Oil prices hold steady amidst news of mergers, oil finds and a possible peace deal

By Eithne Treanor…

The oil price was holding steady this week as news of mergers, oil finds and a possible peace deal dominated the headlines. Crude inventories continue to be high and in early trading on Friday. Brent crude was priced above US$56 with WTI holding above US$50 a barrel.

The big news of the week was the agreed Shell-BG merger with analysts saying this might be the start of further consolidation. Royal Dutch Shell’s US$70 billion offer to buy BG Group has certainly excited the market with the prospects of Shell becoming the world’s biggest gas player if the deal goes ahead.

Shell will buy the company’s deep-water oil fields and natural gas assets and this already has investors reading the fine print as well as global regulators scrutinizing the magnitude of the merger.

The CEO of Shell Ben van Beurden and the Chairman of BG Andrew Gould indicated that the regulators would approve the deal by 2016 at the latest. The two companies have obviously done their homework and van Beurden said he expected no “insurmountable issues.”

The deal will position Shell as the world’s leading liquefied natural gas players as the oil company repositions its future in the wider energy market. Shell has already become a major gas player, but this deal is being questioned as a reaction to lower oil prices. Shell will welcome new oil and gas reserves, as replacement was becoming an issue, having only managed to replace 26 percent of its production in 2014.

While Shell might have gained the oil assets at a reasonable price, analysts and investors are looking at the offer price of 50-percent above BG’s closing share price on the day. The future for LNG looks encouraging with demand from China and emerging markets growing rapidly.

China wants to burn less coal and is driving gas demand, thanks to a rising middle class and consumer base in recent years. On completion, this deal will boost Shell’s energy reserves by a quarter, and should produce a global oil and gas company worth an estimated US$300 billion.

Iran’s President Hassan Rouhani is calling for the lifting of all sanctions as the key condition for a successful completion of the deal on its nuclear procurement programme. The representatives of the six world powers were looking for a more phased-in approach. In a televised address this week, Iran’s Supreme Leader, Grand Ayatollah Ali Khamenei said he still did not trust the Americans and “what has happened so far does not guarantee a deal.”

Many hardliners in Iran fear the country is caving into the excessive demands from the West. The final deal should be concluded on 30th June. Khamenei added that “the other side” was knows for “backpedalling on its commitments.”

While the framework agreement might be in place, the US House of Representatives and the Senate will be as equally untrusting as the Iranian Supreme Leader. Iran would have to suspend its stockpile of enriched uranium and prove its nuclear programme was for research and domestic use. Iran’s oil minister Bijan Zanganeh said that OPEC members would “coordinate” and accommodate Iran’s prospective return to the oil market despite the current over supply.

Iran will need the support of fellow producers, especially Saudi Arabia and the country will not immediately flood the market with oil, but Iran is anxiously waiting to begin re-exporting oil after years of sanctions. Geopolitical upheaval in Yemen is currently impacting relations between Iran and Saudi Arabia.

This week’s surprise oil find in the UK sent shares of UK Oil & Gas Investments higher on news of an oil field near Gatwick Airport that could produce as much as 100 billion barrels of oil. Exploratory drilling has been carried on at the Horse Hill site for three years. This “significant” find could be the UK’s biggest for 30 years, estimated more than four times the volume of the off-shore UK reserves. UKOG said it only expected a fraction, up to 15 percent of this oil could be recovered.

No immediate exploration plans were released, as the company, the government and the community will all have their say. The low oil price, high operating costs as well as local planning and permission will now be the key focus to determine the next step.

The state of the global economy will continue to impact the oil price with a boost this week from Germany’s stronger economic data. Germany’s industrial output improved and Greece made favourable progress on its IMF loan repayment.

Despite the economic situation, and depending on who you talk to, estimates of oil oversupply in the market could be as high as 2 million barrels a day. All the major producers are pumping at record volumes and Saudi Arabia said it raised its output for March to 10.3 million barrels a day, but added that demand for 2015 will still be healthy.