New Highs for Brent

Jim Brown
 
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There is no stopping Brent as the price for the highly indexed commodity continues to move higher. Brent reached a new nine month high on Friday at $119.

Goldman Sachs warned that global oil markets will remain "tight" this quarter because of "surprisingly robust fuel demand in emerging economies." Rising global demand, disruptions in Canadian supplies and a production cut by Saudi Arabia are accentuating the result of sanctions on Iran.

China reported on Friday that crude imports in January rose to the highest level in eight months because of their economic recovery. They imported 25.15 million tons of crude, a 7.4% increase. That is roughly 5.88 mbpd. Brent crude closed at $118.90. WTI closed at $95.76. Goldman believes that $23 spread will narrow to $5 over the next six months. The bank expects WTI to rise to $102.50 in three months, $105 in six months and $97 in 12 months.

The rising price for Brent is a plus for exploration and production companies producing crude for sale into markets indexed to Brent. In the U.S. the landlocked production is still selling at a steep discount to WTI. In theory this will be corrected by the end of 2013 as various pipeline projects are completed and absolutely by the end of 2014 as dozens more are completed. There are more than 50 pipeline projects currently under construction or in the planning stages.

U.S. drillers in the Gulf ran into a problem last week when the BSEE told them to inspect blowout preventers made by GE or NOV because of defective bolts. Later in the week the BSEE told them to halt operations and replace those defective bolts. This could cost them 2-3 weeks of operations on each rig. With those deepwater rigs renting for $500,000 per day and salaries and supplies adding up to another hundred thousand or more the downtime is going to be expensive.

An employee of GE said 24 of the 83 rigs in the Gulf had equipment with potentially defective bolts. Of those six have already been cleared to return to drilling. Overall there are 30-40 customers with potentially defective GE bolts. Transocean is the largest with 55 BOPs with the potentially defective bolts with 12 in the Gulf. Diamond Offshore has about 30 affected rigs worldwide with 2 in the Gulf.

Transocean said they will be inspecting and swapping bolts at the next available opportunity. They also said they did not expect the inspection/replacement to have a significant impact on their business. Anadarko said they would be replacing the bolts on its Phobos well and on a Ceasar/Tongas well at the next available stopping point and there would be no impact on production.

The blowout preventers are up to 400 ton stacks of valves that set on top of the well to prevent a blowout like what happened on the Deepwater Horizon. They cost up to $45 million each. A mile long tube is attached to the top and the drill stem is inserted into the tube to drill the well. If the BOP has to be returned to the surface the tube has to be removed and the BOP disconnected from the well and lifted to the surface. This is a lengthy and complicated procedure.

The bolts in question are an 18.75 inch bolt/clamp that attaches the BOP to the well and the tube to the BOP. In theory they can be replaced without removing the BOP from the ocean floor.

Unfortunately the replacement bolts are on backorder because of the surge in demand. GE said the BOPs using those bolts are in every major producing region in the world. Replacement will be prioritized to the U.S. market and then expand globally. The hydrogen in the liquids in the pipe accelerates corrosion of certain types of steel.

BP Going Broke?

BP has added up the claims made by states and local governments for economic and property damages and came up with a $34 billion number. This does not include the civil claims settlement and the thousands of civil claims that are still pending. It also does not include the potential $20+ billion liability to the U.S. government for water pollution claims. That trial begins on February 25th.

BP has already put up a $20 billion guarantee for payment of general claims and more than 150,000 claimants have already received money from that fund. BP has already put up $42 billion in assessments for claims and a total of $37 billion has already been committed in separate settlements. The company plans to litigate the $34 billion in state and local government claims.

This will easily go down as the most expensive accident in history and the final cost could be closer to $100 billion. Fortunately BP is not going broke. They may have to live on a budget for several decades in order to afford the payments but they will not go broke. In their recent earnings their profits declined by $1 billion to $4 billion for Q4 and that included another $5 billion charge for settlements in the Gulf disaster. As long as they continue to make $5 billion a quarter in profits they can eventually payoff this disaster.

New Interior Secretary

Sally Jewell has been nominated to be the new Interior Secretary to replace Ken Salazar. She has the support of environmentalists and energy companies and that is tough to manage. She is the head of a retail chain and a former oil engineer. She began working for Mobil Oil in 1978 and moved to be CFO of Recreation Equipment Inc in 2000. That company is better known as REI Outfitters. She is an avid outdoors enthusiast and has climbed Mount Rainier several times.

She believes in the need for production of oil, gas and coal from private lands as a boon to the economy. However, as an outdoor person she will want to guarantee it is done properly.

While most legislators were positive on the pick there were a few concerned that her REI heritage could be a problem. REI has consistently supported several special interest groups with radical agendas. Senator Lisa Murkowski of Alaska, the top republican on the Energy and Natural Resources Committee, said Jewell was a "suitable candidate" for replacing Salazar. Let's hope Murkowski was right.

Anadarko Earnings

Anadarko Petroleum (APC) reported earnings of 91 cents that was 20 cents over consensus estimates. Revenue rose +8.5% with production of 741,000 bpd. That was well above the Oct-29th forecast of 711,000 to 730,000 bpd. Production rose sharply at the Wattenberg, Eagle Ford and Marcellus shale plays.

Anadarko has proved reserves of 2.56 billion barrels with 46% oil and 54% natural gas. The company said it was on track to have 3.0 billion barrels of reserves by the end of 2014.

Iran as Belligerent as Ever.

The IAEA is scheduled to meet with Iranian negotiators for three days this week ahead of the P5+1 meetings with Iran on February 26th. On the eve of the IAEA meetings the president of Iran, Mahmoud Ahmadinejad, said world powers will never be able to prevent Iran from technological advancement in the nuclear field.

"No power is able to impose its will on the Iranian nation. They failed to stop Iran from accessing nuclear technology. This will never happen."

His comments were at a ceremony to celebrate the 34th anniversary of the Iranian revolution. Thousands of people were massed in Freedom Square in Tehran where Ahmadinejad made his speech. However, reporters covering the event for the foreign media were restricted to designated areas and allowed to interview only specific members of the crowd.

Last week the supreme leader, Ayatollah Ali Khamenei, rejected an offer by vice president Biden to meet directly with the USA to discuss the nuclear issue. He said "negotiations while the U.S. holds a gun to Iran won't solve a thing."

The last round of P5+1 talks in June failed for the same reasons all prior talks had failed. Iran will not talk about the nuclear subject. They come to the meetings with their own agenda to talk about Israel, sanctions, aircraft parts, etc, and will not discuss the nuclear issue. The talks always breakup with the P5+1 spokesman saying nothing was discussed and Iran claiming substantial progress was made.

I seriously doubt these talks will make any progress either. Khamenei has made it a matter of Iranian pride that the country has stood firm in the face of the great satan (USA) and continued working on the nuclear project. To back down now would be a loss of face.

Ahmadinejad is leaving office in August but any new president will have the same supreme leader to answer to so nothing is likely to change.

The six nations enacted new sanctions last week that require countries buying Iranian oil to do so in their own currency and not with dollars or euros. They are also requiring the payments be held in an escrow account in the purchasing country and Iran is only able to use those funds by purchasing something from that country. Iran does not get the money. It only receives credit towards the purchase of future goods. This is going to severely cripple Iran but it is a good deal for those countries. Iran will have to find something available for export in those countries.

Nemo Hits Fuel Supplies

Heating oil prices rose to four month highs on speculation that the storm would boost demand for distillates in the region. The storm dropped up to 40 inches of snow in some states but New York City avoided the worst of the snow.

There were long lines at service stations for the two days before the storm as consumers filled up their cars and every available portable container just in case there were massive power outages and generators were required to keep power on in the cold weather.

We are probably going to see a large decline in distillate and gasoline inventories in next week's EIA inventory report. That will be followed by a gain the next week because demand was simply pulled forward rather than increased. If anything demand was diminished because of emergency laws forbidding travel for the two days after the storm.

Jim Brown

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