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**GRG55** · September 07, 2015, 07:45 PM

Re: Oil priced in WHAT !!!!!!!!!!!!!!?

Originally posted by Mega View Post

Oh My

China�s new oil contract signals shift from Brent and US dollar

New Chinese oil contract will challenge the dollar's dominance as the primary currency for trading commodities

IS the Brent oil contract sailing into history? Photo: Alamy

By Andrew Critchlow, Commodities editor

9:05AM BST 07 Sep 2015

Brent crude has been the global benchmark against which most oil is measured ever since the field from which it draws its name was discovered in the 1970s.

The first Brent futures were introduced in 1988 as a way for traders and refineries to smooth out volatile price movements and stabilise the market, which was being increasingly dictated by Middle East producers and the world�s largest consumers in the US.

Initially, the contract only comprised light-sweet crude oil from the Brent field in the North Sea, but then was broadened to include a blend of high-quality oil from 15 different areas in the province. Today, the contract comprises oil from just four fields: Brent, Forties, Oseberg and Ekofisk.

Despite declining production in the British side of the North Sea and the start of decommissioning part of the Brent field itself, the contract is still used as a reference against which about two-thirds of the world�s oil is priced. The high quality of the oil makes it ideal for refining into high-grade diesel, petrol and other petroleum products. Because it is largely delivered by ship, it can also be easily distributed anywhere in the world. Although it accounts for only about 1m barrels per day (bpd) of physical supply, compared with world demand of around 92m bpd, Brent crude remains the Dom P�rignon of tradable oil.

However, its role as the preferred global benchmark is soon to be challenged by a new contract that is expected to be offered to the market next month. China is thought to be plotting the downfall of Brent and its US cousin, West Texas Intermediate (WTI), as the world�s second largest economy seeks to gain more control over the pricing of its main source of energy. The Chinese are expected to launch their own global crude contract as early as next month. Unlike Brent and WTI, the new contract will be priced in China�s yuan instead of US dollars.

To be traded on the Shanghai International Energy Exchange to compete with the existing global benchmarks, traders are already talking about the new benchmark potentially superseding these more established crude futures contracts.

The launch of the Chinese contract is also a reflection of Beijing�s growing influence over world energy and commodities markets. China has now grown to be the world�s second largest consumer of oil after the US and is quickly closing the gap as more of its gigantic population aspire to the trappings of a middle-class lifestyle such as a family car. Oil companies such as Royal Dutch Shell have plans to open hundreds of new filling stations in China to meet expected demand from the country�s burgeoning transport sector.

Fuel consumption is rising in China Photo: Reuters
Developing a futures contract is the logical next step for China now that it has developed into a major power in the physical market for crude oil. Competition among the world�s largest producers in the Organisation of the Petroleum Exporting Countries (Opec) such as Saudi Arabia and Iraq are competing fiercely to win a greater share of a market they see being the future of the industry.

The Chinese government has already laid the groundwork for this transition to happen by partly liberalising the market by allowing independent refineries in the country access for the first time to oil imports. Opening up China�s downstream refining industry has also added to pressure on state oil companies which should lay the foundations for a yuan-based oil contract to gain traction in the local market.

This will add to pressure on Brent and London to maintain their role as a pivot for global oil futures. As European countries continue to pursue policies that are intended to reduce the importance of hydrocarbons in the real economy, the physical market upon which futures depend is being gradually undone.

Although it�s too early to predict the end of Brent futures, or the role of the dollar in oil trading, China�s new crude contract signals a wider shift towards Asia.

This article sounds like it was written by the Department of Propaganda in Beijing.

First, WTI and Brent have no exclusivity in oil trading. They are but two of the marker crudes that are used to price the almost 200 different known grades of crude oil produced worldwide. Other marker crudes include Bonny Light, OPEC Reference Basket, Dubai, Tapis (Singapore) and Urals (yes, Russia). So establishing a Yuan based crude contract traded in Shanghai is going to face more competition than merely "reducing the role of the US Dollar" or "adding pressure on Brent and London".

The article states that Beijing's recent "partly libralising" crude import controls for independent refiners "laid the groundwork". That's complete nonsense.

China has a problem.

a) Too much refining capacity in a market that is now growing too slowly - YTD 2015 demand increase for petroleum products in China is running at an anemic 3% (and probably still falling). Refining capacity in China is 14 MMbpd compared to an internal demand of only 11 MMbpd.

b) Too much capital mis-allocated to build refining capacity - the local authorities in Shandong Province, for example, become overly reliant on independent refinery projects to create jobs and hit their GDP targets. In less than 15 years independent refining capacity in Shandong alone increased by a factor of 25 times. Most of that capacity is geared to gasoline & diesel, and cannot make other spec product. Now some of that capacity is either shut in or losing money.

c) Beijiing's controls the refining sector to protect the State owned majors that monopolize the industry, Sinopec and PetroChina. These include limiting crude import licenses to the connected few, excluding the independents from export licenses altogether and forcing the independents to sell to the State owned retailers at prices set by Beijing. This worked fine as long as Chinese demand was rising rapidly and everybody made some money. Now things are unwinding, there is too much capacity, the mounting losses are being concentrated in the independents as the State owned companies are being protected, jobs are disappearing, and you know the rest of the story.

d) Beijing started to allow independents to import crude for the first time in November 2012 (one company, limited quantity). In February 2015 Beijing announced it would expand the program of allowing independents access to alternate feedstock through granting more import licenses.

e) Last month Beijing announced it would allow increased exports of refined products - primarily diesel to get rid of the surplus that is building (but at the same time reduced the allowable gasoline and jet fuel that could be exported...go figure).

f) Lousy margins, slowing demand and a credit market running in reverse is proving a wee bit difficult, and Beijing is trying to walk a fine line between keeping the sector from collapsing, while still protecting their refining/retailing SOEs.

**Mega** · September 09, 2015, 06:42 AM

Re: Oil priced in WHAT !!!!!!!!!!!!!!?

North Sea faces �12bn investment collapse from oil price slump

Offshore industry in the UK has lost 65,000 jobs but companies now adapting to lower oil price, says Oil and Gas UK

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North Sea could lose �12bn of investment in three years Photo: Stefano Zardini/REX Shutterstock

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By Andrew Critchlow, Commodities editor

10:00PM BST 08 Sep 2015
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Oil company investment in the North Sea is expected to slump by up to �4bn per year through to the end of 2018 as operators slash costs to compensate for lower prices, the industry trade body has warned.

In its latest economic report on the North Sea, Oil and Gas UK said that 15pc of the offshore industry�s workforce - equal to 65,000 jobs - has been lost since the beginning of last year as oil companies cut back amid a 50pc slump in prices to around $50 per barrel.

Deirdre Michie, Oil and Gas UK�s chief executive, said: �Last year, more was spent than was earned from production, a situation which has been exacerbated by the continued fall in commodity prices. This is not sustainable and investors are hard-pressed to commit investment here because of cash constraints.�

The trade body said that exploration for new resources in the North Sea has fallen to its lowest level since the 1970s. It has warned that with so few new projects gaining approval, capital investment is expected to drop from �14.8bn last year by between �2bn and �4bn in each of the next three years.

�The industry is under a lot of pressure and it is now widely recognised that a transformation in the way business is done is required if the UK sector is to become more resilient and competitive in a world of sustained lower oil prices,� said Ms Michie.

Despite the cuts in investment, Oil and Gas UK said that output from the region has increased. Initial figures from the Department of Energy and Climate Change show that production increased by around 3pc in the first half of the year compared with the same period in 2014. Last year, output from the UK Continental Shelf averaged 1.49m barrels per day of oil equivalent, which is a measure that includes gas.
This was the first increase in production by the region in the past 15 years, said Oil and Gas UK.

Mike Tholen, Oil and Gas UK�s economic director, said: �Strong investment in asset integrity over the last four years, coupled with measures being taken to improve the efficiency of assets offshore, have resulted in better output from many existing fields, and we expect the rate of decline in production from those fields to slow significantly over the next two years.�

North Sea operators, which generally have to shoulder some of the world�s highest production costs offshore, have been caught in the crossfire of a price war that has broken out between the Organisation of the Petroleum Exporting Countries (Opec) and the shale industry in the US.

Earlier this year BP, which has cut jobs and costs in the North Sea, warned that the area was facing a �massive shock� to adjust to lower oil prices. The financial blow for oil companies was softened by Chancellor George Osborne in the Budget after he increased tax breaks across certain areas in order to boost investment.

�The Government�s restructuring of the tax regime to provide a more fiscally competitive proposition and its funding of seismic surveys to open up new areas for exploration are steps in the right direction,� said Ms Michie.

**Mega** · September 12, 2015, 09:45 AM

Re: Oil priced in WHAT !!!!!!!!!!!!!!?

Why oil prices have scraped the bottom of the barrel

Political unrest, which is a possibility in Nigeria, where extremist group Boko Haram operates (above), could increase the price of oil by threatening the country�s supplies

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Photo: Reuters

Oil prices and the impact on the economy Find out how the repercussions of the falling price of oil are felt in every corner of the wider economy

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By Liam Halligan

2:40PM BST 12 Sep 2015
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Only a fool or a liar claims to know where the oil price is going. I like to think I�m neither � although some may disagree.

While predicting the future path of crude is almost impossible, the oil price remains the most important economic variable on earth. So, despite the pitfalls, any self-respecting economist needs to take a view.

Mine is that oil is priced some way below its fundamental value, and has lately been artificially deflated by a soaring dollar and excessive fears the Chinese economy is about to implode, based on the dramatic volatility of its relatively small but highly visible stock market.

To that, we might add a sizeable dose of wishful thinking about the future growth of US shale production and �Iran quickly coming properly back on stream� following a sanctions reprieve which, given the vagaries of US politics, may yet not happen.

The likelihood in my view is that, over the coming year, the trajectory of crude will rise � and, once the dollar falls back and shale production truly flounders, prices could go up rather sharply. Unless, that is, none of this happens and oil stays roughly where it is, or keeps heading downward.

Predicting the oil-price path is so difficult because both demand and supply are themselves subject to countless unfathomable factors.

The speed of global growth � not least the US and China, by far the world�s two biggest oil importers � is the most important driver of total oil use. Will the supply side then develop as predicted, or exhibit unexpected production surges?
Could it, alternatively, be hit by political unrest in the likes of Nigeria, Venezuela or Iraq? All three countries pump well over 2m barrels daily, more than enough � if such supplies are threatened � to hike the price of the 92m barrels we currently use each day.

Estimates of total global oil inventories vary widely, depending on who you ask � but that doesn�t stop such data from moving the market. Then there are the speculative pressures, based on rumour, fear and innuendo that send markets haywire.

There�s also ample scope, of course, for unrest in the Middle East to send oil soaring. Any systemic meltdown on global markets, another �Lehman moment�, would conversely see the crude price collapse.

I mention all this only to stress, in an outbreak of honesty too rarely displayed by economists, that when it comes to oil prices 12 weeks or 12 months hence, no one really knows anything. Yet every economic growth estimate, in every country, is affected profoundly by one�s view on the future price of oil.

What we do know is that Brent crude was over $100 a barrel as recently as June 2014. Oil has fallen almost to $40 and is currently around $46.

Over recent weeks, the market has been particularly volatile, with crude rising over 10pc in a single day at the end of August, its biggest increase since late 2008. Going well over $50, crude spiked on the combination of an upward revision to US growth and the outage of two pipelines across the Nigerian delta.

Such erratic prices partly reflect thin summer trading volumes. But they�re also explained by the general confusion, and lack of consensus, on where the oil market is headed.

My sense that prices will soon go up is based on three main observations, the first of which is US output. Since 2009, US shale production has grown from almost nothing to 4pc of global output.

That�s driven total American supply from 7.3m barrels daily to 11.6m last year � approaching peak US production of the mid-1970s. When oil goes below $70, though, and certainly when it languishes under $50 as now, almost all shale producers lose money. That particularly applies to the small, high-cost outfits that have driven America�s recent production rise.

So production stops, as does investment in future wells � and that�s now happening on a major scale. Last week, America�s government-backed Energy Information Agency (EIA) said domestic production would be 9.2m in 2015 � some 20pc lower than last year. The EIA predicts a further drop to 8.8m barrels in 2016. That�s because low oil prices have driven down total US rigs in operation from over 1,600 a year ago to less than 700 today.

Photo: Alamy
The US shale outfits, for all their determination, admirable efficiency drives and fighting talk, are suffering badly. While some have hedged their price exposure, most are unhedged and heavily indebted. As shale wells deplete far more quickly than conventional wells, and need constant re-drilling, operating at these prices requires ever more debt capital, which is currently scarce.

That�s why the US shale industry last week reported a cash outflow of over $30bn (�14bn) during the first half of 2015, as lower oil prices forced a spate of bankruptcies and restructurings.

America�s shale revolution has indeed caused a production surge but the revenues generated, for all the hype, have never got close to covering related capital spending. And now US production is falling fast � with the lost volumes large enough to help push global prices back up. America�s shale producers will recover and come again, no question, but only when we�re back at $80 to $90 a barrel.

My second � related � observation concerns Saudi Arabia. America�s recent production rise didn�t go unnoticed by the Saudi-led Opec exporters� cartel.

� AEP: Saudi Arabia may go broke before the US oil industry buckles
� Opec powerless to halt oil price slide, warns former group president
Last November, at a time of souring relations with Washington, Riyadh decided that Opec wouldn�t cut its export quota in the face of falling prices. The goal was to drive prices even lower, so knocking upstart US shale producers out of the market.

Riyadh faces a budget deficit approaching 20pc of GDP, its reserves having plunged from $774bn to $664bn

So when will Opec change its mind, and cut production once again? That�s when the oil market will truly turn, when traders believe the body controlling a third of global oil supplies has decided enough is enough. I think that moment could come soon.

Riyadh has been determined to keep prices low enough for long enough to achieve its unstated but obvious aim. Had Saudi not succeeded in imposing real pain on US shale producers, that could undermine its clout later, when Opec wants to resume its traditional role of keeping prices high.

The Saudi government�s budget, meanwhile, commits it to spending $296bn in 2015 � much of it on lavish welfare payments that keep political unrest in check. Riyadh�s break-even oil price is over $90 a barrel. With oil near $40, the Saudis are bleeding red ink, running a deficit of over $500m a day.

That�s why the Riyadh now faces a budget deficit approaching 20pc of GDP, its reserves having plunged from $774bn in December to $664bn last month � a 14pc drop.

The Saudis, nerves shredded and their oil ministry in turmoil, now desperately need an excuse � to return to normality, cut production and send oil prices back up. The US production drop announced last week is pretty seismic � and could be the excuse that Riyadh needs.

My final thought relates to the dollar. Last autumn, the Federal Reserve announced that the US would rein in quantitative easing. Since then, the dollar has surged � which, in turn, has driven down oil, seeing as it�s priced in dollars.

The US recovery is so shaky, though, that American QE could well make a comeback. And the Fed, despite its rhetoric, is unlikely to raise rates anytime soon. As the markets digest this reality over the coming months, and the dollar falls, oil subsequently goes up. But, as I said, no one really knows anything. We�re talking about oil, after all.

**GRG55** · September 12, 2015, 10:46 AM

Re: Oil priced in WHAT !!!!!!!!!!!!!!?

Originally posted by Mega View Post

...While predicting the future path of crude is almost impossible, the oil price remains the most important economic variable on earth...

LOL. And all this time I thought it was whether The Fed was going to raise interest rates 0.25 or not...