OGJ Senior Writer
Strong rallies in both equity and commodity markets in late July pushed front-month crude contracts above $68/bbl in New York and $70/bbl in London just 2 weeks after the price dipped below $60/bbl in a more pessimistic market.
That rapid rebound prompted analysts at KBC Market Services, a division of KBC Process Technology Ltd. in Surrey, UK, to ask, “Is this becoming a new price band, this time set by the market and not by the Organization of Petroleum Exporting Countries?”
The rally started with better than expected earnings at a number of companies and improved economic data. The Federal Reserve raised its 2010 growth forecast and trimmed the amount of the 2009 contraction. But the bull market run was not supported by any major improvement in supply and demand. “The only rationale that explains the run-up is that expectations of a better tomorrow are growing. This perception also prevents the whole complex toppling over under the weight of stocks,” said KBC analysts. “In the real world, oil stocks are almost brimming over the top of the tanks and, with the exception of China and a few other places, demand remains firmly in the doldrums.”
China’s second-quarter gross domestic product was up 16.4% from the previous quarter and 7.9% from a year ago. “The oil data seem to confirm the improvement in the Chinese economy,” said Paul Horsnell, a managing director and head of commodities research at Barclays Capital in London. China’s oil demand in the second quarter was up 5.2% from a year ago, having fallen 3.1% in the first quarter. Had Chinese demand continued its first-quarter weakness into the second quarter, global oil demand would have been 600,000 b/d lower, Horsnel said.
Meanwhile, KBC analysts said, “There are still plenty of skeptics out there who believe that even if the bottom of the recession is near, the recovery will be slow and could even be reversed when the stimulus packages lavished on economies around the world wear off.” They warned, “If the current more-positive outlook for the global economy turns sour—and there are many respected commentators still talking about the W-shaped recession—the much anticipated oil demand will be pushed further out into the future and the sheer weight of stocks could lead to a major correction in product prices that will drag crude down too.”
Good signs for marine rigs
The deepwater market is showing evidence of firming, and a sharp increase in tender activity for jack up rigs suggests that market may be nearing bottom, too, said analysts at FBR Capital Markets & Co. in Arlington, Va.
For jack up rigs, they said, “We have already seen several tenders for significant term work in major markets such as the Middle East, and inquiries to rig owners are picking up. We believe that as many of these come to fruition, global fleet utilization should stabilize” toward the end of this year. However, FBR analysts said, “Demand is far short of a rebound in day rates, and we continue to believe current levels will persist for some time.”
On the other hand, FBR increased its rate forecasts for ultradeepwater rigs by $75,000/day after Brazil’s Petroleo Brasileiro SA (Petrobras) contracted Transocean Ltd.’s Cajun Express semisubmersible unit for roughly $500,000/day. The rig is a Sedco Forex Xpress 2000 design semisubmersible unit capable of operating in moderate environments and water depths of 8,500 ft.
Petrobras signed a $558.5 million, 3-year contract for the rig to drill in ultradeep waters off Brazil. Within a year of executing that contract, Petrobras has the right to convert it to a 5-year contract valued at $894.3 million. The contract term is expected to commence in the first quarter of 2010 following the completion of the rig's current contract.
That deal highlights the strength and resiliency of the high-end deepwater market, analysts said. As a result, FBR raised its ultradeepwater rate forecasts to $475,000/day for most high-end rigs.
“Although few data points exist, the contract, combined with an uptick in activity from independent and major operators, leads us to believe $60/bbl and above oil will provide meaningful support to the fifth- and sixth-generation market. We expect a sharp differentiation, however, between newer and high-end rigs vs. older upgraded rigs,” FBR analysts said.
Day rates are forecast on a rig-by-rig basis, with relatively newer fourth-generation rigs up by $25,000–50,000 to $400,000-450,000/day. “Lower-end floaters, such as those built in the 1970s and 1980s, should continue to see significant pressure,” analysts said.
(Online July 27, 2009; author’s e-mail: email@example.com)
A $60-70/bbl price band