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As oil emerges from recent lows, mergers kick off with a bang

By Kishori Krishnan Exclusive To Crude Investing News

The market in Toronto jumped significantly, in part due to the merger announcement between Suncorp (TSE:SU) and Petro-Canada (TSE:PCA).  Petro-Canada was up 20 per cent at the end of the day and many of the other Canadian oil patch companies rose along with it.  EnCana (TSE:ECA), Canadian Natural Resources (TSE:CNQ) and Talisman Energy (TSE:TLM) all closed up significantly.

The merger comes at a time when oil prices are coming off recent lows and Petro-Canada was trading around the $30 mark, or half the 52 week high of $61.85.  The combined company will have daily production of approximately 680,000 barrels and a resource base of 7.5 billion barrels.  It is understood that Petro-Canada’s retail operations will continue to operate as is.

On Thursdy, crude oil soared above $51 per barrel, gold surged more than $70 an ounce and silver enjoyed its biggest rally in nearly three decades, as the commodity markets reflected the immediate impact of the Federal Reserve’s decision to pump another $1.1 trillion into the money supply.

Fueled by the plunging dollar, which slumped to multiweek lows versus rivals, commodities posted a serious rally Thursday. “It just became extremely more dangerous to be short on commodities, gold included,” Phil Flynn, vice president and energy analyst at Alaron Trading, told FoxX Business. Some analysts predicted the rallies in commodities could be quickly reversed.

“We deem it an overreaction. It’s not as if (the Fed move) yields instant inflation, let alone hyperinflation. These are knee-jerk reactions,” said Jon Nadler, senior analyst at Kitco Bullion Dealers Montreal. “If anyone is up $50 or $60 today, that becomes very tempting for profit-taking” tomorrow.

Just a day after the energy market was rattled by a bearish inventory report, the price of a barrel of crude soared to its highest level since January, breaching $51 per barrel. Crude jumped $3.47 a barrel to settle at $51.61 — the highest settle since November 28. “It looked like crude was set to fail again at $50 a barrel, but the Fed action caused a big move in the dollar,” said Tom Bentz, director and senior energy analyst at BNP Paribas Commodity Futures.

Reversing a string of bullish inventory reports, the Department of Energy said crude stockpiles unexpectedly soared by 2 million barrels last week. Crude was able to rise Thursday in the face of the latest evidence demand will continue to be hurt by the global recession.

However, a rider. Both gold and oil were influenced by the expiration of the April contract on Friday. It’s not clear if the rally in oil prices will hold as the action is clearly based on the dollar.

In New York, U.S. crude oil futures seesawed near flat on Friday, amid some expected volatility as the front-month April contract approached expiration and after crude oil’s strong rally the previous session. “The sentiment that the economy may improve and that the Fed’s moves may be inflationary has crude trying to put in a base above $50 after breaking out of its recent range,” said Gene McGillian, analyst, at Tradition Energy in Stamford, Connecticut.

 China woes

China will import 1.8 million barrels of African crude in April for the government’s strategic reserve, said a trade source familiar with the transaction, as it capitalises on low prices to add to already swollen state stockpiles. The purchase, news of which comes after an industry official said in early March that China’s emergency tanks are already filled to the brim, may suggest that stock levels have begun to ease after two months of low crude imports, a Reuters report said.

“The purchase was made under the government’s call to boost reserves,” the trader told Reuters, adding that at least half of the cargo was sourced from Angola, China’s second-largest crude supplier after Saudi Arabia.

China, the world’s second-largest oil user, stepped up crude purchases for its strategic tanks around last October, when oil fell to about $100 from its near $150 peak in July, Beijing-based trading sources have said. The stockbuild has contributed to a near 10 per cent rise in China’s crude imports last year at nearly 3.6 million barrels per day, an increase that was below expectations of double-digit growth, as a worsening economic slump hit Chinese fuel demand. Traders now say that when they purchased the oil, they were not sure where the cargo would finally land – government tanks or companies’ commercial storages.

Company news

Cairn India has said it will start crude oil production from its prolific Rajasthan oil discovery next month even though the government is yet to find a buyer for the oil. Cairn, in a letter to the Petroleum Ministry, stated that it would be starting oil production from Barmer fields next month with an initial output of 4,000-5,000 barrels per day. The company, sources said, proposes to truck the oil to a refinery named by the government for processing the crude.

Under the production sharing contract for the Cairn block, the government has to appoint the buyers of the crude before the actual production. The government had previously nominated Mangalore Refinery and Petrochemicals Ltd as the buyer of Rajasthan crude, but it is unwilling to take anything more than 1.02 million tonnes out of the peak output of 8.75 million tonnes, sources said.

While state refiners are reluctant, Reliance Industries has placed a demand for 30,000 to 60,000 bpd (1.5-3 million tonnes) of Cairn crude at each for its two refineries at Jamnagar in Gujarat while Essar Oil has written for 30,000 bpd this year and 120,000 bpd (6 million tonnes) by 2011 when it expands its Vadinar refinery in Jamnagar district.

The Mangala field, the first of the three discoveries Cairn is putting to production, is expected to produce 30,000 bpd by the second quarter of 2009-10 fiscal, sources said. Production is then expected to ramp up to 80,000 bpd by the end of 2009 before reaching a plateau of 125,000 bpd during H1 of 2010. Besides 125,000 bpd of Mangala, the adjacent Bhagyam field would produce 40,000 bpd and Aishwariya another 20,000 bpd. The peak of 175,000 bpd would be reached in 2011.

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