Missing the connection between Providence being up 8% and and Logp being down 2% as a sign that we are getting close to news on Barryroe. I would have thought that if there is news on Barryroe, Logp would also be pulled up on the coat tails of Providence.
Lansdowne is also up twenty percent today.
The conflict between OPEC and U.S. shale/tight oil producers has entered a new phase. And the result has been an accelerated decline in oil prices.
Last November (on Thanksgiving no less), Saudi Arabia led an OPEC decision to hold production stable, followed by a later significant increase in volume. For the first time, the cartel had opted to protect market share rather than price.
This certainly did not serve the interests of some OPEC members – Venezuela, Nigeria, Libya, Iran – who require much higher prices to balance unwieldy central budgets
The primary opponent was the new source of oil in the market – unconventional production from North America, the U.S. in particular. Thereupon began a tug of war that has largely determined the range of oil pricing variation over the past eight months.
This is what is strange about all of this. Essentially, the same market conditions prevail today as existed a year ago when crude oil was exceeding $100 a barrel. In fact, global demand is higher now than it was last July and accelerating. The price, on the other hand, has been cut in half.
To be sure, there is excess supply on the market (thanks to the remarkable recovery of American production, now at levels not seen in 40 years), and a correction was in order even without any OPEC move.
But that correction was more in the order of a decline to the low $80s or mid $70s. That has gone down much further because of what outside pressures have done to the trading environment.
Here’s my take on the international scheme to keep oil prices down…
The Big Players Still Play Dangerous Shorts
As I have noted here in Oil & Energy Investor on a number of occasions, the interchange between “paper barrels” (futures contracts) and “wet barrels” (actual consignments of oil) has been undergoing some major changes. It is the financial contract, not the allotment of crude, that drives the market.
When prices begin showing weakness, the manipulation turns to shorting oil. A short is a bet that the price of an underlying asset will decline. Control of a commodity (or stock shares, for that matter) is acquired by borrowing from a dealer. What is borrowed is then immediately sold. The short seller later returns to the market, buys back the asset, and returns it to the original owner.
If the short seller is correct (or has manipulated the market through huge positions to make it correct), a profit is made. Take this simple example. A futures contract in oil is obtained at $70 a barrel and sold at market. When the contracts are reacquired (i.e., the short seller buys at market to return the contract to its source), the price of oil has declined to $62. The transaction makes $8 a barrel (with the contract usually for 10,000 barrels), minus whatever small fee is paid for the right to use (temporarily) an asset actually held by somebody else.
Now, shorting is a component of the market. It remains quite dangerous for the average investor because there is theoretically no limit to how much you can lose if the value of the underlying asset goes up after the initial sale. It still must be bought back and returned, regardless of how much it has appreciated in price during the interim.
Some shorts are even more dangerous and are now limited or prevented by regulators. These involve running a “naked” short, a short contract without actually having the underlying commodity or stock to begin with.
Big players can sometimes do this by stringing together options and other pieces of derivative paper. Nonetheless, a really bad move here can bring down a trading house. For the individual retail investor, it is a direct way of losing the farm.
Two SWFs Have Been Shorting Oil…
But what if the underlying asset upon which the short is constructed – both its availability and amount – is under your control? What if you are shorting your own product?
Normally, this would be considered insane. Why deliberately reduce the price charged for your source of revenue? Why guarantee that you are going to be receiving less?
This makes sense only if the short is run for a different objective, one for which the short seller is prepared to take a price hit short term for more market control longer term.
Well, this is what OPEC nations have been doing at least over the past three weeks. Indications have surfaced from the volume and direction of paper makers in Dubai and on the continent that at least two Sovereign Wealth Funds (SWFs) from OPEC members have been shorting oil.
This is the latest stage in the competition with shale producers. By driving the oil price to below $58 a barrel, sources are indicating between 8 and 12% has been shaved off the Dated Brent benchmark price.
Brent is one of two major benchmarks against which most international oil trade is based. The other is West Texas Intermediate (WTI). Brent is set daily in London; WTI in New York.
…Depressing Brent Prices
Statistics for what shots are run in the U.S. are transparent. This is not the case in many other parts of the world. There, indication of movement is gained by what financing middlemen do.
As of Tuesday of this week, sources confirm that oil shorting contracts beginning on June 15 have increased markedly from Persian Gulf interests. Brent prices have declined 13.8% in the six weeks that followed.
According to sources cutting the paper, primary among the short contracts sold and purchased has been action sponsored by two of the largest SWFs in the world: SAMA Foreign Holdings (Saudi Arabia) and the Kuwait Investment Authority. In each case, financial intermediaries are used for the actual transactions. Other SWFs are suspected.
It is certainly possible that an SWF may short oil merely as a revenue-gathering device. After all, such funds are investing excess capital to gain a return and they exist all over the world.
But short sales are rather uncommon with these huge outfits; they would rather have longer-term returns from less volatility instruments.
Both of the SWFs identified obtain their funds from oil sales. The shorts constitute undercutting their own profits. However, the objective here is not to gain a return. They are, after all, assuring a reduced revenue flow from the very asset providing their own funding.
Why the Funds Are Playing This Game
This is a policy decision, not a fiduciary one. It is intended to drive the price down, prompting the closure and/or reduced operations of primary oil production competitors. And it is likely to have the intended affect as we move into unsustainable debt loads for many American shale producers, rising bankruptcies among smaller operators, and a resurgence in the M&A curve.
The shorts guarantee a loss of income but are orchestrated for other reasons. Obviously there are other shorts being run by interests having nothing to do with OPEC. In fact, as the major short positions emerge, it makes it that much easier for others to follow suit.
OPEC is proving a point by (at least in the short term) shooting itself in the foot to clear out competitors.
Short positions need to be unwound and settled. This will happen quickly. The Saudi Oil Ministry announced yesterday they expected the dip in crude prices to be ending soon.
Easy enough to say when major crude providers have been driving prices of their own product down all along.
What next for the Ocean Guardian? Currently 5 supply boats along side her, getting ready to move but where?
Makes a lot of sense Sobeit, only time will tell...any day now
Bound to be some nervousness prior to drill results...
I am amazed there is not more activity here prior to drill results...I guess I should know better by now...The antics at JLP are offsetting the boredom from PVR/LOGP...
linkoping 20:51 Sequa might back him Mamms 20:45 Re: The Cuckoo's Nest Thanks for posting this Sobeit. I find the bit that says" there are rumblings a management-led take-private could materialise." quite worrying. The SP has been driven into the ground by management's failure to do a deal- then they'd swoop in and buy it subsequently do a deal? It seems unlikely that they would be backed by anyone though, What a balls. Adven 20:35 Full text>Providence puts faith in O’Reilly as pressure mounts Gavin Daly Published: 7 June 2015 Print At least someone in the O’Reilly clan is in the money. As his father endures an insolvency arrangement in the Bahamas, Tony O’Reilly Jr has been handed another two years at the helm of Providence Resources, the oil and gas explorer best known for its long-running adventures with the Barryroe oilfield off the Cork coast. O’Reilly Jr’s contract was renewed last month, and is subject to one year’s notice period, reveals the Providence annual report, which was quietly made available last week. There was no stock exchange announcement of his reappointment. It’s a good gig. O’Reilly’s pay rose by €22,000 to €516,000 in 2014, a year in which the company’s share price fell from a high of about €3.50 to below €1. The shares are now at 31c. The boss soldiers on regardless, marking 10 years as chief executive of Providence and 18 years since he founded the company. There has been plenty of turnover on the share register since then, and the current crop of investors can be forgiven for wondering when Barryroe will deliver on its reported potential. Not any time soon, is the answer. All things going well — and things have not gone well for Providence — the company will soon pin down a farm-out partner to take on the cost of developing Barryroe. Then it has to drill an appraisal well, before moving on to extraction and production. Sources suggest a phased approach is likely, meaning the first oil will not flow until 2019 or even 2020 — up to eight years since it triumphantly announced 300m barrels of recoverable oil were there for the taking. As Davy, the company broker, put it in a recent note, getting wells drilled is “ultimately the only source of real value creation” for Providence. Until then, it is a company “straining to develop its assets” in a difficult market. Providence says it is continuing discussions with a number of potential partners who are active in the Barryroe data room. “The recent rise in both oil prices and M&A activity provides a better background environment for the company to conclude matters,” the annual report declares. Sources say there are as many as four parties in the data room, possibly two oil outfits and two private equity firms. If a deal cannot be done, there are rumblings a management-led take-private could materialise. To do that, O’Reilly Jr would have to find a funder. He would also have to offer a significant premium to the anaemic share price, given he has long been telling shareholders the company is significantly undervalued. His task may have been made easier by a €25.9m share placing in March at the equivalent of 34c a share. New investors who bought in at that price could happily take, say, 60c or 70c a share and walk away. Investors who have been in Providence for the long haul — some since the heady days of €8 a share in 2012 — may be in no mood, however, to hand the firm to the man who has been at the wheel all along. Providence, of course, is only 80% of the story at Barryroe. Two other quoted companies, and surely thousands of individual investors, also have their fates tied up there. Lansdowne Oil & Gas holds the 20% balance. San Leon Energy, a former Barryroe shareholder, still has a 4.5% “net profit interest” (NPI) in the project. Like Providence, their shares have collapsed. Like Providence, they have carried out rock-bottom fundraisings to tide them over to the day when, hopefully, Barryroe delivers. Lansdowne, listed on the AIM, raised £1m (€1.4m) in a March share placing and has also issued loan notes worth £1.8m to LC Capital Master Fund, its biggest shareholder. A strategic review of its operations, which may lead to a sale, has been going on since April. San Leon, headed by former MMI stockbroker Oisín Fanning, is raising £29m in a new share placing — a figure not far off Providence’s market cap. The placing will significantly dilute existing shareholders but is designed partly to protect the Barryroe NPI. In shareholder documents, San Leon said it wanted to hold on to rather than “monetise” — sell — its Barryroe interest. “The company expects to benefit from considerable cash flow arising out of the NPI, in excess of $700m [€630m] over the field life,” it said. That calculation is based, of course, on figures from Providence. Those numbers — and Providence’s managers — will surely get a going-over when the explorer’s annual meeting takes place in Dublin on June 26
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