Although investors have flocked to equity markets since the
start of 2013, they have shunned energy stocks. Only basic
materials equities have put in a worse performance.

Energy-focussed funds have averaged a more than 6 percent
loss in the past year, but Whall’s Investec Global Energy Fund -
one of the sector’s largest – has made returns of 4.93 percent,
helped by an investment mandate that has allowed him to bet on
stocks in Brazil, Russia and China that are excluded for others.

He believes the market is too bearish on the outlook for oil
prices, which have fallen to around $102 a barrel this week as
shale oil production drove U.S. reserves to record levels while
demand from China was weak.

“The market is structurally tighter than people understand,”
said Whall, arguing that non-OPEC supply growth had been a
“perennial disappointment” with project delays, geopolitical
problems and unplanned outages in the North Sea.

He said that with OPEC started taking oil off the market
mid-way through 2012, the market was significantly tighter on a
seasonal basis than last year and will tighten “faster than
people think” going into the summer.

Whall said that energy equities were trading as if the Brent
crude oil price was at around $80 a barrel, whilst
Investec expects it to average about $110 for the year.

“The market is unwilling to value these equities on a higher
oil price,” he said. “The view persists that we are in a
short-term spike scenario, driven by financial speculation and
non-fundamental market forces.”

He also believes expectations for shale oil production are
overinflated, arguing that shale oil will prove more difficult
to extract than shale gas, and that China, India and Brazil will
deliver decent demand growth.

Strong car sales in emerging markets pointed to sustained
oil demand growth even if demand for industrial metals from
leading consumer China took a hit, he argued.

The fund, which has $1.080 billion under management, is
underweight the big integrated oil and gas companies, which have
struggled to hit growth targets, and overweight service sector
companies such as Schlumberger and Ensco.

To exploit greater demand for liquefied natural gas (LNG) in
Asia he is holding Santos and Oil Search,
whilst Gazprom is well-placed to benefit from
increased demand for gas in Europe, he said.

“The price of gas in the winter will continue to be very
high – most utilities have given up some flexibility in their
gas-supply contracts so they have to balance their take in the
spot markets,” Whall said. “The Norwegians helped out this year
but next year they won’t have the same flexibility.”

Regulators have scrutinised banks, trading houses and
commodities markets more closely following the Libor benchmark
rigging scandal but trading desks at oil majors have largely
escaped attention.

Although banks and trading houses have expanded rapidly in
energy over the past decades, oil companies still often dwarf
them in size, geographical reach, profits and sometimes the
magnitude of scandals surrounding their operations.

An EU investigation into the suspected manipulation of the
price of crude oil, refined products and ethanol has thrown them
into the spotlight.

“Political pressure for regulatory action and stricter
oversight of both traders and price reporting agencies will ramp
up,” said Roderick Bruce, energy analyst at IHS think-tank.

EU investigators raided offices of BP, Shell
and Statoil, trading house Argos Energy and pricing
agency Platts last week as part of the case. It was the biggest
cross-border action by the regulators since the Libor scandal.

Despite massive disclosure obligations by publicly-listed
oil firms, simple metrics such as revenue and profit at their
trading divisions are not public.

There is also pressure from shareholders for the companies
to provide more transparency.

“Obviously you can’t talk about the size of the positions
that the companies are taking, but in terms of the impact that
trading has on profitability, it should be evident because that
helps to explain the underlying profitability of the company,”
said Charles Whall, who helps co-manage $1.08 billion at
Investec Global Energy Fund, including shares in Shell.

The world’s biggest trading houses including Glencore
, Vitol, Gunvor, Trafigura and Mercuria, long perceived
as the most secretive firms in oil trading, have all started
releasing detailed financial data in recent years to tap bond
and equity markets.

By contrast, oil majors like BP, Shell, Statoil, Total
and Eni disclose very little.

For example, BP, one of the biggest and most powerful
trading desk in the industry, last disclosed figures for trading
in 2005 when it earned $2.97 billion, or over a tenth of the
group’s overall net profit.

RISK APPETITE

Since 2005, BP has only disclosed whether trading had
“stronger” or “weaker” contributions in a given quarter.
Disclosure levels at Shell, Total, Eni are similar.

“Our trading activities are accounted for under
International Financial Reporting Standards. The disclosures we
provide in the annual financial statements are also determined
by those standards,” a BP spokesman said.

He added that when trading has a notable impact on quarterly
performance the firm would always spell this out. Shell, Eni and
Total declined to comment.

Insiders say BP’s annual trading profits have fluctuated
since 2005 between $1-$3 billion compared to $1.7-$2.3 billion
at the world’s largest oil trading house Vitol.

Oil majors say trading facilitates cooperation between their
producing, refining and distribution units.

“It is not speculative and it doesn’t take large positions
or exposures,” Shell’s chief financial officer Simon Henry told
a shareholders meeting this week while saying the company often
makes more money in volatile trading conditions.

This is not how Investec’s Whall sees trading operations.

“We invest in these companies because this is one of the
ways they make money. They have a physical position and run a
speculative book on the back of it. I’m quite comfortable with
that if it’s well controlled,” he said.

One metric shows that risk appetite at oil majors’ trading
divisions is large.

Value-at-risk, which measures how much a company is prepared
to lose in one day on trading, averaged $34 million at BP in
2012, down from as high as $45 million in 2009. It was stable in
the past few years at around $30 million at Shell.

Only Glencore, the world’s top trader, has comparable
figures at $40 million with Gunvor’s VaR averaging only $12
million.

The biggest Wall Street banks active in commodities trading
have almost halved their VaR levels to $15-$20 million a day in
recent years as they cut down on proprietary trading – trading
with a firm’s own money to make money for itself rather than for
a customer. It can lead to more risky trading and more volatile
profits.

“I find it quite extraordinary that during a global
clampdown on proprietary trading, especially at banks,
publicly-listed oil majors are still allowed to effectively
maintain large prop operations,” an industry veteran, who has
worked at both banks and majors, said.

PRESSURE ON BOTH CONTINENTS

The United States has stricter oversight of financial and
commodities markets and has had several successful high-profile
prosecutions of oil companies for market manipulation.

In 2007, BP paid a record $303 million in a settlement with
U.S. authorities for manipulating propane prices. “BP engaged in
a massive manipulation…” U.S. Commodities Futures Trading
Commission (CFTC) said at the time.

After that, the U.S. Department of Justice installed a
monitor, who oversaw BP’s trading activities for several years.

Insiders say BP has made significant changes to its trading
division since then, including by cutting back on remuneration
to reduce risk taking.

Other oil majors as well as traders such as Arcadia have
also been charged by U.S. officials with market manipulation
over the past decades.

The European Union has tightened oversight of the
commodities market to be closer to rules in the United States.
The EU pricing probe, which a key U.S. senator has urged the
U.S. Justice Department to join, may signal that the regulator
is getting more aggressive.

Output from 12 crude streams tracked by Reuters will average
1.734 million barrels per day (bpd) in June, based on the latest
information from loading schedules and trading sources, down
from the 1.932 million bpd in May.

A large proportion of the decline is due to a much shorter
Ekofisk programme, which will load just three cargoes or 60,000
bpd in June, compared with 12 cargoes or 232,000 bpd in May.
This is because of three weeks of maintenance in the Greater
Ekofisk region in June.

“The tightness is being derived from the short Ekofisk,
which I think was mostly expected by the market,” a trader said.
“If we strip out the Ekofisk number, the programmes are not
looking that tight.”

As a result, it is grades such as Ekofisk and Oseberg that
traders expect will appreciate in value in coming weeks. “It
will tighten the light, sweet market,” one said. “I expect the
Norwegian grades to improve.”

The Brent benchmark is underpinned by four crude oils -
Brent itself, Forties, Oseberg and Ekofisk (BFOE).

The output of these crudes will add up to around 740,000 bpd
in June, the latest loading schedules show, down from the
891,000 bpd that was originally scheduled for May, and the
948,000 bpd that will actually load.

Forties gained a cargo after the initial May loading
programme was issued, taking the total to 23, as Britain’s
biggest oilfield Buzzard was pumping well at that time. It has
since suffered an outage and 21 cargoes will load in June.

Output from the Brent stream is also expected to be lower in
June as work continues on Taqa’s Cormorant Alpha platform. The
10,000 bpd platform is expected to remain shut for months as
repairs are carried out following a leak.

Flotta, one of the smallest North Sea streams tracked by
Reuters, will load no cargoes in June. It loaded one cargo in
May but this was an April cargo that had been deferred.

“They’re really struggling,” one market participant said.
“Those are old platforms that feed into Flotta and they
experience lots of issues. It has been particularly bad
recently.”

REFINERY DEMAND

Traders were divided over whether June’s tighter supply
would be offset by weaker demand, with some pointing to run cuts
at European refineries, while others argued that a seasonal
uptick in demand could be expected.

At least five refineries in Northwest Europe and the
Mediterranean have been reducing output since the second half of
April due to weak margins.

But some traders see this as a low and argue that by June,
end-user demand will pick up as the summer driving season gets
underway in the United States and Europe.

Another trader thought that some refineries had already laid
in crude feedstock ahead of the Ekofisk shutdown, which might
limit an uptick in demand.

“I hear that some refiners have prepared for the maintenance
by buying in replacement grades, but overall a tighter supply
will help to tighten the market if demand stays stable,” he
said.

European appetite for North Sea crudes is once again driving
prices now that the arbitrage to South Korea has stuttered to a
halt. No VLCCs appear to have made the trip over the last month,
traders said, and there are no upcoming fixtures to South Korea.

Wealth managers have been pulling money from commodities
since the start of the year, culminating in a major sell off in
April when investors dumped gold, copper and oil.

Poor economic data from China, Europe and the United States
has hit global growth forecasts, making investors reassess the
demand for raw materials.

The 19-commodity Thomson Reuters-Jefferies CRB index
was down almost 6 percent following April’s rout and
is still off some 4 percent since the start of the year.

Investors say it is too soon to pick up a bargain.

“We are neutral to mildly underweight commodities now and we
are not exactly itching to get straight back in there,” said
Johan Jooste, chief market strategist at Merrill Lynch Wealth
Management, EMEA, which manages some $1.76 trillion globally.
“The macro story is just less supportive of commodities now.”

Some $9.02 billion was pulled from commodity sector mutual
funds in the month to April 26, according to data from research
firm EPFR Global. This followed $8.5 billion of redemptions from
commodity exchange traded products (ETPs) globally in the first
quarter, according to BlackRock data.

“We are not out of the woods yet,” said Andrey Kryuchenkov,
an analyst at VTB Capital. “We will still need persistent
physical interest in order to underpin prices and limit the
downside at times when investors remain utterly unconvinced.”

Commodities are particularly sensitive to economic news
about China, a manufacturing powerhouse that also requires huge
amounts of raw materials to build its infrastructure.

China’s economic recovery unexpectedly stumbled in the first
quarter of 2013, with growth sliding below the 8 percent
forecast as factory output and investment spending slowed.

“The biggest concern right now in commodities is that the
economic slowdown in China is going to be far more severe than
anticipated,” said Jeff Sica, chief investment officer at New
Jersey-based Sica Wealth Management, which oversees more than $1
billion in assets.

“This slowdown is going to shake a lot of people up.”

Sica is currently underweight commodities and short copper,
which is particularly sensitive to Chinese demand. China is the
world’s biggest consumer of copper, accounting for 40 percent of
demand. Managers say that without strong growth from China,
commodities will not perform well and China’s key export markets
are struggling.

In Europe, Germany’s business sentiment fell in April for a
second consecutive month, missing even the lowest estimate in a
Reuters poll, while orders for long-lasting U.S. manufactured
goods recorded their biggest drop in seven months in March.

SAFER BETS

Multi-asset managers have been switching from commodities
into equities after a good run for stocks in the first quarter.

But investors are still favouring “defensive” stocks, as an
element of caution remains. These pay good dividend yields that
should continue to do well in a recession because their
performance is less dependent on economic growth.

“Investors are preferring the safer bets in risky assets,”
said Koen Straetmans, senior strategist at ING Investment
Management in the Netherlands, which manages some 183 billion
euros of assets worldwide. The group is overweight equities and
real estate but neutral on commodities.

Commodity-focused fund managers are pinning their hopes on a
rebound in the second half of 2013. They see fresh stimulus
measures from central banks driving inflation, which would be
supportive for commodities, particularly gold.

However, multi-asset managers and analysts are sceptical as
to how much impact more stimulus will have. They are not
expecting inflation to pick up this year, point out that the
U.S. inflation-linked bond market already pricing it lower.

“From a tactical viewpoint, and maybe even medium term,
commodities wouldn’t be an area where we feel we want to take
advantage of what might be perceived cheapness,” Jooste said.

“We like being long equities and it’s doing well, but there
is still some scepticism built in about an upturn in the second
half, and that’s an argument we would concur with.”

Ashok Shah, investment director at London & Capital, which
has some $3.7 billion under management, expects the economic
environment to deteriorate. In the short term he sees a stronger
possibility of a deflationary rather than an inflationary
environment.

“Buy blindly and hold won’t work as global growth continues
to be lacklustre and Europe in particular remains under
pressure,” he said. “The outlook for aluminium and copper
continues to be incredibly difficult.”

Sica is also bearish. He said oil could go into another
“hopeless range”, similar to the one before the slump, with
Brent stuck at between $100 and $105 a barrel, and U.S.
crude languishing at between $90 and $95 a barrel.

“Copper looks even more doomed than oil, truly pointing to
the depths of the economic slowdown in China now,” he said.

Recent disappointing data from Europe and top oil consumers
the United States and China have stoked worries about global
demand for oil, dragging down prices by more than 5 percent
since the start of April and fuelling speculation about supply
cuts.

By 0847 GMT, Brent crude was off 12 cents at $101.61
a barrel. The move lower reversed a small rally in Asian trading
after better-than-expected South Korean growth data.

South Korea’s economy expanded in the first quarter at its
fastest pace in two years, but customs figures, which measure
the value of exports, painted a less rosy picture.

U.S. crude was up 17 cents at $91.60 a barrel.

Analysts said doubts were creeping back into the market
after a short-lived rally late on Wednesday that followed the
weekly U.S. crude oil and products data.

This continued into Thursday’s Asian trading session, but
the market turned lower after London traders arrived at their
desks.

“The market is questioning yesterday’s rally and whether it
was really justified,” said Bjarne Schieldrop, chief commodity
analyst at SEB.

“There was some support at the start of the day from the
South Korean numbers. This is seen as the canary in the coal
mine because of its industrial orders as it produces so many
components. But it looks as if that first-quarter growth was
more to do with front-loaded government spending.”

Brent pushed to an intraday high of $102.22 in Asian
trading, its highest level since April 15, helped by a sharp
drop in weekly U.S. gasoline stocks on Wednesday.

Gasoline inventories fell 3.9 million barrels week-on-week,
according to data from the U.S. Energy Information
Administration, compared with analysts’ expectations for a
smaller decline of 200,000 barrels.

But analysts cautioned against a bullish interpretation of
the data. “The drop in gasoline stocks was driven by lower
refinery production, not just an increase in demand,” said
Carsten Fritsch, an oil analyst at Commerzbank in Frankfurt.

“If you look at the seasonal pattern, it isn’t unusual for
gasoline stocks to fall at this time of year, so I wouldn’t read
too much into it.”

Fritsch was also dismissive of the notion that a rate cut by
the European Central Bank would boost oil demand – something
that has helped support the market. The ECB is expected to shave
a quarter-point off interest rates at its policy meeting next
week.

“I don’t see why oil demand should benefit from that,”
Fritsch said. “Maybe it will boost investor demand, but investor
demand has not benefited at all from the most recent monetary
stimulus in Japan and the United States. So why should a
marginal ECB rate cut do that?”

WEAK ECONOMIC OUTLOOK

Analysts and traders said the technical picture remained
bearish, pointing to weak global demand growth and abundant
supplies from the North Sea, the Middle East and North Africa.

At least nine May cargoes have been moved forward in the
North Sea Forties crude programme after stronger-than-expected
output from Britain’s Buzzard oilfield, the biggest contributor
to the Forties stream.

In addition, production from Iraq, Libya and the United
States continues to rise, raising questions as to whether Saudi
Arabia, Kuwait and the United Arab Emirates will have to cut
their output.

Meanwhile on the demand side, discouraging economic data
remains the norm. Orders for durable U.S. manufactured goods
recorded their biggest drop in seven months in March, and a
gauge of planned business spending rose only modestly.

And although UK gross domestic product showed a 0.3 percent
rise in the first quarter, this was partly linked to the bounce
back in North Sea oil and gas output, alongside service sector
growth.

(Additional reporting by Jessica Jaganathan in Singapore;
editing by Jane Baird)

A cross-commodity sell-off in mid-April led by safe-haven
gold has since compounded the pain. Gold plunged about 13
percent over last Friday and Monday – its worst two-day fall in
30 years.

Commodity prices as indicated by the Thomson
Reuters-Jefferies CRB index fell nearly 2 percent in
the first quarter, but were down almost 6 percent after Monday’s
rout.

“Commodity markets were erratic and mostly headed lower,”
said Brian Ziv, co-manager of the William Blair Commodity
Strategy Long/Short Fund, a multi-manager fund that
came tenth in the Lipper league table. Lipper is a unit of
Thomson Reuters.

“Choppy markets are hard to trade. But bear markets do not
particularly bother the fund, because we invest long and short.”

The CS Commodity ACCESS Strategy Fund, which
came fifth in the Lipper league table, is another long/short
fund that managed to make money on both sides of the market.

Nelson Louie, global head of commodities at Credit Suisse
Asset Management (CSAM) and Christopher Burton, head of
portfolio management, commodities at CSAM, said the fund was
generally underweight or even short gold during the quarter.

This helped it outperform its peers when gold fell due to
U.S. dollar strength and reduced demand as a safe haven. Gold
exchange-traded products suffered global redemptions of $9.2
billion in the first quarter as investors switched to equities.

The largest sector contributor to the fund’s outperformance
was livestock, where the fund was also generally underweight and
at times held a short position. “Livestock fell more than 6
percent during the quarter, due to decreased demand for U.S.
exports,” they said.

Theresa Gusman, head of commodities at Deutsche Asset &
Wealth Management, also cited a significant underweight position
in agricultural commodities, particularly wheat and corn, as a
contributor to outperformance. The DWS Invest Commodity Plus
Fund came fourth in the Lipper league table, up
1.48 percent.

Both corn and wheat came off sharply at the end
of March after a U.S. Department of Agriculture report showed a
larger-than-expected corn stockpile and high annual plantings
for corn and wheat.

But very specialist funds also did well in the first
quarter, as some individual commodities bucked the trend.

William Blair’s Ziv said his fund’s best performance came
from a sector-specialised trader who participated in strong
cotton prices. Cotton was up almost 17 percent in the
first quarter. Over half of the William Blair fund is invested
with commodity-sector specialists.

The top-performing fund in the first quarter was also a
specialist – the SafePort Strategic Metals & Energy Fund
is a small fund with a concentrated investment in
physical rhenium. This is found in small quantities in copper
and molybdenum mines and used in aircraft turbines.

Dr Juerg Schatz, chief executive of Perfect Management
Services, which manages the fund, said rhenium is scarce, whilst
demand from industrial buyers such as aircraft manufacturers, is
growing steadily. However, the market is small by its very
nature, and so cannot absorb large capital inflows.

(Reporting by Claire Milhench; Editing by Alison Birrane)

Analysts said the market seemed to be stabilising after a
week of heavy liquidation, in which prices tumbled from over
$106 along with a rout in gold and industrial metals.

Brent crude was up 51 cents to $99.64 a barrel by
0843 GMT, extending Thursday’s 1.47 percent gain. U.S. crude
rose 74 cents to $88.47, but analysts remained cautious
as to whether the recovery had legs.

“It’s probably too early to say if we are out of the woods
after such a big sell-off,” said Ole Hansen, head of commodity
strategy at Saxo Bank. “At the moment it’s more a question of
establishing some support in the market, and so far that has
been reasonably successful.”

Front-month oil prices are still on course for a fall of
more than 3 percent for the week, after a cut in oil demand
forecasts by global energy agencies and weak economic data from
the United States and China, the world’s two largest oil
consumers.

“The latest economic data out of Europe, China and the U.S.
was not so good, so it’s no wonder demand projections have been
revised downwards,” said Carsten Fritsch, and oil analyst at
Commerzbank in Frankfurt.

“This will lead to even higher physical oversupply in the
oil markets, given rising U.S. shale production and constant
OPEC supply. In the very short term, I don’t see any room for
meaningful price recovery unless OPEC cuts supply or we get some
better-than-expected economic data.”

Data through the week contributed to falling prices. Chinese
first-quarter GDP growth was seen as disappointing, down at 7.7
percent from 7.9 percent in the fourth quarter. In the United
States, the number of people filing new claims for unemployment
benefits rose last week, and factory activity in the nation’s
mid-Atlantic region cooled in April.

Oil prices are down nearly $10 a barrel from the start of
this month. Brent fell to its lowest level since July 2012 on
Thursday at $96.75 a barrel after commodities took a hammering
across the board earlier in the week.

Earlier in the week gold suffered its worst two-day fall in
30 years. Copper is still down below $7,000 a tonne, on course
for its worst week since 2011.

But with the exception of industrial metals, the complex now
appears to have stabilised. “There is a general feeling in the
market that Brent won’t go much below $100 at this stage as a
lot of speculative length has now been liquidated,” said Hansen.

The $100 level is seen as critical, because it is a budget
breakeven point for OPEC members such as Iran, Iraq and Algeria.

“OPEC doesn’t want to see the price fall much below $100,
and given that they continue to produce at very high levels,
they can just turn the taps down a little bit, which would
quickly change the balance in the market,” Hansen said.

Iran and Venezuela have already raised concerns about the
price fall and said discussions had taken place over whether to
call an emergency OPEC meeting before the group’s scheduled
meeting at the end of May.

(Additional reporting by Florence Tan in Singapore; editing by
Jane Baird)

Gold suffered an investor exodus for a third consecutive month, bringing first-quarter ETP outflows to $9.2 billion, but white metals – silver, platinum and palladium – escaped the sell-off, BlackRock, the world’s largest asset manager, said.

Riskier, growth-related commodities such as industrial metals and energy also did poorly in March, as the Cyprus crisis stoked new worries over eurozone debt and economic growth.

“European-listed ETPs had outflows in every commodity category, which we attribute to heightened uncertainty in the region,” said Dodd Kittsley, global head of ETP research at BlackRock.

Equity ETPs were the big gainers, popular among investors wanting to take more risk for more return.

An easy route into commodities for investors, ETPs include funds, commodities and notes traded on a stock market with their value linked to the underlying assets.

In the first quarter of this year, flows into U.S. equities accounted for $37.3 billion, up 80 percent year-on-year, BlackRock said. The S&P 500 .SPX leapt 10 percent over the first quarter, and a slight dip at the end of February gave more investors an opportunity to buy in.

“Despite continued market volatility, investors recognise that the fundamentals in the United States are generally favourable, given strong corporate earnings and cheap equity valuations,” said Russ Koesterich, global chief investment strategist at BlackRock.

The white metals were the only commodities group to see any inflows in March, attracting $170 million. Kittsley noted that these inflows were driven by U.S.-listed products amid expectations of U.S. economic growth.

Nicholas Brooks, head of research and investment strategy at ETF Securities, an issuer of ETPs, said silver tended to outperform gold strongly during periods when economic growth is rising because of its use in industrial production.

Physical platinum ETPs attracted inflows due to supply worries after South African energy provider Eskom reduced power to some mining companies due to a strike at its coal supplier Exxaro (EXXJ.J: Quote, Profile, Research).

Brooks said investor positioning in the futures market was near all-time highs, however. “So all you need is a bit of negative news on the growth side and prices could come off very sharply. I wouldn’t be surprised if investors take more off the table in platinum and palladium in the next month or so.”

GOLD ENDS LOSING STREAK

Gold ETPs began to claw back some ground in the second half of March as the Cyprus debt crisis unfolded, driving investors back to defensive assets from the more cyclical commodity ETPs such as industrial metals.

S&P GSCI’s Gold index, a popular benchmark, was up 0.99 percent in March, following a 11.2 percent drop in the last five months, its longest consecutive losing streak in 17 years. Conversely, S&P GSCI Industrial Metals was the worst performing sector in March, down 4.4 percent.

Agriculture ETPs suffered a reversal in March, with $176 million of outflows after strong inflows in February. The S&P GSCI Agriculture index was down 2.2 percent, with corn hit by a report showing larger-than-expected U.S. corn stockpiles and the most planted corn acres since 1936.

Energy ETPs also experienced large outflows in March, losing $668 million according to ETF Securities data. Brooks said this was due to profit-taking, with S&P GSCI’s Crude Oil index up 5.1 percent in March after inventories fell at Cushing, Oklahoma.

Natural gas ETPs also suffered heavy outflows of $562 million after U.S. benchmark Henry Hub prices climbed to over $4 per million British thermal units (mmBtu) from $3.19 per mmBtu in February. Cold weather and high electric power sector demand triggered larger-than-usual inventory draws in the United States.

At the end of March, BlackRock’s data covered 928 commodity ETPs worldwide, worth some $183.6 billion. Data from ETF Securities also reflect global flows, and assets totalling $185.9 billion.

Although output is expected to decline another 3-6 percent
this year, it will rebound by almost a third by 2017 as some 50
oil and gas fields start production on the United Kingdom’s
Continental Shelf, industry body figures show.

Falling oil production held back growth in GDP by 0.2
percentage points last year, Office of National Statistics data
showed, after acting as a drag in the previous two years.

This has damaged attempts by Britain’s Conservative-led
coalition government to stimulate growth, bringing the world’s
sixth largest economy close to its third recession in less than
five years.

The government’s record on economic growth will be a key
factor in the 2015 parliamentary election, with the opposition
Labour Party blaming austerity measures for anaemic output.

North Sea oil also underpins the global Brent crude
benchmark and over the last two years, concerns about dwindling
supply have dogged the market, which is seen as vulnerable to
sudden price spikes when key oilfields unexpectedly go offline.

This situation will improve when 14 new oilfields off the UK
coast start production over the next two years.

By 2017, Britain’s North Sea oil and gas production is
forecast to rise to around 2 million barrels of oil equivalent
per day (boepd), up from 1.55 million in 2012, Oil & Gas UK
said, but far from the 2.7 million boepd it hit in 1999.

Industry experts say sustained oil prices of above $90 a
barrel since the end of 2010 have made it possible to go after
reserves that are smaller or more difficult to access.

Using new technology to boost recovery rates has been vital,
as the average recovery factor for the global oil industry is
only around 25-35 percent.

“Moving the recovery factor just 1 percent globally
represents about 2-3 years of global production,” said Juan
Carlos Gay, a London-based partner at consultants Bain &
Company. “So anything that improves the recovery factor of a
field has a tremendous impact on production volumes.”

EnQuest’s Alma/Galia project, which is expected to
begin producing in the fourth quarter of 2013, illustrates how
new owners can extend the life of fields that are too small to
be of interest to the oil majors.

This will produce 20,000 boepd at its peak, revitalising
Argyll, the UK’s first producing field. Argyll has been
decommissioned twice due to the difficulty of extracting the
remaining reserves, estimated at 34 million boe.

Oil majors have also been busy. BP’s Kinnoull, which
contains an estimated 45 million boe, should start feeding oil
into the Forties pipeline this year, enabling the Andrew
platform to remain in production to 2020 and beyond.

Gay also cited BP’s development of Clair Ridge where the use
of low-salinity water injection will unlock assets that have
lain dormant since the field’s discovery in 1977. Extracting the
oil has proved tricky because of the geology, but BP’s LoSal
technique forces the crude to separate itself from the rock.

This will allow 640 million barrels of recoverable oil to be
tapped and extend the life of the field to around 2050. BP is
now looking at a potential third development phase.

NEW LEASE OF LIFE

This new lease of life for the North Sea, which has produced
oil for four decades, follows a 30 percent fall in UK production
from 2010-2012 due to problems at Total’s
Elgin-Franklin and Britain’s biggest oilfield Buzzard, operated
by Nexen.

“In the last couple of years we saw a lot of fields come
offline because unreliability and unanticipated shutdowns had
just grown to such an extent where it was intolerable,” said
Mike Tholen, economics and commercial director at Oil & Gas UK.

Between 2011 and 2012, this amounted to a loss of 1.2
billion barrels worth over $120 billion if an average oil price
of $100 per barrel is taken. Tholen said major works were now
being undertaken to improve the reliability of fields.

China’s CNOOC, which has taken over Nexen, is
fixing the Buzzard field.

China’s Sinopec is helping Talisman Energy
boost production at its Montrose/Arbroath field, where
output had declined 14 percent per annum between 2010 and 2012
against a background of rising operating costs.

Talisman’s 1.6 billion pound ($2.42 billion) project to
redevelop Montrose takes advantage of tax breaks for older
fields to encourage investment.
Increased certainty around the tax treatment of decommissioning
liabilities is also attracting new operators.

Chris Hamlet, operations and improvement manager at
consultants ADIL, cited Apache’s acquisition of the
Forties field in 2003 as another example of a new operator
boosting production from an ageing asset.

“You very rarely hear of Forties having problems now and yet
that was an old asset and it was remarked at the time how bad a
condition it was in,” he said.

Apache is installing a satellite platform to the main
Forties platform, aiming to extend the life of the field by
nearly two decades. When it acquired the field from BP,
production had fallen to 40,000 bpd and it was projected to
cease producing in 2012.

CNOOC has taken a controlling stake in the North Sea field
central to the price of benchmark Brent crude and which, every
time it shuts, can raise costs for some of China’s oil imports.

China imports around a third of its oil – over 2 million
barrels per day (bpd) including Nigerian and other African
crudes – based on Brent prices. An increase in Brent prices by
$1 per barrel costs the world’s top energy consumer over $60
million a month or $720 million a year in additional oil import
spendings.

“We fully expect to increase production from the UK North
Sea assets,” CNOOC said in a statement to Reuters. “Detailed
operational matters have not been finalized, but we are working
on specific plans for the North Sea assets.”

The Chinese company owns a stake in Buzzard through its
$15.1 billion purchase of Canadian oil firm Nexen Inc.,
operator of the field, which closed last month.

The purchase gave Chinese companies operatorship of around
300,000 bpd or a third of the dwindling UK North Sea oil output
of roughly 1 million bpd.

CNNOC is the world’s largest dedicated exploration
and production company by market capitalization – with 40
percent of its proven reserves outside China.

Reuters reported at least six Buzzard outages that slowed or
shut down output in 2012. A one-month planned shutdown in 2012
took twice as long as expected. So far in 2013, the field has
had one unplanned stoppage.

Buzzard normally pumps 200,000 barrels per day, less than
0.25 percent of daily world supply.

That contrasts sharply with its role for the global oil
markets as the largest contributor to the Forties crude blend,
the most important of the North Sea crude grades underpinning
the Brent benchmark.

As a result, Buzzard shutdowns often lead to an increase in
Brent prices as well as premiums of Brent futures for immediate
delivery .

As well as boosting costs for oil consumers, this frustrates
traders in the North Sea market.

“It is literally unbelievable,” said a crude trader with a
bank, caught on the wrong side of a sudden jump in Brent after a
production glitch in November. “It is easy to say from the
sidelines, but still, this is worse than Nigeria.”

Buzzard’s problems have been irritatingly regular for
traders but are unlike those of Nigeria, Africa’s top exporter
where theft from pipelines hampers production and oil spills
occur almost daily.

PROBLEMS TO TACKLE

By the North Sea’s standards, where some fields have been
producing for decades, Buzzard is relatively youthful, having
started production in 2007. Other field partners are Suncor
Energy Inc and Britain’s BG Group.

Age may play a part in Buzzard’s woes.

The Forties pipeline system, which gathers the oil from
Buzzard and more than 50 other fields, dates back to 1975 and,
say industry sources, often breaks down.

More reliable Buzzard output would lead to more stable
exports of Forties crude blend. Its loss for one day can cause
delays in Forties loadings since field output of 200,000 bpd is
enough to fill a Forties cargo every three days.

Higher-than-expected levels of sulphur in Buzzard’s oil have
also caused problems, and meant that new equipment has had to be
installed. Sulphur in higher concentrations is corrosive and
damages pipelines.

According to a 2009 article by John Sheehan in JPT, the
publication of the Society of Petroleum Engineers, Nexen was
forced to add a fourth production platform to reduce the sulphur
level so the oil could still be transported in the Forties
pipeline.

Delays associated with the new facility contributed to
unplanned outages at the field in 2011.

Another reason, said a source with a Buzzard field partner,
may also have been a strong safety culture and risk aversion at
Nexen. Work may have taken longer and the field shut as a
precaution more frequently.

On top of this, engineers say the field was designed in an
era when a focus on cost-cutting may have removed margins of
flexibility seen in older assets.

In the 1990s, oil prices were much lower: spiking to $40
after Iraq’s 1990 invasion of Kuwait and sinking to $10 in 1999,
but mostly trading around $20. The prospect of today’s $110 oil,
back then, was pretty much unthinkable.

Nexen did not go into detail when asked to comment on the
reasons for Buzzard’s outages although a company spokeswoman,
Patti Lewis, described the field as “one of the most complex
operations working in the UK North Sea.”

She said Nexen had worked over the last two years to improve
reliability at its operations company wide and in the third
quarter, Buzzard’s production efficiency was 86 percent,
slightly better than planned.

Asked if a safety focus lay behind outages, Nexen said
output was not the sole factor it used to judge success.

“Production efficiency is only one measure that we follow
and Nexen is very proud of our reputation as a responsible
energy developer,” Lewis said in the email.

Nexen, which is still led by its CEO, Kevin Reinhart, as a
wholly-owned subsidiary of the Chinese company, also said work
already done by Nexen had increased reliability.

“Nexen has recently completed a major turnaround at
Buzzard,” CNOOC said. “In conjunction with the existing team, we
have the relevant expertise to continue to safely and
successfully manage the field.”