The energy era has bought both, challenges and opportunities for the global energy industry. For all stakeholders in the energy chain, this remains a critical and uncertain time, and adaptation has become vital.
By Mahin Siddiqui
Energy Analyst, The Gulf Intelligence
Image Attribute: Red oil barrels image via ezioman / flickr. Creative Commons 2.0 license.
The energy era
has bought both, challenges and opportunities for the global energy industry.
For all stakeholders in the energy chain, this remains a critical and uncertain
time, and adaptation has become vital.
As the US
shale boom shows resilience, and OPEC keeps it’s spigots at full flow, oil
prices have halved to reach the $50 glass ceiling. At the same time, oil
supplies from the North Sea and West Africa have reached their peak from the
last three years and Russian nonchalance over a low price environment
continues. Added to this is the historic deal between Iran and the super powers
concluded in June 2015 which is expected to add another two million barrels of
crude to an overflowing energy market once sanctions are fully lifted.
On the demand
side many worry about China. As the locus of world oil demand, a further oil
spread is foreseen as Beijing slows down to 2% per year as reports the Wall
Street Journal.
As a
consequence, August crude stocks have risen to stand at about 2.7 million
barrels and Goldman Sachs Group Inc. estimates that crude supply will outstrip
demand by 2 million barrels a day, warning of increasing pressure over world’s
storage capacity - Asia’s Singapore, Europe’s Rotterdam and Middle East’s
Fujairah combined. Lastly, as winter fast approaches and refiners enter the end
of their calendar days, there is no option but to find storage space for
millions of barrels of oil flooding the global energy market.
For oil
producers, these are tough times. But for traders, crude surplus means to
exploit contango – the time when the price of a commodity in present is less
than the price in future.
In a cyclical
industry, a contango market was previously witnessed in 2008 during the global
recession as the dramatic economic downturn corresponded with a drop in oil
prices. Five years ago, by end 2008, crude oil inventories reached a record
high as oil fell to less than $38 per barrel and the difference between long
term and short term maintained the widest gap ever witnessed.
While the
super-contango of 2008 is not seen in today’s market, it is still true that
many other contango opportunities have emerged. Chief Executive Officer of
Vitol – the largest independent trader – Ian Taylor certainly agrees with
bright prospects to play the field in an interview in August, with mounting
evidence of a future market growing globally in the past three months.
Traders with
access to physical onshore storage are certainly keen to exploit the
opportunity - according to Bloomberg News, the Caribbean Island of St. Lucia
and Saldanha Bay are on the receiving end of oil bounty providing substantial
profits to pro-active companies. Vitol has sent Nigerian crude to an onshore
facility in Africa’s Saldanha Bay on Aug. 25 while rival Glencore, not to be
outdone, has sent a medium sized Everglade tanker full of North Sea crude to
St. Lucia on Sep. 9.
In the Middle
East, around the same time last year, many worried about empty tanks and hollow
storage vessels. Today the Emirate is undergoing aggressive expansion as
traders with access to physical oil storage scramble to profit from the great
2015 oil glut. Vopak Horizon Fujairah – wholly owned by Emirates National Oil
Company (ENOC) – has announced the seventh phase of their expansion plan which
will see five new storage tanks installed for crude oil with completion to be
scheduled by summer 2016. Sharjah based Gulf Petrochem has plans to spend $80
million divided between Fujairah and East Africa.
While
expanding to exploit a contango opportunity in an era of low oil price and high
trading profits is a commendable business move, it may be well for the trading
industry to note the nature of the cyclical industry. A storage tanks fill up
and profits pour in, this is an ideal time for storage operators and trading
companies with physical infrastructure to diversify cost effectively and aim to
maintain a more diverse portfolio. Business models launched in times of steep
oil prices can be revamped in an era of prolonged low price to sustain the next
price super cycle.
For some
companies this could mean diversifying in to and modifying infrastructure to
cater to more oil products. Market conditions in 2008 quickly turned into a
backwardation market by 2011 – the opposite of contango where traders had empty
stockpiles. However, diversifying needs to come at a rational basis. For Middle
East’s Fujairah it could mean to continue building crude storages but other
operators in the North would do well to cater to chemicals storage, and even
expanding into the waste and recycling storage market.
A key
investment opportunity for trading companies could be to supervise construction
of flexible storage facilities. Facilities with necessary infrastructure for
storing and blending fuels will be regarded as more efficient and hence attract
greater profits. More daring storage operators can take this a step further and
create infrastructure for green fuel to ensure relevance in the sustainable
energy sector. A typical lesson learnt in this industry is to diversify one’s
business or die.
Lastly,
trading companies need to ensure expansion plans need to come at a cost
effective and efficient location. For example the Eastern Coast of England
remains an ideal location for inland distribution of fuels through
strategically developed transport links while the River Rhine in Germany
remains a strategic location at the heart of Europe with access to ports of
Antwerp, Rotterdam and Amsterdam. Prime locations in west coast and Baltic Sea
is another opportunity to play contango for a diverse range of fuel products
such as jet, diesel and fuel oils. In the Middle East, Fujairah is the only UAE
emirate located outside the prone to conflict Strait of Hormuz at the Arabian
Sea. While neighbouring Oman is gearing up to introduce Duqm’s crude park, Fujairah’
location between Europe, Africa, and Asia means a distinct geographical
advantage for trading companies with well-developed infrastructure – a fact
many industry officials give testimony to.
While this is
obviously a hallelujah time for the trading community, investments in the post
easy oil era must be made certainly, but with caution. As the only certainty is
uncertainty in the global energy industry – in contango times and otherwise
- it would do well for trading companies
and storage operators to be prepared to invest in key locations with a diverse
portfolio to allow growth and survival in a distinctively Darwinian oil and gas
industry.
About The Author:
Mahin Siddiqui is an energy analyst and communications professional based in Dubai.
She started her career with UAE and Iraq based energy consultancy Manaar Energy
Group where she worked on energy trends and holistic analysis of MENA energy
issues. Currently she is an associate at Gulf Intelligence, a Dubai based
strategic communications agency and think tank, where she handles the media and
production engagement for the company and partners.
Her interest is in upstream
and downstream conventional energy analysis, holistic trends identification,
geopolitical analysis, and risk analysis of the MENAP region. She has a
Bachelors in Social Sciences majoring in International Relations from Karachi
based Shaheed Zulfiqar Ali Bhutto University of Science and Technology and a
Masters in International Studies from the University in Wollongong, Australia.
Mahin is fluent in Urdu and has basic knowledge of Arabic and French. She
tweets @siddiquimahin
