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US: will Oil industry save (once more) its tax cuts? February 14, 2011

Posted by mytruthaboutoil in Oil giants, Oil trading.
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For the third year in a row, President Barack Obama on Monday will implore Congress to repeal an array of tax incentives the oil and gas industry has enjoyed for decades.

Lawmakers have twice rejected the White House appeal to boost government coffers more than $30 billion over the next decade by axing the tax breaks, amid fierce opposition from industry leaders and their congressional allies, who say the plan would curb domestic oil and natural gas production.

Now the plan faces more political resistance on Capitol Hill, because Republicans who oppose the plan are in charge of the House of Representatives and there are more of them in the Senate.

But oil industry leaders say they aren’t letting their guard down, as the stark economic climate – combined with a new budget-cutting zeal in Congress – means anything could be on the table.

“There’s a real concern about deficit reduction and that we can’t keep overspending,” said Bruce Vincent, chairman of the Independent Petroleum Association of America. “Anytime you have that concern in the overall marketplace, taxes are always a threat.”

Lawmakers swept into office in November on the promise of fiscal discipline will be searching for ways to pare spending.

“In the current dynamic, we can’t take anything for granted,” said Marty Durbin, the American Petroleum Institute’s executive vice president of government affairs. “Given the strong desire for new members of Congress to want to show they are really doing something on cost cutting and deficit reduction, you never know what could get thrown in the mix.”

Big Oil could be an even bigger target if gasoline prices rise – tempting lawmakers to slash the industry’s tax breaks as a way to offset the costs of unrelated proposals.

Ten Democratic senators insisted last week that Republicans trying to pare billions from the federal budget should target “wasteful” tax breaks for oil companies.

‘Yesterday’s energy’

Stephen Comstock, API‘s tax policy manager, said the industry must be vigilant because Obama’s tax proposals could be advanced at any time to offset the potential costs of unrelated legislation.

Obama telegraphed his tax plan in the State of the Union address last month, when he said tax incentives for oil, natural gas and coal should be replaced by subsidies for alternative energy.

“Instead of subsidizing yesterday’s energy, let’s invest in tomorrow’s,” he said.

The White House is scheduled on Monday to release its proposed budget for the fiscal year that begins Oct. 1, but it’s up to Congress to rewrite and implement it.

One of the targets is a 97-year-old deduction for intangible drilling costs – such as expenses for fuel, hauling supplies and preparing sites – that have no salvage value at the end of the pro-ject. Companies now have the option of deducting the expenses the year they occur or over a five-year period, but if the provision were repealed, the costs would have to be capitalized and depreciated over a longer time frame.

The provision is fully available only to independent producers, who say that it keeps money flowing to start new wells. The swifter expensing schedule “serves as an incentive to take that capital and put it in the ground again,” said Lee Fuller, an Independent Petroleum Association.

The administration also wants Congress to block oil and natural gas companies from claiming deductions for domestic manufacturing income. Under a 2004 law, the deduction applies to a broad swath of products manufactured in the U.S., but Obama’s plan would eliminate it only for the oil and gas industry.

The White House also seeks to roll back a deduction that mineral rights owners can take for the value of oil and natural gas removed from their property – a provision that industry leaders say is essential to sustaining small, barely economic wells.

Major oil companies are worried about a proposed change in the treatment of foreign levies – such as petroleum income taxes – that they pay in exchange for some economic benefit, including access to a country’s reserves. The White House plan would block companies from taking a credit on their U.S. returns for what they pay in foreign levies above the general tax rate in those countries.

They still could deduct the difference from taxable income, but that doesn’t dent the final bill as much as a credit subtracted from the tax itself.

Essential incentives

Industry leaders say the tax incentives are essential to trim the cost of doing business and keep the U.S. competitive with other countries.

Vincent, of the Independent Petroleum Association, said that while hiking taxes could boost federal revenues in the short run, it ultimately would curb oil and gas exploration – and cause the U.S. to take in less money in royalties, drilling fees and other industry payments.

Industry critics argue that the oil and gas tax provisions unfairly subsidize fossil fuels at the expense of cleaner alternatives.

Even if the industry holds on to its tax breaks this year, a broader debate over the provisions is looming. House leaders are examining ways to streamline the tax code and lower the overall tax rate by scrapping targeted exemptions and deductions.

‘Justify that treatment’

“Every industry and social cause that has a special treatment in the tax code will be asked to justify that treatment,” said Rep. Kevin Brady, R-The Woodlands, a top member of the House Ways and Means Committee that is leading the tax overhaul.

A major question for oil and gas producers will be whether the tax trade-offs are worth it. Major companies, already barred from capitalizing on some of the specialized drilling provisions, may be willing to support a tax rate without deductions that is higher than what independents say they can sustain.

Brady said his gut feeling is that there’s no way to get the tax code low enough to offset the effect of taking away those provisions, “because they are so critical.”

The Independent Petroleum Association is also skeptical. Fuller said independent oil and gas producers have indicated that to offset the lost deductions, the rate would have to dip so low it might not balance out for lawmakers striving to keep the overhaul revenue neutral.

Members of the API also are struggling with the issue.

“We’re still trying to figure out where we would stand on some sort of tax reform. Certainly there’s value in lowering the rate and making the U.S. more economic in relation to other companies,” Comstock said, but the effects could be as diverse as the industry itself.

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Gennady Timchenko: how Gunvor’s founder changed the face of oil trading October 22, 2010

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Logistics and infrastructures. Gennady Timchenko’s motto over the years has been to improve logistics and infrastructures. The only way to do business for a “niche player” who wants to buy and sell competitive oil.

When Timchenko founded the independent oil trading company Gunvor, more than a decade ago, oil trading was a business only Majors could afford to get involved in.

Oil majors were essentially controlling the entire logistics systems in the trade and did not have to fear the rise of competitors. Neither did they have to work on improving logistics to bring cheaper oil to markets.

From Perestroika to Geneva

Gennady Timchenko’s oil trading career started at the dawn of the Soviet era when Mikhail Gorbachev’s Perestroika was in place.

This was a period of liberalization for Russia’s economy, during which Timchenko, who was working for the government at the time, was asked to build the first ever oil export routes from Russia to Western Europe. Railway, pipelines, port facilities,… Timchenko’s team conceived the first infrastructures meant to export Russian oil.

This experience gave Timchenko in-depth know-how and expertise of Russian oil trading infrastructures and bottlenecks.

He created Gunvor in 1997 based on his insight: Russia’s oil was not competitive on an international scale because of the weakness of Soviet-inherited infrastructures.

Better logistics to sell competitive oil to Western markets

Gennady Timchenko, along with his business partner Torbjorn Tornqvist, understood the cause of Russia’s bottlenecks. So they massively invested in infrastructures.

Gunvor notably built its own railway company, several port facilities, and its own oil tanker fleet.

These investments allowed Gunvor to buy oil cheaper than their competitors and to sell it at attractive prices. This meant they became a highly reliable and competitive player in the market.

More than ten years after its creation the company has widely broadened its range of activities with offices and operations across the world. Gunvor is also active in the global energy trading market, including power, gas and renewables

Israel’s suspends trading in Givot Olam September 21, 2010

Posted by mytruthaboutoil in Oil (general), Oil trading.
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The Israel Securities Authority ordered the Tel Aviv Stock Exchange to suspend trading in Givot Olam participation units yesterday after a report from the oil and gas exploration firm was found to be unintelligible.

The watchdog explained that that they were unable to decipher what had or hadn’t been found from the final engineering report sent to it, ahead of a public announcement.

The partnership’s recent announcements to the investor public have also been unclear and uninformative. On August 22, the partnership held a shareholders assembly to answer questions about their results at the Meged-5 drill.

Tuvia Luskin, the partnership’s geologist, compared the Meged-5 exploration to the Israelites’ exodus from Egypt. “For years we were in the dark, with ‘signs of oil’ but no light,” he said. “Meged 5 is like the granting of Torah for us. It’s a revelation.”

Now, Givot Olam has been ordered not to publish the findings at this stage, and in an unusual move, the ISA ordered Givot Olam to publish, instead of the unclear report, another one that “lists all the omissions [presumably from the unclear report], and clarifies the findings and their implications for the partnership”.

“It sounds like a disaster,” an energy sector analyst said yesterday morning. “It’s good that the ISA is finally waking up, but it just means that again, Givot planned to issue a report to investors that said nothing.”

The fact that the partnership is not clearly divulging what it has found indicates that there is a problem, he added. It is questionable how long trading in the participation units can be suspended.

“Everywhere in the world, some drills fail. These things happen,” he said. “Even if the Meged-5 drill isn’t what they had expected, that doesn’t mean that the entire field can’t be productive. The problem is that Givot Olam whipped up expectations so high, regarding that specific well, deliberately or not, that it will be very hard for them to meet [these expectations].”

They were living on “borrowed credit” as far as investors were concerned, the analyst said: “If they disappoint this time, they’ll lose all the credit they had.”

The week before the assembly with Luskin, Givot Olam said that the estimated potential of Meged-5 was 1.53 billion barrels.

Crude Oil Trading Nearly Flat September 8, 2010

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A piece of news from the Wall Street Journal which might set the trend… Wait and see…

Crude futures were mostly flat Wednesday as scant signs of improvement in the broader economy have investors looking ahead to data on U.S. oil inventories later this week.

Light, sweet crude for October delivery was trading 21 cents lower at $73.88 a barrel on the New York Mercantile Exchange. Brent crude on the ICE futures exchange traded 35 cents lower at $77.39 a barrel.

Oil prices have fallen for the past two sessions, slumping as concerns grow about a glut of oil in the U.S. and a sluggish economic recovery that shows no signs of reducing the high supplies.

Economic data last week provided some modest optimism as a report on U.S. manufacturing showed continued growth and the monthly jobs report was better than anticipated. But new worries about the strength of Europe’s financial system have cropped up this week, and stagnant equities have left crude treading water as well.

“The market is building up energy to make an assault on either side of the range,” said Gene McGillian, a broker and analyst with Tradition Energy. “The signals from the economy are going to give us a better idea of what side it’s going to come down on…but until we see signs these record inventories we have are pared back, I’m more inclined to think we have more of a chance of testing the downside.”

Commercial stocks of oil and fuel products remain at 27-year highs, and data due Thursday from the Department of Energy is expected to show a further build.

The department’s Energy Information Administration is expected to report crude inventories rose by 300,000 barrels in the week ended Sept. 3, according to a survey by Dow Jones Newswires. Gasoline stocks are expected to show a modest 600,000-barrel drop, while distillates, which include heating oil and diesel fuel, are seen rising by 400,000 barrels.

High supplies and an uncertain economic outlook have kept crude prices from pushing above the recent trading range between roughly $70 and $80 a barrel. But traders are wary of moving much lower either, particularly amid an Atlantic hurricane season that could quickly reduce stockpiles should a storm affect Gulf of Mexico oil producers.

“This remains a very difficult trading environment in which price follow through in either direction of more than $3 to $4 within any given week has proven elusive,” Jim Ritterbusch, head of oil research firm Ritterbusch and Associates, said in a client note.

Front-month October reformulated gasoline blendstock, or RBOB, recently traded 1.06 cents, or 0.6%, lower at $1.9223 a gallon. October heating oil recently traded 0.69 cents lower at $2.0674 a gallon.

A drunk trader scares the world… and loses $520 million June 30, 2010

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It is not uncommon for financial traders to wonder how they burnt so much cash during a drunken night on the town. But Steve Perkins was left with a bigger black hole when his employer rang one morning to ask what he had done with $US520 million of the oil trading firm’s money. At 7.45am on June 30 last year the broker for PVM Oil Futures was contacted by an administration clerk asking why he had bought 7 million barrels of crude in the middle of the night.

By 10am it emerged that Mr Perkins, 34, had single-handedly moved the global price of oil to an eight-month high during a drunken blackout. Prices leapt by more than $US1.50 a barrel in under half an hour at around 2am, the kind of swing caused by events of geopolitical significance.

By the time PVM realised the trades were not authorised and swiftly began to unwind the positions, losses of exactly $US9,763,252 had stacked up.

Details of the bizarre incident have only just been made public after a British Financial Services Authority investigation.

According to the regulator, Mr Perkins first started trading irregularly the day before the enormous price spike. He had been drinking heavily over the weekend at a PVM golf event.

Records show that he placed a legitimate order for a client at 1.34pm. This was quickly followed by seven more orders with a value of $US8 million using PVM’s cash.

In the early hours of the morning, he returned to the oil market via his laptop. He placed an incredible $US520 million in orders through ICE Futures Europe. The first trade, at 1.22am, was at $US71.40 a barrel and the last trade at 3.41am was at $73.05. During this period, he gradually edged up the price by bidding higher each time, until he was responsible for 69 per cent of the global market volume.

By 6.30am, he appeared to have realised what he had done. He sent a text message to the managing director claiming an unwell relative meant he would not be coming in to work. When PVM challenged his story, he confessed and co-operated with the inquiry. He told investigators he has ”limited recollection” of the entire episode, claiming he had placed the trades during a drink-induced stupor.

Mr Perkins was banned from trading for five years and fined £72,000 ($127,000), reduced from £150,000 because of potential financial hardship.

Bank of America to stop trading with BP June 17, 2010

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A top executive at Bank of America Merrill Lynch told the bank’s traders not to enter into oil trades with oil giant BP after June 2011, Reuters reported, citing an anonymous source familiar with the oil markets.

Although a reason for the instruction was not provided, there is speculation that it may be a method of protection against the risk that BP, responsible for a massive oil spill in the Gulf of Mexico, might be unable to meet contractual responsibilities in the future.

It was recently reported that BP agreed to establish a $20 billion escrow fund to pay for the damage in the Gulf of Mexico. Although this agreement is still in negotiation, the economic liabilities of BP could understandably make Bank of America a bit nervous. Already in the public eye for ongoing financial troubles related to mortgage-lending arm, Bank of America has no room to take a gamble on longer-duration trades with a company like BP.

BP Stocks, Credit in Trouble

As a result of the accident in the gulf, BP’s shares on the New York Stock Exchange have fallen nearly 50%. BP’s credit rating was knocked down six levels on Tuesday by Fitch Ratings, which used the costs of the spill as its reasoning for the markdown.

Although Bank of America is not one of BP’s larger oil trading partners, the loss of Bank of America’s trading would be another blow to an oil trading division at BP that has seen several employees quit. It would also be another symbolic blow to the reputation of the powerful oil company.

Butterfly effect: when volcanic ashes (almost) threatened oil prices April 21, 2010

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No one mentionned it, but oil was among the “collateral victims” of last week volcanic eruption.  Four days of closed airports and incertainty weakened oil positions (during three losing sessions!). No worry though! Oil is on its high again!

Gunvor: an unknown trading giant March 16, 2009

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traderdeskVery few people outside oil circles have ever heard of Gunvor, a Dutch company with trading desks in Geneva and Singapore, even though it is now the third largest oil trader in the world with an annual turnover of around 70 billion dollars and profits in the hundreds of million according to its Chairman Torbjorn Tornqvist. (see the Financial Times article 14/05/08).

The oil trading success story of recent years

The company was created in 1997 as a niche player focusing on exporting Russian oil through Estonia, relying on the expertise of its two founders (Torbjorn Tornqvist and Gennady Timchenko) in the oil business, the Russian market, and transit logistics as well as connections in Estonia. Mr. Tornqvist has traded oil across the world for over twenty years, beginning his career at BP. Gennady Timchenko was one of the first Russians to export oil to Europe. Many in the oil industry consider him to be one of the pioneers of the oil trade between East and West, and he created the first new export routes for Russian oil after the break-up of the Soviet Union.

It is very interesting from a trading point of view to see how Tornqvist and Timchenko used their experience to build a logistics system able to overcome the different bottlenecks which were seriously harming Russias oil export, since the country had (and still has) quite poor infrastructure. This allowed Gunvor to take maximum advantage of overcrowded pipelines and thus transit oil extremely efficiently. A real case study!

logistics-image

Gunvor also invested in oil storage facilities, railway transportation as well as port facilities and terminals, therefore ensuring a comparative advantage over their competitors (this is how John D. Rockefeller got rich, too). Today, Gunvor is associated with a railway oil transportation company (Transoil) and has its own tanker fleet, which allows it to keep costs very low. (On this there is an excellent article, if you read German, in Capital, 12/02/2009)

Gunvor’s business has grown steadily since its founding, but especially so after the Yukos group was dissolved and taken over by Rosneft. This is because Rosneft, contrary to Yukos, did not trade its own oil. Suddenly, Rosneft needed to outsource the sale, transportation and delivery of huge volumes of oil, and Gunvor (as well as Glencore, Vitol, and other traders) dramatically increased their volumes. Gunvor is now in a position to rival these other great oil traders.

In 2007, the company had an annual turnover of about 70 billion dollars and profits of several million dollars. Gunvor has thus become the third largest oil trader in terms of turnover behind Glencore (142 billion dollar turnover) and Vitol (146 billion dollar turnover). I call these the “Big Three”.

Thanks to its knowledge of the Russian market and its logistics, Gunvor also trades one third of Russian oil exports. Perhaps because of this, rumours circulate that Gunvor is somehow linked to the Kremlin (some even say Timchenko and Vladimir Putin are in the same Judo club). I personally dont see how such a strategic company could NOT be closely watched by the political authorities (remember what I said about French Total, or even Aramco?). What is certain (from my point of view) is that Gunvors management is professional and, if we look at its history, its success does not seem surprising or strange: they have continuously offered Russian suppliers the best price. Of course, other traders have complained about this…

The company’s future also seems sound. Indeed, as the company has become larger it has begun focusing on the Asia and West African markets, where they already have a strong presence. It is a pity the company is not publicly traded, or I would buy some of its stock today!

Anyway, this means that Gunvor is a company to keep an eye on, as it promises to become a huge actor in the global oil trade. Ill keep that eye for you.

Oil price fluctuations February 7, 2009

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For almost a decade now, fluctuations in oil prices have totally been out of control. A barrel of West Texas Intermediate (WTI), was traded at $26.20 in September 2001. Seven years after, in September 2008, the barrel was worth $104.10, which represents an increase of 297% in 7 years.
During the same period, the difference between its maximum and minimum values is even more incredible: a 590% increase from December 2001 ($19.39) to June 2008 ($133.88).
Despite the current craziness of Financial markets, we can see that oil prices are much more unpredictable that the rest of the Market. Why such fluctuations in prices? As usual, market observers give many post explanations, but very few were ever able to predict these fluctuations.

The first and most obvious answer to oil prices fluctuations is that oil prices simply respond to market laws and economic fundamentals.
Recent oil prices explosion would simply be the result of the shrink of oil reserves and the strong growth of consumption, especially in China and India.
According to this theory, the market was simply urging us to economize oil, to look for new oil supplies, to discover alternative energies, and to improve energy efficiency.
Then, by the third semester of 2008, investors started to feel that the US and the world might enter a period of recession and that the worldwide oil demand would slower or even decrease. Therefore, prices started to fall from almost $150 to about $40.
If it appears to be a rather logical, it also seems that other parameters have strongly impacted these past years over oil prices. Some even have a fully opposed view, and claim that oil market does not respect basic laws of supply and demand.
Wall Street banks, hedge funds, mutual funds and other financial operators have recently massively rushed into oil market, causing huge impacts by itself to oil prices. Many, such as George Soros, described the speculative interest of financial operators as an “insidious development”.
Many start to ask for a regulation on oil speculation in order to limit its effects of fluctuation of prices and some say that if implemented, such a regulation would have for main effect to freeze oil price to $65-70 a barrel.
According tome, both of these theories are correct but do not fully explain these out of proportion fluctuations. First, I don’t believe one can regulate oil market. I also think that as the rest of the market, oil prices are mostly set up by speculators who invest based on their view of how prices will move.
These investors simply react to news and try to predict where prices will go. It is this latter group of quick-hit investors who dominate the market. This is basically what is written  in a June research report from Goldman Sachs, estimating that speculators account for about 42 percent of all oil trading.

What is the difference between brent and sweet light crude? January 8, 2009

Posted by mytruthaboutoil in Oil (general), Oil prices, Oil trading.
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Many people ask me why the medias always give two different prices for oil: Brent and Sweet light. Let me try to explain what the differences between the two are, and why prices vary from one to another.

Originally Brent crude refers to oil pumped from the North Sea, especially in the UK and in Norway.

What journalists call Sweet Crude or Light Sweet Crude is actually a crude oil called West Texas Intermediate (WTI), which is originally a US produced oil both light (because it contains little wax) and sweet (less than 0.5%).

So, on a global production scale Brent and Sweet Crude represent tiny volumes. People talk about these types of crude because they became the two major benchmarks for settling the oil prices on world markets.

For instance, two-third of the oil traded in the world is currently sold as Brent Crude. The benchmark oil is a combination of

Brent and WTI are actually not the only two benchmark oils available on the market. We can also find the OPEC basket or the Dubai Crude.

 

So as you have probably already seen, Brent is usually one to two dollar per barrel cheaper than Sweet Crude (WTI), but with respect to the crazy situation we are in these days, we can

crude oil from 15 different oil fields in the Brent and Ninian areas of the North Sea.t be sure of anything and it happens from time to time that Brent becomes shortly more expensive than WTI. Nothing rational into this…