as production. Gasoline imports were 42,000 b/d higher than last year and the year-to-date average was also 44,000 b/d higher."

While IEA worried about the effect of OPEC production cuts on India's economy, FBR analysts said, "This morning, the Indian Oil Ministry proposed a 'windfall gains tax' on oil exploration and production companies." Citing an Economic Times report, FBR analysts said, "When prices of domestically produced oil exceed $75/bbl, 'public sector producers' (state-owned ONGC and Oil India) would pay 100% of earnings as a windfall profit tax, while private sector companies (e.g., RIL, Essar Oil, Cairn India) would pay 40%. The Indian government would also consider imposing the tax on production sharing contracts under the New Exploration Licensing Policy."

FBR analysts warned investors to look at the implication and consequence of national "windfall" taxation. "The implication is that the nation imposing the tax is bankrupt or in very serious fiscal hardship. The consequence is usually diminished productivity of the link(s) of the value chain affected by the tax. Nations that are net exporters have already been moving toward capturing the value stream thrown off by extraction premiums with royalty hikes, nationalizations, and renegotiations of contracts. For nations that are net importers of crude oil with significant distillation capacity (like the US and Italy), the downstream represents the logical target."

Energy prices
The November contract for benchmark US traded at $71.77-76.12/bbl Oct. 20 prior to closing at $74.25/bbl, down $2.40 for the day on the New York Mercantile Exchange. The December contract gained $2.26 to $74.39/bbl. Information on West Texas Intermediate at Cushing, Okla., was not available at press time. Heating oil for November was up 7.7¢ to $2.21/gal on NYMEX. The November contract for reformulated blend stock for oxygenate blending (RBOB) increased 5.4¢ to $1.72/gal.

However, natural gas for the same month dropped 4.5¢ to $6.74/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., escalated 24¢ to $6.99/MMbtu.

In London, the December IPE contract for North Sea Brent crude climbed $2.43 to $72.03/bbl. Gas oil for November gained $13.25 to $691.25/tonne.

Contact Sam Fletcher at samf@ogjonline.com.

Related Articles

Schlumberger subsidiary pleads guilty to violating US sanctions

03/26/2015 Schlumberger Oilfield Holdings Ltd. (SOHL) agreed to plead guilty and pay a fine of more than $232.7 million for conspiring to violate the Internat...

Motiva to integrate Norco, Convent refineries in Louisiana

03/26/2015 Houston-based Motiva Enterprises LLC reported it will integrate the company’s two Louisiana refineries—the 220,000-b/cd Norco facility and the 227,...

NGC asks CEQ to withdraw GHG guidance for agencies

03/26/2015 Six US natural gas associations jointly asked the White House Council on Environmental Quality (CEQ) to withdraw its December 2014 guidance for fed...

Delek boosts nameplate capacity at Texas refinery

03/26/2015 Delek US Holdings Inc. has wrapped an expansion project at its Tyler, Tex., refinery that will increase the plant’s nameplate processing capacity t...

Tesoro’s Goff named AFPM chairman

03/26/2015 The American Fuel & Petrochemical Manufacturers reported that Gregory J. Goff, chairman, president, and chief executive officer of Tesoro Corp....

Senate Democrats offer bill to reduce crude volatility on rail cars

03/26/2015 Four US Senate Democrats introduced a bill that would require reductions of volatility in crude oil shipped by rail. The bill, S. 859, also would h...

Analysts: Oil industry dealing with downturn better than years’ past

03/26/2015 Investment bankers and analysts entrenched in the oil and gas industry say US companies have so far staved off the major negative impacts of the cu...

Canadian oil industry jobs, revenues plunge

03/26/2015 The Canadian oil industry will shed nearly 8,000 jobs this year as revenues fall by $43 billion (Can.) in response to the plunge in oil prices, pre...

MARKET WATCH: Oil prices surge on Saudi airstrikes in Yemen

03/26/2015 US light, sweet crude oil prices settled more than $1 higher on the New York market in Mar. 25 trading and then surged in early Mar. 26 trading on ...
White Papers

Pipeline Integrity: Best Practices to Prevent, Detect, and Mitigate Commodity Releases

Commodity releases can have catastrophic consequences, so ensuring pipeline integrity is crucial for p...
Sponsored by

AVEVA’s Digital Asset Approach - Defining a new era of collaboration in capital projects and asset operations

There is constant, intensive change in the capital projects and asset life cycle management. New chall...
Sponsored by

Transforming the Oil and Gas Industry with EPPM

With budgets in the billions, timelines spanning years, and life cycles extending over decades, oil an...
Sponsored by

Asset Decommissioning in Oil & Gas: Transforming Business

Asset intensive organizations like Oil and Gas have their own industry specific challenges when it com...
Sponsored by

Squeezing the Green: How to Cut Petroleum Downstream Costs and Optimize Processing Efficiencies with Enterprise Project Portfolio Management Solutions

As the downstream petroleum industry grapples with change in every sector and at every level, includin...
Sponsored by

7 Steps to Improve Oil & Gas Asset Decommissioning

Global competition and volatile markets are creating a challenging business climate for project based ...
Sponsored by

The impact of aging infrastructure in process manufacturing industries

Process manufacturing companies in the oil and gas, utilities, chemicals and natural resource industri...
Sponsored by

What is System Level Thermo-Fluid Analysis?

This paper will explain some of the fundamentals of System Level Thermo-Fluid Analysis and demonstrate...
Available Webcasts


The Alternative Fuel Movement: Four Need-to-Know Excise Tax Complexities

When Thu, Jun 4, 2015

Discussion on how to approach, and ultimately embrace, the alternative fuel market by pulling back the veil on excise tax complexities. Taxes may be an aggravating part of daily operations, but their accuracy is crucial in your path towards business success.

register:WEBCAST



On Demand

Prevention, Detection and Mitigation of pipeline leaks in the modern world

Thu, Apr 30, 2015

Preventing, detecting and mitigating leaks or commodity releases from pipelines are a top priority for all pipeline companies. This presentation will look at various aspects related to preventing, detecting and mitigating pipeline commodity releases from a generic and conceptual point of view, while at the same time look at the variety of offerings available from Schneider Electric to meet some of the requirements associated with pipeline integrity management. 

register:WEBCAST


Global LNG: Adjusting to New Realities

Fri, Mar 20, 2015

Oil & Gas Journal’s March 20, 2015, webcast will look at how global LNG trade will be affected over the next 12-24 months by falling crude oil prices and changing patterns and pressures of demand. Will US LNG production play a role in balancing markets? Or will it add to a growing global oversupply of LNG for markets remote from easier natural gas supply? Will new buyers with marginal credit, smaller requirements, or great need for flexibility begin to look attractive to suppliers? How will high-cost, mega-projects in Australia respond to new construction cost trends?

register:WEBCAST


US Midstream at a Crossroads

Fri, Mar 6, 2015

Oil & Gas Journal’s Mar. 6, 2015, webcast will focus on US midstream companies at an inflection point in their development in response to more than 6 years shale oil and gas production growth. Major infrastructure—gas plants, gathering systems, and takeaway pipelines—have been built. Major fractionation hubs have expanded. Given the radically changed pricing environment since mid-2014, where do processors go from here? What is the fate of large projects caught in mid-development? How to producers and processors cooperate to ensure a sustainable and profitable future? This event will serve to set the discussion table for the annual GPA Convention in San Antonio, Apr. 13-16, 2015.

This event is sponsored by Leidos Engineering.

register:WEBCAST


Emerson Micro Motion Videos

Careers at TOTAL

Careers at TOTAL - Videos

More than 600 job openings are now online, watch videos and learn more!

 

Click Here to Watch

Other Oil & Gas Industry Jobs

Search More Job Listings >>
Stay Connected