In the last month, US oil prices have fallen from close to $52 a barrel to below $45. Partly due to the large exports of US crude which have been around 1 million b/d in recent weeks, London prices have been running only about $2 a barrel higher than the US. Last week a report from the IEA predicting that the oil glut would continue into 2018 or beyond, combined with an unexpected jump in US commercial petroleum stocks, to push oil prices down by $2 a barrel to touch a low of $44.50 on Thursday before a slight recovery on Friday.
Until recently, the IEA seemed convinced that the OPEC/NOPEC production cut would soon drain off the oil glut and prices would rise. The Agency now has changed its forecast and foresees that the global oversupply situation will continue through 2018. While the IEA sees global demand for crude growing by 1.3 million b/d in 2017 and 1.4 million in 2018, it also sees US shale oil production growing by 430,000 b/d this year and 780,000 next year. Total non-OPEC production including the US is forecast to grow by 1.5 million b/d next year. With global inventories currently 292 million barrels above OPEC’s target, the five-year average, it is difficult to see how the excess oil will be consumed in the next year or so if US shale oil production continues to grow at anything close to projected rates.
There is also the Nigerian and Libyan production to be considered. Due to domestic situations that have cut production well below normal levels, they have been exempted from the current production cut. Libya could be on track to get its crude production back up to 1 million b/d in the next few months and Nigeria to regain a 2 million b/d production level. If this can be achieved, the two countries could be producing some 900,000 b/d more than at the time the production cuts were established. It is easy to see why oil traders are pessimistic about prices rising soon.
This pessimistic forecast for oil prices is, of course, based on the optimistic production forecasts happening. The Libyan and Nigerian political situations are unstable, and production could drop precipitously at any time. In Nigeria, militants are already talking about another round of attacks on the oil infrastructure, and in Libya, the Qatari situation seems to be causing even deeper divisions among the pro and anti-Islamist factions in the country.
In the US, where shale and offshore oil is relatively expensive to produce compared to conventional production which still constitutes most production, the debate has started as to whether oil production can continue to increase with prices in the mid-$40s or lower. There have been major efficiencies in the production of shale oil in the last few years such as walking rigs, better drilling equipment, longer lateral well shafts, more intense fracking, better logistics and drilling in only the best locations that have lowered the costs. Many say these efficiencies have lowered costs from above $60 a barrel to the $40s, allowing for profitable production in the $50s.
Others see the US shale as coming “perilously close to puncturing its rally.” Should US oil prices fall to $40 a barrel or below many of the smaller producers that depend completely on shale oil production would be in serious trouble and unable to meet optimistic forecasts of increased production. West Texas Intermediate crude has fallen 19 percent from a high of $55.24 last January and is currently only a few dollars away from flirting with the $40 level. Only 18 months ago, US crude was below $30 a barrel causing many bankruptcies and a reduction in shale oil production.
Some believe that unless the OPEC/NOPEC coalition is willing to make a larger production cut soon, oil prices will continue to fall. The interaction of so many supply and demand variables that will be in play during the next 18 months makes it nearly impossible to tell where we are headed – witness the recent flip-flop in the IEA’s price outlook.
2. The Middle East & North Africa
Iran: Tehran said last week that its top energy priority this year would be to begin developing onshore and offshore oilfields that it shares with Qatar and Iraq. The neighboring countries have already been extracting oil and gas from these fields so that the longer the Iranians wait to start drilling, the more of the fields resources will go to its neighbors.
Iraq: Baghdad has been India’s largest supplier of crude for the last three months, replacing the Saudis from the number one position. Iraq’s compliance with the OPEC production cap has been mixed, but the Saudis have been over compliant. As the Saudis enter the summer months, an increasing share of their production is going to be needed to support air conditioning, thereby reducing exports still further.
Russia seems to be taking advantage of the Kurds desperate need for cash to support the war effort amidst falling oil prices. In a deal signed in February, Rosneft is reported to have paid the Kurds a $1 billion advance on oil to be delivered over the next three years. Some of this oil is already going to Rosneft facilities in Europe. Now, a recent agreement gives Rosneft access to five exploration blocks in Iraqi Kurdistan as well as the transportation infrastructure.
After several foreign oil companies, including Exxon, Chevron, Genel, Repsol, and Total gave up rights to exploration blocks in Kurdistan, Erbil redrew its licensing map to offer 22 new exploration blocks in 2017. Some of these blocks are in territory controlled by Baghdad before the Kurds took over the region around Kirkuk to keep it out of ISIL’s hands. In the long run, the Kurds will need backing from Russia as well as the US if they are ever going to establish an independent country. Getting Moscow involved in the Kurdish oil business is one way to ensure this support.
Saudi Arabia: The Kingdom’s oil exports are expected to fall below 7 million b/d during the summer months. Last year the Saudis shipped an average of about 7.4 million b/d between May and August. Under the production cut agreement, the Saudis are limited to producing 10.058 million b/d but have been below this number for the first five months of 2017. Aramco cut allocations to the US by 35 percent in July, to Europe by 11 percent, and Asia by some 300,000 b/d. Last year the Saudis burned some 700,000 b/d in electric power plants to counter temperatures running around 112o F in Riyadh. Temperatures in Arabia are forecast to run a couple of degrees above normal this summer – likely due to global warming.
The Saudis are having trouble deciding where to list the IPO of Saudi Aramco in the next year or so. A split between the royal family which favors the New York stock exchange and Aramco executives who favor London has broken out. Listing in New York has many problems include the stringent reporting requirements concerning company operations that the company would prefer to keep secret and the possibility of endless law suits stemming from 9/11 attacks which involved many Saudi citizens. A decision is not expected before the end of July
Libya: A new agreement with the German energy company Wintershall increases the likelihood that Libya will meet its goal of producing 1 million b/d of crude by the end of July. Wintershall has kept 160,000 b/d shut-in for the last two years due to a dispute with Libya’s National Oil company. The dispute has been partly settled with Wintershall guaranteed enough revenue to cover its costs.
The National Oil Company announced that it is currently producing 830,000 b/d and with production from the Wintershall concessions and two other oil fields, expects to be over 1 million b/d shortly. This development, of course, complicates OPEC’s production freeze as Libya’s production could be 700,000 b/d higher than OPEC had contemplated when exempting Libya from the production freeze.
The government announced that China’s crude oil production in May was down by 3.7 percent year on year. This is the lowest production since China started published production statistics in 2011. China’s oil imports, however, jumped by 15.4 percent in May to 8.8 million b/d. Some believe that an oil product glut is forming in China due to slower growth in demand and competition from independent refiners with large import allocations.
In recent years, Beijing has launched a major effort to replace its fleet of gasoline-powered vehicles with electric and hybrid vehicles. Last week a new government mandate directed that manufacturers increase their electric vehicle share to 8 percent of production by 2018 and 12 percent by 2020. Sales figures from 2016 show that only about 315,000 “new energy vehicles” or 1.25 percent of the 28 million vehicles were sold last year. Questions are rising about whether the 315,000 figure is accurate or is only being sent to Beijing to keep the government happy.
In recent years China has been relying on generous subsidies to increase sales of electric vehicles. Now Beijing seems to be switching to mandates on manufacturers, including foreign ones. This issue seems destined to go on for a while as German car sales in China are involved as are Chinese sales in California.
The recent drop in oil prices brought forth a blast of bravado from some energy officials in Moscow that Russia’s economy was so strong that it could withstand $40 oil indefinitely. Two weeks ago, Moscow’s finance minister told parliament that Russia has adopted a lower-for-longer oil price policy and was converting its economy to less dependence on foreign oil revenues. A week before that, Russia’s Economy Minister said that the underlying key assumption of Russia’s economic policies—oil prices at US$40—can allow it to live forever at that price or below.
Last week Russia’s Central Bank, which may have a more realistic view, said that it is keeping its oil price forecast at $50 a barrel for this year, but sees oil prices down to $40 in 2018-2019. On Friday, the Bank cut a key interest rate to 9 percent despite the pace of recovery slightly exceeding expectations. Russia’s energy minister said last week that deeper cuts in the OPEC/NOPEC production agreement were not out of the question, but would depend on developments in coming months.
With the lifting of the force majeure on exports from Forcados, Nigeria’s oil production increased by 200,000 – 250,000 b/d possibly putting the nation’s oil production back to 2.2 million b/d, the highest in 16 months. OPEC has started to monitor Nigeria to see if it should now be subject to a production cut like the other members. The recent increase in Nigerian production is equivalent to about 20 percent of the OPEC production cut.
In the meantime, a coalition of Niger Delta militant groups said last week that all “Northerners” should leave the oil-rich delta or face attacks on oil infrastructure in the region. This suggests that recent talks between the government and militant leaders have settled little and that Nigeria’s oil production may see yet another insurgency-caused drop in oil production later this year.
Anti-government protests are now in their third month with street clashes going on every day. Some 70 have been killed and 1,300 have been wounded so far. Both sides talk of a civil war, but given the imbalance in strength between the government and protestors, open fighting between armed groups seems unlikely. More likely is a collapse of government authority that leads to a period of anarchy and homicidal chaos. Everyone who has the ability seems to be fleeing the country in search of food and safety in neighboring countries.
Last week Venezuela defaulted on part of its $2.5 billion bank loan from Russia, but there is disagreement as to whether a missed payment constitutes a default. This raises the issue of whether Goldman Sachs, which is trying to make a quick killing on Venezuelan bonds, will not be the next victim of a collapsing economy.
There seems to be little way out of the current crisis making it likely that Venezuela will not be producing much oil by this time next year. A total collapse of Venezuelan oil production would take as much oil off the market as the OPEC production cut.
7. The Briefs
The withdrawal of the US from the Paris climate pact is unlikely to have a direct impact on the expected decline in global carbon emissions, BP’s chief economist said on Tuesday. “Nearly all the improvement in (carbon reduction) comes from the developing world, it isn’t coming from OECD or America,” Spencer Dale said during a presentation of BP’s annual Statistical Review of World Energy. (6/14)
Outdated supertankers are becoming the storage units of choice for commodity traders looking to take maximum advantage of the new oil price crater. Brokers said roughly ten very large crude carriers aged between 16 to 20 years have been employed as excess crude storage since the end of last month. Each unit holds 2 million barrels of oil. Thirty other supertankers are parked in Singapore and Malaysia’s Linggi. (6/17)
France’s Total SA, one of the world’s largest oil companies, sent its top executives to Silicon Valley last summer, where they met with tech investors and futurists, including people at electric car manufacturer Tesla, to explore a future with electric cars. (6/14)
In Poland, the first shipment of American LNG from Louisiana’s Cheniere Energy arrived on Wednesday, a feat hailed as an energy milestone in both Poland and Europe. Some U.S. commentators have even suggested that American suppliers could help end Polish dependence on Russia’s state oil company, Gazprom, which provides 59 percent of the country’s annual natural gas consumption. Poland’s government has said that it does not intend to renew its supply agreement with Gazprom when it lapses in 2022. (6/14)
Russia’s largest natural gas producer Gazprom said on Thursday its gas exports to Europe and Turkey rose 13.2 percent year-on-year between January 1 and June 15. (6/16)
Kazakhstan, a party to an OPEC-led market balance agreement, has no plans to modify its production plans. Under the terms of an agreement coordinated by the Organization of Petroleum Exporting Countries, Kazakhstan sidelined about 20,000 barrels per day. Crude oil production from Kazakhstan could increase by the end of the year once operations at its Kashagan oil field are optimized. (6/14)
Off the coast of Yemen, the Bab al-Mandan Strait, which facilitates the transfer of 4 million barrels of oil to Middle Eastern markets every day, has become increasingly contentious over the past few weeks as a 31-nation international naval coalition grows its presence in the area. Recent attacks against merchant shipping have highlighted that there are still risks associated with transits through these waters. (6/16)
Offshore Guyana, ExxonMobil said on Friday that it had made a final investment decision to proceed with the first phase of development of the Liza field, which is expected to cost just over US$4.4 billion. The Phase 1 development at Liza field—one of the largest oil discoveries of the past decade—will include a subsea production system and a floating production, storage, and offloading vessel designed to produce up to 120,000 barrels of oil per day. Production is expected to begin by 2020, less than five years after the discovery of the field. (6/17)
Cuba: As Venezuela’s oil industry goes down in flames, it’s looking like it may just take Cuba down with it. Venezuela, once the crude powerhouse of South and Central America, is no longer able to produce enough oil to sustain its own economy, much less those of other countries. Cuba is frantically drilling in search for new reserves and reaching out for new suppliers, but there is no guarantee they’ll be able to stabilize their oil income any time soon. Cuba became dependent on Venezuelan oil in the 1990’s when they were sold cut-price crude in exchange for the services of skilled laborers to bail them out of economic collapse in the wake of the fall of the Soviet Union. Currently, Cuba relies on foreign oil for more than two thirds of its daily consumption, with over 100,000 barrels of crude flowing from Venezuela every day for years. (6/15)
Mexico is looking forward to its next round of offshore oil auctions on Monday with guarded optimism thanks to robust interest from oil majors for the shallow-water tenders. Mexico will auction 15 oil and gas blocks along the southern coastal waters of the Gulf of Mexico in the next stage of the country’s historic opening of the industry following a 2013-14 energy reform. (6/17)
Canada’s problem with its oil pipeline capacity is becoming increasingly serious as opposition to new pipelines is growing in intensity. Two pipelines–Kinder Morgan’s Trans-Mountain expansion project and the XL pipeline–would relieve the pressure on the existing pipeline network—but there is just one problem: the expanded Trans-Mountain will take two years to become operational. In the meantime, Canadian exporters are resorting to increased shipments by rail to their largest customer—the USA. (6/14)
The US oil rig count increased by 6 last week to 747, making 22 straight weeks of gains, continuing the longest growth streak in oil and gas rig increases since at least 1987, said Baker Hughes Inc. Gas rigs increased by 1 to 186. (6/17)
In the Permian Basin, cash, people and equipment are pouring into the prolific Texan oil play as business booms in the largest U.S. oilfield. But one group of investors is heading the other way – concerned that shale may become a victim of its own success. Eight prominent hedge funds have reduced the size of their positions in ten of the top shale firms by over $400 million, concerned that producers are pumping oil so fast they will undo the nascent recovery in the industry after OPEC and some non-OPEC producers agreed to cut supply in November. (6/17)
While the June oil production data is still pending, it is safe to say that the June oil output from U.S. shale producers – estimated today by the EIA at 5.348 mb/d – will post the first double-digit production growth since July of 2015. That was when oil prices tumbled and a substantial portion of U.S. production was briefly taken offline. (6/14)
Refracking: Oil companies are applying new hydraulic fracturing techniques to early Bakken wells, a process industry leaders say has the potential to recover more oil without increasing the footprint on the land. Operators are targeting wells drilled between 2008 and 2010, the early years of Bakken development before fracking technology advanced to where it is today. (6/12)
Shale oil concern: North America’s oil industry has been in school for the past three years, studying how to become more productive in a fragile $50-a-barrel world. Many companies in the class of 2017 have graduated and are now competing hard for a greater share of global barrels. Having said that, North America’s education on how to make oilfields more productive appears to be stalling. After a breathtaking uphill sprint, productivity data show that the last few thousand oil wells in top-class American plays may have hit a limit—at least for now. (6/15)
Cash-strapped U.S. shale firms scaled back their hedging programs in the first quarter, leaving them more vulnerable to tumbling spot market prices just after OPEC reached a landmark deal to curb global supply. The pullback in hedging was driven by rising service costs and expectations that prices would continue to rally after the Organization of the Petroleum Exporting Countries extended those cuts in May, but the opposite happened. (6/13)
The US gasoline market is flooded, meaning most consumers are paying less at the pump than they were last year, AAA reported. The motor club reported a national average retail price for a gallon of regular unleaded gasoline at $2.33 on Tuesday. (6/14)
Methane rule: The Trump administration will postpone industry compliance with an Obama-era rule limiting methane emissions from oil and gas wells on federal lands. An effort by congressional Republicans to repeal the methane rule failed in the Senate by one vote on May 10. (6/15)
Atlantic offshore: President Donald Trump ‘s administration issued a draft for public comment in the Federal Register last week for seismic air gun blasting in the Atlantic Ocean, a practice used to get a better understanding of the reserve potential in a particular basin. Sen. Bill Nelson, D-Fla., led a group of Senate Democrats in calling on the administration to provide more transparency in the proposal. In a letter sent to UPI during the weekend, Nelson’s office said the call from the National Oceanic and Atmospheric Administration came with little notice and afforded no opportunity for public hearings. (6/13)
When interest rates fall, this tends to allow oil prices to rise, and thus allows increased production. This postpones the Peak Oil crisis but makes the ultimate crisis worse. The new crisis can be expected to be “Peak Economy” instead of Peak Oil. Peak Economy is likely to have a far different shape than Peak Oil–a much sharper downturn. It is likely to affect many aspects of the economy at once. The financial system will be especially affected. We will have gluts of all energy products because no energy product will be affordable to consumers at a price that is profitable to producers. (6/13)
It’s the end of an era for coal. Production of the fossil fuel dropped by a record amount in 2016, according to BP Plc ’s annual review of global energy trends. China, the world’s biggest energy consumer, burned the least coal in six years and usage dropped in the U.S to a level last seen in the 1970s. (6/14)
Solar power, once so costly it only made economic sense in spaceships, is becoming cheap enough that it will push coal and even natural gas plants out of business faster than previously forecast. That’s the conclusion of a Bloomberg New Energy Finance outlook for how fuel and electricity markets will evolve by 2040. The research group estimated solar already rivals the cost of new coal power plants in Germany and the U.S. and by 2021 will do so in quick-growing markets such as China and India. The scenario suggests green energy is taking root more quickly than most experts anticipate. (6/17)
EVs: China registered about 351,000 electric vehicles during 2016, compared to 159,000 during that same period in the U.S. (more than half of which were in California). Questions have been raised about how accurate those sales figures are, thanks to subsidies to manufacturers that have led to fines for fraudulent reporting. (6/16)