There was a time when August was the quietest of all months in the oil industry. In fact, Portland once had a boss who worked 7 days a week (including Christmas Day) from September through to July and then took the entire month of August off! Historically, the only people around in this quietest of summer months, tended to be operators with chips on their shoulders (having lost the office sweep to man the desks) or office juniors with no authority to actually do anything.
So the turmoil of the last 30 days – whilst not a total surprise – was nonetheless, rather a shock to the system. Holidays were cancelled left, right and centre and not just by political figures, as business leaders also, were cutting short their summer breaks and flying back to steady their respective ships. Although oil markets were not quite as jittery as equity markets (ie, share prices and share indices), it was still an incredibly volatile month as the graph below shows. On average throughout the month, the daily price of Brent crude changed by $1.59 and to put that into some sort of context, the average change in July was $1.08. In short, August was circa 50% more volatile than July.
The fact that prices had once again recovered most of their losses by the end of the month, does highlight the strong uncertainty in the market, as to which direction prices will take in the longer term. On the one hand, a second recession (or at least a remarkably slow recovery) now seems inevitable and therefore oil prices must fall. On the other hand, the long-term prognosis for the oil markets (demand from the east outstripping supply, continued social upheaval in key producing nations, tighter fuel specifications) would suggest that prices will rise. The logical consequence of these conflicting messages is therefore price stalemate, rather than the drop in fuel prices desired by UK consumers.
Two other noteworthy pieces of oil news in August; the Obama administration’s approval of the Keystone XL pipeline from Canada to the US Gulf Coast and Exxon’s deal with Rosneft (Russia’s state-controlled oil company) at the expense of BP.
The approval of the 1,700 mile Keystone pipeline from Alberta to the Gulf Coast refineries shows once again that Realpolitik, rather than ideology, drives US policy (not that we ever thought otherwise). No green administration – which Obama’s claims to be – could really countenance the use and encouragement of tar sands for mass oil production (significantly higher carbon footprint, localised pollution, etc, etc). But with Asia’s voracious appetite for oil, this rich source of supply on America’s doorstep was in danger of escaping (via Vancouver and the Pacific) to China, rather than heading south into America. Clearly some of Canada’s tar sand oil will still find a way to Chinese refineries, but in the medium-term, the pipeline will mean that the bulk ends up in the States.
Exxon’s triumphant tie-up with Rosneft is just another piece of bad news to add to the BP litany of bad-news. It was after all, only in the spring of this year that the latter’s much hyped tie-up with Rosneft fell apart, amidst legal disputes with existing Russian partners and open hostility from the Putin (sorry Medvedev) Government. Not so long ago, BP’s swashbuckling foreign take-overs, joint ventures and mergers were the envy of the industry. But their golden touch seems to have deserted them, coincidentally or not, since John Browne’s departure. So this latest deal leaves Exxon (Esso) with plum exploration rights for some of the world’s greatest untouched oil reserves, whilst BP is left with fragmented operations, dispirited staff and most importantly, no local friends. In truth, BP’s reputation in the 2 biggest oil producing nations on earth (USA and Russia) is in tatters and much as it pains Portland to speak negatively about an (excellent) ex-employer, their dire share price of £3.85 – down from £6.50 over an 18 month period – is sadly a fair reflection on the recent performance of Britain’s biggest company.