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Contents
1.  Oil and the Global Economy
2.  The Middle East & North Africa
3.  Russia
4.  Venezuela
5.  The Briefs

1.  Oil and the Global Economy

Market sentiment has switched to the opinion that prices are not going much lower, despite warnings from Goldman Sachs and other respected observers that there is no fundamental support for higher prices at this time.  Last week various pieces of slightly bullish news that are usually are ignored by the markets were enough to move prices higher for the eighth time in the last ten weeks. Crude now is up 67 percent since February, closing on Friday at $43.73 in New York and $45.11 in London.

US crude stocks continued to increase the week before last while the gasoline inventory fell by more than expected. US drivers appear to be taking full advantage of the low gas prices by buying larger, less fuel-efficient cars and driving more as the weather gets better. Occasionally somebody wonders whether at least some of the increased demand for gasoline is going to exports. Goldman Sachs continues to say flat-out that the markets are still oversupplied, and that meaningful “rebalancing” is not happening as quickly as speculators would hope, and the IEA is forecasting.

Having been burned by false prices rebounds in the past year, US shale drillers are showing no sign of increasing production as yet. The US oil-rig count was down by another seven units last week. Many US drillers are busy working their way through bankruptcy proceedings, selling off assets, or negotiating for lines of credit to continue their unprofitable operations.

One interesting phenomenon of the two-year price slump is the amount of oilthat is still being produced by companies undergoing bankruptcy. Many drillers already had large backlogs of drilled but not-yet-fracked wells when the price slump began. As much of the cost producing the oil has already been sunk, the marginal profit of continuing to operate producing wells makes sense even when in bankruptcy. Despite the rapid depletion curves for shale oil wells, overall production is holding up remarkably well considering the large cut in active drilling rigs and overall capital expenditures.  The EIA and IEA keep forecasting large cuts in US oil production. However, when the actual figures come out a couple of months later, these show that in comparison to the size of the estimated overproduction, the forecast drop in US production does not seem to be “rebalancing” the markets as rapidly as forecast.  Thus, with Chapter 11 protections keeping the creditors away, many oil companies find it profitable to keep already completed wells pumping.

First quarter reports for the oil industry have been coming out, and the results are not good. While the producing oil companies have the flexibility to reduce capital expenditures as much as necessary to maintain dividends or stay solvent, the oil service companies which are mostly dependent on fees for supporting new drilling operations are being hurt badly. Halliburton says it cut 6,000 jobs in the first quarter as its revenue slumped by 40 percent from last year. Schlumberger saw a 36 percent drop from the 1st quarter of last year and has now cut 36,000 jobs since the oil price downturn began in 2014. The company’s CEO expects business will continue to deteriorate in the 2nd quarter as prices are not yet high enough to spur much capital investment. Much of the drilling still going on is in the massive offshore megaprojects that have too much already invested to suspend completion.

Given the large losses that US banks are suffering on the loans to the oilindustry, it will likely take much higher prices continuing for a while before the oilindustry considers increasing drilling. While $60 oil would be great for the economies of some of the low-cost OPEC producers, it is doubtful that high-cost producers such as the deep-water drillers, tar sands companies and those working in the less productive shale oil acreage will be doing much new drilling until selling prices start approaching $100 a barrel again.

Concerns are rising about the future of the oil industry. Total industry debt now has increased to roughly $3 trillion with at least $1 trillion being spent on unprofitable projects.  Goldman Sachs recently concluded that two-thirds of the world 400 largest oil projects are unprofitable with oil selling below $70 a barrel.  Should these projects stop producing due to unprofitability, the world economy would be in danger from much higher prices. Then there is the carbon emissions issue which says that the world simply cannot burn all the oil being unlocked by $3 trillion in capital spending.  This fear is beginning to impact investment decisions with people asking why invest in new oil production projects if the oil can never be sold due to environmental constraints. In many regions, including the US, China, and the EU, this fear is already becoming a reality for the coal industry.

2.  The Middle East & North Africa

Iran: The Iranians are now saying that their oil production will reach pre-sanctions levels of 4 million b/d by June of this year, up from the 3.5 million b/d they claim to have produced in March. The addition of another 500,000 b/dwithin two months is certainly faster than anybody anticipated, but some analysts are now saying it is possible. India’s Reliance Industries recently announced a long-term oil deal with Tehran.

Among the problems Iran would have in increasing production by 500,000 b/d in the next few months is the lack of ships to move the oil to customers, if they can find them. Many of the worlds’ tankers are tied up in massive queues at import and export terminals that are at loading and unloading capacity. Lingering issues about US sanctions have left some tanker owners reluctant to get involved with Tehran for fear they could be banned from doing business with the US. Much of Iran’s tanker fleet no longer meets safety standards and must be overhauled before visiting foreign ports.

Lifting of the sanctions has given a major lift to Iran’s economy. Last week the IMF reported that it expects Tehran’s economy to grow by 4 percent this year. Iran is making an effort to collect the oil revenues from those countries that continued to take Iranian oil during the sanctions but were unable to transfer money to Tehran. Some 6.5 billion euros are said to be owing.

Tehran’s final problem in increasing its oil export is to find foreign investors willing to put money into its aging oil industry. While it may be possible to increase oil production by the 500,000 b/d that Tehran is aiming for, further production increases will require massive amounts of investment that will have to be raised from foreign sources. Arguments in Tehran about how much foreigners should be allowed to profit from exploiting Iranian oil continue. Iran’s latest revisions to proposed contracts for foreign oil companies are so unfavorable that some doubt there will be many offers.

Syria/Iraq: The ceasefire in Syria may have effectively collapsed as the rebels are no longer attending the peace negotiations. Aerial and artillery bombardments by government forces continue and fighting has resumed in most areas. Some 270,000 have been killed since the fighting began five years ago.

In Iraq, the effort to create a new cabinet continues. This delay comes amidst the arrest on charges of corruption of two dozen officials of the state-run Northern Oil Company, which manages oil production around Kirkuk. Corruption is a major issue in Iraq these days and is part of the problem of settling on a new cabinet. The longer this situation continues, the bleaker become the long-term prospects for Iraq.

The battle with ISIL and efforts to retake Mosel continue. Air strikes on the city, with efforts by the US and her western allies to avoid civilian casualties, and less so by the Iraqi government, continue. After many months, the bombing of ISIL is starting to take its toll. ISIL’s revenues from selling oil have been cut significantly and there is almost no outside logistical support for the caliphate. ISIL military presence outside of cities is being badly hurt by air strikes and the US has moved artillery to within range of ISIL defenses for Mosel.

Just to remind ourselves of the scope of the force that is confronting ISIL, the Pentagon reports that: “Coalition nations that have conducted strikes in Iraq include the United States, Australia, Belgium, Canada, Denmark, France, Jordan, the Netherlands and the United Kingdom. Coalition nations that have conducted strikes in Syria include the United States, Australia, Bahrain, Canada, France, Jordan, the Netherlands, Saudi Arabia, Turkey, the United Arab Emirates and the United Kingdom.”

Baghdad is still interested in a brokered oil production freeze to force prices higher. Iraq says it will participate in a new freeze meeting if one convenes in May.

Libya: Britain may be on the verge of deploying combat troops to Libya to support the new UN and EU recognized government. The intervention would contain or eliminate the Islamic State threat; halt the migration of immigrants into the EU via Libyan ports; and stop the power struggles among the various militias that emerged during the civil war against Gadhafi. The Islamic State has enjoyed some success in Libya, but it has been operating in a power vacuum with little or no meaningful opposition. Presumably, the arrival of British forces would stabilize the situation and perhaps lead to an increase in oil production which recently has been holding at around 300,000 b/d or 1.3 million below pre-uprising levels.

Islamic State militia are still making occasional attacks on Libyan oil facilities to destabilize the country. Over the weekend IS militants clashed with guards around the Brega oil terminal. Libya’s National Oil Company, which presumably is now under the control of the new unity government, said that last week the eastern government at Tobruk tried to export 650,000 barrels of oil for its own account. Terminal workers refused to load the shipment; however, the effort may still be underway.

Libya remains a colonial era country still divided by tribal loyalties. Whether a single democratic government is possible over the long term remains an open question.

Saudi Arabia/Yemen: The fourth round of the UN-backed Yemen peace talks resumed in Kuwait on Sunday with an agreement to set up a ceasefire monitoring panel. In the meantime, the Saudi-backed Yemen government has launched an offensive against al-Qaeda in Yemen, which is considered the most dangerous section of al-Qaeda still operating.

President Obama’s visit to Riyadh last week highlights the growing split between with Washington over the Saudis’ efforts to compete in Tehran in leading the Arab world and the increasingly costly war in Yemen. The fuss over the move to release the 28 pages in the 9/11 report about possible Saudi government involvement in the attacks is raising the possibility of further troubles as the Saudis are threatening to dump billions in US securities if the pages are released. Criticism is rising about the closeness of the relationship.

On Monday, the Saudi government is to announce the details of the new plan to set up a $2 trillion investment fund that will someday replace much of the oilrevenue that has sustained the kingdom for the last 80 years. Many observers are puzzled as to just how the Saudis are going to raise a fund of this size and will it produce enough revenue to replace what has been coming from oil.  So far a plan to sell-off 5 percent of Saudi Aramco to private investors seems to be the major source of revenue. The Saudis currently are burning through their existing sovereign wealth fund to cover budget deficits and support foreign entanglements. Last week they issued $10 billion worth of bonds to cover current expenses. Rumors are rife over the possibility that the Saudis may devalue their currency by eliminating its tie to the dollar which has been in place for 30 years.

Another part of the “Vision for the Kingdom of Saudi Arabia” is the reduction of subsidies and support for the conservative Wahhabi fundamentalists that has been the keystone of Saudi social policy for generations. The current king (or at least his son) recognizes that current policies relating to women are a major deterrent to modernizing a post-oil nation. The Saudi government still employs about two-thirds of Saudi workers while 80 percent of those working for private companies are foreigners.

The Saudis are clearly at a crossroads. With oil revenues that underwrote the stability of the monarchy on the wane, there could easily be trouble ahead. Although the Saudis run a formidable security apparatus and the little dissidence that has appeared has been quickly crushed, all heredity monarchies are on borrowed time in the 21st century. For now, the country is capable of producing some 10 or even 12 million barrels of oil per day at a cost low enough to weather any possible selling price. This may not always be the case.

3. Russia

Despite the jump in oil prices and partial recovery of the ruble, Moscow’s economy is still in a lot of trouble. The Bank of Russia is warning that inflation may stall at an unacceptable rate of 6-7 percent making an economic recovery difficult. Russian consumer demand has stagnated and unemployment is rising faster than expected.  Like the Saudis, Moscow is beginning to plan for post-oilera when it cannot base its state budget on the hope for $100 oil. The new plan is to tie the budget to $40-$50 oil and to set government spending at a level that corresponds to the expected revenue.

As is the case with the Russian oil companies, the collapse of the ruble against the dollar and the euro has partially offset the low oil prices as most government spending is in rubles. The problems come with the very high costs of imports or travel.

The Russians were stung by the Saudis’ insistence that Iran be included in anyoil freeze. In retaliation, Moscow announced that it was prepared to push oilproduction to historic highs. Most observers consider this an empty threat as Russia is very close to peak oil production at the current time. In recent years, it has been able to push its production marginally higher each year through an intensive drilling program in older old fields. For the immediate future, Moscow does not seem to have much prospect of opening new sources of oil except shale and Arctic fields which are too expensive to consider at current prices.

4. Venezuela

While nearly all oil exporters have been hit hard by the fall in prices in recent years, Venezuela is at the top of the list of countries which could completely collapse stop exporting oil. Much of Venezuela’s 2.3 million b/d of oil exports is going to China to pay back the loans the Chinese extended to the government. Caracas’s problems are not simply low oil prices and few other sources of revenues. Many years of mismanagement by the Chavez government which drove most of the foreign oil companies out of the country has left the nation as an economic wreck. Inflation is forecast to reach 500 percent this year. Its currency is now worth less than one cent to the dollar on the black market which effectively has halted nearly all imports including critical medicines and other supplies into the country. Many factories have closed due to the lack of imported materials.

The final blow is coming in the form of low water which could force the imminent closure of the giant Guri dam which supplies 65 percent of the country’s electricity.  The water level behind the dam is only two meters away from the point at which the turbines would have to be shut down to avoid damage due to cavitation. Should the heavy rains come soon or the release of water not be slowed, the country will be nearly out of power.

On Wednesday President Maduro announced that the government was imposing a 4-hour daily blackout in 10 of Venezuela’s 23 states in order to save water behind the dam. As are already daily blackouts in most cities, the new blackouts will probably end up lasting for much more than four hours daily.

Some observers are suspicious that the low water at the Guri dam may not be from the lack of rainfall as the government claims, but simply be the result of mismanagement. They note that rainfall in the dam’s basin is in line with that of past years in which there were no problems. Failures in electric power production elsewhere in the country could easily have resulted in overutilization of the dam’s water supply to compensate. If this is true, additional rain may not completely solve the problem. At any rate, the dam’s critical level is fast approaching at which the country may lose a large share of its electricity supply an event that is bound to have political and economic repercussions.

Although efforts to maintain oil exports will be a top priority, a modern country without electricity can not remain stable and functional for very long.

5.  The Briefs

Limits to Growth: A report published by the UK government’s new All-Party Parliamentary Group (AAPG) on Limits to Growth reviews the scientific merits of a controversial 1972 model by a team of MIT scientists, which forecasted a possible collapse of civilization due to resource depletion. The recent report found that world fossil fuel production is likely to peak in around 2025… largely as a result of Chinese coal production peaking. An important and often misunderstood issue clarified by the report is that the risk of collapse is not because resources are running out, but because the quality of the available resources is declining while the cost of extracting this lower-quality resource is increasing. According to the report’s authors, growth could well be coming to an end, permanently. (4/22)

The world’s biggest oil companies, set to report their worst quarterly earnings in more than a decade, are finding their cost-cutting efforts haven’t matched the decline in crude prices over the past two years. While producers have been deferring projects, eliminating jobs and freezing salaries, the process will take three years to complete. In the meantime, profits are being hammered. (4/23)

Oil tankers carrying around 200 million barrels of crude are waiting to leave or dock at ports around the world, creating “the world’s biggest traffic jam,” according to a Reuters story. Middle East ports are choking on the oil waiting to be loaded onto tankers and shipped to Asia, and Asian ports are forcing tankers to wait for weeks before unloading because their infrastructure can’t cope with these amounts of oil. (4/18)

Diesel glut: Europe has become a dumping ground for diesel. The continent may run out of onshore capacity and European-bound ships may become offshore storage tankers. (4/20)

In the UK, the so-called Gatwick Gusher shale basin could add as much as $74 billion to the nation’s economy, according to a study by Ernst & Young and commissioned by U.K. Oil & Gas Investments. (4/19)

Russia beat Saudi Arabia as China’s top crude oil supplier in March, a follow-on to taking the No.1 spot in four months of 2015. Shipments from Russia rose 58 percent last month from a year ago to 1.09 million b/d. This compared with February volumes from Russia at 1.03 million b/d and an all-time high at 1.13 million b/d in December. (4/21)

Head-fake “freeze meeting #2”? Major OPEC and other crude producers will meet in Russia, possibly next month, in a new push to agree on an output freeze to shore up oil prices, Iraq’s Deputy Oil Minister Fayyad Al-Nima said. There is still no agreement on an oil meeting in May, Russian Energy Minister Alexander Novak said after Al-Nima’s comment. (4/21)

Leviathan a headache: Though a game-changing gas discovery for Israel and for the discoverer, Texas-based Noble Energy, the giant Leviathan offshore gas field in the Eastern Mediterranean has been one bureaucratic headache after another. Now reports are surfacing that the company is seeking to reduce exposure by selling 15 percent of its 40 percent interest in the project. Noble Energy discovered the Leviathan deposit back in 2010. (4/21)

India’s crude oil imports resumed climbing in the year ended March, after stagnating in the previous period, as a new refinery on the country’s east coast started up. The nation’s crude imports rose 6.7 percent to 202.15 million metric tons (about 4.05 million b/d) last financial year. (4/21)

Egypt offers a bright spot for natural gas development, a lone bright spot in an energy world undergoing harsh austerity. Egypt has suffered blackouts due to shortages in natural gas and has been scrambling to make up for the shortfall. But a more enduring solution could soon arrive as Italian oil giant Eni develops the gigantic Zohr natural gas discovery in the Mediterranean Sea. The field could hold 30 trillion cubic feet of natural gas, enough to make it the largest gas discovery ever recorded in the Mediterranean. (4/22)

East Africa decision: The oil pipeline route puzzle has been solved, with Uganda choosing to export her crude oil to the East African coast through Tanzania and not Kenya.  A report states that the Kabaale-Tanga route through Tanzania is the only option to secure first oil exports by mid-2020. (4/21)

Nigeria deployed police and soldiers to gasoline stations to maintain order as fuel shortages grip Africa’s biggest oil producer. The most severe fuel scarcity in a year in Africa’s most populous nation has left motorists paying more than double the government’s official price for gasoline and put increasing pressure on a stagnating economy that’s been hit by tumbling oil prices. (4/22)

The Brazilian pre-salt bonanza has now officially begun, with Norway’s Statoil and partners announcing production of the first oil and gas from the offshore Gavea field in Brazil—part of the largest-ever oil and gas discovery in the Campos Basin’s pre-salt layer. Pre-salt oil and gas deposits are attractive because wells in this layer tend to yield more crude oil than other offshore wells. However, they are also much deeper than other wells, so pre-salt projects tend to be cost-intensive and challenging—particularly in a depressedoil price environment. (4/22)

Offshore Brazil, energy company Statoil and partners Repsol Sinopec Brasil and Petrobras have struck oil in the deepwater Campos Basin. The appraisal well produced around 16 million standard cubic feet of gas and 4,000 barrels per day of oil. (4/19)

Mexican officials are setting out to assure investors of government support for state oil company Pemex after the firm received a $4.2 billion financial lifeline to help it through a cash-flow squeeze brought on by falling oil prices. (4/19)

The total US rig count declined by eight last week to 433, according to Baker Hughes. The number of gas rigs fell by one to 88 while the oil rig count declined by seven to 344.

Total US energy production increased for the sixth consecutive year. According to EIA data, energy production reached a record 89 quadrillion British thermal units, equivalent to 91 percent of total U.S. energy consumption. Liquid fuels production drove the increase, with an 8 percent increase for crudeoil and a 9 percent increase for natural gas plant liquids. Natural gas production also increased 5 percent. These gains more than offset a 10 percent decline in coal production.

Increased US oil production from the Gulf of Mexico is not enough to offset on-shore declines of 1.65 million b/d by 2017.  Total U.S. crude oil production is projected to fall 15 percent from 9.43 million b/d in 2015 to 8.04 million b/d in 2017. (4/21)

LNG exports: A tanker from Louisiana loaded with US liquefied natural gas is en route to Portugal, the first shipment in a trade relationship that could shake up the European market. The 970-foot long Creole Spirit is expected to arrive by the end of April. In Europe, American gas will add to a swell in supply in a crowded market long dominated by Russia. Analysts predict that the arrival of U.S. gas could trigger a price war, leading to lower prices for consumers that could act as a shot in the arm for the struggling European economy. (4/22)

Alaska has long been a bastion of US oil production, even giving dividend checks to residents from oil revenues. But oil price woes are having a major effect on a state that has no state income tax or state sales tax, and crude production on Alaska’s North Slope in 2015 fell to its lowest point in decades. (4/18)

The global oil-market rout is weighing on General Electric, which posted a quarterly decline in operating income and orders for its core industrial businesses. GE reported a 6.1 percent gain in revenue for the first three months of 2016, but profit declines in units making locomotives, power turbines and oil-industry equipment hurt its bottom line. (4/23)

Oil companies seeking cash have found a well that keeps producing: the stock market. Callon Petroleum Co., a small oil producer, has sold new shares three times in the past six months to raise cash, most recently in a successful sale Tuesday night. Though stock prices often decline on such deals due to the addition of new shares, Callon’s shares ended Wednesday up 12 percent, at $10, as the price of oil reached near a five-month high and US energy shares broadly rallied on better-than-expected crude-supply data. (4/21)

Rig company Transocean said it was delaying the delivery of two ultra-deepwater drill ships to 2020 in an agreement with a shipyard company in Singapore. (4/21)

Oil-to-solar jobs: A few years ago, Sean and Stormy Fravel were riding the oiland gas boom like so many others in West Texas. But when their jobs disappeared along with $100-a-barrel oil prices, they turned to a new type of energy occupation: solar power. Instead of driving an 18-wheeler to haul drilling equipment in and out of the oil patch, the Fravels now install solar panel racking systems and perform quality checks on a solar farm under construction in McCamey, about 300 miles northwest of San Antonio. (4/22)

State-level taxes and fees on gasoline in the United States averaged 26.5 cents per gallon (¢/gal) as of January 1, 2016. These taxes and fees ranged from a low of 8.95¢/gal in Alaska to a high of 51.4¢/gal in Pennsylvania, in addition to the federal tax of 18.4¢/gal. (4/20)

US energy bill: As recently as a week ago, the energy bill that Congress was considering was stalled and faced an uphill battle. But the Senate has sprung into action, and voted in favor it by 85-12. The energy package is the first major piece of energy legislation passed in almost a decade. At the same time, it is a rather modest piece of action. (4/21)

Developing “clean coal” technology would help the coal sector in both the US and China and prevent further job losses, the US energy secretary has said.  Crashing prices for coal amid China’s economic slowdown and US investors’ preference for newer, less polluting energy technology has hit the industry hard in both countries. (4/19)

Climate: Representatives from more than 150 countries gathered at the UN last Friday to sign a global accord aimed at slashing greenhouse gas emissions and slowing climate change. But in the four months, since that historic pact was negotiated in Paris, a drumbeat of grim scientific findings has underscored that staving off the worst consequences of global warming may take far more aggressive actions. The first three months of 2016 were the warmest on record in 136 years — by large margins. (4/21)

Sea levels could rise by much more than originally anticipated, and much faster, according to new data being collected by scientists studying the melting West Antarctic ice sheet – a massive sheet the size of Mexico. That revelation was made by an official with the National Oceanic and Atmospheric Administration on Tuesday at the annual RIMS conference for risk management and insurance professionals in San Diego, CA. (4/22)