Saturday, 30 April 2011

Fungible Oil

The FT had an interesting note on oil markets last week.  It seems US traders are floating barges full of oil down river from Oklahoma to Louisiana where a barrel fetches an extra $15.10.

Record stocks of 40m barrels at landlocked Cushing, Oklahoma (the delivery point of West Texas Intermediate, the US benchmark price), have produced a supply glut.  There’s talk of building a pipeline to move 400,000 barrels per day from Cushing to Houston to connect “stranded” barrels with the global energy infrastructure.  In the meantime, oil is being moved by truck, train and boat to take advantage price differentials.

The economics and infrastructure are such that one oil company is even sourcing Canadian crude from a pipeline in Mississippi and literally shipping it to refineries in Louisiana. 

“We’re taking a steady diet of crude through our proprietary barge system down to our Garyville refinery,” said one oil executive. “Who would have ever thought that we would be moving western Canadian all the way down to Louisiana?”

The current trend of price anomalies reconfiguring energy markets is reminiscent of the oil price swings of 2008.

At that time, however, it wasn’t geographical price differences—exacerbated by a Middle East supply shock, growing emerging markets and loose monetary policy—that traders were cashing in on.  It was quite the opposite in fact.  As the world economy fell off the precipice in 2008, traders, oil companies, and even investment banks, were taking advantage of the record price differences between tumbling current prices and rebounding future prices caused by oil supply outstripping global demand. 

Punters were hoarding the cheap, excess oil, storing it offshore on super tankers, while at the same time entering agreements to sell that oil at a future date and at an agreed upon higher price, thereby locking in a profit.  The difference then between WTI for immediate delivery and a one-year forward contract was $21.50 a barrel.

But not all oil is created equal, independent of if it’s bought today or tomorrow.  The crisis in Libya has halted the production of its light, sweet crude that is prized for being easily refined into diesel and petrol, and for having a low sulfur content, making it cleaner to burn.

Saudi Arabia has said it “will meet any shortage” of oil supply but its oil is heavier and higher in sulfur, leaving it as a more expensive product for oil refineries to work with.  WTI oil, also sweet and light, is a better substitute for Libyan oil, which means unrest in North Africa has helped push the US benchmark to $114 a barrel. 

Luckily a flattening has been occurring across the crude spectrum in the last few years.  Since oil prices reached their record level of $147 a barrel in 2008, refiners have invested hugely in infrastructure allowing them to process heavy crude much more efficiently and thus putting on smaller premium on the sweeter variety.

Had this not been the case, who knows how far, and by what means, traders would be moving Canadian oil just to make a quick buck.


Thursday, 28 April 2011

The Endgame Cometh

Happy Mujahideen Victory Day.

Nineteen years ago, today, a rag-tag group of insurgents overthrew the previously Soviet-supported Afghan government.  It’s a national holiday here in Kabul.  The roads, usually clogged with traffic and pedestrians, are clear not only because Afghans are staying home to celebrate but also because many international civilians are on lockdown. 

A string of high profile attacks on government and military buildings in the past few weeks have cast a pall over the holiday.  And a blockbuster prison break this week has only added to tensions.

But in commemorating a day that was precipitated by the withdrawal of Soviet troops three years earlier in 1989, it’s worth looking forward to how the next major foreign military withdrawal from Afghanistan might shape the country.

Lost in the stories of Taliban infiltration of Afghan security forces has been reporting on how Afghans across the country are starting to hedge their bets as U.S. and coalition forces prepare to drawdown their forces this July, a process that should end by 2014.

Taliban are turning themselves in to authorities to be reintegrated into society, sometimes as part of local militias.  Ethnic minority groups are beginning to rearm themselves in anticipation of a return of the Pashtun Taliban.  And armies of pundits have weighed in on the false hope of talks with the Taliban or are exasperated that a 10-year war has gone on this long without a diplomatic component to compliment the military hardware.

Perhaps the most interesting aspect of all this is what exactly happens after 2014.  Ahmed Rashid commented on Karzai’s request for a “strategic partnership agreement” with the U.S. after 2014:

The Pentagon is keen on this so it can maintain between two and six bases in Afghanistan to keep pressure on al-Qaeda. Most countries in the region – such as Pakistan, China and Russia – will object to an indefinite U.S. military presence, while Iran will see it as a permanent threat.

The New York Times reports that upon hearing talk of a U.S. presence beyond 2014, Iranian, Indian and Russian officials made a mad dash to Kabul.  The Times goes on to explain how talk of long term U.S. bases could sink the burgeoning peace negotiations.

[The strategic partnership agreement] is without doubt a delicate process, and one that comes at a critical time.  Afghan officials have expressed concern that the negotiations could scuttle peace talks with the Taliban, now in their early stages, because the insurgents have insisted that foreign forces must leave the country before they will deal. That they are already talking is an indication they are willing to compromise on the timing of a withdrawal – but it is hard to imagine Taliban acceptance of a lasting American presence here.

Discussions of permanents bases also plays into Afghan conspiracy theories that the U.S. is only here to steal Afghanistan’s mineral wealth and to have a permanent base in the region from which to exert influence over the eventual nuclear state of Iran and the current nuclear power of Pakistan, to say nothing of China and Russia.

A Wall Street Journal piece nicely explores of the geopolitical posturing that surrounds an Afghan-U.S. strategic partnership.

Pakistan is lobbying Afghanistan’s president against building a long-term strategic partnership with the U.S., urging him instead to look to Pakistan – and its Chinese ally – for help in striking a peace deal with the Taliban and rebuilding the economy, Afghan officials say…

Some U.S. officials said they had heard details of the Kabul meeting, and presumed they were informed about [Pakistan’s] entreaties in part, as one official put it, to "raise Afghanistan's asking price" in the partnership talks. That asking price could include high levels of U.S. aid after 2014. The U.S. officials sought to play down the significance of the Pakistani proposal. Such overtures were to be expected at the start of any negotiations, they said; the idea of China taking a leading role in Afghanistan was fanciful at best, they noted.

And yet, Gen. David Petraeus, the top commander in Afghanistan, has met Karzai three times since the Pakistani overture.


Monday, 18 April 2011

60 Cups of Tea

60 Minutes, last night, aired an expose on Three Cups of Tea author Greg Mortenson.  While acknowledging his promotion of girls’ education in Pakistan and Afghanistan, their report brought into question his “origin story,” financial irregularities within his Central Asia Institute and exactly how many schools his NGO has built.

For those unfamiliar with Three Cups of Tearecommended reading for the rank and file of both the US military and Oprah’s book cluban Outside magazine article chronicles Mortenson’s activities in Afghanistan.

The fascinating nexus between book clubs and the military was highlighted in a New York Times piece last summer:

The collaboration [between the US military and Mortenson], which grew in part out of the popularity of “Three Cups of Tea” among military wives who told their husbands to read it, extends to the office of Adm. Mike Mullen, the chairman of the Joint Chiefs of Staff. Last summer, Admiral Mullen attended the opening of one of Mr. Mortenson’s schools in Pushghar, a remote village in Afghanistan’s Hindu Kush mountains.

On the ground here in Afghanistan development workers will confess that Mortenson’s inspirational story re-ignited their passion and drive for their often frustrating line of work.  However, many hold reservations about the efficacy and sustainability—to say nothing of the possible harm—of this “cowboy” approach to development work.