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This Week In Energy: Asian Energy Empire Expansion

This week saw WTI prices break the psychological $50 threshold, compounding trader and oil company woes further. However, recent price updates from certain shale areas in the U.S. would seem to indicate many producers are receiving far less for their oil (as low as $34 per barrel in some cases). As the oil markets now appear to be in contango, near-term prices are cheaper than longer term futures, more and more companies are storing crude in the hopes of reaping profits later in the year once the market stabilizes. Trading firms Vitol and Trafigura as well as oil major Royal Dutch Shell have all reserved oil tankers for up to 12 months, according to Reuters. However, with OPEC digging their heels in, stating that there was “no chance” of reassessing their position prior to their June meeting and that, “Naimi made it clear: OPEC will not cut alone,”when this market stabilization will occur is anyone’s guess. While bearishness abounds amid capex cuts, increased surplus forecasts for 2015 and slow economic growth in various key economies of the world, for others, it’s hunting season.

The state oil companies of major Asian players are, at present, replete with cash and see the coming year as an opportunity to snap up assets around the globe on the cheap. The Oil And Natural Gas Company of India (ONGC) is predicting crude prices to stay at around current levels for 10 months. This provides a once-in-a-decade opportunity to pick off debt-laden exploration companies in Africa, Latin America as well as North America. Competition is rife among Asian state oil companies with India, China, Malaysia and Thailand all looking to expand amid the current oil crisis. ‘‘The current oil and gas prices offer a new opportunity for us to leap-frog our growth trajectory,” ONGC’s Narendra KumarVerma said in an interview. ONGC is predicted to have a budget of around $4 billion to splurge on assets. However, this is dwarfed by China’s PetroChina Co. with an estimated budget of $12 billion. “They’re likely to scour Russia and traditional destinations including South America, Iraq and Africa,”said Shi Yan, an analyst at UOB-Kay Hian Ltd. in Shanghai. Meanwhile, Indonesia’s state-owned energy company PTPertamina, purchased a 30 percent stake in US-based Murphy Oil Corp. (MUR)’s oil and gas assets in Malaysia for $2 billion last year. Expect such predatory spending to change the face of global energy production and shift dynamics eastward should oil prices continue to remain low as we move further into 2015.

Urgent Note: This week, our top energy trader Martin Tillier discusses why good news coming from the energy sector is not making it through all of the recent doom and gloom, and how this presents well-informed investors with some quality opportunities. Be warned, this play is not for the faint of heart, but it is based on traditional wisdom. If you would like to know more – click here and start a 30 day free trial to Oilprice Premium.

Meanwhile, yet more pressure is mounting on the Obama administration to open U.S. crude oil exports but this time, the calls are not coming from US shale producers but from America’s neighbor to the South. Petroleos Mexicanos or Pemex, Mexico’s state-owned oil producer, is engaged in talks with the US department of commerce regarding potential crude oil exports to Mexico to assist refining operations and improve gasoline production levels. Pemex are seeking in the order of 100,000 barrels a day of light crude oil which comes amid a 66% percent increase in US crude production, owing to the shale boom, over the last five years. The U.S. has had a long-standing ban on most crude exports for 40 years, stemming from the oil shocks of the 1970s, with only Canada receiving limited exports. However, November figures for U.S. crude exports showed a record 502,000 barrels a day, a trend that could prove optimistic for Mexican aspirations. Pemex’s oil production fell for the tenth consecutive year in 2014, leading to the liberalization of the Mexican oil market in the hopes of a reversal. While the outcome of the export discussions will not affect Mexican exports of heavy oil to the U.S., the trading of light for heavy oil could greatly benefit U.S. shale producers and the U.S. Government alike.

Finally, no week in 2015 would be complete without more bad news for Russia. While the economic woes, the falling ruble, Western sanctions, the cancellation of key pipelines and the dispute in Crimea have all been discussed at great length, it now appears Russia is facing yet another economic threat: weakening natural gas prices. Despite faring better than crude oil in 2014, gas prices still fell significantly and the average cost on the European market is expected to reach its lowest since 2010 or a 13% drop. A huge factor affecting gas prices this year is the arrival of several major LNG projects to the market, with an expected 5% expansion in global LNG output, which will greatly increase competition within the European market and threaten Russian pipeline flows that account for almost a third of European demand. With demand and prices declining in Asia, Europe’s imports of LNG are expected to rise by 18% in 2015. Given Russia’s dependence on both oil (45%) and gas (14%) for almost two-thirds of its state revenue, this news will come as a bitter blow to an already battered economy. As Europe increases energy efficiency amid weak economic conditions while at the same time seeking to diversify energy supplies away from Russia following recent geopolitics, 2015 does not hold much promise for Putin’s Russia.

As oil reaches new lows each week, our Premium service provides our members with the best ways to take advantage of current market volatility and emerge from the current oil crisis in a far stronger position than you might have dreamed of. To find out how best to ride out the energy market storm, click here and join our Premium Energy Investment Community.

By. James Stafford of Oilprice.com


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