Middle East Oil Troubles Could Lead To Lower Prices

http://247wallst.com/2010/06/01/middle-east-oil-troubles-could-lead-to-lower-prices/

Prices for crude oil fell below $74/b this morning as crude oil continues wobbling downward after hitting a high of around $87/b in early May. Conflicting signals from the Middle East contribute to the uncertainty of which direction oil prices will head.

In May, OPEC rose to a 17-month high as the cartel produced 29.372 million b/d. That amount is 2.197 million b/d above the cartel’s self-imposed quotas on production. The official production quota, adopted in January 2009 is 24.845 million b/d. In May, every OPEC country exceeded its quota.


The largest increase came from Nigeria, which grew by 60,000 b/d, and now exceeds its quota by more than 400,000 b/d. The relative calm in Nigeria has allowed the country to grow its production, but it doesn’t have much effect on the overall crude market because Nigerian production is so volatile all the time.

OPEC production grew to take advantage of the higher prices of early May, and high production is likely to continue as long as prices don’t collapse entirely.

Greed aside, another reason OPEC production could continue to grow is that floating oil storage is declining rapidly. Danish shipping company A.P. Moller-Maersk estimates that there are about 25 VLCC tankers, each of which holds about 2 million barrels of oil, currently being used for floating storage. That is about half the number of VLCCs being used for a similar purpose a year ago.

The decline in floating storage is a result of an easing of the crude market’s contango, a position where the price of oil for prompt delivery is lower than the price of future delivery. As the prompt and future prices converge, it becomes too expensive to store oil on a tanker.

On of the biggest users of floating storage is Iran, which Maersk estimates is storing oil on 20 of the 25 tankers. That’s not highly unusual because Iran’s lack of refining capability coupled with its limited on-shore storage and its 3.7 million b/d production capacity means the country has to put the black stuff somewhere.

Iran has been raising its price for some varieties of crude in an effort to keep the dollars flowing in. The country’s oil competes with Russian crude, which is priced lower than Iranian crude. Certain Asian buyers prefer Iranian oil, but the price differential has been too great to ignore.

Iran has cut the differential between its heavy crude benchmark and some other crudes by about half in an effort to move product and get it out of floating storage. But in the face of what is expected to be an oversupplied global market for the rest of 2010, Iran is feeling the pressure to drop prices even more in order to keep the funds rolling in.

Iran’s national budget is based on an oil price of $65/b. Because Iranian crude trades at a discount of $7-$10/b to the Nymex WTI price, when WTI is trading at $74/b, Iranian crude is trading at about $64-$67/b. If crude prices keep falling, Iranian crude could go to $60/b or less. The country was selling its crude for about $80/barrel at the high point of the market in early May.

The weak global economic recovery, particularly in Europe makes the problem worse for Iran. The sanctions against Iran are also having an effect on potential buyers. To gain back those buyers, Iran will have to lower prices, but then it won’t make any money.

The flattening of the contango curve, the decrease in floating storage, and the increasing price pressure on the world’s fourth-largest exporter of crude point to lower crude prices for the rest of this year. The weak recovery just gives crude prices a further nudge downward.

Paul Ausick

Iran oil rig fire may blaze for six months - report

http://uk.reuters.com/article/idUKTRE64U11720100531

(Reuters) - An Iranian oil rig fire may take six months to put out, an official in charge of extinguishing the blaze was quoted as saying on Monday.

World

Three oil workers were killed and at least 10 injured when the fire broke out on Saturday at well number 24 at the Naft Shahr oil field in Kermanshah province which borders Iraq.

Oil officials declined to specify the output of the Iranian state-owned rig or of the field which Iran shares with Iraq. Naft Shahr, the only active oil field in Kermanshah, has estimated reserves of 692 million barrels, Mehr news agency said.

Kermanshah is hundreds of kilometres north of Iran's main oil producing province of Khuzestan.

"The conditions and the situation of well number 24 in Naft Shahr are different from other gushing oil wells," Heidar Bahmani, head of the National Iranian Drilling Co. was quoted as saying in Monday's edition of Iran daily newspaper.

"The drilling rig and other equipment installed on the wellhead have fused and the volume of the oil bursting from the well is currently unknown," he said.

"Based on international standards in the world oil industry, the minimum time for harnessing and controlling the outburst from such a well is six months," he said. Previously officials had said it would take up to a month to control the fire.

OPEC member Iran is the world's fourth biggest crude exporter.

(Reporting by Hashem Kalantari; writing by Robin Pomeroy; Editing by Keiron Henderson

Sonangol Seeks Brazil Partners After Starfish Buy

http://www.businessweek.com/news/2010-05-31/sonangol-seeks-brazil-partners-after-starfish-buy-update1-.html

By Peter Millard

(Bloomberg) -- Sonangol SA, Angola’s state oil company, will seek partners to help fund the development of Brazilian offshore blocks after buying exploration company Starfish Oil & Gas, an official said.

The African oil producer plans to sell minority stakes in the fields that belong to Rio de Janeiro-based Starfish to raise cash, Candido Cardoso, Sonangol’s manager in the South American country, said today in an e-mailed response to questions.

Starfish operates three blocks in Brazil’s shallow waters, two in the country’s offshore Campos Basin and one in the Santos Basin, according to its website. State-run Petroleo Brasiliero SA has a 40 percent stake in the company’s BM-S-60 Santos block.

Foreign oil companies including Sinochem Group, BP Plc, Inpex Corp. and Ecopetrol SA have bought stakes in Brazilian oil fields this year. Rio de Janeiro-based Petrobras is developing the largest oil field discovered in the Americas since 1976 in the so-called pre-salt area off Brazil’s coast.

OGX Petroleo & Gas Participacoes SA, the oil company controlled by Brazilian billionaire Eike Batista, plans to sell a 20 percent stake in the seven blocks it has in the Campos Basin. Repsol YPF SA said April 29 it is looking to sell individual assets in Brazil or carry out an initial public offering for its unit in the country.

Sonangol bought Starfish earlier this year and had a stake in the company before the purchase, Cardoso said, declining to disclose the value of the acquisition. Starfish also has 20 onshore blocks in the country and the company has found signs of oil and natural gas at the Potiguar Basin.

--Editors: Jessica Brice, Dale Crofts.

To contact the reporter on this story: Peter Millard in Rio de Janeiro at Pmillard1@bloomberg.net

To contact the editor responsible for this story: Dale Crofts at dcrofts@bloomberg.net

Dubai Oil Gains Means China Buys Angola, Brazil: Energy Markets

http://www.businessweek.com/news/2010-05-31/dubai-oil-gains-means-china-buys-angola-brazil-energy-markets.html

By Christian Schmollinger

June 1 (Bloomberg) -- The price of Dubai crude rose above Brent oil for the first time in three months in May, leading China, the world’s second-biggest energy user, to buy from Angola and Brazil.

Dubai climbed to a premium of 28 cents a barrel to the U.K. grade on May 13, the highest since Dec. 15, according to data from PVM Oil Associate
s Ltd. Brent has traded at a premium to Dubai 81 percent of the time this year, peaking at $2.26 April 6. West Texas Intermediate oil futures for July slumped to a $3.71 discount against Dubai on May 14, according to Bloomberg data.

The Middle Eastern grade has risen faster as demand in Asia, led by India and China, climbs while the debt crisis in Europe prompts concerns the region’s fuel use will fall. Asian consumption may grow by 789,000 barrels a day in 2010, versus a contraction of 149,000 for Europe and an increase of 181,000 in North America, the International Energy Agency said on May 12.

“Markets expect the emerging economies to grow,” said Akira Kamiyama, a derivatives trader at Mitsui & Co. in Tokyo. “So relatively, the demand factor for Middle East crude is supported. The West Texas benchmark is a ridiculous value.”

PetroChina Co., the country’s biggest oil company, booked a very-large crude carrier on May 20, the Maersk Nautilus, to load supplies in Brazil on June 21 for arrival in Dalian in northern China, according to shipping reports from Optima Shipbrokers Ltd. and Bloomberg data. Oil price publishing service Platts valued Marlim, the South American country’s biggest oil grade, at a discount of $7.50 a barrel to the July West Texas Intermediate future on May 28.

Asia Recovery

Marlim would cost $67.11 a barrel today, based on the Platts assessment, compared with the yesterday’s $73.28 close for Dubai for July delivery. China’s Brazilian imports have averaged 131,000 barrels a day this year, up 47 percent from 2009, General Customs Administration data released on May 21.

“Brent weakness has been less severe than WTI, and Dubai has by comparison suffered even less, suggesting the recovery trade is alive and well and living in Asia, despite weakness in Atlantic Basin oil markets,” said JPMorgan Chase Co. analysts led by Lawrence Eagles in a May 19 report. “Since the price slump last year it has been Asia that has cleared the market every time it has weakened.”

June Brent traded at $5.57 a barrel above the corresponding WTI contract when the European marker expired on May 14. The new front month July Brent was trading at a 3 cent premium to WTI at 8:20 a.m. in Singapore.

China Boosts Africa

China’s purchases of West African crude have risen for July loading shipments, said two oil traders. Angola was the country’s largest exporter in April sending about 1.1 million barrels a day, Chinese customs’ data showed on May 21.

“Angola is no worse quality than the Dubai crude and certainly Dubai’s higher price will make Angolan crude more attractive,” said Gordon Kwan, head of energy research at Mirae Asset Securities Ltd. in Hong Kong. “European markets are pretty much in chaos given what’s happened with the euro. With Europe importing less from Angola then China will be the big buyer.”

The euro has weakened 14 percent against the dollar this year, reaching a four-year low of $1.21 on May 19. The decline has meant crude prices haven’t dropped as much for European buyers.

Since May 3, when European leaders first proposed a bailout plan for Greece and unsettling markets there, oil prices in euro terms have declined by 10 percent. In U.S. dollar terms, crude has dropped by 16 percent.

--Editors: Ang Bee Lin, Clyde Russell.

To contact the reporter on this story: Christian Schmollinger in Singapore at christian.s@bloomberg.net

To contact the editor responsible for this story: Clyde Russell at crussell7@bloomberg.net

Khelil’s ‘Long Overdue’ Dismissal May Boost Algerian Oil, Gas

http://www.businessweek.com/news/2010-06-01/khelil-s-long-overdue-dismissal-may-boost-algerian-oil-gas.html

By Ayesha Daya

(Bloomberg) -- Last week’s dismissal of Algerian Energy Minister Chakib Khelil may give Africa’s biggest natural- gas exporter a fresh start after its national oil company lost its senior executives in a corruption scandal, analysts said.

President Abdelaziz Bouteflika appointed Youcef Yousfi, 68, a former oil minister, to replace the 70-year-old Khelil in a May 28 cabinet reshuffle. Khelil himself took over from Yousfi in 1999, after Bouteflika became president.

Analysts say that Khelil’s stewardship of the Ministry for Energy and Mines was marred by the failure of his efforts to open the hydrocarbons industry to foreign investment. He also was unable to persuade fellow gas exporters to shore up prices by cutting supply or to clamp down on illegal activities by senior officials at national oil company Sonatrach, they say.

“When allegations of corruption emerged at Sonatrach, Khelil’s position become untenable for President Bouteflika,” said Wolfram Lacher, head of Middle East and North Africa at Control Risks Group, a London-based political risk consulting firm. “Foreign investors in the energy sector have been concerned about the blockages the Sonatrach investigation has had over the past few months, and will be hoping these will be eased with the new appointment.”

International oil producers operating in the North African country include BP Plc, Total SA and Repsol YPF SA.

‘Long Overdue’

Yousfi will be responsible for stabilizing Algeria’s oil and gas industry after senior Sonatrach officials were suspended early this year amid allegations of illegal activity. Mohamed Meziane, Sonatrach’s former chief executive officer, was suspended along with the vice presidents for marketing, upstream and pipeline transportation, Khelil said Jan. 18.

Khelil’s dismissal “was long overdue,” said Nordine Ait- Laoussine, a former Algerian energy minister, by e-mail yesterday. Among the changes Ait-Laoussine would like Yousfi to make are easier entry terms in exploration and production activities for international oil companies and more flexible prices of gas exports.

Under Khelil’s leadership, Algeria began exporting liquefied natural gas to the U.K.’s Isle of Grain in 2005, the first such shipment in 40 years. He also oversaw construction of the Medgaz venture, a sub-sea pipeline that will transport 8 billion cubic meters of gas a year from Algeria to Spain starting in September.

Khelil was also one of the more vocal ministers among members of the 12-nation Organization of Petroleum Exporting Countries, constantly briefing reporters about his outlook for oil and gas prices. Prices should return to $80 or $85 a barrel this year as the European Union intervenes to solve the continent’s debt crisis, he said in a May 9 interview.

Hydrocarbons Law

He faced difficulties at home. The hydrocarbons law, conceived upon his return to Algeria in 1999 after two decades at the World Bank, was an attempt to make the country’s energy industry more attractive to foreign companies by limiting Sonatrach’s share in domestic upstream ventures. It was passed and then overturned as the country pursued a policy of resource nationalism.

Khelil also failed to convince his peers in the Gas Exporting Countries Forum to jointly cut production during its most recent meeting in April, as global oversupply hurt contract sales and prices.

Along with Meziane’s replacement, Nordine Cherouati, Yousfi may re-instill confidence in the country’s energy industry, according to Jon Marks, director of Hastings, U.K.-based research company Cross-border Information. Algeria has a production capacity of 1.4 million barrels a day of oil and exports about 60 billion cubic meters a year of natural gas.

‘Steady Hands’

“The reshuffle is being seen as a steady pair of hands to stabilize the ship,” Marks said by phone yesterday. “When his hydrocarbons law was overturned, Khelil stayed in office, and his micro-managing became increasingly resented in Sonatrach. Now Sonatrach will be able to get on with its work and the ministry can focus on strategy.”

The president also replaced the ministers of commerce and telecommunications, Bouteflika’s office said in a May 28 statement. Algeria relies on oil and gas for the majority of its foreign-currency revenue. It is the fourth-largest oil producer in Africa and the third-largest supplier of gas to Europe, after Russia and Norway.

Yousfi graduated from the Ecole Nationale Supérieure des Industries Chimiques in France, according to his CV received by e-mail yesterday from Algeria’s energy ministry. He became chief executive officer of Sonatrach in 1985 and energy minister in 1997, and he served as OPEC President in 1998 and 1999. He most recently served as Algeria’s ambassador to Tunisia.

“He is very capable, very professional,” Qatar’s Oil Minister Abdullah bin Hamad al-Attiyah said of Yousfi, who served as an adviser to him for three years. “I am very happy because it is very rare to see a former oil minister come back to the same position.”

Khelil declined to be interviewed when contacted by e-mail.

--With assistance from Ola Galal in Cairo and Robert Tuttle in Doha. Editors: Bruce Stanley, John Buckley

China signs USD23bln oil deal with Nigeria

http://www.istockanalyst.com/article/viewiStockNews/articleid/4165433

BEIJING, (Xinhua News Agency) -- China has signed a 23 billion US dollars deal with the new government of Goodluck Jonathan in Nigeria to build three oil refineries and a petrochemical plant, reported Nigerian media.

Goodluck Jonathan came to power on May 6 after the death of the former president Umaru Yar'Adua.

The new government declared that it had signed an MOU with China State Construction Engineering Corporation on May 13 for building three refineries in Lagos, the commercial capital, in Kebbi state in the remote northeast, and Bayelsa. The refineries would have a combined capacity of 900,000 barrels per day (bpd).

Chinese oil firms have shown growing presence in Nigeria with Sinopec (NYSE:SNP) (SNP.NYSE; 0386.HK; 600028.SH) securing a stake in Nigerian production when it took over Addax Petroleum in June 2009 at a cost of 7.2 billion US dollars.

CNOOC (CEO.NYSE; 0883.HK) is also to buy up to six billion barrels of Nigerian reserves. It has expressed interest in the 23 prime offshore fields where Shell, Total, Chevron and ExxonMobil (NYSE:XOM) currently operate. If this were to succeed, it would double China's oil reserves in sub-Saharan Africa. (Edited by Lin Fanjing, linfanjing@xinhua.org)

BP shares plunge after failure to contain oil spill

http://news.yahoo.com/s/nm/us_oil_rig_leak

By Ed Stoddard and Sarah Young Ed Stoddard And Sarah Young

VENICE, La.,/LONDON (Reuters) – BP shares plunged on Tuesday as markets reacted to the failure of the energy giant's latest effort to contain an oil spill in the Gulf of Mexico rated the worst in U.S. history.

BP fell close to 17 percent in London trading, wiping $23 billion off its market value, on weekend news that its latest attempt to plug its blown-out seabed well had not worked sparked fears oil could leak into the Gulf until August.

The shares have lost more than a third of their value, or about 46 billion pounds ($67 billion), since the leak started six weeks ago. The cost of dealing with the crisis now totals $990 million.

At the same time, the cost of protecting the debt of what was once Britain's biggest company against default rose sharply as the five-year BP credit default swap widened by 71 basis points to 173 basis points, CDS monitor Markit said.

The leak is a financial and public relations nightmare for BP. It has also damaged President Barack Obama, who is fighting accusations that he reacted too slowly to a disaster that threatens Louisiana fishing communities, the state's multibillion dollar seafood industry and Gulf coast ecology.

Obama will meet with the co-chairs of a commission he created to make policy recommendations about offshore drilling in the light of a spill that has sloshed oil onto the fragile wetlands of Louisiana and threatens Mississippi and Alabama.

The commission will be similar to those that looked into the explosion of the space shuttle Challenger in 1986 and the Three Mile Island nuclear accident in 1979.

In its latest bid to contain the spill that has eclipsed the 1989 Exxon Valdez disaster in Alaska, BP is preparing an untested plan to use a dome to funnel oil to a tanker on the surface.

"We are intent on minimizing the flow of the oil into the Gulf and we've begun a series of operations to ensure just that," BP managing director Bob Dudley told CNN.

"Later on this morning we should see ... robots putting giant shears and cutting parts of that pipe about 35 feet away from the wellhead followed by a robot making a clean diamond saw cut across the top of it. That will allow us to put this dome down," he said on CBS's Early Edition show.

If that fails, it is possible that up to 19,000 barrels of oil a day 3 million liters will leak into the Gulf until relief wells, due in August, are completed.

White House advisor Carol Browner described that as a "deeply, deeply troubling" possibility.

DAMAGE

In evidence of the slew of litigation the slick will likely generate, U.S. Attorney General Eric Holder will meet with federal prosecutors and state attorneys general in New Orleans.

It will be Holder's first trip to survey the damage before what legal experts believe will be a criminal investigation into the disaster.

The fate of BP's shares weighed on investors but was of little concern to residents of Louisiana's coast half a world away, who have suffered crippling losses because of the closure of some Gulf waters to fishing.

"I really don't care much about it (the share price)," said Kimberly Mertz, who works at a marina in rural Venice, Louisiana. "We want to get everything cleaned up."

The slick has spread over 100 miles of Louisiana's coast but Mississippi and Alabama have escaped so far with only scattered tar balls and oil debris reaching its coasts.

That could change as National Oceanic and Atmospheric Administration said moderate southerly and southwesterly winds this week may start moving oil closer to the Mississippi and Alabama coasts.

The forecast was a reminder that oil from the unchecked spill, broken up and carried by winds and ocean currents, could threaten tourism mecca Florida, as well as Cuba and Mexico.

Raising the stakes still further, Tuesday is the official start of the 2010 Atlantic hurricane season, which forecasters say may be the most intense since 2005.

That year Hurricane Katrina ravaged the region and disrupted offshore oil and gas output. Experts fear a big storm could drive more oil ashore and force BP and the U.S. government to suspend cleanup efforts.

(Additional reporting by Jeremy Pelofsky and Matt Spetalnick in Washington; writing by Matthew Bigg, editing by Philip Barbara)