Quotes of the Week
"Nothing is economic at today’s prices… We’re drilling the best of the best rock right now. At some point we’ll have to move to lesser-quality rock, which will increase the break-even costs."
James West, an analyst at Evercore ISI
“The long-term price of oil is literally unforecastable. The only thing that can be said with absolute certainty is that oil prices will continue to defy the expectations of experts.” John Kemp, Reuters
If the ban on US oil exports is lifted…] “The net effect of export of American oil on the market is zero. This will have no effect on the price because the U.S. still is an importing country. They export some, but they need to import the same quantity from somewhere else.”
Abdalla El-Badri, Secretary-General of OPEC
1. Oil and the Global Economy
Oil prices continued to fall with London closing on Friday at $36.88, down 3.8 percent for the week, and New York closing at $34.73, down 2.5 percent for the week. A surprise and unexplained jump of 17 units in the US rig count announced on Friday helped the decline. Prices are now approaching an 11-year low. New highs in US crude inventories, including a 1.4 million barrel jump in the stocks at Cushing, Okla., and unusually warm weather across the US and Europe, continue as major reasons for the decline. The outlook for oil prices remains gloomy. OPEC will keep its output at 32 million b/d for the time being and Iran is expected to be increasing its exports in the next few months. Talk of a bargain between OPEC and Russia to jointly lower crude production was quashed by Moscow late last week. Some are now saying that it will take two years to eliminate the excess crude stockpiles after supply and demand are brought back into balance.
It is worth noting that despite the list price of oil running around $35 barrel, much oil is selling for far less. Some Mexican crude is going at less than $28 a barrel, an 11-year low. Iraq is offering its Basra Heavy crude to some Asian buyers at $25 and in western Canada isolated oil is going for $22. The well-head price of Bakken shale oil was at $27 a barrel last week.
Analysts have noted some strange things happening in the Atlantic and the Gulf of Mexico where some 40 large crude carriers containing some 28 million barrels of oil are anchored while waiting to unload at ports around Houston. In the Atlantic, three tankers carrying diesel fuel from the Gulf to Europe turned around and began sailing west. This comes amid reports of warm weather in Europe and some 250,000 tons of diesel anchored off the European and Mediterranean coasts looking for a place to unload. There are two possible explanations for the armada anchored off Galveston — either the owners are awaiting the end of the year to avoid taxes on crude in US inventory, or there simply is not enough storage space for crude along the US Gulf coast. Goldman Sachs has been warning for months that the US could run out of space to store crude, but this notion has been rebutted by the EIA and various analysts who maintain there is still a ways to go before US oil tanks are at maximum practical levels.
Natural gas prices also had a bad week falling to a 16-year low on Thursdayafter the weekly stocks report showed that stockpiles contracted by only a third of their average drop for the week. The front-month contract closed on Thursday at $1.75 per million BTUs – the lowest settlement since March, 1999. Analysts are worried that the natural gas glut will continue into 2016 and that there may be problems finding enough space to store the excess gas production. At these prices natural gas is obviously way below profitability. The biggest hope for the industry lies in the shift from coal to gas for power generation and the LNG export facilities that are starting to come online. As global LNG prices, which in many cases are indexed to oil prices, have fallen markedly in the last 18 months, exports of US LNG are no longer as profitable as the builders of LNG compression plants had hoped, but the desire of many European customers to reduce their dependence on Russian gas may offer long-term markets.
It is becoming obvious that there will be a major shake-out in the oil and gas industry in 2016. With prices now in the mid-$30s, hedging with futures contracts no longer profitable, and the opportunities for cost-cutting and other efficiencies running thin, many oil production and service companies will be closing their doors in the coming year. In short, oil production is going have to get a lot lower before supply and demand comes back into balance. Many oil production companies were not profitable even when oil was above $100 a barrel and survived by heavy borrowing at low interest rates.
Technical analysts have recently become interested in the question of whether oil prices will fall below $32.40, the low that US prices hit in 2008. Some believe that crude prices will hold at this point and begin a long rebound. Others are saying that if this price level is breached oil will fall into the $20s.
Despite the lifting of the US export ban last week, few traders believe a major increase in US exports, which are already substantial, is in the offing. The decrease in the spread between London and US prices has reduced the profitability of selling US oil abroad where it once could bring $10 a barrel or more than selling it in the US. Like the demise of the Keystone pipeline, the lifting of the export ban is largely symbolic.
2. The Middle East & North Africa
Iraq/Syria: Military activity picked up in Iraq last week as ISIL launched offensives around Mosel in the north and outside Ramadi in Anbar province. Both attacks were beaten back with heavy casualties for the ISIL attackers. US and coalition aircraft played a significant role in repelling the attacks. As usual, ISIL employed its favorite tactic of using suicide car and truck bombers to lead the attacks in hopes that the defenders would run. While airpower has been shown to have only limited usefulness against ISIL forces imbedded amidst hundreds of thousands of civilians in cities and towns, attacks on opposing military units backed by modern air forces can be very costly.
In Syria, the military situation remains a stalemate. Russian intervention with its heavy bombing campaign has stemmed the tide that was turning against the Assad government last summer. However, little progress has been made in offensive action against the rebels. It was learned last week that Moscow is making use of civilian para-military forces in its support of the Assad government. Up to nine Russian “mercenaries” are reported to have been killed in the fighting which allows Moscow to avoid the problem of casualties within its uniformed forces.
The UN is making a new effort to eliminate the Islamic State’s revenues from selling oil into Turkey, to the government-controlled territory in Syria and to the civilian economy in those parts of Iraq and Syria it controls. While some progress can likely be made against smuggling oil into Turkey, widespread destruction of the Syrian oil fields would result in serious hardships for the millions living under ISIL control. To deprive these people of electricity, transport, etc. would only increase the refugee problem. Moscow seems to have fewer concerns about civilian casualties and hardships.
Baghdad passed its 2016 budget last week based on the assumption that it would average $45 a barrel for its oil sales in the coming year. Many legislators characterized this assumption as totally unrealistic. Last summer, Baghdad began shipments to the US of its new very heavy blend of sulfur-laden crude known as “Basra Heavy.” However, shipments to the US peaked at 2.5 million barrels in October, and have nearly disappeared in November and December. This may be the reason the Iraqis are trying to sell this blend in Asia for $25 a barrel. Prices like this will not do much for Iraq’s budget in the coming year.
Libya: The country was back in the news last week with ISIL forces based in Sirte moving to take control of a key town that controls access to much of the oil in central Libya. A US Special Forces unit which landed at an airbase in western Libya last week was chased out by local militia. Western governments are trying to get permission to bomb ISIL forces in Libya before they can make significant progress in gaining control of oil supplies. Some discussions in Europe about direct intervention to stop ISIL are underway.
UN efforts to broker a rapprochement between the two rival governments seems to be making little progress; however, the Tobruk government says it will sign a new deal to sell oil from the eastern oil ports as soon as an agreement is signed. It is hard to fathom what is going on in the country, except that the Islamic State seems to be making progress and the West wants to attack it.
Iran: Tehran is moving rapidly to complete its obligations under the nuclear treaty, suggesting that the sanctions could be lifted in January rather than in the spring. The major players in the agreement still want it implemented, while the agreement’s opponents in the US Congress and Israel continue to denounce it and seek ways to stop it from coming into effect. The press is full of claims and counter claims concerning the implications of the agreement.
On Tuesday, the IAEA ended its 12-year inquiry into the issue of whether Iran tried to build nuclear weapons in the past. In the end the West decided to let sleeping dogs lie and agreed to end the inquiry without any significant revelations about what the Iranians tried to do and how much progress they made. Tehran hailed the end of the inquiry as a major victory which will bring an end to the sanctions.
Hazardous levels of pollution forced authorities in Tehran to close schools over the weekend. In comparison with Beijing, Tehran gets little publicity about its air quality which is among the worst in the world. The UN says Iran is home to four of the world’s ten most polluted cities. Iran is also suffering from a 7-year drought which is leading to a major water crisis. The government had to struggle to keep Tehran supplied with water last summer, and a former Iranian Agriculture Minister says that half of Iran’s provinces may become uninhabitable in 15 years, forcing millions to migrate. Those who profess concern that Tehran will soon dominate the Middle East should contemplate the country’s underlying problems. Last summer the “feels like” index hit 155o F. along parts of Iran’s gulf coast. In the face of troubles like these, squabbles over nuclear capabilities, oil production, and military interventions around the region are likely to soon become insignificant.
Saudi Arabia/Yemen: It has been a bad year for the Saudis. The wars in Yemen and Syria in which the Saudis are deeply involved have not been going well and oil prices continue to fall. The appointment of 30-year old Mohammad bin Salaman as defense minister and deputy crown prince has upset decades of tradition in the 15,000 member royal family by unsetting many traditions and concentrating much power in one family branch.
The Saudis currently are planning a major government economic shake-up to deal with the effects of low oil prices which seem likely to last for some time. These plans are expected to be made public in the next few weeks. The government has been running an annual deficit of $100 billion, forcing it to sell off foreign assets at a pace that will only last for a few more years, and that has become the primary motivation for major economic changes.
All future projects must be approved by a new economic council. There is to be increased privatization of many government functions and the current large subsidies of energy and water are to be restructured so that the wealthy receive a smaller share of the benefits. The government is to seek a wider range of revenues rather than mainly from oil sales which now provide 80 percent of the government’s budget. An increasing share of the deficit is to be covered by the issuance of bonds rather than the sale of foreign assets.
Saudi Arabia’s crude oil exports in October rose by 253,000 b/d from September to 7.364 million, according to official data from the JODI databank. The country maintained high output and pumped 10.276 million bpd in October, slightly higher than September’s 10.226 million. Some of the increase in exports likely came from cooler weather, reducing the requirement for electric power in the country.
The government’s announcement that it will no longer adjust retail oil and gas prices downwards signals that it believes the oil market has fallen too far too fast and that there will be serious consequences from the very low oil prices ahead. Other than signaling OPEC that it should cut production, there is little Beijing can do about world oil prices. Domestically, it can control retail prices to discourage wasteful consumption and perhaps slow new car sales which continue to be strong.
The announcement of yet another red alert for Beijing underscores the hazardous conditions under which hundreds of millions of Chinese must live. Beijing is making a major effort to cut down on coal consumption without doing too much damage to its economic growth. The IEA believes that China’s coal consumption already has peaked paving the way for a decline in global use — unless India succeeds in achieving marked increases in its coal consumption. Some foresee massive layoffs in China’s coal industry which could lead to unrest – something which Beijing does its best to avoid. There are already scattered reports of unrest among workers who have been laid-off due to the economic downturn.
China’s currency, the renminbi, which was recently declared one of the world’s elite currencies by the IMF, has been unusually weak lately. Many companies and individuals are said to be moving large sums of money out of the country due to weakening economic conditions.
A shaky truce continues in Ukraine as the crisis approaches its third year. President Putin says he will not abandon the Russian speaking people in eastern Ukraine as the separatists are threatening to resume hostilities to bring all of the two eastern provinces under their control.
Ukraine has halted repayments of the $3.5 billion it still owes Moscow for natural gas. Kyiv wants Russia to join a debt restructuring program that has been accepted by commercial creditors that will allow the debt to be written down by 20 percent and delay repayments. The restructuring was part of Ukraine’s IMF loan of $17.5 billion. President Putin has rejected the idea of Moscow accepting the settlement.
Ukraine is prepared to “pay the price” that Moscow will extract for a new Ukraine – EU trade deal. President Putin has issued a decree closing the Russia-Ukraine free trade agreement that was signed in 2011.
It is again time for the EU to extend its economic sanctions on Russia, but this time there is opposition to the extension. Some in the EU want to reengage with Moscow in order to reach some sort of settlement in Syria that will slow the refugee flow coming into the EU. Germany wants to continue with the Nord Stream 2 pipeline which would significantly increase the amount of Russian gas delivered to Europe. The expanded pipeline would by-pass Ukraine and avoid the large transit fees that Ukraine has been earning by allowing the passage of Russian gas into the EU.
In the meantime, falling oil gas prices continues to wreak havoc with Russia’s economy. The ruble is now below 71 to the dollar. President Putin said last week that the $50 a barrel oil price used as the basis for Russia’s 2016 budget is too optimistic and that the budget will need to be reworked. Putin maintains that Russia’s economic crisis is over but does not say just why other than to keep up morale. Russia’s chief finance official, however said that the country must prepare for $30 a barrel oil, which is far more realistic.
6. The Briefs
The UK’s Task Force on Shale Gas report says that a domestic shale gas industry could create thousands of jobs but more exploratory work is required to determine exactly how much gas is economically recoverable. (12/16)
Saudi Arabia has reopened its embassy in Iraq, a quarter of a century after Riyadh broke off diplomatic relations with Baghdad following the Iraqi invasion of Kuwait. Reports say that a Saudi consulate is expected to open later in Erbil, the capital of Iraq’s autonomous Kurdistan Regional Government. (12/17)
Asian oil buyers will probably have a limited appetite for the quality of crude soon on offer from the US. Many of the region’s refiners are geared to process heavier, cheaper oil with higher sulfur content. The lighter and cleaner shale oil from the US has also got about a third farther to travel than alternative supplies from the Middle East and that represents an additional cost. (12/18)
In Japan, restart of nuclear reactors, growing renewable sources of energy and a slow economy are expected to push down the country’s LNG consumption by 2020 by as much as 10.5 percent from 2014 levels. Japan’s LNG demand is expected to drop to 77 million mt by 2020 from a record 86 million mt reached in 2014. In 2015 itself, Japan bought 3 million mt less LNG in the first 10 months compared with a year earlier. (12/15)
Algeria’s state oil producer Sonatrach Group plans to raise crude output by 5 percent next year and offer energy-exploration rights to foreign companies by the end of March, steps that may add barrels to an oversupplied global market. (12/17)
In Kenya, Tullow Oil shares gained after a successful well increased the potential size of oil resources the Africa-focused explorer has discovered. Tullow has found about 2.3 billion barrels of resources in East Africa, with discoveries in Kenya and Uganda. The oil remains undeveloped as the London-based company and its partners debate the route of an export pipeline amid a slump in the price of crude. (12/15)
Nigeria has put the country’s crude oil production for October at 2.2 million b/d. This represents an increase of 4.16 percent relative to August output. The Federal Government pegged crude oil benchmark at $38 per barrel in the 2016 budget proposal. (12/18)
The Nigerian government stated yesterday that the country no longer has the resources to fund the oil and gas industry, and is therefore considering and developing new models of financing the industry in the days ahead. (12/19)
Nigeria’s federal government said Monday it would begin a gradual withdrawal of its fuel subsidy next year, for purchasers of liquid fuels, due to an acute shortage of budgetary dollars. (12/16)
In Venezuela, Hugo Chávez lavished millions from this country’s oil boom on his home state of Barinas. But boom has turned to bust, the economy is in shambles and the love affair is over. Last week, in a gut blow for the Chavismo movement, Barinas and the rest of the country voted in a landslide to toss out the current legislature, in an angry reaction to the harsh economic downturn. (12/14)
Venezuela is heading towards a political crisis. A stand-off between branches of government looms just as the country is struggling with one of its worst ever social and economic calamities. Forces loyal to President Nicolas Maduro have responded to defeat in legislative elections this month with defiant words and executive action aimed at clinging to power. (12/16)
The opening of Mexico’s oil industry is warming up after a slow start. Mexico awarded all of its 25 onshore fields auctioned Tuesday, exceeding expectations and defying the six-year low in crude prices that has dogged the worldwide oil industry. Previous sales received less interest than expected. (12/16)
In Mexico, the Energy Ministry on Wednesday announced plans for a highly anticipated tender of deep-water exploration blocks in the Gulf of Mexico, not far from the US side of the waterway. That fourth oil auction will be announced by the third quarter of 2016 and held within 90 days of that announcement. (12/17)
Pemex’s unexpected announcement of expansion into the US retail gasoline market, with their first station opened in Houston on December 3 and four more later this month, comes at a curious time. Pemex had its credit rating downgraded by Moody’s Investor Service on Nov. 24, is delaying payments to service providers and reported a record $10 billion loss in the third quarter. (12/15)
In Mexico getting paid has always been hard for government contractors, but seldom has the problem been so bad, as low oil prices are battering government finances. Analysts and officials said Tuesday the problem has broken out into the open. Government contractors are openly complaining and experts worry the country’s largest construction firm could be nearing bankruptcy. The head of Mexico’s top business chamber publicly rebuked President Enrique Pena Nieto on Monday, saying that late payments were putting Mexican businesses at risk of failing. (12/16)
Canadian oil-sands producers like to tout the long life of the world’s third-largest crude reserves as their greatest asset. That longevity may now be their biggest liability with a new global agreement to curtail carbon emissions. Alberta is one of the costliest — and most carbon intensive — places in the world to produce oil. With prices below $40 a barrel, oil-sands growth has already ground to a halt. Hopes of a return to the boom years are fading amid limits on emissions and the uncertainty of future fossil fuel demand. (12/16)
Canadian Prime Minister Justin Trudeau, speaking to reporters in Vancouver, reiterated his opposition to advancing the planned Northern Gateway oil pipeline. Canadian company Enbridge Energy aims to build the pipeline from the Alberta oil fields to the coast of British Columbia. The pipeline received conditional approval from the National Energy Board, the country’s independent regulator, last year. (12/18)
The US’s EIA continues to expand its assessment of technically recoverable shale oil and shale natural gas resources around the world. The addition of four countries—Chad, Kazakhstan, Oman, and the United Arab Emirates—to a previous assessment covering 42 countries has resulted in a 13% increase in the global assessed total resource estimate for shale oil and a 4% increase for shale gas. (12/15)
The total US drilling rig count was unchanged last week, although the oil rig count increased by 17 to 541—the first increase in five weeks—while the gas rig count declined by 17 to 168. (12/15)
Barnett has legs: The U.S. Geological Survey said its review of the Barnett shale basin in north-central Texas led it to double the estimated reserve potential. The USGS estimates the shale basin holds 53 trillion cubic feet of shale natural gas, 172 million barrels of shale oil and 176 million barrels of natural gas liquids. (12/18)
Cash-strapped US shale oil producers are facing another sharp sell-off because of reduced hedging, risking a severe hit to earnings if prices fail to recover. A Reuters’ analysis of hedging disclosures from the 30 largest oil producers showed the sector as a whole reduced its hedge books in the three months to September. (12/14)
Earthquake activity in Oklahoma, believed to have been triggered by saltwater disposal well injection activity, marks the latest in a trend of a growing number of US earthquakes and their link to increased oil and gas activity. The Oklahoma Corporation Commission’s oil and gas conversation division called for operations at two disposal wells to be halted Nov. 19, and for reduced volumes for 23 other wells, a total net volume reduction of 41 percent. (12/18)
Gas leak: Los Angeles County officials have declared a state of emergency over a leaking natural gas well near a neighborhood that has forced a utility company to relocate thousands of residents who have said the stench has made them sick. Southern California Gas Co. said it will take three to four months to drill a secondary well that will be used to stop the leak that was discovered Oct. 23. (12/17)
ConocoPhillips and Anadarko Petroleum are among 29 U.S. oil and gas exploration and production companies whose ratings Moody’s Investors Service is reviewing for possible downgrades, spelling new trouble for the beleaguered industry. The Bloomberg Intelligence Independent Explorers and Producers Index of 61 equities has fallen 51 percent this year. (12/17)
Cheniere Energy is about to begin something that many people thought could never be done: exporting liquefied natural gas from the southern states of the US. Yet over the weekend Charif Souki was ousted as Cheniere CEO, following a clash with the board and Carl Icahn, the activist investor with a 14 percent stake. Mr. Souki’s departure is a sign of the tensions that have emerged in the emerging US LNG export industry. (12/15)
Chesapeake’s debt: The Evercore bankers are advising the natural-gas producer on potential measures to reduce its $11.6 billion debt load, such as exchanging existing bonds at a discount for new securities or selling assets, the people said. Chesapeake ended September with $1.8 billion in cash. (12/15)
Bankrupt: Cubic Energy, the latest Texas oil company brought down by falling oil prices, filed for bankruptcy protection after reaching a deal with its lenders to hand over control of the company. The company drills for oil and natural gas in Texas and Louisiana. (12/15)
Cheap fuel: The average national price of unleaded regular gasoline is poised to fall below the $2 per gallon threshold, AAA reported Tuesday. At $2.013 per gallon, the average is the lowest price for gas in the United States since 2009, and 79 cents per gallon lower than the 2015 peak. (12/16)
Biofuel credits: The US Senate on Friday passed a tax and spending package that includes a retroactive extension through next year of a $1/gal blenders tax credit for biodiesel and a $1.01/gal production tax credit for cellulosic biofuels. The credits had expired at the end of 2014. (12/19)
Aviation biofuels: The Port of Seattle, Alaska Airlines and Boeing are partnering to move toward powering all flights by all airlines at Seattle-Tacoma International Airport with aviation biofuel. Sea-Tac is the first US airport to lay out a long-term roadmap to incorporate aviation biofuel into its infrastructure in a cost-effective, efficient manner. (12/19)
ExxonMobil is looking for a PhD engineer, scientist, or economist who can “lead research in areas such as Earth systems science and the role of technologies and systems in managing the risks posed by global climate change.” Well, that’s interesting. Job ads can offer a useful peek into what companies actually want to do. (12/15)
Solar and wind companies scored a major victory when US lawmakers voted to extend federal subsidies for renewable energy late Tuesday night. The tax credits for new power projects fueled by wind turbines and solar panels have been key to the rapid expansion of renewable energy from California to Massachusetts. But those credits were set to expire. (12/17)
Self-driving cars: Texas is already reminding Google that self-driving cars are welcome in the state after California released draft regulations that the tech titan calls disappointing as they require a licensed driver to be behind the wheel when the car is in motion. Austin is the only place where Google is testing the vehicles outside California. (12/17)
Battery blues? On the edge of the Nevada desert, Tesla, the electric carmaker, is building the world’s largest battery plant. The mile-long, so-called Gigafactory is expected to boost demand for lithium, the raw material used in the batteries that power most electric cars. But the company has yet to announce any lithium supply deals with big producers, leaving it unclear where it will source the lightweight natural material it will need to start producing batteries by 2017 with Panasonic, its partner. (12/16)
Quotes of the Week