Last week, wire services reported that ConocoPhillips has paid close to $2 billion for a stake in Russian oil company Lukoil. According to the New York Times ConocoPhillips bought 7.59 percent of Lukoil for $1.988 billion. It plans to increase its stake to 10 percent this year and 20 percent within two to three years, allowing it for bookkeeping purposes to list part of Lukoil's 20 billion barrels in reserves as its own.
But, more important, the Times reported, is the fact that "the deal also provides an opening for drilling projects in Iraq and northern Russia."
More specifically, "ConocoPhillips and Lukoil said they wanted to join in developing the West Qurna oil concession in Iraq, which Lukoil won in 1997 during Saddam Hussein's regime and was later taken away. The project is highly speculative, hinging on Iraqi elections and the country's fragile security. But if it goes forward, Lukoil would hold 51 percent; the Iraqi government, 25 percent; and ConocoPhillips, 17.5 percent. Lukoil's president, Vagit Y. Alekperov, estimated that the Iraqi fields could produce 500,000 barrels of crude oil a day in three years."
At the center of the deal maybe international post invasion politics. Quoting Roger Diwan, head of markets and countries research for PFC Energy, a consultant in Washington, the Times noted: ["Conoco gives Lukoil an entry pass with the new government - if there is one."]
The deal has been "secured" since the summer, when, as reported by the New York Times James J. Mulva, president and chief executive of ConocoPhillips, and Mr. Alekperov 'met with Russia's president, Vladimir V. Putin, at his summer residence. Mr. Putin assured Mr. Mulva that ConocoPhillips could ["count on his support."]'
Last December, in our 2004 Predictions, we noted: "Russia's Putin will attempt to move closer to Bush and the U.S. oil industry after his re-election in March."
And indeed, this seems to be what has happened. According to the Times "As the deal was negotiated, the American secretary of commerce, Donald L. Evans, and the energy secretary, Spencer Abraham, were kept informed of its progress, said Rick L. Burdick, a partner in the law firm of Akin Gump Strauss Hauer & Feld, who represented Lukoil."
Others echoed the fact that this was a high level development. '["This thing was blessed by both governments, and nothing was left to chance,"] said Fadel Gheit, an oil analyst with Oppenheimer & Company in New York. ["Everyone knows that Lukoil is the Kremlin's favorite son. Conoco married well."]'
OPEC finally has some potential major competition.
Russia and the United States have made the first big deal in the oil markets. The roadmap has now been drawn. The only thing left to do is to fill in the truck stops along the way.
It took them long enough.
Oil Markets: Natural Gas Break Out
Oil closed above $50 on Friday, but was trading below the key round number on 10-4. If the market was to pull back, we would expect it to find support near the $45.50-$47.30 area. A break below that could take the December crude contract to $44.
But, it's difficult to see any erosion below that as we enter the cold weather season, and with geopolitical risk still high.
More interesting, from a seasonal standpoint is the natural gas market, where the December and February futures contracts closed last week, just below $8.
The Philadelphia Oil Service Index (OSX) made a new high to end last week. For more details on trading the energy sector visit our energy timing page, featuring our highly effective OIH timing model and our Top Ten Energy Stock List.
The Amex Oil Index (XOI) made a new high, and again closed above 700. This remains uncharted water for the oil stocks. A pull back of some significance would not be out of the question here, given the size of the one-day move on 9-21. For immediate analysis, including stock picks, and the latest in technical analysis of the entire energy complex, our subscriber section has a full complement of recommendations in oil service and the rest of the energy complex.
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