Headlines
March 17, 2010
OTC Regulation Advances in Senate Finance Reform Bill
Fuel market watchers tracking potential changes in the so far unregulated
over-the-counter (OTC) derivatives, or swaps, market got a little more to think about this week.
Senate Democrats' bill to reform U.S. financial regulation, introduced on Monday, is sweeping in scope. Among the major proposals are a plan to head off
systemic risk crises of the kind that threatened global financial systems in 2008, greater regulation of hedge funds, restrictions on trading and oversight of credit rating companies.
The bill will have to be reconciled with the House version that was passed
in December.
Swaps are contracts that are mostly traded (and privately negotiated) directly between two parties, without going through an exchange or another intermediary, that require an exchange of cash payments. Payments are based on the performance of an asset such as a security, the change in an interest rate index or, as in the case of petroleum, various changes in crude oil or refined product prices. Commercial end-users, who most often use swaps to hedge risk, represent only a small part of a market worth hundreds of trillions of dollars.
The House and Senate bills propose the first comprehensive system of regulation of swaps, requiring clearing and trading on exchanges or electronic platforms
for all standardized transactions that involve both dealers and other large or
major market participants. Both call for regulation of OTC derivatives by the Securities and Exchange Commission and the Commodity Futures Trading Commission (CFTC).
However, there are subtle differences between the two and possible changes to the Senate version that have potentially far-reaching consequences.
The derivatives section of the bill may be made stricter, changed to limit regulators' ability to decide which products are cleared, analysts for investment bank Morgan Stanley wrote in a note to clients. Senate Banking Committee staff said Monday that amendments might be made next week when the committee meets to discuss the bill.
In addition, the House and Senate bills define "major swap participant"
differently. In the House legislation, major swap participants are those "that could expose counterparties to significant credit losses," while the Senate version characterizes them as participants that "would cause significant credit losses to its swap counterparties." The latter definition is more inclusive, certain to apply to major hedge funds.
And when it comes to end-user exemptions from clearing and trading standardized swap contracts, the Senate bill may yet tighten the regulatory screws on companies more than the House version does. Fewer end-users may be allowed exemptions from the requirement to process bank-corporation trades through clearinghouses, Morgan Stanley speculated in its note.
Such a change would cheer the head of the CFTC. As recently as yesterday, Gary Gensler, CFTC Chairman, called for exemptions to be limited.
"If reform ultimately includes exemptions for customer transactions, those exemptions should not apply when dealers are trading with financial end- users," Gensler said in remarks before the Economic and Monetary Affairs Committee of the European Parliament.
Citing data collected by the Bank for International Settlements (BIS), Gensler said any exemptions should be limited to the small slices of the swap markets involving commercial customer transactions and not the large parts of those markets that interconnect dealers with the rest of the financial system.
In the case of interest rate swaps, he said, only 9% is comprised of transactions between dealers and their commercial customers while 57% of the market consists of dealers and their financial customers.
BIS data show that for OTC equity-linked and commodity derivatives, 10% of dealer transactions are with their commercial customers but 49% are with their financial customers.
March 15, 2010
Investment Bank: Most Analysts Overlooking Unconventional
Oil Growth
It would be safe to say that most global investment banks have a bullish view of where oil prices are headed in the next 18 months. The notable exception is Deutsche Bank, and that company this weekend provided one more reason to be suspicious of $80-$100/bbl crude prophesies by peers such as Goldman Sachs, JP Morgan and Barclays.
One clear reason for Deutsche Bank's more cautious outlook: its researchers believe that other analysts are not paying sufficient attention to the growth in unconventional oil.
And the bank is not referring to oil from shale, or coal gasification technologies, or gas-to-liquids projects. It specifically suggests that brisk growth in biofuels' production is overlooked in the unconventional category.
"The contribution to oil supply growth this year from unconventional oils is greater than any of the individual countries often cited as being the likely sources of non-OPEC growth for 2010," Deutsche Bank's latest commodity report notes. Those countries include Azerbaijan, Canada, Kazakhstan and Russia.
Coverage of the contribution for unconventional oil is noticeably absent from monthly reports issued by the Energy Information Administration (EIA) and the OPEC Secretariat.
A year ago, falling prices, high feedstock costs, and the credit crisis all undermined the viability of unconventional oil projects, including biofuels.
This year, the total contribution of unconventional oil is expected to be
2.391 million b/d, up some 1.071 million b/d from five years ago. Biofuels account for 1.859 million b/d of the unconventional number, an increase of 472,000 b/d from last year, and up some 1.25 million b/d from 2005.
Deutsche Bank kept its forecast levels for petroleum intact. It projects a 2010 average WTI value of $65/bbl, or some $15/bbl or more below NYMEX prices for the remainder of the year. Bank researchers see an $80/bbl average price for 2011, and an $85/bbl level for 2012.
The projections for refined products are as much as 35cts/gal below some current numbers. For example, Deutsche Bank sees RBOB averaging $1.82/gal this year, with heating oil projected to average $1.88/gal.
March 10, 2010
OPEC Tweaks Demand, But Warns About Potential Oversupply
OPEC researchers have slightly raised expectations for global demand in 2010, but are not looking at oil prices through rose-colored glasses. In its latest Oil Market Report, issued today, the cartel warned that even a smaller- than-normal first-to-second quarter slide in world demand could pressure crude oil prices over the near term.
For the year, OPEC sees world demand growth of 900,000 b/d, and that represents a 100,000-b/d upward revision from its previous forecast. The demand projection is based on global economic growth of 3.4% in 2010, and the majority of that growth comes from China and other non-OECD (Organization for Economic Co-operation and Development) countries.
If global demand does indeed rise by 900,000 b/d this year, it would compare with a loss of 1.4 million b/d last year. Demand in OECD countries is expected to drop by 150,000 b/d, but emerging economies, including China and Mideast countries, will need an additional 1 million b/d or so of petroleum.
A 400,000-b/d increase in output is projected for non-OPEC countries, and that number reflects a 100,000-b/d upgrade from the previous cartel forecast.
OPEC raised estimates for demand for its own crude by 200,000 b/d to 28.9 million b/d in 2010. But by any measure, demand this year will be off more than 2 million b/d from 2008 levels.
Special attention was given in the report to the soft demand in the shoulder period between winter and summer. OPEC cites five years of data that sports an average seasonal decline (between the first and second quarters) of
1.8 million b/d. Cartel researchers believe that the drop this year will be a less considerable 800,000 b/d, but that still puts the projected demand for OPEC crude around 1.5 million b/d short of actual OPEC production.
A note of caution was sounded for member countries, and OPEC stressed that "the present quarter calls for continued caution and close monitoring."
March 1, 2010
Funds Add Long Positions on NYMEX; Bet on Higher Prices
The funds were very active on the NYMEX last week, adding long positions across the board in the energy complex, according to bank analysts.
The addition of more long positions on NYMEX could extend the rising price trend for crude, gasoline and heating oil.
"This means that the money managers are betting on higher prices this week and in the near term," a banker said.
He noted that crude and products prices were higher at the end of last week as more long positions were adopted two weeks ago.
For WTI crude, the increase in aggregate net length was 21,000 lots mainly through addition of new length, and short liquidation amounting to about only half the addition of length.
For RBOB, longs added 14,000 lots, while shorts liquidated 2,500.
In heating oil, the increase was the largest since the end of last year at 12,000 lots, which was achieved by an addition of 7,500 longs and liquidation of
4,500 lots.
Bankers noted that these additions to net length had been more due to the speculative flows rather than underlying fundamentals.
The latest move is similar to the fund increase that the market saw in October and December of last year.
At noon, NYMEX front-month crude was up 22cts to $79.88/bbl, and April heating oil was up 1.58cts to $2.0511/gal.
April RBOB was up 67pts to $2.1946/gal.
February 24, 2010
Saudi Aramco Eyes Start-Up of Third-Party Oil Trading Operations
Saudi Arabia's state-owned national oil company, Saudi Aramco, is expected to launch its new third-party physical oil trading operations soon, pending approval from the company's board of directors, industry sources in Asia told OPIS
on Wednesday.
Third-party trading is defined as trading barrels that you do not already own.
Currently, Saudi Aramco, one of the largest crude producers in the world, is engaged only in marketing and distribution of its crude and products. If the trading plan is approved, Saudi Aramco will begin third-party trading or directional trading for the first time ever.
The trading headquarters is expected to be located in Dhahran, Saudi Arabia. Saudi Aramco does have an office in Houston and in other key petroleum markets around the world.
In the U.S., it relies solely on Shell Trading to market all products from Motiva, which is a 50-50 refining joint-venture between Shell and Saudi Aramco.
Motiva operates and owns three refineries on the U.S. Gulf Coast, with a total refining capacity of about 740,000 b/d.
Saudi Aramco has another 1.5 million b/d refining capacity at its disposal in
Saudi Arabia.
The company's plan is to trade across the barrel as well as crude in all regional markets around the world, and the plan has already been submitted to the board. It is unclear how long it takes to approve the plan.
Neville Romme, a company spokesman, declined to comment on the plan
when contacted by OPIS via email, as he regarded that company
information proprietary.
Sources expect Saudi Arabia to begin its trading operation on a small scale due to its conservative business model.
"It means that there will be another player in the market, and that also means more liquidity," a trader said, adding that the entrance of a major oil company such as Saudi Aramco may not change the market dynamics significantly in the near term.
In the past year, major international oil companies such as India's Reliance, Brazil's Petrobras and China's PetroChina have been actively expanding their physical oil trading activities across the globe.
Despite physical trading being a high-risk and capital intensive investment, some companies do see it as a high-growth area that could contribute substantially to their overall profitability.
