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Alexander Khurshudov: Autumn brings the oil industry some good news

September 11/ 07:17

No sooner has the summer finished than news items appeared in abundance. Commentators, managers, ministers and hurricanes have become active. 

More than anything, Hurricane Harvey came out of hand severely flooding Houston, the US oil capital. It’s hard to believe that in just a few days there’s been 75 sm of rain, which is 65% of the annual precipitation. Two water reservoirs overfilled; on August 28 the authorities began controlled water release from Addicks and Barker Reservoirs into the suburbs sacrificing some houses to be washed away to stop the water from entering the city center. Meanwhile the people were evacuated timely, preventing a large number of casualties. I can only imagine the kind of fuss our media would raise if a tenth of this happened in Russia…but in this case the silence is so total that one has to dig for the information from the BBC.       

Oil production in the US hasn’t suffered a lot. It’s only in the Gulf of Mexico that they suspended about a third of the wells, resulting in 749 thousand bpd or 7.9% decrease in the total US production. Refineries suffered the most; at least one chemical plant in Brockley was flooded and partially destroyed. All in all, oil refining in the US decreased by 3.25 mln bpd or 18.4% last week. 

These are not critical losses. The significant stocks of oil and gasoline should prevent shortage of fuel. However, another hurricane with a woman’s name Irma is already blasting across Florida. Two more are on their way – Hurricane Jose and the tropical storm Katia (obviously created by Russian hackers as can be seen from its name)…But let’s not run ahead and turn to the other events.   

Russian gas tanker Christophe de Margerie successfully completed its first commercial trip carrying liquefied natural gas from Norway to South Korea via the Northern Sea Route (NSR), as reported by Sovkomflot press office. It covered the Northern Sea Route in record-breaking 6.5 days, with Christophe de Margerie becoming the first vessel to have covered the whole route without icebreaker support. 

 My comment is the Russians are in the habit of coming unexpected, like thunder out of the blue sky. No sooner did the Western companies start to enjoy the high prices for gas in Japan and South Korea, than the Russians turned up with their non-democratic gas.

Russia and South Korea are discussing gas supply in the amount of 12 bln cubic meters a year, according to what A. Novak, RF energy minister told journalists on the sidelines of the Eastern Economic Forum. Earlier Russian President Vladimir Putin remarked that 15 tankers will be built at the South Korean yards to transport the products of Yamal LNG company. It’s not too difficult to guess where they will transport the gas to.

The head of Energy Ministry Alexander Novak in his RBK interview expressed his willingness to discuss the possibility to continue transporting gas through the Ukraine after 2019, in case they suggest an option more attractive than transporting gas via the new Turkish Stream and North Stream pipelines. He also remarked that the transport costs through these pipelines are expected to be twice as low as the current ones.

Rosneft and the Italian ENI are to start drilling the first exploratory well in the Black Sea at the end of the year. According to the agreement signed in 2012, the Italians are to pay the total cost of exploration getting 33% share in the development of the West Black Sea area, stretching 47-119 km offshore the cities of Gelendzhik and Novorossisk. A floating drilling rig Scarabeo 9 is already on its way to the Black Sea. Rosneft is to start exploratory drilling under the license terms. It’s too early to speak about production, reserves have to be estimated first. I'd like to remind you that the environmental hazards there are enormous.

The Swiss Glencore and the Qatar investment authority QIA announced the sale of the biggest part of their Rosneft shares to the Chinese CEFC. After the deal is closed CEFC will own 14.16% of Rosneft stock, with Glencore and QIA keeping 0.5% and 4.7% of Rosneft shares respectively. Earlier Rosneft and CEFC signed an agreement on strategic partnership, which involves exploration and production in the Western Siberia. I. Sechin, the head of Rosneft spoke of the deal approvingly.    

My comment is as follows: back in December I suggested that these shares will soon change hands. However, there is a bitter aftertaste lingering if you ask the question why they had to sell the shares under the minimal price at the end of last year, taking such pains to find temporary holders. Why couldn’t they WAIT for a better moment?     

China is finally preparing to launch Shanghai International Energy Exchange, which would be trading oil futures nominated in yuan. The trading is supposed to start this year. Note that Shanghai has already traded in gold futures, also nominated in yuan.  

Oil price has started goning up. The stock exchange got scared of the hurricanes. Brent quotes have risen by 7.5% during the last two weeks, closing at $53.75 (pic.1).

Pic.1

The increase in the oil price is supported by some other news, which may not catch the eye, though in fact they are quite important.  

Firstly, though the commercial oil stocks in the US grew last week, they reduced by 71 mln barrels dropping to 462 mln barrels over the summer. This is significantly less than last September’s level. On the other hand, the stocks of natural gas liquids are rising sharply, which indicates the progressing shift of shale wells from oil to gas condensate.  

Secondly, the published data on the US oil production in June turned out to be less than that of May by 73 thousand bpd. That’s another cut at the praised American statistics, which was over optimistic for the last three month. It doesn’t look that optimistic now.   

Thirdly, drilling for oil has stopped rising, the rig count even decreased by 10 in August (pic.2). Experience shows that this will be followed by another decline in the production. 

Pic.2

Oil prices keep moving to $57 (pic.1) and the bulls will hardly be able to overcome such strong barrier at once. A bounce back to $54 will follow, the level of $60 will be attacked as early as October. This is fine with us, there is no rush.

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