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Saudi Arabia Cuts Oil Prices for Asia and Europe

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Saudi Arabia cut oil prices for customers in Asia and Europe as coronavirus lockdowns and sagging economies cool energy demand and impact oil price determination in the two regions. For the first time in four months, state-controlled Saudi Aramco has slashed prices of October crude oil exports for European and Asian buyers just a day after OPEC+ symbolically cut output for that same month by 100,000 bpd on global demand concerns.

On Monday, 5th September, OPEC+, the oil producers group that Riyadh leads along with Russia, endorsed a decision to cut the collective oil production target by 100,000 barrels per day (bpd) for October, despite Russia reportedly resisting such a move. The 23-nation alliance is seeking to stabilize oil markets and the steel fabrication industry amid faltering economies and rising inflation. In China, the world’s biggest crude importer, the spread of virus lockdowns is hurting manufacturers and retailers. Saudi Arabia sells most of its oil to Asia where China, Japan, South Korea and India are the biggest buyers.

This would imply returning targeted production levels to the August quotas. The OPEC+ decision is largely symbolic for markets, sending a message that the cartel is ready to meet at any time and decide on any cuts it deems appropriate to “stabilize” oil prices.  The price cut also comes shortly after Moscow announced it would increase shipments of oil leveraging pressure vessels to Asia in response to the G7’s plan to implement a price cap on Russian oil beginning on December 5th, when the European Union ban on Russian seaborne oil goes into effect. The price cap would remain in place for two months.

Aramco lowered its key Arab Light grade for next month’s shipments to Asian refineries from a record $9.80 a barrel to $5.85 a barrel above the Middle Eastern benchmark. That’s a decrease of almost $4 from September. Aramco lowered all grades to Northwest Europe and the Mediterranean, most of them by $2 a barrel. The company raised pricing for US buyers by 50 cents, except for Arab Light, which was kept unchanged.

The move was largely in line with traders’ expectations and follows a 25% drop in Brent crude futures in the past three months to below $95 a barrel. Despite signals of slowing consumption in many major economies, the global market remains tight. Many analysts forecast that demand will outstrip supply in the final quarter of this year, especially if Russia reacts to a G7-proposed cap on its oil prices by limiting exports. Saudi Energy Minister Prince Abdulaziz bin Salman said in an interview late last month that futures markets were “in a state of schizophrenia” following Russia’s invasion of Ukraine. They are giving “a false sense of security at times when spare capacity is severely limited and the risk of severe disruptions remains high,” he said.

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Investing in Oil and Gas

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Commodities are a great source of investment and many investors have traded in potatoes, soya, gold, silver etc. over the decades. Some of the major commodity exchanges are the New York Mercantile Exchange (NYMEX) and the Chicago Mercantile Exchange (CME) with the Commodities Futures Trading Commission (CFTC) providing regulatory oversight in this regard. Energy sector investments are also very large as investors look to invest in oil markets and capitalize on energy price fluctuations.  Different investment vehicles in the oil and gas sector are available to cater to investors’ preferences and risk appetite. So, what are some of these investment vehicles? Let’s find out more in this blog.

Exchange Traded Funds

Greater exposure to the price of oil can be gained through an energy-sector exchange-traded fund (ETF) or exchange-traded note (ETN), which typically invests in oil futures contracts rather than energy stocks. Several sector mutual funds that invest mainly in energy-related stocks are available like the iShares Global Energy Sector Index Fund (IXC), and energy-sector mutual funds, like the T. Rowe Price New Era Fund (PRNEX). These energy-specific ETFs and mutual funds invest solely in oil stocks and oil services companies and come with lower risk. Because oil prices are largely uncorrelated to stock market returns or the direction of the U.S. dollar, these products follow the price of oil more closely than energy stocks and can serve as a hedge and a portfolio diversifier.

Options and Futures

One can also invest in crude oil options, which are contracts that give the option holder the right (but not the obligation) to buy or sell securities at a fixed price. These securities are derivatives which have oil or other oil-related product as the underlying asset whose movements determine the possibility of option exercise. Investing in crude oil options limits the potential for loss and may help protect against adverse commodity price movements.

Crude oil futures are traded on the NYMEX and the CME and are the most actively traded futures contract for a physical commodity. They are popular as they possess strong liquidity and price transparency. Crude oil futures provide individual investors an investment avenue in a vital commodity market. However, crude oil futures are leveraged which increases their risk as compared to other investments. Crude oil investment also impacts the metal fabrication industry due to existing interdependencies.

Risks of Investing

Risks of Investing

There are many risks which need to be taken into consideration in the context of investment in the crude oil markets. Some of these risks are highlighted as follows: –

Risk of Loss – Futures contracts are leveraged or “margined,” which means one may be liable for losses above the initial deposit. Risk tolerance, investment experience and securities knowledge should be gauged prior to investment in crude oil futures.

Volatile Market – The crude oil market is subject to periods of high volatility, and over time, oil prices have fluctuated significantly. For example, during the 2020 recession, the price of West Texas Intermediate (WTI) tumbled. At the start of February 2020, the price was $50.06 per barrel. On April 20, 2020, it closed at -$36.98 per barrel.

False Information – Some brokers and firms claim that crude oil investments soar during and after natural disasters. This claim has no real backing, and natural disasters don’t necessarily increase the chances of profiting in commodity futures or options trades based on crude oil. Manipulation of the oil market is also a very real scenario.

Final Thoughts

Investments in oil and gas are exciting, especially since it is a globally connected market which impacts nearly all economies globally. However, the ever-changing geopolitical and economic factors mean that the oil market can also lead to large losses in case of incorrect or short-sighted investments. Risks need to be understood and taken into account while investing in the energy industry and measures should be taken to ensure losses are limited. There is a difference between hedging and speculation – in the case of oil markets, speculation is a definite no-no!

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Calgary Stampede Returns with Oil Boom Vibe

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The biggest party in Canada’s oil patch is staging a comeback this year, fueled by soaring energy prices and a population eager to mark the end of two years of pandemic lockdowns. The 110-year-old Calgary Stampede is pulling out every nostalgic stop, from chuck wagons, to rodeos, to tapping movie cowboy Kevin Costner as parade marshal. Long a barometer of the Canadian oil sector’s health, this year’s festivities take place as oil trades above $100 a barrel, helping the province of Alberta post its first budget surplus in seven years.

Whether it also marks a last hurrah for the industry is an open question. Longer-term, Canada’s oil sector is facing an existential challenge as the world shifts away from fossil fuels and investors shun the spending excesses of the past. “I am expecting this stampede will be good because people are tired of being cooped up,” said Vern Kimball, who served as chief executive officer of the stampede during the most recent oil run-up from 2006 to 2015. But oil companies understand that high prices “come and they go,” sometimes in a matter of months, he said. “People in the oil patch are talking about paying down debt and returning money to shareholders.”

That’s a far cry from past decades, when global energy companies invested billions in the oil sands and investment banks vied to host the biggest and best stampede events. Invitation-only parties like FirstRowdy, hosted by FirstEnergy Capital Corp. — now Stifel FirstEnergy — became legendary for attracting thousands of boisterous attendees, rivalled only by Firewater Friday, thrown by Peters & Co. Ltd. Entry donations went to charities, helping the community as well as generating business at a time of massive deal flow, Brett Wilson, a FirstEnergy founder, said by phone. “We were raising hundreds of thousands of dollars off what was usually just a drunk-fest.”

Today things look a bit different. Stung by years of depressed oil prices, Calgary-based companies (including heavy steel fabrication companies) are being disciplined even as commodity prices roar higher. FirstRowdy hasn’t returned since it was cancelled in 2016 although Peters & Co.’s event will be back this year. Following a much-slimmed-down version of the stampede last year, and a complete cancellation of the event in 2020, organizers are expecting more than a million visitors in 2022, in line with pre-pandemic stampedes.

Companies including oil sands producer Suncor Energy Inc. and pipeline giant TC Energy Corp. are sponsoring fairground days as well as parties and pancake breakfasts for employees. Cenovus Energy Inc. signed a new four-year sponsorship agreement that includes sponsoring the “Saddle Bronc,” in which a rider tries to stay on a bucking horse at the daily rodeo, and is holding its first in-person event for staff in two years. “There is a huge buzz going on in the city,” organizer Robert Laidlaw, of Acumen Capital Partners said. “Things are better for the energy sector and people have been pent up for three years now and can finally go out and have some fun.”

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Major Controversies Impacting the Oil and Gas Industry

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Being one of the largest industries globally, developments in the oil and gas world have always received attention from the media. Whether it be various oil spills, new oil sources or oil price volatility as a result of geopolitical updates, oil and gas has been under the spotlight in most countries. As a result, controversies and scandals in this industry have been covered extensively over the years. This blog will deep dive into some of the biggest environmental and financial controversies which have taken place in the offshore industry and will look to analyse the resulting impact on the oil and gas sector.

Car Wash corruption row

Brazilian oil giant Petrobras has been the focus of corruption allegations as part of wider criminal investigations in a case known as Operation Car Wash. Named after the car wash that the operation was first discovered in in 2014, Operation Car Wash saw Petrobras accused of bribing politicians and political parties in Brazil and trying to conceal these payments from regulatory agencies and investors. The bribes were paid to secure contracts at inflated prices.

The US Department of Justice described the Car Wash scandal as “the largest foreign bribery case in history,” with $2.1bn siphoned from Petrobras in bribes and secret payments. In September 2018, the company reached a deal with the US and Brazilian authorities to settle longstanding investigations in the scandal. As part of the settlement deal, Petrobras agreed to pay $853.2m in penalties.

Shell-Eni Nigerian corruption case

In December 2018, Nigeria filed a $1.092bn lawsuit against oil companies Shell and Eni over alleged fraudulent practices and cases of corruption. Nigeria contended that Shell and Eni engaged in bribery and conspiracy against the country, claiming that the companies diverged billions of dollars of potential revenue from the Nigerian people.

The lawsuit relates to money Shell and Eni used to purchase interest in the OPL 245 block. It is alleged that this money was paid to Malabu Oil and Gas, a company owned by former Nigerian Minister of Petroleum Dan Etete, where it was then used for bribes and kickbacks. Reynolds Porter Chamberlain solicitor Tom Hibbert, who represented Nigeria, said: “This claim reflects the determination and ongoing efforts of the Federal Republic of Nigeria to recover the very significant sums lost to corruption and the unlawful activity of Shell and Eni in this transaction.”

The BP Oil Spill

The biggest oil scandal in recent memory is the Deepwater Horizon oil spill, better known as the BP oil spill. The explosion at the BP-owned Deepwater Horizon drilling rig offshore Mexico in 2010 killed 11 men and injured several others. The resulting oil spill is considered to be the largest in the history of the petroleum industry, releasing an estimated 4.9 million barrels of oil into the Gulf of Mexico.

Investigations following the oil spill revealed problems in BP’s administration that contributed to the disaster. In September 2014, US district judge Carl Barbier accused the company of wilful misconduct and gross negligence, ruling that BP had acted with “conscious disregard of known risks” and describing the company’s conduct as “reckless”.

Closing Comments

The above incidents are some of the controversies which have had an adverse impact on the major oil and gas players and how they function. While this has led to negative publicity for stakeholders involved, the environmental and financial costs incurred have hindered the growth of the oil and gas industry (and other industries like pipe fabrication, detergents, plastics etc.) over the years. With the rise in alternative sources of energy, oil and gas needs an image overhaul in certain areas going forward!

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Manipulation of Oil Market

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Can oil markets be manipulated after knowing the process of determination of oil prices? This is the question which is being asked by traders who have observed unusual trends in the oil market – like the price of oil falling to zero and continuing to fall further. This was unprecedented in the history of the oil market and, as a result, investors who had taken long positions on oil found their losses increasing at an exponential rate. So, how does this manipulation take place and who are the major players in this area? Let’s find out more in this regard.

Activities pertaining to Oil Market Manipulation

As an example, a trader may be scheduled to purchase tens of thousands of metric tons of fuel, with the price tagged to the daily benchmark provided by S&P Global Platts. In order to save money, the trader would offer to sell small amounts of crude at a price lower than the current spot, or at a loss. The key factor that actually makes the trader money is that oil traders are not required to report their purchases and sales of crude – the process is voluntary. Platts bases its benchmark price based off of the information that traders voluntarily provide. Hence, when a trader reports a sale of the commodity below the current spot price, Platts takes this into account and lowers the spot price.

Next, the trader is able to make his purchase of fuel at a small discount, only a few dollars per ton, but the savings compound quickly. For instance, the trader is scheduled to purchase 100,000 metric tons next week at a price of $100 per ton (the current spot price). This week, the trader will sell some of his crude assets for $95 and report the sale to Platts. Platts will then take the trade into account and lower the spot price to $98 per ton. Then, the trader makes his purchase of 100,000 tons, effectively saving $200,000 on the purchase as the spot price is now artificially $2/ton lower.

Mitigation and Controls around Market Manipulation

With such a seemingly well-known scheme plaguing markets, it is tough to imagine how it can possibly still go on. Traders engaged in practices such as those described above do not view their actions as illegal because they did not involve “colluding with competitors, reporting fake prices or other obviously forbidden behavior.” And it would seem that from a legal standpoint, these traders are mostly correct.

Proving market manipulation requires a legal team to show clear intent to mislead markets in order to make a financial gain. Definitive proof of a person or institution’s intent has long been the snag in the legal proceedings for prosecutors. Within the confines of trading, proving intent is often too difficult, allowing many would-be market manipulators off the hook. However, the European Union and Platts have stated that they will be looking into the matter in an effort to make oil markets more efficient and safer for all traders.

Conclusion

The role of regulators and regulatory bodies in oil market manipulation is likely to grow in the coming days. The Commodities and Futures Commission (CFTC) has already received a number of complaints and claims in this regard and they have been involved in analyzing crude oil price aberrations to identify cases of market misconduct and the evidence supporting the same. As rogue traders or other individuals employ increasingly sophisticated manipulation methods, the security of the oil and gas market and related industries like steel fabrication needs to be equally robust – so that oil prices are subject to supply and demand and market sentiment factors and nothing else!

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Determination of Oil Price

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Did you ever wonder how the price of oil is determined? Oil price movement is the in-vogue topics as a consequence of the Russian invasion of Ukraine and the ongoing inflation of prices in countries like India. It is a testament to the importance of oil that, despite continued efforts to reduce its use and to find alternative green energy sources, oil remains one of the most in-demand commodities globally. Rising oil prices is also an indicator of simultaneous price rise of daily essentials like fruits, wheat, vegetables etc. So, price determination of oil is crucial and it has the potential to affect the global economy. This blog will dive deeper in this regard.

Primary factors that impact oil price

With oil’s stature as a high-demand global commodity comes the possibility that major fluctuations in price can have a significant economic impact. The two primary factors that impact the price of oil are:

  1. Supply and demand
  2. Market sentiment

The concept of supply and demand is as follows: As demand increases (or supply decreases) the price should go up and as demand decreases (or supply increases) the price should go down. The price of oil as we know it is actually set in the oil futures market. An oil futures contract is a binding agreement that gives one the right to purchase oil by the barrel at a predefined price on a predefined date in the future. Under a futures contract, both the buyer and the seller are obligated to fulfill their side of the transaction on the specified date.

The other key factor in determining oil prices is sentiment. Similar to stocks, the mere belief that demand for oil will increase dramatically at some point in the future can result in a dramatic increase in oil prices in the present, as speculators and hedgers alike snap up oil futures contracts. Of course, the opposite is also true. The market sentiment that oil demand will decrease at some point in the future can result in a dramatic decrease in prices in the present as oil futures contracts are sold (possibly sold short as well), which means that prices can hinge on little more than market psychology.

Oil Price Economics Variations

Basic supply and demand theory states that the more a product is produced, the more cheaply it should sell, all things being equal. If someone were to invent a well stimulation technique that could double an oil field’s output for only a small incremental cost, then with demand staying static, prices should fall. Actually, there have been periods of time when supply has increased. Oil production in North America was at an all-time zenith in 2019, with fields in North Dakota and Alberta producing large quantities of oil. Since the internal combustion engine still predominates on American roads, and demand hasn’t kept up with supply, it is expected that the price of oil was low at that point in time. However, a completely different situation gave rise in this scenario. Production was high with oil being stored in pressure vessels, but distribution and refinement were not able to keep up with it. Hence, the price of oil did not fall as much as was expected. This is because refineries operate at 90% of capacity; the excess capacity is there to meet future oil demand.

Final Thoughts

As discussed, the factors around determining oil prices are manifold and at times, they may cause well-known economics to become redundant. Considering the number of financial and geopolitical factors at play, guessing or “timing” oil prices in advance is difficult; however there have been cases where oil and gas prices have been manipulated. As the world becomes more inter-connected, oil prices become more ubiquitous in our lives – from the oil price at the local gas station to the prices displayed on financial indices!

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Correlation between oil prices and stock markets – Fact or Fiction?

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It is a commonly held view that rising oil prices directly and negatively impact the economy and the stock market. This is because it is generally felt that an increase in oil prices will raise input costs for most businesses and force consumers to spend more money on gasoline, thereby reducing the corporate earnings of other ventures. The opposite should be true when oil prices fall. However, does oil really drive stock prices or is the correlation weaker than it is made out to be? In this blog, the likely divergence of oil prices and stock markets will be further explored.

Oil and Cost of doing business

Oil and Cost of doing business

A drop in fuel prices is presumed to directly lead to lower transportation costs which should leave more disposable income in people’s wallets. Also, since many industrial chemicals are refined from oil, lower oil prices benefit the manufacturing sector including lower costs for mining plant and equipment. However, if a country increases its oil production (e.g., the United States), low oil prices can potentially hurt oil companies and affect domestic oil industry workers. High oil prices add to the cost of doing business and these costs are ultimately passed on to the consumers.

Reasons for Oil not driving Stock Prices

Reasons for Oil not driving Stock Prices

It has been theorized that other price factors in the economy—such as wages, interest rates, industrial metals, plastic and computer technology—can offset changes in energy costs. This can lead to a diminished impact of oil price shocks and hence, capital markets remain insulated to an extent. Another possibility is that corporations have become increasingly sophisticated at reading futures markets and are better able to anticipate shifts in factor prices; a firm should be able to switch production processes to compensate for added fuel costs. Some economists suggest that general stock prices often rise on the expectation of an increase in the quantity of money, which occurs independently of oil prices.

It has also been observed that the oil market is much more positive about the economy, both in the U.S. and globally, than are stock traders. History shows that when that kind of dichotomy exists, oil traders are right more often than not, in part due to that enforced short-term outlook in oil. Stocks are being driven lower by fear of what might happen and oil is being pushed higher by what actually is happening.

Distinction based on Definition

Oil prices are determined by the supply and demand for petroleum-based products. During an economic expansion, prices might rise as a result of increased consumption; they might also fall as a result of increased production. For instance, front end oil futures contracts look no further than a month out. Because of that, crude is being less influenced than stocks by what the Fed may or may not do later this year and, right now, the economy is strong.

On the other hand, stock prices rise and fall based on future corporate earnings reports, intrinsic values, investor risk tolerances and a large number of other factors. Even though stock prices are commonly aggregated and lumped together, it is possible that oil prices affect certain sectors much more dramatically than they affect others.

The Final Word

It stands to reason that oil prices impact stock prices in some sectors, e.g., transportation is strongly correlated with oil prices as the dominant input cost for transportation firms is fuel. However, for other sectors, oil is not likely to have a dominant impact partly because the stock markets function differently compared to the oil market. In light of the Russian invasion of Ukraine, the oil market is more volatile than however – however this may be a golden opportunity to invest in some stocks which are trading low now and which have great potential (irrespective of whether they are dependent on oil prices or not!).

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Oil suffers first weekly loss since Russian invasion

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Since the Russian invasion of Ukraine, oil posted its first weekly loss and this kicked off one of the most volatile periods in the history of the oil market. Oil futures declined by 5.5% last week and Brent crude fell by 4.6%. The international benchmark ended above $112/barrel which marked a more than $30 drop since its Monday rally on 7th March which saw prices surge to nearly $140.

Prices see-sawed over the five-day period due to a flurry of news including a US ban of Russian crude imports and UK’s gradual phasing out of the same. Increasing sanctions against Russia have prompted fears that an already tight oil market may be stretched further, due to the absence of the country’s 5 million barrels of oil exports.

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Open interest in the main oil futures contracts has fallen to a six year low in recent days as traders retreat from risk. Volatility has shot up and exchanges have boosted margins, effectively raising the cost of buying and selling. Brent traded as high as $139.13/barrel and as low as $105.60/barrel, indicating extreme volatility. “Extreme intraday volatility perhaps says something about several things: degree of uncertainty, the nature of the news flow, the spill over from some chaotic spot markets and the relatively low liquidity levels at some points,” said Paul Horsnell, head of commodities research at Standard Chartered Plc.

Another contributor to fall in oil prices was the suspension of negotiations between Iran and world powers on Friday to restore a 2015 nuclear deal. Russia sought U.S. guarantees that sanctions imposed for its invasion of Ukraine wouldn’t affect its planned partnership with Iran and this led to talks coming to a standstill. Iran carried out a missile strike in Iraq following breakdown of nuclear talks and this prolonged the absence of Iranian barrels in a market desperate for additional supplies.

Russia-Ukraine conflict

Other factors which are likely to test the global markets are whether Russia plans to pay its international debt and the Federal Reserve is likely to raise interest rates for the first time since 2018, which will potentially strengthen the dollar. Despite repeated urgings from consumers to boost output, OPEC+ has resisted calls from consumers to pump more oil, arguing that the surge in prices is driven by geopolitical tensions rather than a supply shortage.

Major oil companies such as, BP, Shell and ExxonMobil have made the tough decision to exit their joint ventures with Russian oil and gas companies. The US has announced a halt to all energy being imported by the US, a move which may make other countries to follow suit. This news is likely to adversely impact Russia’s oil exports which account for 6% of the global supply needed to match the 100 million barrel/day demand.

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