INSIDE U.S. OIL

INSIDE U.S. OIL
Tuesday, November 18, 2014
Futures (Front Month)
NYMEX light crude
Close
Net Change Pct Change U.S. Cash Crude
$75.64
-$0.18
0.24
NYMEX RBOB gasoline
$2.03
-$0.02
0.80
NYMEX heating oil
$2.40
-$0.01
0.51
ICE Brent crude
$79.31
-$0.10
0.13
ICE gas oil
$697.75
-$0.25
0.04
Brent/WTI spread
-$3.65
-$0.06
1.64
Reuters 321 Crack Spread
$14.75
-$0.45
3.05
CHART OF THE DAY
Click on the chart for full-size image
Price
Net Change Differential Diff Change
Light Louisiana Sweet
$79.14
$79.14
3.93
$3.93
Poseidon
$74.74
$74.74
0.40
-$0.40
Thunder Horse
$77.09
$77.09
2.00
$2.00
U.S. Cash Crude Products
(Values in Cents/Gal)
Price
Net Change Differential Diff Change
NYH Prompt Heating oil
222.06
222.06
NYH RBOB
210.52
210.52
6.50
6.50
USG ULSD
229.06
229.06
-12.25
12.25
USG Prompt Gasoline
184.52
184.52
-22.50
22.50
-17.00
17.00
JOHN KEMP ON MARKETS
COLUMN– OPEC'S options (none of them good)
As ministers from the 12 members of the Organization of the Petroleum
Exporting Countries (OPEC) prepare to fly to Vienna for their 166th
meeting next week, the quiet consultations and soundings have already
begun.
John Kemp is a Reuters market analyst. The views expressed are his own.
Click here to read the rest of his column
TODAY’S MARKETS
MARKET NEWS
 China's home-price fall deepens despite policy support,
FDI slips
 U.S. Senate heads for vote on Keystone XL pipeline
 Halliburton to buy Baker Hughes for about $35 bln
 OW Bunker Far East to meet liquidator on Dec. 4; six
more vessels arrested
 Iraqi security forces enter Baiji refinery - police colonel,
state TV
 Putin's oil tsar heading to Vienna as OPEC meets
 Brazil's Petrobras vows graft probe; may take writedown
 Russia's Rosneft looks for alternative ways to explore
Arctic - Natural Resources Minister
REFINERY NEWS
 Japan's Showa Shell restarts CDU after maintenance
BEYOND THE HEADLINES
 COLUMN-Hedge funds caught out by oil slide, worsening rout
OIL: Brent crude oil reversed early losses to rise back towards $80 a
barrel, recovering from last week's four-year low as speculation increased that OPEC could cut output at its meeting on Nov. 27. "We are
getting closer to 50:50 on whether there is going to be an OPEC cut or
not," said Michael Poulsen, an oil analyst at A/S Global Risk Management in Copenhagen.
FOREX: The euro clawed back some ground against the dollar in a
choppy start to trade in Europe, with investors looking to the ZEW survey of German investor sentiment and events in Japan and the United
States later for new direction. "The yen is the only game in town really,"
said Graham Davidson, a spot currency trader with National Australia
Bank in London.
GLOBAL MARKETS: European shares rose and bond yields fell on
hopes that a snap election and delayed tax increase in Japan might
lead to more economic stimulus measures, which also knocked the yen
to its lowest since 2007. "This is positive for growth and supports the
'overweight' position in Japanese equities we added to on weakness
yesterday," said Trevor Greetham, Director of Asset Allocation at Fidelity Worldwide Investment.
U.S. EVENTS TO WATCH TODAY (EST)
 U.S. NAHB HOUSING MARKET INDEX NOV (1000)
OIL ANALYTICS: ASIA SWAPS FORWARD CURVE
INSIDE U.S. OIL
November 18, 2014
OIL ANALYTICS: ASIA SWAPS FORWARD CURVE (0830 GMT)
ICE BRENT FUTURES FORWARD
ICE Brent Fut. Fwd Curve
DUBAI SWAPS FORWARD CURVE
1M - 1Y 1M
Yield
83.97
84.00
Dubai Swaps Fwd Curve
1M - 1Y 1M
Yield
81.74
80.00
82.00
1M 2M
3M
4M
5M
6M
7M
8M
9M 10M
78.00
80.00
76.00
.12
.12
1Y 1M
1M 2M
FO180 FOB CARGO SG FWD CURVE
FO180 FOB Cargo SG Fwd Curve
3M
4M
5M
6M
7M
8M
9M 10M
1Y 1M
FO3.5% BARGES ARA FORWARD CURVE
1M - 1M
Yield
456.25
455.00
FO3.5% Barges ARA Fwd Curve
1M - 1Y 1M
Yield
425.75
425.00
420.00
450.00
415.00
445.00
410.00
405.00
.12
440.00
.12
1M
1M 2M
FO380 FOB CARGO SG FORWARD CURVE
FO380 FOB Cargo SG Fwd Curve
1M - 1Y 1M
Yield
448.25
445.00
5M
6M
7M
8M
9M 10M
6M
7M
8M
9M 10M
1Y 1M
1M - 1M
Yield
679.50
675.00
670.00
665.00
.12
.12
4M
5M
Naphtha CFR Japan Fwd Curve
435.00
3M
4M
NAPHTHA CFR JAPAN FORWARD CURVE
440.00
1M 2M
3M
1Y 1M
1M
2
INSIDE U.S. OIL
November 18, 2014
OIL ANALYTICS: ASIA SWAPS FORWARD CURVE (0830 GMT)
NAPHTHA CIF NWE FORWARD CURVE
Naphtha CIF NWE Fwd Curve
NAPHTHA FOB SG FWD CURVE
1M - 1Y 1M
Yield
657.00
650.00
Naphtha FOB SG Fwd Curve
640.00
72.00
630.00
71.50
.12
.12
1M 2M
3M 4M
5M
6M
7M 8M
9M 10M
2M
1Y 1M
ICE GO FUT. FWD CURVE
ICE GO Fut. Fwd Curve
GO FOB CARGO SG FORWARD CURVE
1M - 2M
Yield
GO FOB Cargo SG Fwd Curve
702.50
1M - 1Y 1M
Yield
96.76
96.00
702.00
95.00
701.50
701.00
701.00
.12
94.00
93.00
.12
1M 2M
1M 2M
JET FUEL FOB CARGO SG FWD
Jet Fuel FOB Cargo SG Fwd Curve
1M - 8M
Yield
97.56
97.00
96.00
95.00
.12
1M
2M - 2M
Yield
72.80
72.50
8M
3
3M
4M
5M
6M
7M
8M
9M 10M
1Y 1M
INSIDE U.S. OIL
November 18, 2014
MARKET NEWS
China's home-price fall deepens despite policy support, FDI
slips
U.S. Senate heads for vote on Keystone XL pipeline
WASHINGTON, Nov 18 (Reuters) - Backers of the Keystone XL
oil pipeline hope a vote in the U.S. Senate late on Tuesday will
send a bill to the desk of President Barack Obama.
With the chamber apparently stuck at 59 votes in favor of Keystone XL, Senator Mary Landrieu worked hard on Monday to
gather one last vote. Late in the day it seemed the Louisiana
Democrat would come up just short, likely hurting her chances
of winning a new six-year term in a December run-off election.
Backers of the bill in the 100-seat Senate need 60 votes to prevent a filibuster by opponents. A companion bill easily passed
the House of Representatives on Friday.
The Senate is expected to vote as early as 6:15 p.m. ET (2315
GMT) on the TransCanada Corp pipeline, which would transport
more than 800,000 barrels per day of oil from Alberta to Nebraska, en route to the Gulf of Mexico.
Obama criticized the project during a trip to Asia late last week,
saying it would not lower fuel prices for U.S. drivers but instead
would allow Canada to "pump their oil, send it through our land,
down to the Gulf, where it will be sold everywhere else."
Republicans and energy analysts said those comments likely
mean Obama is leaning toward vetoing any Keystone bill.
BEIJING, Nov 18 (Reuters) - China's home prices fell in October
by the most since 2011, Reuters calculations show, in spite of
government support measures to try to end a national downturn
that threatens to stifle economic growth.
Prices last month slumped 2.6 percent from a year earlier, according to the calculations based on nationwide prices reported
by the National Bureau of Statistics (NBS).
House prices in the capital Beijing dropped 1.3 percent year on
year - the first fall since October 2012.
Falling prices may deter investors who are seeking capital
gains, with some analysts expecting the housing market correction to continue.
"China's housing market is still on the way down in its correction," said Bill Adams, senior international economist for PNC
Financial Services Group.
"Real estate corrections can persist for 5-7 years, meaning this
slump in China is likely to persist into 2015 and 2016 at least."
But other analysts are more optimistic and believe the market
may be bottoming.
Liu Jianwei, senior statistician at the NBS, said recent policy
relaxations may have boosted home-buying interest as developers promoted sales to reduce inventories.
OW Bunker Far East to meet liquidator on Dec. 4; six more
vessels arrested
Halliburton to buy Baker Hughes for about $35 bln
SINGAPORE, Nov 18 (Reuters) - The Singapore arm of bankrupt Danish shipping fuel trader OW Bunker will meet with its
liquidator KPMG in early December to discuss the firm's outstanding debt, which totals almost $1.5 billion globally.
OW Bunker, a leading supplier of marine fuel oil known as
"bunker", filed for bankruptcy in Denmark earlier this month after
it revealed losses of at least $125 million at one of its Singapore
-based subsidiaries Dynamic Oil Trading, sending the bunker
fuel market into turmoil.
Oil firms have stepped up legal action against OW Bunker's
Singapore units since the announcement with the arrest of
ships, now totalling seven, Singapore court documents show.
Six vessels - Star Quest, Petro Asia, Luna, Nepamora, Zmaga
and Arowana Milan - were arrested in the city-state over Nov.
15-17 by Rajah & Tann Singapore LLP, which earlier this month
also arrested ship fuel delivery barge Laguna.
The law firm made the latest six arrests on behalf of Phillips 66
International Trading Pte Ltd, a court official said. Phillips 66
could not be reached for comment.
Nov 17 (Reuters) - Halliburton Co said on Monday it will buy
Baker Hughes Inc for about $35 billion in cash and stock, creating an oilfield services behemoth to take on market leader
Schlumberger NV as customers curb spending on falling oil
prices.
Halliburton expressed confidence that the tie up of the No. 2 and
No. 3 players in the services industry would clear regulatory
hurdles, saying it was prepared to shed assets to mollify antitrust concerns that could arise in Asia, Europe and the
Americas.
The deal, the second biggest in the U.S. energy sector this year,
could create a company with more revenue than Schlumberger.
With oil prices down by a third since June, demand for drilling
services has slipped and stock prices across the energy sector
have suffered. That has stoked chatter among executives and
bankers about acquisition opportunities companies could take
advantage of to weather the downturn.
Halliburton Chief Executive Dave Lesar said the combined entity
would be more resilient and able to offer a wider suite of products globally.
Putin's oil tsar heading to Vienna as OPEC meets
Iraqi security forces enter Baiji refinery - police colonel,
state TV
MOSCOW/CARACAS Nov 17 (Reuters) - Top Russian oil producer Rosneft's Chief Executive Igor Sechin will fly to Vienna on
Nov. 25, just two days before the Organization of the Petroleum
Exporting Countries meets in the city to debate the plunge in oil
prices.
The surprise announcement from the state-backed firm raised
speculation that Sechin, a close ally of President Vladimir Putin,
will discuss coordinating with OPEC to try stem the near 30
percent drop in oil prices since June.
Venezuela said on Monday its Foreign Minister Rafael Ramirez
and Russian Energy Minister Alexander Novak had met in Moscow and discussed "the need to coordinate actions in defence"
of prices in the oil market.
But Russia, the largest oil exporter outside OPEC, has so far
made no statement about joining any possible production cut,
even as the price drop threatens to tip its sanction-hit economy
into recession.
BAGHDAD, Nov 18 (Reuters) - Iraqi security forces entered the
country's largest refinery for the first time on Tuesday after
months of battling Islamic State militants who had surrounded it,
a police colonel and state television said.
If confirmed, the recovery of the facility could provide critical
momentum for government forces charged with restoring stability in a country facing its worst security crisis since dictator Saddam Hussein was toppled in 2003.
"The first Iraqi force, the anti-terrorism force called Mosul Battalion, entered Baiji refinery for the first time in five months," police
colonel Saleh Jaber, of the Baiji refinery protection force, told
Reuters. State television flashed news of the advance and
broadcast what it said was live footage of the complex from outside its walls. No security forces were visible.
4
INSIDE U.S. OIL
November 18, 2014
MARKET NEWS (Continued)
Brazil's Petrobras vows graft probe; may take writedown
Russia's Rosneft looks for alternative ways to explore Arctic - Natural Resources Minister
RIO DE JANEIRO, Nov 17 (Reuters) - Brazil's state-run oil company Petroleo Brasileiro SA vowed on Monday to fully investigate a graft scandal that has knocked its shares lower and saddled President Dilma Rousseff's government with its biggest
political crisis.
In their first public comments since a former Petrobras executive
was arrested in connection with the scandal last Friday, Chief
Executive Officer Maria das Gracas Foster and other company
leaders said they had hired legal consultants to investigate the
allegations.
Petrobras delayed the release of its third-quarter earnings last
week following accusations that the company systematically
overpaid for assets and work by contractors. The excess funds
were then funneled to political parties including Rousseff's ruling
Workers' Party, prosecutors said.
MOSCOW, Nov 18 (Reuters) - Rosneft, Russia's top oil producer, is looking for alternative ways to develop Arctic hydrocarbon resources after U.S. company ExxonMobil suspended cooperation, Russian Natural Resources Minister Sergei Donskoi
said on Tuesday.
Speaking at a press-conference via a video-link from Sydney,
Donskoi said that Rosneft plans to release development plans
for the Arctic project by the year-end.
Earlier this year, Exxon suspended cooperation with Rosneft in
the Arctic Kara Sea due to U.S. sanctions over Moscow's role in
the Ukraine crisis. Rosneft has promised to continue drilling on
its own.
REFINERY NEWS
Japan's Showa Shell restarts CDU after maintenance
TOKYO, Nov 18 (Reuters) - Japan's Showa Shell Sekiyu KKsaid on Tuesday it restarted the 100,000-bpd No.2 crude distillation unit
at its Yokkaichi refinery on Saturday following scheduled maintenance.
The CDU had been shut since Oct. 3 and was expected to be restarted in mid-November.
5
INSIDE U.S. OIL
November 18, 2014
BEYOND THE HEADLINES
COLUMN-OPEC'S options (none of them good)
Saudi Arabia, Kuwait and Abu Dhabi could ride out a period of
lower prices with comparative ease. But for the organisation’s
other members, it would be much tougher.
The second option is to cut production, sacrificing market share
in the hope of obtaining higher prices and higher revenues overall, and perhaps also speed the adjustment process.
But there is no guarantee production cuts would produce a big
enough rise in prices to offset the fall in volumes. If prices rose
too much, shale producers would be unlikely to cut back, and
the necessary rebalancing might not take place at all.
By John Kemp
LONDON, Nov 17 (Reuters) - As ministers from the 12 members of the Organization of the Petroleum Exporting Countries
(OPEC) prepare to fly to Vienna for their 166th meeting next
week, the quiet consultations and soundings have already begun.
OPEC must decide whether and how to respond to the 30 percent decline in oil prices since the middle of June, in what may
be the organisation’s toughest test in five years.
Slower oil demand growth and rising competition from nonOPEC suppliers, especially U.S. shale producers, pose a common threat to all the organisation’s members.
But formulating a common response will be hard because the
slowdown in demand and the shale revolution have had a very
different impact from member to member.
Saudi Arabia, Kuwait and the United Arab Emirates are producing and exporting close to their highest-ever levels of crude,
according to the BP Statistical Review of World Energy.
All three countries have built large financial reserves so they
could weather a prolonged period of lower prices without too
much effect on their day-to-day government operations.
In contrast, production and exports from Iran, Iraq, Libya, Venezuela and Nigeria have been variously hit by war, sanctions,
unrest, expropriations and mismanagement.
None of those countries has significant foreign exchange reserves and the drop in oil revenues will quickly feed through into
reduced government spending and/or inflation.
The light oils being produced in the United States are not much
of a direct threat to the heavier crude grades exported by Saudi
Arabia and other Gulf countries.
But they compete directly with the very light oils exported by
North and West African producers, including Libya, Nigeria and
Angola.
Formulating a common response is made complicated because
ministers are negotiating on two separate issues: (1) OPEC’s
share of the world oil market versus non-OPEC producers; and
(2) how OPEC’s share is allocated among its members. Allocating production is the age-old problem for any cartel
OPEC is a cartel, whatever its members may say, and however
incomplete its market coverage.
OPEC has struggled with these issues, on and off, since the
early 1980s, so it is familiar territory for the ministers.
But sharing out the market is much easier when oil demand is
growing rapidly and non-cartel supplies are flat or falling -- a
situation that describes much of the last decade.
It is much harder when demand is stagnating and non-OPEC
output is surging -- putting the organisation back into the difficult
position in which it found itself 30 years ago.
ALLOCATING PRODUCTION CUTS
If the organisation does decide to cut, the question becomes
how to share the reductions.
The producers that are best placed to cut their output (Saudi
Arabia, Kuwait and Abu Dhabi) are also the ones with the least
incentive to do so.
The countries that most need higher prices (Iran, Iraq, Libya,
Nigeria and Venezuela) are the least able to afford to reduce
their output.
Iran blames Saudi Arabia for taking advantage of U.S. sanctions
to increase its market share at the expense of Iranian exports,
and expects Saudi Arabia and its allies to shoulder the bulk of
any cuts.
In fact, Saudi Arabia’s share of global oil exports has remained
broadly flat. It is U.S. shale production (up 3 million barrels per
day in the last five years) which has filled the gap left by sanctions, war and unrest across the Middle East.
If there are to be production cuts, Saudi Arabia will almost certainly insist all the organisation’s members participate. There is
no reason for the kingdom to accept a significantly greater
share of the cuts than its historic market share.
Cuts totalling around 500,000 barrels per day (bpd) would be
too small to make a significant difference to prices or market
balances in the short term.
To have any impact, the organisation would need to find cutbacks amounting to at least 1 million bpd.
Based on Saudi Arabia’s historic share of OPEC production,
which has been around 30 percent since the late 1990s, the
kingdom might contribute 300,000 bpd -- which could perhaps
be stretched to as much as 500,000 bpd.
Close allies such as Kuwait and Abu Dhabi might contribute
another 150,000 to 250,000 bpd between them based on their
financial strength. That would leave the other members needing
to find relatively small and symbolic cuts totalling around
300,000 to 400,000 bpd.
Production cuts would demonstrate that the organisation is not
powerless to respond to the challenge posed by the shale revolution. But by propping up prices, production cuts also prop up
non-OPEC suppliers who contribute nothing to the cutbacks.
Free-riding has always been the organisation’s biggest problem.
In the past, it was Britain, Norway, Mexico and Russia that
benefited most. Now it would be U.S. shale players.
If prices do bounce and non-OPEC supply growth continues
unabated, OPEC could be forced to cut again in 12-18 months,
and face the prospect of a permanent loss of market share.
OPEC must determine the best joint path for its output, prices
and the output of non-members. This is fiendishly difficult, given
the large uncertainties around the demand outlook and the sensitivity of U.S. shale producers to falling prices.
So there are no good options for oil ministers in Vienna next
week -- only a choice between poor alternatives in the hope of
finding the least-bad one. And there is no guarantee that they
can reach an agreement at all.
(John Kemp is a Reuters market analyst. The views expressed
are his own)
TO CUT, AND IF SO, HOW MUCH
Ministers must decide whether to cut production, and if so by
how much, and how to share out the reductions.
The first option is to do nothing, allowing lower prices to force a
rebalancing between demand and supply: the best cure for low
prices is low prices.
Prices might remain stuck at current levels, perhaps even head
another $10 or $20 lower in the short term.
But eventually demand will pick up as moves towards energy
efficiency take a back seat in consuming countries and incomes
rise in emerging markets.
And supply growth will fall as shale producers cut back and new
capital spending around the world is postponed or cancelled.
The market would tighten again over a 12- to 24-month period
and prices begin to rise.
6
INSIDE U.S. OIL
November 18, 2014
BEYOND THE HEADLINES (Continued)
COLUMN-Hedge funds caught out by oil slide, worsening
rout
positions almost doubled from 36 to 69.
The ratio of long-to-short positions fell from 12 to one to less
than three to one.
Hedge funds’ net long position more than halved from 413 million barrels to just 168 million on Nov. 4, a turnaround representing an enormous 244 million barrels in just 20 weeks.
Throughout the last five years, there has been a close correspondence between WTI oil prices and the number of hedge
funds with reportable long positions in NYMEX WTI futures and
options contracts.
This is not the time or the place to discuss whether changes in
hedge fund positioning drive changes in oil prices or the other
way around, whether hedge funds initiate price changes or
merely follow trends.
Given the close correspondence between hedge fund positioning and WTI prices over the last five years, however, it comes
as no surprise that the brutal slide in oil prices over the last five
months has been accompanied by an equally huge turnaround
in fund positioning.
In a world of limited liquidity, such a turnaround was bound to
accelerate and magnify the price drop, contributing to the negative or inverted bubble exhibited since June.
The question is whether the turnaround in positions has now run
its course.
The number of hedge funds with reportable short positions is
now close to its highest level at any point since 2006, while the
number of funds with reportable longs has fallen to the lowest
level since the recession in 2008-2009.
There is no way to call the top (or bottom) of a bubble, but the
hedge fund data indicates that the adjustment in speculative
positioning may be nearly done.
(John Kemp is a Reuters market analyst. The views expressed
are his own)
By John Kemp
LONDON, Nov 17 (Reuters) - Hedge funds have been badly
wrong-footed by the slide in oil prices over the past five months,
and by trying to turn their positions around have accelerated the
rout.
Going into the summer, hedge funds and other money managers had amassed one of the largest bullish positions on oil
prices on record.
By the middle of June, hedge funds had a net long position in
WTI-linked futures and options contracts equivalent to almost
413 million barrels of crude oil, according to the U.S. Commodity
Futures Trading Commission (CFTC).
WTI prices had risen to $106 per barrel, and Brent was at $113,
and yet most hedge funds had positioned themselves to benefit
from further price increases.
Hedge funds' long positions (451 million barrels) outnumbered
their short positions (38 million barrels) by a ratio of almost 12 to
one.
Just three weeks earlier, the imbalance had been even more
pronounced, with a long-short ratio of almost 15 to one, the biggest since the series began in 2006.
But prices started to fall, rather than rise, and most hedge funds
found themselves sitting on positions that were losing money (or
giving back earlier profits).
Thus began a race to offload losing futures and options positions and try to square up or get short, which only accelerated
the decline in prices.
Between mid-June and mid-November, the number of hedge
funds with significant long positions above the CFTC’s reporting
threshold fell from 117 to just 72.
Over the same period, the number of funds with reportable short
7
INSIDE U.S. OIL
November 18, 2014
ANALYTIC CHARTS
Daily NYMEX Crude - 30 Min
Daily ICE Brent Crude - 30 Min
Daily ICE Gas Oil - 30 Min
Daily NYMEX RBOB Gasoline - 30 Min
Daily ICE Heating Oil - 30 Min
Daily NYMEX Heating Oil - 30 Min
(Inside U.S. Oil is compiled by Shruthi Narayanan in Bangalore)
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