Quote of the Week
“The message from oil services firms is that shale drillers will not simply be able to turn the tap back on again once prices rise. Halliburton said on its earnings call last month that pressure pumping equipment currently sitting idle was being cannibalized for parts while the stuff still being used was being worked to its limits. And the falling backlog of uncompleted wells will also begin to make an impact.”
Liam Denning, Bloomberg View columnist
1. Oil and the Global Economy
2. The Middle East & North Africa
6. The Briefs
1. Oil and the Global Economy
Crude oil prices fell by 8 percent in New York and London last week, closing at $40.74 and $43.61 respectively. Continued growth in global crude stocks and uncertain economic outlooks for China and the US are still seen as the cause of the price slump. Short covering by speculators who believed we had already reached the bottom of the slump and a strong US dollar contributed to the decline. On Friday the IEA reported that at the end of September global crude stocks were at a new high of at least 3 billion barrels and growing. The Agency is not able to track stocks in smaller countries so actual storage is somewhat higher.
For months now Goldman Sachs has been warning that a shortage of storage space could lead to a further drop in prices. Many challenged this notion and produced lengthy analyses detailing how much oil storage capacity still existed in the world. It now seems that Goldman’s was on the right track. In the last week it has become apparent that there now is so much oil aboard crude carriers that there may not be enough tanker capacity left to transport oil to buyers. There are said to be in excess of 39 tankers waiting to offload at Houston and a flotilla of additional tankers are scheduled to be coming from Iraq to the US. It may be that the US is the only remaining place with spare storage capacity, but it may not be in the places where it is needed. The early winter forecast for Europe and the US is for warmer than usual weather, which would lower consumption of heating oil in the next few months.
“Peak storage” is that we could see a time in the not too distant future when owners of oil tanker cargoes are forced to sell their oil at below the going market, driving prices still lower. Numerous analysts are now saying that oil prices in the low $30s are a possibility before the year is out. The large crude inventory (the US stockpile is now 109 million barrels higher than at this time last year) serves as a buffer against temporary shortages developing. This is why various Middle Eastern developments that would normally move oil prices are having little effect recently.
The IEA now forecasts that world oil demand will increase by only 1.2 million b/d next year as compared to the 5-year high of a 1.8 million b/d increase in 2015. The jump in consumption this year is seen as being largely due to much lower oil prices and to large purchases China made to fill is strategic reserves at bargain prices.
Although the Saudis are still expected to hold firm in their policy of not cutting production in order to drive high-cost US shale and some high-cost deep water oil producers out of business, there is growing talk that this strategy may backfire. Several large OPEC members and Russia for that matter are in desperate straits due to the low oil prices. As the they cannot afford to cut their own production, they believe that the Saudis and the other Gulf Arab states who have large exports in comparison to their populations should do the cutting. Part of the trouble is that while the Saudi policy has now driven prices down to less than half what they were 18 months ago, there has not been a comparable drop in shale oil output by producers who up to now have been hanging on at unexpectedly high levels.
If the surplus continues to grow to the point there is no storage capacity left, either on land or at sea, it is obvious that there will have to be a production cut somewhere along the line as there will simply be no place to put the stuff. The only possible answer might be to store oil in the underground caverns used for the US Strategic Reserve. At present, however, US policy is to sell off some of its strategic reserve, rather than adding to it.
2. The Middle East & North Africa
Iran: The country still plans to increase its oil production by attracting a large amount of foreign investment to upgrade its deteriorating oil infrastructure. The cabinet has endorsed the terms of new oil contracts to be offered to foreign companies willing to invest in Iran. The new contracts seem to involve the establishment of joint ventures with the Iranian National Oil company and paying the foreign investors with a share of the oil production. Previous agreements gave the foreign companies a predetermined price for the oil they produced. Some foreign oil companies, however, have warned that Tehran must offer very attractive prices given that most oil companies are focusing on profits in the face of lower prices lasting for some time. The details of the new Iranian offer will be made at conferences in Tehran and London on Nov. 21st and Feb 22nd respectively.
Iranian hard liners continue to resist and are attempting to undermine the new nuclear agreement out of fear that improved relations with the West and particularly the US could undermine their positions. Last week the pace of centrifuge dismantlement was slowed in response to their protests. There have also been several arrests of people holding dual US-Iranian citizenships on trumped-up charges designed to hurt relations with Washington. While compliance with the terms of the agreement still seems to be underway and the Rouhani government is expecting sanctions relief in the next six months, the Middle East is a turbulent place and there are still issues out there, particularly Iran’s deep involvement in growing Sunni/Shiite struggles across the region, which could upset things.
Moscow announced last week that it will be delivering its advanced S-300 surface-to-air missile system to Iran. The deal had been on hold as part of the pressure on Tehran to negotiate a nuclear treaty. The installation of such missiles would make it more difficult for the Israelis to bomb Iranian nuclear facilities as has been threatened several times in the past.
Syria/Iraq: ISIL’s attacks in Paris, in Lebanon, and on the Russian aircraft in the past 10 days and the growing EU refugee problem is likely to bring some kind of sea change to the Middle Eastern wars. This could involve anything from large scale foreign intervention to destroy ISIL’s “caliphate” to some sort of “settlement” of the Syrian civil war. In the meantime, there will likely be fewer restraints on the bombing of ISIL targets in an effort to avoid civilian casualties. The Russians are already leading the way in Syria by bombing whatever stands in the way of the government/Iranian/Hezbollah offensive which now seems to be making progress against the rebels.
There is a renewed effort to stop production from ISIL-controlled oil fields in Syria. So far the bombing of these installations has been so restrained that ISIL has been thought to be earning some $40 million a month from sales of oil smuggled to Turkey and government-controlled areas of Syria. Given the ever increasing brutality of these wars, concerns about civilian casualties may become secondary to halting all Syrian oil production.
Baghdad’s oil production dropped in October by 195,000 b/d to just over 4 million as the accumulated weight of the low prices and the turmoil weighs on production efforts. The jump in Iraq’s oil production that was brought about by the arrival of foreign oil companies may be coming to a close. World prices are now so low that foreign oil companies have been asked to cut back on investments in the oil fields.
The foreign oil companies working in Iraq have said that they could boost production, even at low oil prices, if their contracts were changed. When Baghdad invited the foreign oil companies back into the country several years ago, it was under fee-for-service agreements rather than the production sharing which are common in the industry. The bottom line is that the oil companies, most of whom are facing difficult times around the globe, will expect a larger share of the pie if they are going to contend with the risks of producing oil in Iraq.
Down in Basra, the oil capital of Iraq, local leaders are threatening to seize several oil fields as a way to pay their bills. Baghdad has been slow to share the oil revenues with local governments of late due to the low prices and the need to confront ISIL.
Saudi Arabia/Yemen: The Saudi monarchy has been one of the pillars of the Middle East for nearly 100 years now. The country was formed in 1932 and has been remarkable stable through several changes of hereditary kings. Rarely, if ever, has the possibility that political instability in the kingdom been considered as a factor in world oil production. This may be changing. The new king, Salman, has undertaken a more aggressive foreign policy by involving his country in a civil war in Yemen. After eight months of fighting, the war, which the Saudis are fighting mainly by bombing, seems to be nearing a stalemate.
The Saudis have been unsuccessful in convincing large Sunni countries such as Egypt and Pakistan to send military forces to confront the Shiite Houthi rebels and have had to make do with small numbers of troops from the UAE and quickly-trainied Yemeni militias. The Saudis themselves seem reluctant to commit large numbers of their troops to the fighting as excessive casualties could cause unrest at home. People are starting to characterize the Yemen civil war as the Saudis’ Vietnam.
The wars in Yemen and Syria, and the offensive against the American shale oil producers are becoming expensive even for the Saudis who have found their oil revenues reduced by more than 50 percent in the last 18 months. The government has already begun to sell bonds as it watches its sovereign wealth funds steadily erode. Oil revenues are probly less than 50 percent or less of what is necessary to cover the government budget.
These problems are starting to weigh on the Salman monarchy. The new king has broken with a fifty-year tradition by appointing his 30-year old son as number two in the line of succession and making him Minister of Defense. His appointments as government ministers have not been the traditional royal princes, but civil servants, many of whom have been educated outside of the country. There has been an unprecedented amount of grumbling about all this from inside the royal family with some even suggesting there could be a coup some day. Saudi oil production may not always be the “given” we have known for the last 70 years. Should it be substantially reduced, the world would be a different place.
The issue of Beijing’s slumping economy continues to be with us. China’ exports fell 6.9 percent in October, the fourth consecutive monthly decline, and weak domestic demand continues to reduce imports. While oil imports for the month rose by 9.4 percent year over year to 6.23 million b/d, they were down 8.8 percent from September. Much of this increase in demand this year was simply turned into exports from newly built refineries. These were up by 4.5 percent year on year. To compliment this, oil product imports were down 11 percent year on year last month.
China’s crude stocks grew for the fifth straight month in October despite a small increase in refinery throughput. As China does not release official crude stockpile data, considering these number to be state secrets, outside analysts have calculated that the country’s crude stocks rose by 45,000 b/d in October; however a 784,000 b/d increase was calculated for September.
Growth in China’s factory output slowed to 5.6 percent in October, down from 5.7 percent in September and new investment during the month was slightly lower. These numbers may be more reflective of the true growth in China’s GDP as opposed to the official figures which are closer to 7 percent. To add to its troubles, deflation is starting to beome a major problem. The consumer price index rose by only 1.3 percent in October, missing the government’s goal of 1.5 percent. Moreover, the producer price index fell by 5.9 percent in October, its 44th straight monthly decline. This suggests that still more stimulus measures are in store.
The ruble underwent its biggest weekly loss, 3.3 percent, in more that two months as oil prices declined by 8 percent last week. The price of Brent crude, in rubles, fell to lowest since February 2011 on Friday. The lower oil prices were accompanied by weaker demand for Russian oil as Moscow is getting more competition from Middle Eastern exporters. A further drop in the ruble would help the situation from the Russian point of view as the price of oil in rubles would be more competitive in European markets.
The Russian economy contracted by 4.1 percent last quarter as a combination of the Ukrainian sanctions and the low oil prices hit home. Last week the head of Russia’s central bank bemoaned the state of Moscow’s economy. The general quality of the bank’s portfolio is declining. Overdue loans are increasing across the board. The staff of the Russian airline that was bombed over Sinai recently ago had not been paid in weeks due to the economic conditions. Since the demise of the Soviet Union 25 years ago, Russia has been dependent on Western banks to finance much of its growth, but these are now largely cut off. Inflation is still running at double digits.
Last week, the government began reviewing a budget for next year that assumes $50 oil, a 6.4 percent inflation rate and domestic growth rate of 0.7 percent. Lawmakers say they are working on a one-year budget delaying consideration of 2017 and beyond due to the uncertainties involved.
With only two weeks to go before the world climate conference is due to open in Paris, news relating to the climate and discussions about what could happen at the conference are on the upswing. Last week’s news concerning climate change is not good. The World Meteorological Organization released new data showing still more growth in the concentrations of the three most important heat-trapping gases in the atmosphere. Another milestone was passed as carbon dioxide levels surpassed 400 parts per million across much of the planet. A new report on Greenland says that a large glacier there has just opened a major new “floodgate” that allows a torrent of water to melt into the Atlantic Ocean. The glacier involved and neighboring ones are thought to contain enough water to raise sea levels more than 3 feet. The entire Greenland ice cap contains enough water to raise sea levels by 20 feet. This year we are on course to set new temperature records with the global average now up by 1.02oC since the industrial revolution began.
How the increasing anxiety of climate scientists and people that are listening to them will play out in Paris is an open question. The first problem is whether the conference will draft a legally binding treaty or simply an agreement. With opposition to a legally binding treaty on climate change running rife in the Republican Senate, the Obama administration does not want the conference to result in a “treaty” which is sure to be rejected, but is seeking an executive agreement which would only require the President’s signature.
The French in particular are bothered by this US position, as there have been many pledges to cut emissions over the years that have not come to pass. The truth of matter is that the effects of the ongoing climate change simply have not yet become bad enough for many countries and politicians to give up the universal desire for economic growth and higher standards of living. Even in places with life threatening emissions such as China, the immediate problem is seen as dirty air rather than carbon emissions causing climate change.
In general, the environmental community is pessimistic that real progress can be made in Paris this year. They believe that more that 80 percent of the remaining fossil fuel reserves must be left in the ground if human civilization is to have a chance to survive past the next few centuries. While the draft treaty aims at limiting emissions, some of this is supposed to be accomplished by various carbon sequestration schemes while fossil fuel extraction continues apace. The poorer countries of the earth are demanding a redistribution of the world’s wealth as a price for participation in any agreement. Many of these demands are simply politically impossible for some 200 countries to agree on given their widely varying situations. Some island states are facing inundation by the sea in a matter of years, other counties are starting to be baked by summer temperatures and are running out of water, while a few might even benefit for a while from warmer winters. How all this will play out in December seems to be an open question.
6. The Briefs
Norway’s economy has slowed, with the oil exporter’s GDP increasing by slightly less than 1 percent over the past four quarters. Part of the problem is employment in the oil and gas sector, where declines are the order of the day. (11/14)
In the Middle East, Chevron is planning to lay off up to 1,000 employees working in the 2,230-square-mile oil-rich neutral zone between Saudi Arabia and Kuwait, as a dispute between those countries has halted all work on oil fields for several months. (11/10)
Israel is inviting international oil companies to further explore its offshore waters for natural gas, the country’s energy minister said on Tuesday, as the country tries to become an energy exporter for the first time. Officials believe that based on the geological data there is still the potential for new discoveries. (11/11)
In China, output of pure electric and plug-in hybrid passenger vehicles in October 2015 was 850 percent and 200 percent higher, respectively, than in October 2014. In the first 10 months, Chinese carmakers produced 206,900 electrics and plug-ins. Measures including tax exemptions, subsidies and requirements for government bodies to buy green cars are in place. (11/11)
Offshore Liberia Exxon Mobil said it plans to start drilling in 2017, in what President Sirleaf said was a sign of economic recovery after the Ebola epidemic. The West African country produces no oil but has awarded a number of exploration blocs offshore, following the examples of Gulf of Guinea neighbors Ghana and Nigeria. (11/13)
Nigeria’s crude oil market remains under pressure — many grades have lost around $1 a barrel in value since the start of October — as an abundance of sweet crude and high freight rates have failed to excite interest from refinery buyers. (11/13)
Venezuela’s PDVSA will secure contracts to import crude by early next year, likely from Africa, phasing out spot-market purchases as part of a strategy to reduce costs and boost quality of its final blends. Light crude imports will allow Venezuela to keep blending and selling its domestic heavy oil until new upgraders, to complement the current four, are built in around four to five years. (11/11)
Canada plans to formally ban oil tanker loadings along the northern coast of British Columbia. The ban will add to hurdles Enbridge has faced since proposing the Northern Gateway pipeline to move Alberta crude to the port of Kitimat, at the end of the Douglas Channel for shipment to Asia. The project has been met with resistance from local communities over concerns including potential spills that could harm fisheries and threaten their livelihood. (11/14)
Canadian Oil Sands continued to urge its shareholders to reject a $3.2 billion takeover bid from rival Suncor Energy, saying the offer would sell itself if it was worthwhile. (11/14)
In Canada, the impact of the oil-price collapse is increasingly seeping into other areas of the economy, as insurers, telecommunications companies and even liquor retailers signal the energy sector’s pain is spreading. While production from the oil sands continues to flow, the lack of investment is lowering demand for labor and services, which is seeping into other industries and contributing to the economic drag that led a contraction in Canadian growth in the first half of the year. (11/14)
The US oil rig count increased by two to 574, breaking a 10-week streak of declines. Still, there are about 64% fewer oil rigs from a peak of 1,609 in October 2014. According to Baker Hughes, the number of gas rigs fell by six to 193. (11/14)
Gasoline prices in the US rose to $2.25, just less than a cent over the past two weeks but breaking a 19-week-long decline when the price plummeted by 63 cents per gallon, according to a Lundberg survey. (11/9)
In Texas, a survey from the Texas Alliance of Energy Producers says the number of jobs lost in the state as a result of the depressed oil economy may be worse than initially forecast. (11/14)
Marathon Oil said it signed a deal to unload the majority of its assets in the Gulf of Mexico already in production as well as most of its acreage there. Onshore, the company reported mixed production results from its US operations, with a 7% decrease in North Dakota over the previous quarter. (11/10)
Chesapeake Energy’s bonds have plunged to half their face value—50.375 cents on the dollar—as lenders fret that tumbling energy prices are hurting their chances of getting paid on borrowings that are three times the current worth of the company’s oil and gas fields. Chesapeake shares have been the worst performer among their peers in the Standard & Poor’s 500 Index this year, plunging 73 percent. (11/14)
LNG historic first: Cheniere Energy’s Sabine Pass liquefied natural gas export plant in Louisiana will receive its first tanker for loading on Jan. 12. The Energy Atlantic LNG tanker is the first in a string of test cargoes that will be loaded before commercial operations begin later in the year. Those LNG exports will be an historic first and may help a U.S. gas market that has been swamped with new supply in recent years due to a domestic shale-gas drilling. (11/10)
An LNG nyet: Gov. Andrew Cuomo has rejected a proposal to build a liquefied natural gas terminal in the waters off New York and New Jersey, effectively killing the project, amid an outcry from residents of some coastal communities that it could endanger the environment and be a target for terrorists. (11/13)
Flaring gas: North Dakota’s current target is to capture and sell at least 78 percent of its natural gas that comes up with the oil and flare just 22% of the output. Based on the targets established in April 2014, the percentage of flared gas was set to fall to 15% in January 2016 and to remain at that level until 2021. However, on September 24, state regulators loosened the restrictions, allowing 22% to be flared through the first quarter of 2016, with the decline to 15% taking place in November 2016. (11/14)
North Dakota’s Senator John Hoeven said he is working to insert language in a highway-funding bill that would lift a ban on U.S. crude oil exports. (11/14)
Firewood and fracking: Northeasterners who are digging deeper into their pockets to pay for firewood this season can add a new scapegoat to the roster of usual market forces: fracking. Hydraulic fracturing well sites in Pennsylvania’s Marcellus Shale formation are using construction “mats” made of hardwood logs — think of the corduroy roads seen in photographs from the 1800s — to get heavy equipment over mucky ground, wetlands or soft soils. (11/10)
Alternatives hurt: The plunge in oil prices risks undermining efforts to cut fossil fuel production, especially oil. The IEA concluded in its annual assessment of markets that if the cost of crude remains near $50 a barrel until the end of the decade, cheaper conventional fuels would hold back the development of electric cars and biofuels that are helping curb carbon emissions. (11/10)
Self-driving cars are expected to take over the roadways in the next two decades, but the vast majority of the fleet will likely be dedicated to services and not owned by individuals, according to a new report by IHS Automotive. (11/13)
EVs and self-driving cars: The key to self-driving cars is software that can interpret all of a vehicles’ sensors and learn to mimic the driving skills and experiences of the very best drivers. Google is the current technology leader in this arena…. IHS Automotive also forecasts that global EV charging stations will grow from 650,000 in 2015 to more than seven million in 2021—excluding home charging outlets. (11/14)
Japan is the biggest backer of public coal financing globally. For all the talk of a solar boom in Japan, coal still has a future there, and potentially a big one at that. Japan’s government and industry are backing emerging coal technologies they say are less damaging to the environment. (11/10)
Nuclear fusion: Scientists have discovered a new confinement state of plasma which can lead to generation of fusion energy. (11/13)
Two wind energy companies—RES America Development and U.S. Wind—won the rights to advance wind energy off New Jersey’s coast, where the potential exists to power 1.2 million homes. (11/11)
Climate misinfo: Peabody Energy, one of the largest global coal producers, will submit revised investor disclosures after the New York attorney-general’s office found it misled the public and investors about the financial risks associated with climate change. The Peabody settlement announced Monday is the first to emerge from the state attorney-general’s probe of oil and energy companies, and reflects a rare move forcing companies to make certain disclosures about climate change. (11/10)
El Nino could have a bigger impact on grain and oilseed markets than drought in Russia and Ukraine, which may be alleviated before the crucial spring growth period. The weather outlook for Ukraine and Russia was improving as winter weather projections called for normal rainfall and warmer than normal temperatures. (11/12)
El Nino: Some 11 million children are at risk from hunger, disease and water shortages in east and southern Africa because of the strengthening El Nino weather phenomenon, the UN children’s charity has said. It has caused the worst drought in more than 30 years in Ethiopia. (11/11)