Monday, October 22, 2018

Houston Takes Center Stage as Major Crude Oil Trading Hub


Since the lifting of a decades-old ban on crude exports at the end of 2015, Houston has emerged as a major physical crude oil trading hub, overtaking the country’s primary crude benchmark (West Texas Intermediate, or “WTI”) pricing power long held in Cushing, Oklahoma due to access to major pipelines that run through it and ample storage space.

The surge in crude oil production can be tied to the shale boom, particularly in the Permian Basin in West Texas and New Mexico, where vast amounts of crude oil flow directly to the Gulf Coast – oftentimes bypassing Cushing altogether – to destinations such as Asia, Europe and Latin America.

Traders and market observers say WTI crude at Houston is a preferred futures contract hub over WTI Cushing because it better reflects global market balance and offers a more liquid market for export customers.

Since the lifting of the crude oil export ban, U.S. crude exports have surged nearly 350%, from 490,000 barrels per day (bbl/d) in January 2016 to a record 2.2 MMbbl/d in June 2018, according to the U.S. Energy Information Administration (EIA).

Rising oil production in the Permian Basin, which is estimated at around 3.5 MMbbl/d, along with increased U.S. light sweet crude exports to overseas customers, have prompted the launch of new physical futures contracts in Houston that are set to debut later this year.

In fact, the U.S. port district of Houston-Galveston earlier this year began exporting more crude oil than it imported for the first time on record, according to EIA statistics. In April 2018, crude oil exports from Houston-Galveston surpassed crude oil imports by 15,000 bbl/d. In May 2018, the difference between crude oil exports and imports increased substantially to 470,000 bbl/d.

On July 17, 2018, the Intercontinental Exchange Inc. (“ICE”) announced plans to launch in the third quarter of this year a physically delivered Permian WTI crude oil futures contract, deliverable in Houston. According to ICE, the new futures contract “is designed to provide price discovery, settlement and delivery at Magellan Midstream Partners LP’s terminal in East Houston.”

The contract is expected to provide ample liquidity for traders and brokers seeking flexible hedging and trading opportunities for export shipments.

Meanwhile, CME Group on September 24, 2018, announced that it intends to offer a new WTI Houston crude oil futures contract with three physical delivery locations on the Enterprise Houston system, pending regulatory review. WTI Houston crude oil futures will be listed with and subject to the rules of NYMEX, beginning with the January 2019 contract month.

The new WTI Houston crude oil futures contract expands CME Group’s already robust suite of crude oil futures and options and will complement its global benchmark NYMEX WTI Light Sweet Crude Oil futures. Participants will have the flexibility to make or take delivery of U.S. light sweet crude oil at the Enterprise Crude Houston (“ECHO”) terminal, Enterprise Houston Ship Channel (“EHSC”) or Genoa Junction through the new contract.

Enterprise has a network of 19 ship docks along the U.S. Gulf Coast and is the largest exporter of crude oil in the U.S. and the ideal provider of delivery points for this physical WTI Houston futures contract, according to CME Group.

Through its network of pipelines, storage and marine terminals, the firm has the capability to handle the flow of more than 4 MMbbl/d of crude oil. Participants will also benefit from access to a diverse group of refiners, storage facilities and export facilities through the Enterprise network.

What We’re Hearing

Opportune LLP’s Derivative Valuation group has heard very little from our existing clients about the new WTI Permian crude oil contracts delivered into Houston. Unfortunately, this is very common as we often deal with transactions that have already been executed.

That being said, we routinely see examples of hedging mismatches. For instance, some companies have marketing agreements that sell WTI at Cushing and are erroneously hedged with Brent crude contracts. These pricing relationships tend to deteriorate over time and eventually result in both losses on production and the hedge itself. These costly mistakes can easily be avoided.

Saturday, October 20, 2018

Suddenly Toxic, Saudi Prince Is Shunned by Investors He Courted



He was the man who sold the world on his vision of a Saudi economy no longer dependent on oil.

Now Crown Prince Mohammed bin Salman could become the biggest risk to his own project. Everything changed when Jamal Khashoggi walked into the Saudi consulate in Istanbul on Oct. 2 and didn’t come out. Allegations rapidly spread that the Washington-based journalist was murdered by a hit team sent from Riyadh. And suspicion naturally fell on the oil-rich kingdom’s de facto ruler, the 33-year-old heir to the throne.

Prince Mohammed, who’s denied any knowledge of Khashoggi’s fate, still has his defenders -– notably Donald Trump. The U.S. president and his top diplomat have cautioned against putting America’s decades-old Saudi alliance at risk while they await the results of a Saudi investigation. But that’s in sharp contrast to a growing chorus of outrage, putting pressure on the White House to act. In Congress, lawmakers from Trump’s own party denounced the prince personally and demanded sanctions.

And, crucially for Prince Mohammed’s economic plans, the global business leaders he courted are distancing themselves. The bosses of JPMorgan Chase & Co., Ford Motor Co. and Uber Technologies Inc. are among dozens of executives and policy makers scrapping plans to attend the prince’s business forum next week.

‘Official Complicity’

For a leader who’s staked his country’s future on a surge in foreign investment, that’s an ominous indicator.

“What appears to be Saudi official complicity in Jamal’s disappearance, and perhaps death, sends all the wrong signals to the people and groups MBS needs to change Saudi Arabia in the direction he wants,’’ said Gregory Gause, a Saudi specialist at Texas A&M University.

The investors the crown prince needs were already wavering. They were fine with showing up at lavish summits, at least until Khashoggi disappeared -– but the money wasn’t flowing.

Foreign direct investment slumped more than 80 percent last year. In an interview this month, the crown prince said early data suggested a partial rebound in 2018. But to meet his 2020 targets, FDI needs to soar.

Instead, even before the Khashoggi scandal, business leaders had seen enough in Prince Mohammed’s rule to unnerve them. At home, Saudi Arabia detained dozens of prominent local entrepreneurs as part of a supposed crackdown on graft. Abroad, it launched a boycott of Qatar, and got embroiled in disputes with Germany and Canada that threatened commercial deals with those countries.

When his father King Salman ascended to the throne in 2015, Prince Mohammed began to leapfrog a generation of more experienced uncles and cousins, and eventually became heir to the throne. On the way he grabbed control over the key levers of the economy, including the central bank and oil giant Aramco, as well as the Defense Ministry.

War in Yemen

The crown prince set out to change a strict religious culture, and he delivered on some promises, allowing women to drive cars and loosening Saudi social life by permitting cinemas and concerts. Those measures won him fanfares in the West.

Meanwhile, Prince Mohammed was abandoning a traditionally cautious foreign policy and seeking to assert Saudi power –- which led him to intervene in Yemen’s civil war. More than three years of Saudi bombing, directed against rebels said to be backed by Iran, has left thousands of civilians dead.
On the economic front, the prince wanted to ditch a model based on state handouts of oil cash, and build a new private sector. A key driver was Saudi Arabia’s slowdown after the crude-price shock of 2014. The economy contracted 0.9 percent last year, and while the government expects growth of 2.1 percent in 2019, that’s still only about half the average pace between 2000 and 2014.

Prince Mohammed worked hard to court U.S. executives who could potentially help meet his goals. During a visit earlier this year he met Amazon.com Inc. Chief Executive Officer Jeff Bezos and Microsoft Corp.’s Satya Nadella. But Prince Mohammed had to backtrack on some policies. His efforts to cut salaries and allowance met with signs of public opposition.

‘That Has Consequences’

And opposition to any of his initiatives hasn’t been tolerated, in a climate of fear. An economist who questioned the Aramco sale plan was arrested. So were women activists who’d campaigned for an end to the driving ban. So were dozens of people accused of collaboration with Qatar –- a charge also leveled at Khashoggi, before he disappeared.

“Was it a planned, horrendous killing, or an operation that has gone badly wrong?’’ said James M. Dorsey, a Middle East scholar at Nanyang Technological University in Singapore. The Saudi response to the crisis has been “abysmal,’’ he said, as authorities responded first with blanket denials and then with “conspiracy theories.’’

“They have lost any high ground,’’ Dorsey said. “That has consequences for MBS.’’

--With assistance from Ziad Daoud (Economist).

To contact the reporter on this story: Glen Carey in Riyadh at gcarey8@bloomberg.net

To contact the editors responsible for this story: Alaa Shahine at asalha@bloomberg.net, Ben Holland, Bill Faries

Friday, October 19, 2018

Exclusive: OPEC, allies struggle to fully deliver pledged oil output boost - internal document

The flag of OPEC stands on a desk ahead of the 174th Organization Of Petroleum Exporting Countries (OPEC) meeting in Vienna, Austria, on Friday, June 22, 2018. OPEC and its allies reached a preliminary agreement in the face of strong opposition from Iran to boost production by a theoretical 1 million barrels a day - the actual increase will be smaller as several countries are unable to raise output. Photographer: Stefan Wermuth/Bloomberg Photo: Stefan Wermuth / Bloomberg / © 2018 Bloomberg Finance LP

https://www.reuters.com/article/us-opec-oil-exclusive/exclusive-opec-allies-struggle-to-fully-deliver-pledged-oil-output-boost-internal-document-idUSKCN1MT1G0

OPEC is struggling to add barrels to the market after agreeing in June to increase output, an internal document seen by Reuters showed, as an increase in Saudi Arabia was offset by declines in Iran, Venezuela and Angola. 

The Organization of the Petroleum Exporting Countries and allies agreed in June to boost supply as U.S. President Donald Trump urged producers to offset losses caused by sanctions on Iran and to dampen rising prices. 

Saudi Energy Minister Khalid al-Falih said OPEC and non-OPEC would pump roughly an extra 1 million barrels per day (bpd) following the June agreement. The OPEC document seen by Reuters adds to signs they have yet to deliver the full amount. 

OPEC says it is on course to do so, although it hasn’t given a timeframe. “It is a work in progress,” OPEC Secretary General Mohammad Barkindo said earlier this week. 

The internal document prepared by OPEC’s Vienna headquarters for a technical panel meeting on Friday showed that OPEC members, excluding Nigeria, Libya and Congo pumped an extra 428,000 bpd in September compared to May. 

The OPEC and non-OPEC technical panel called the Joint Technical Committee reviews producers’ compliance with their oil supply pledges. 

Top exporter Saudi Arabia pumped most of the extra oil, raising output by 524,000 bpd in September compared to May, the document showed. Other increases came from Iraq, Kuwait and the United Arab Emirates. 

Iran, facing U.S. sanctions on its oil exports from Nov. 4, cut production by 376,000 bpd in September versus May, and has said OPEC and Saudi Arabia are not able to make up for a total loss of its exports. 

“There is no spare capacity,” Iran’s OPEC governor, Hossein Kazempour Ardebili, said last month.
Among other OPEC members, production fell by 189,000 bpd in Venezuela and by 17,000 bpd in Angola. 

The non-OPEC nations cooperating with OPEC pumped an extra 296,000 bpd since May, the OPEC document showed. Russia increased output by 389,000 bpd, although Kazakhstan, Mexico and Malaysia posted declines. 

Trump calls Fed his 'biggest threat'
 
Nigeria, Libya and Congo are not included in OPEC’s supply-limiting pact. Including them brings the increase in OPEC’s output in September to 628,000 bpd. 

Editing by David Evans

Thursday, October 18, 2018

Ghana Launches First Ever Competitive Bid Round



Ghana launched a licensing round on October 15. This is the first open and competitive bidding round that the country has held, previously choosing to hold direct negotiations with oil and gas firms for acreage. Ghana is offering up three blocks in its offshore Central Basin.

According to reports, the licensing round has already attracted interest from major E&P firms, which have been conspicuously absent in Ghana’s burgeoning oil and gas sector to date.

Initial indications from sources in the Ministry of Energy suggest that BP, ExxonMobil, Total, Chevron Texaco, Rosneft, Sinopec and CNOCC will all be participating in the bidding.

The tender process is specifically focused on expediting exploration activity in the Central Basin. Ghana is calling on firms with the financial capacity and technical competence, coupled with the timescale for work program activity. Fiscal terms, including royalty payments to the government and Ghana National Petroleum Corporation (GNPC) equity is also an important issue in the tender process, as well as the equity and skills transfer to local partners under the local content aspect.

Wednesday, October 17, 2018

Don't mention the oil price - U.S. legal threat prompts change at OPEC

Khalid Al-Falih, Saudi Arabia's energy and industry minister, arrives for the 171st Organization of Petroleum Exporting Countries (OPEC) meeting in Vienna, Austria, on Wednesday, Nov. 30, 2016. 
 Akos Stiller | Bloomberg | Getty Images
Khalid Al-Falih, Saudi Arabia's energy and industry minister, arrives for the 171st Organization of Petroleum Exporting Countries (OPEC) meeting in Vienna, Austria, on Wednesday, Nov. 30, 2016.


OPEC has urged its members not to mention oil prices when discussing policy in a break from the past, as the oil producing group seeks to avoid the risk of U.S. legal action for manipulating the market, sources close to OPEC said.

Proposed U.S. legislation known as “NOPEC”, which could open the group up to anti-trust lawsuits, has long lain dormant, with previous American presidents signaling that they would veto any move to make it law. 

But U.S. President Donald Trump has been a vocal critic of the Organisation of the Petroleum Exporting Countries, blaming it for high oil prices and urging it to increase output to relieve pressure on a market hovering around four-year highs. 

That has made OPEC and its unofficial leader, Saudi Arabia, nervous about what it might mean for NOPEC, or No Oil Producing and Exporting Cartels Act. 

The decision to refrain from discussing a preferred oil price level — one way the group can guide market expectations — underlines how Trump’s aggressive stance on the oil market is unsettling OPEC and testing ties between allies Riyadh and Washington. 

In July, senior OPEC officials attended a workshop in Vienna with international law firm White & Case to discuss the NOPEC bill, and the lawyers advised avoiding public discussion of oil prices and rather talk about the stability of the oil market, two sources familiar with the matter said. 

OPEC officials were also advised to explore diplomatic lobbying channels to try and prevent the NOPEC bill from becoming law, one of the sources said. 

On Aug. 1, the OPEC secretariat sent a letter to the ministers making a similar recommendation. 

“We solemnly believe that market stability, and not prices, is the common objective of our actions,” UAE Energy Minister Suhail al-Mazroui, who holds the rotating OPEC presidency this year, wrote in the letter, seen by Reuters. 

“I would like to call upon OPEC Member Countries, as well as our participating Non-OPEC colleagues, to refrain from any reference to prices in their commentary about our collective efforts or oil market condition,” he added. 

White & Case did not respond to a Reuters request for comment. 

Specifying oil prices is not the only way OPEC tries to guide the market. By cutting production it can support prices and by raising supplies it can do the opposite, for example. 

But the private coordination of how to communicate OPEC’s message to the market represents a departure from past practice, when Saudi Arabia would often signal a preferred price level when speaking about OPEC policy and seek to push through actions to achieve that.

TIES STRAINED

While chances of the law passing this year appear slim, concerns among OPEC members and other oil producers are growing that it may ultimately get the support of Trump, given his open criticism of OPEC and high oil prices. 

The OPEC letter came two months before U.S.-Saudi relations were further strained when a Saudi journalist disappeared during a visit to the kingdom’s consulate in Istanbul. 

Turkish officials say they believe Jamal Khashoggi, a critic of Saudi policies, was murdered and his body removed. Saudi Arabia has strongly denied killing Khashoggi. 

Some members of the U.S. Congress, which has long had a testy relationship with Saudi Arabia, have criticized the kingdom over the case. 

A Senate source familiar with the bill said renewed interest in NOPEC was likely, as lawmakers weigh any actions in response to Khashoggi’s disappearance. 

The source, who declined to be named, said that with lawmakers out of town for the next several weeks, it was difficult to measure current sentiment.

LITIGATION RISKS MAY BE BEHIND IPO DELAY

Over much of the last year, Saudi Arabia irked Washington by pushing OPEC to adopt measures to boost oil prices in a shift from its previous, more moderate stance. 

Industry sources have linked that shift to a desire to maximize revenues and raise the valuation of state energy giant Saudi Aramco ahead of a planned IPO, a key part of Crown Prince Mohammed bin Salman’s reforms aimed at diversifying the economy. 

The share float, expected by some to be worth up to $100 billion, has been put on hold, sources have told Reuters. 

Prince Mohammed said this month the float was postponed to 2021, and several industry sources say the delay was partly because of litigation risks if Aramco was listed in New York, a preferred venue by the Saudi crown prince. 

“There is a major fear NOPEC could turn into another JASTA,” one of the sources familiar with Aramco IPO preparations said, referring to the Justice Against Sponsors of Terrorism Act which allows victims of the Sept. 11, 2001, attacks to sue Riyadh. 

Saudi Arabia, which denies involvement in the attacks, had long had broad immunity from the lawsuits. That changed in 2016, when the U.S. Congress overrode then-President Barack Obama’s veto of JASTA. 

With close to $1 trillion in investments in the United States, including assets owned by Aramco, Riyadh has a lot to lose if the NOPEC bill was passed into law. 

It would revoke the sovereign immunity which oil producers, including OPEC members, currently enjoy from U.S. legal action. 

Washington-based legal firm Gibson Dunn and the Saudi embassy there signed a contract in late August, according to a copy of the contract filed to the U.S. Department of Justice. 

The contract outlines that among its other responsibilities, Gibson Dunn would be “opposing NOPEC”. 

Saudi Energy Minister Khalid al-Falih has also raised concerns over NOPEC with senior U.S. officials including U.S. Energy Secretary Rick Perry during private meetings, two sources familiar with the talks told Reuters, on condition of anonymity. 

Additional reporting by Jarrett Renshaw in New York and Yara Bayoumy in Washington; Editing by Mike Collett-White