BP Spill Shows a Profit Buying 2018 Oil, Selling Spot

June 7 (Bloomberg) -- The oil market is signaling that
prices have nowhere to go but up as the biggest spill in U.S.
history curbs drilling and makes it more expensive to develop
new fields.
Crude’s premium for delivery in eight years compared with
today’s price rose 86 percent since the BP Plc-leased Deepwater
Horizon rig in the Gulf of Mexico exploded April 20. Oil for
December 2018 is $21 a barrel more than next month, compared
with $11 before the disaster. More regulation may add $5 to the
contracts in coming years, according to Deutsche Bank AG.
President Barack Obama extended a ban on new deepwater
permits and exploration by Royal Dutch Shell Plc in the Alaskan
Arctic for six months, putting off limits as much as 23.2
billion barrels of potential resources, equal to 76 percent all
reserves proven in the U.S. The number of rigs drilling in the
Gulf of Mexico plunged 50 percent last week to the lowest level
in 16 years, Baker Hughes Inc. reported June 4.
“The president said stop drilling, and now we are seeing
the result,” said Adam Sieminski, chief energy economist at
Deutsche Bank in Washington. “Before all is said and done,
we’re going to lose more rigs in the Gulf.”
A one-year worldwide delay in deepwater drilling may cut
500,000 barrels a day from 2013 supply, according to Sanford C.
Bernstein analysts. While that’s less than 3 percent of daily
U.S. consumption, it’s almost enough to fuel Argentina, Latin
America’s third-biggest economy.

Future Oil Costly

Oil for delivery in December 2018 traded at $92.78 a barrel
on the New York Mercantile Exchange on June 4, compared with
$71.51 for July 2010 delivery, a premium of $21.27. That spread
has grown by $9.82, or 86 percent, since April 19, the day
before the accident.
To profit from a wider premium, investors would need to buy
a December 2018 futures contract and sell one for nearer
delivery, and then reverse those trades once the spread expands.
As prices approach $100 for delivery in 2018, the latest
contract on the Nymex, crude for this year is sinking on concern
Europe’s debt crisis will derail the global economic recovery.
July oil fell 14 percent in May, the most for one month since
December 2008. Prices tumbled 4.2 percent on June 4 after a
government report showed that the U.S. added fewer jobs than
forecast last month and as the euro fell to a four-year low
against the dollar, reducing the appeal of commodities.

Share Slump

BP shares have collapsed, losing 33 percent of their value
since April 19 amid mounting costs of the clean-up and damage to
the company’s reputation. The slump has been felt across the
industry, leading to a 14 percent decline so far this year in
the MSCI World Energy index.
The prospect of higher costs and a crackdown on drilling
are driving up future prices because world demand in 2015 will
rise 2.3 percent from now to 88.4 million barrels a day,
according to the International Energy Agency in Paris.
U.S. output may be cut by 150,000 to 200,000 barrels a day
next year because of new limits, Deutsche Bank’s Sieminski said.
The total can feed as much as 35 percent of Exxon Mobil Corp.’s
refinery in Baytown, Texas, the largest in the U.S.
BP estimates its production may be reduced by 75,000
barrels a day in 2015 because of delays.
Those amounts are too little to drive up the cost of crude,
said Mike Wittner, head of oil research at Societe Generale SA
in London.

$101 Forecast

“In the big picture, I don’t think a half million barrels
a day of more or less non-OPEC production is really going to
change the global balance,” Wittner said in a telephone
interview. “It is still going to be Asian-led demand growth
bumping up against a maturing supply base. The big picture does
not really change.” Wittner forecasts oil averaging $101 a
barrel next year.
Brazil has given no signs that limits will be placed on
Tupi and related deepwater oil fields, the biggest discovery in
the Americas since Mexico’s Cantarell in 1976.
The fewer barrels pumped in the U.S., the more refiners need
to turn to the 12-nation Organization of Petroleum Exporting
Countries and other foreign suppliers. To meet rising demand,
OPEC would activate unused fields, curtailing capacity the world
needs during times of disruptions, such as wars and hurricanes.
A 500,000 barrel-a-day drop in global output in 2013 would put a
greater burden on OPEC, Bernstein analyst Neil McMahon said in a
May 28 report.
“Although this may seem small in a global context, such a
situation would decrease OPEC spare capacity, especially in the
second half of the decade, which would lead to an increase in
the oil price,” according to the report.

Deep Waters

The world is growing more dependent on deepwater finds,
focusing attention on hard-to-access fields such as Brazil’s
Tupi and BP’s Thunder Horse in the Gulf of Mexico. Reservoirs
lying more than 1,000 meters (3,280 feet) below the sea surface
will make up almost 4 million barrels of daily global production
by 2018, more than six times the level this year, according to
Bernstein estimates.
OPEC accounted for 41 percent of U.S. imports last year,
down from 46 percent in 2008, according to the Energy
Department, in keeping with the goals of Obama and previous
American presidents to curb dependence on foreign nations.
“Much of our future supplies were supposed to come from
deepwater drilling,” David Hufton, managing director of
London’s PVM Oil Associates Ltd., the world’s largest broker of
over-the-counter crude trading, said in a note. “The
environmental risks are now all too apparent.”


Obama Reacts

The spill has dumped as much as 19,000 barrels a day into
the Gulf, according to government scientists, after the initial
explosion killed 11 workers and sank a $365 million rig. BP has
spent about $1.25 billion to stop the flow and scour crude from
the Gulf, it said today.
“We owe all those who’ve been harmed, as well as future
generations, a full and vigorous accounting of the events that
led to what has now become the worst oil spill in U.S.
history,” Obama said in the White House Rose Garden on June 1.
Oil producers around the world are preparing for stricter
regulation. Norwegian government members are calling for an
immediate stop to deepwater drilling offshore, while Russia may
tighten its rules, according to Energy Minister Sergei Shmatko.
More regulation means more expenses to consumers through
higher commodity prices. Insurers are charging 50 percent more
for policies covering oil rigs following the explosion,
according to Moody’s Investors Service.
“The marginal costs for new supplies have taken a big
upturn,” said PVM’s Hufton. “It is surprising that forward oil
prices have not reacted more aggressively.”