Advantage: Crude

- October 8th, 2009

Even as investors are mulling mixed signals over crude supply numbers from the Energy Information Administration, there are clear indications that the Gulf state leaders have no plans to stop pricing oil in dollars. The rumour had traders hitting the panic button.

By Kishori Krishnan Exclusive To Crude Investing News

The writing is on the wall. Crude oil fell more than $1 a barrel after a US Energy Department report showed that inventories of gasoline and distillate fuel increased. Investors were mulling mixed signals over crude supply numbers from the Energy Information Administration.

Inventories of crude oil dropped 978,000 barrels to 337.4 million, the report showed. A 2 million-barrel gain was forecast by analysts. Supplies are 10 per cent above average. Imports fell 4.6 per cent to 9.1 million barrels a day last week.

At just under $70 a barrel, oil prices are still almost exactly at the center of a $10 trading range that has held firm for most of the last four months. While the oil and fuel surplus is holding prices down, optimism that a recovering economy will soon bring inventories back to normal has halted downward corrections just as quickly.

Tim Evans, an energy analyst with Citi Futures Perspective in New York said: “The product builds are significant and increase the cushion against any disruption. It takes uncertainty about refiners out of the equation.”

Crude oil for November delivery fell $1.31, or 1.9 per cent, to $69.57 a barrel at 2:59 p.m. on the New York Mercantile Exchange, the lowest settlement since September 29. Prices have gained 56 per cent this year.

The markets were waiting with bathed breath for the crude oil inventories report from the US, which was released on Thursday. The bearish report unsettled oil from its previous day’s perch.

On Wednesday, in anticipation of the report, crude oil prices had experienced another day of appreciation as the oft-traded commodity rose above $71 a barrel during Wednesday’s trading session.

Crude prices rose on October 7, as traders took their cue from the weak US dollar, and a major scramble that the Gulf States were considering dropping the greenback for oil transactions.

Though the rumor was denied later by Gulf State leaders and foreign ministers, the impact created a moment for pause in the market. And with the US dollar’s uncertain future, attention has now turned to the crude oil inventories report to find out where the relative level of demand for the commodity currently stands, and to gauge if the rumors have any substance behind them.

The report tends to have a large impact on crude oil’s prices, especially in the short-term.

Oil and other commodities denominated in dollars for global trading tend to rise when the US currency falls as they become cheaper for holders of other currencies. A move away from dollar-based pricing of the world’s leading commodity could further weaken the greenback, a supposed rumour which got traders to hit the panic button.

Report denied

However, the head of the United Arab Emirates’ central bank reiterated that the Gulf nation had no plans to stop pricing oil in dollars. UAE Central Bank Governor Sultan Nasser al-Suweidi told newswire AP in a statement that “there has been no meeting … whatsoever” to discuss ending the US currency’s role in the pricing of oil.

Al-Suweidi “denied totally” a report in a Britain newspaper that said secret meetings were taking place between Arab states, China, Russia, Japan and France to instead use a basket of currencies for oil.

Other officials in several countries either denied talks or said they had no knowledge.

Kuwait’s oil minister, Sheik Ahmed Al Abdullah Al Sabah, said there have been no talks on the topic among Gulf oil ministers. “At our level, no,” he said. “I didn’t even dream about it.”

OPEC Production

Algerian Oil Minister Chakib Khelil said he doesn’t expect OPEC to increase production at its December meeting as a “weak” economic recovery fails to revive oil demand. “I don’t think we will be in a situation where the economic recovery will be strong enough to need additional supply,” Khelil told reporters in Buenos Aires. “I don’t see OPEC raising production.”

Oil volume in electronic trading on the Nymex was 605,802 contracts as of 3:01 pm in New York. Volume totaled 614,684 contracts yesterday, 11 per cent higher than the average over the past three months. Open interest was 1.25 million contracts, the highest since February 13.

Iran tension

Renewed tensions between Iran and the West are doing little to push oil prices higher. Threats of new trade bans or a military strike against the Islamic republic over its nuclear program helped drive crude prices to a record near $150 a barrel last summer.

At that time, traders were concerned that Tehran could disrupt crude shipments out of the Persian Gulf. Today, they merely yawn at any fresh tension.

“Today, the world powers have more options on Iran than they used to,” said Olivier Jakob of Petromatrix in Switzerland. “There is lot of spare capacity in OPEC, and demand in the West is much lower.”

OPEC has slashed 4.2 million barrels off its daily output since last September. Iran, the bloc’s second biggest producer, exported about 2.4 million barrels daily in 2008.

OPEC’s decision to cut output helped stabilize prices between $65 and $75 a barrel in the last three months.

Sale at ConocoPhillips

ConocoPhillips, the third-largest US oil company, said it will sell about $10 billion of assets in the next two years and cut capital spending in 2010 to reduce debt and increase returns on capital.

The divestitures may include oil and natural-gas properties and refineries, Houston-based ConocoPhillips said in a statement. Proceeds will be used to help the company achieve its target debt-to-capital ratio of 20 per cent to 25 per cent.

The company, which said it will cut capital spending to $11 billion in 2010, is still grappling with debt taken on with its 2006 acquisition of gas producer Burlington Resources Inc. The company’s debt-to-capital ratio was 34 per cent as of June 30.

“The company is trying to do something, scrambling to find a way to enhance shareholders’ value,” said Fadel Gheit, an analyst at Oppenheimer & Co in New York who has a “market perform” rating on ConocoPhillips shares. “Reducing capital spending as well as selling assets will give more breathing room financially.”

ConocoPhillips rose $1.29, or 2.7 per cent, to $49.70 in New York Stock Exchange composite trading. The stock, which has eight buy ratings, nine holds and one sell recommendation from analysts, had dropped 6.5 per cent this year before today.

Sale at Essar

Another private refiner to hit the sell button is India’s Essar group, which has decided to sell stakes in its oil and shipping units as part of a global expansion plan.

Prashant Ruia, the group’s CEO said: “There is enough headroom in these two companies so over the next couple of years we will consider increasing the free float.”

Essar is buying oil refineries, steel plants, and coal and iron ore mines from Australia to Canada to compete with rivals including Reliance Industries Ltd and ArcelorMittal.

On Wednesday, the company outbid Jindal Steel & Power Ltd for the Australian coal explorer Rocklands Richfield Ltd, upping its offer price by 19 per cent to A$144 million ($128 million).

To establish a global footprint, Essar Oil bought a 50 per cent stake in Kenya Petroleum Refineries Ltd in July. Essar also bid for Royal Dutch Shell Plc’s Stanlow plant in England to add capacity in Europe and gain access to markets and pipelines.

In a bid to fund its plans, Essar Group may do something it hasn’t done since 1995, “We would like to go to the market to raise funds,” Ruia said.

Niraj Shah, an analyst with Centrum Broking Pvt in Mumbai, said Essar was “cash rich” because of its steel and telecommunications businesses, giving it the confidence to look abroad for bargains.

“Assets are available at reasonable prices so it’s a good time to buy,” Shah said. “The acid test is how they finance and run and integrate the global assets into the group.”

Essar Oil Ltd, which is almost 89 per cent-held by the group, operates a refinery in the western state of Gujarat that processes 10.5 million tons a year. It plans to spend $1.56 billion expanding it to 16 million tons by December next year.

Shares Rise

The Mumbai-based company then will spend another $4.44 billion to increase capacity to 34 million tons, Ruia said.

The refiner’s shares have climbed 74 per cent this year, tracking a 75 per cent gain in the benchmark Sensitive Index of the Bombay Stock Exchange. On Thursday, it marginally fell.

Crude share price

Most stocks were in positive range. Some are detailed below:

Imperial Oil Limited (AMEX: IMO).

Exxon Mobil Corporation (NYSE:XOM).

Marathon Oil Corporation (NYSE:MRO).

BP plc (LSE:BP).

China Petroleum & Chemical Corp (NYSE:SNP).

Murphy Oil Corporation (NYSE:MUR).

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