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

MMS chief hopes next president, Congress won't reinstate OCS bans

12/19/2008 US Minerals Management Service Director Randall B. Luthi said on Dec. 9 that he hopes the Obama administration and Congress seriously consider expa...

FERC issues final EIS for proposed LNG project near Baltimore

12/19/2008 The Federal Energy Regulatory Commission's staff identified additional adverse environmental impacts as it issued a final environmental impact stat...

Gran Tierra defers Colombian pipeline project

12/17/2008 Gran Tierra Energy Inc., Calgary, has deferred a 100-km pipeline project in Colombia connecting Costayaco field to the Orito gathering facilities.

Petrobras gets loan for Revap refinery upgrades

12/14/2008 Brazil's Petrobras has borrowed ¥750 billion from a consortium of Japanese banks to finance its investments in the 226,000-b/d Henrique Lage (R...

CCS ends purchase of Newpark Environmental Services after FTC sues

12/12/2008 Newpark Resources Inc. and CCS Inc. agreed on Nov. 24 to cancel the proposed sale of Newpark's US environmental services business to CCS. The Feder...

PetroSA awards contract for South African refinery

12/08/2008 PetroSA has let a feasibility and front-end engineering and design contract to KBR for its 400,000 b/d refinery in the Coega industrial development...

MMS begins preparation process for 2011 lease sale off Virginia

11/28/2008 The US Minerals Management Service took the first step on Nov. 12 toward holding an offshore oil and gas lease sale off Virginia in 2011.

Sakhalin-2 set to deliver LNG in February

11/25/2008 The Sakhalin-2 project is expected to begin deliveries of LNG to Japan on Feb. 19, 2009, according to an executive of the Sakhalin Energy Investmen...

Myanmar awards China pipeline rights

11/20/2008 Myanmar has awarded China the right to manage planned pipelines that will transport crude oil and natural gas from the Bay of Bengal across Myanmar...

White Papers

AVEVA NET Accesses and Manages the Digital Asset

Global demand for new process plants, power plants and infrastructure is increasing steadily with the ...
Sponsored by

AVEVA’s Approach for the Digital Asset

To meet the requirements for leaner project execution and more efficient operations while transferring...
Sponsored by

Diversification - the technology aspects

In tough times, businesses seek to diversify into adjacent markets or to apply their skills and resour...
Sponsored by

Engineering & Design for Lean Construction

Modern marketing rhetoric claims that, in order to cut out expensive costs and reduce risks during the...
Sponsored by

Object Lessons - Why control of engineering design at the object level is essential for efficient project execution

Whatever the task, there is usually only one way to do it right and many more to do it wrong. In the c...
Sponsored by

Plant Design for Lean Construction - at your fingertips

One area which can provide improvements to the adoption of Lean principles is the application of mobil...
Sponsored by

How to Keep Your Mud System Vibrator Hose from Getting Hammered to Death

To prevent the vibrating hoses on your oilfield mud circulation systems from failing, you must examine...
Sponsored by

Duty of Care

Good corporate social responsibility means implementing effective workplace health and safety measures...
Sponsored by

Available Webcasts


On Demand

Optimizing your asset management practices to mitigate the effects of a down market

Thu, Dec 11, 2014

The oil and gas market is in constant flux, and as the price of BOE (Barrel of Oil Equivalent) goes down it is increasingly important to optimize your asset management strategy to stay afloat.  Attend this webinar to learn how developing a solid asset management plan can help your company mitigate costs in any market.

register:WEBCAST


Parylene Conformal Coatings for the Oil & Gas Industry

Thu, Nov 20, 2014

In this concise 30-minute webinar, participants have an opportunity to learn more about how Parylene coatings are applied, their features, and the value they add to devices and components.

register:WEBCAST


Utilizing Predictive Analytics to Optimize Productivity in Oil & Gas Operations

Tue, Nov 18, 2014

Join IBM on Tuesday, November 18 @ 1pm CST to explore how Predictive Analytics can help your organization maximize productivity, operational performance & associated processes to drive enterprise wide productivity and profitability.

register:WEBCAST


US HYDROCARBON EXPORTS Part 3 — LNG

Fri, Nov 14, 2014

US LNG Exports, the third in a trilogy of webcasts focusing on the broad topic of US Hydrocarbon Exports.

A discussion of the problems and potential for the export of US-produced liquefied natural gas.

These and other topics will be discussed, with the latest thoughts on U.S. LNG export policy.

register:WEBCAST


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