Quote of the Week
Q: “Can you imagine selling shares in Saudi Aramco?
A: “This is something that is being reviewed, and we believe a decision will be made over the next few months. Personally, I’m enthusiastic about this step. I believe it is in the interest of the Saudi market, and it is in the interest of Aramco, and it is for the interest of more transparency, and to counter corruption, if any, that may be circling around Aramco.”
Interview with Saudi Arabia’s deputy crown prince Muhammad bin Salman in The Economist
1. Oil and the Global Economy
Oil prices plunged again last week from a high above $38 a barrel on Monday to a new low of $32.10, touched by NY futures on Thursday. For the week New York futures were down $3.88 or 10.5 percent to close at $33.16. London’s Brent was down 10 percent for the week closing at $33.55, the lowest closing since June of 2004. The usual factors of too much oil and too little demand as the US and Chinese economies continue to weaken were behind the move. A number of the factors that usually move oil markets are beginning to change. For example, another large drop of 20 units in the US rig count failed to drive the market higher for more than a few minutes as traders have come to recognize that changes in the rig count do not translate into short-term supply changes. Likewise the increase in enmity between Iran and the Saudis is having very little impact on prices as the markets believe the harsh rhetoric is unlikely to lead to hostilities – at least in the short term. Even a US jobs report which showed the creation of 292,000 new jobs, 39 percent more than expected, did little to move prices higher. Usually traders see more people working as a sign that there will soon be more demand for gasoline, but not this time. Fundamentals are ruling the markets.
For now, pessimism reigns. Traders see nothing on the horizon that could move markets higher and several developments that could push prices lower. Secretary Kerry says that the Iran sanctions could be lifted in a matter of days and the general belief about the new Iran-Saudi controversy is that it reduces the likelihood that OPEC will agree to lower production in the near term, but also increases the incentive to lower prices in an effort to keep Iran from gaining its former share of the oil market. Money managers have reduced their collective long positions in the oil futures markets to the lowest in five years. The volatility in the Chinese stock markets last week left many with the impression that Beijing is losing control over its economy.
In other markets, US gasoline futures fell 14.3 percent last week to close at $1.12 a gallon, the lowest since June 2004 and the largest weekly decline since September 2009. In contrast to the oil markets US natural gas climbed swiftly in recent days moving from $1.80 per million BTUs in mid-December to a close of $2.47 last week as colder temperatures engulf much of the northern US.
The financial press is full of stories about $20 Goldman Sachs’ forecast last September, at the time the average Wall Street forecast for the 1st quarter of 2016 was $47 a barrel, that it could take oil as low a $20 a barrel to rebalance supply and demand. Some note that lower grades of Canadian crude were selling last week for less that $20 a barrel. Even the Wall Street Journal is starting to write stories about what will happen if oil falls below $30 a barrel, a number which is not that far away. Not willing to talk about $20 oil, the Journal likes the idea that $30 oil will be enough to rebalance the markets in the coming year.
Low prices continue to take a financial toll on oil producers. Reuters likes a figure of $60 oil as the rough break even point for the major international oil companies and points out that most are cutting spending, selling assets and reducing jobs as the oil slump shows no signs of recovering to $60 a barrel. The smaller independent oil companies are running out of financing options. These companies were only able to raise $3.6 billion in equity sales in the second half of last year, down from $14.6 billion in the first half. Likewise, bond sales were down to $4.5 billion in the second half of 2015 from $23.9 billion in the first half. It appears that Wall Street’s infatuation with the shale oil business is on hold until prices rebound.
2. The Middle East & North Africa
Syria/Iraq: Syrian peace talks are scheduled to begin on January 25th amid much pessimism sparked by the Saud-Iranian flare up and continued Russian bombing in support of the Assad government. Many doubt that there will be any settlement at this time. There was an agreement last week to supply food to surrounded towns where people are literally starving to death.
The US continues to say that of the 5,000 Russian air strikes that have taken place since since 30 September, only 30 percent have been directed at ISIL targets and the rest at more moderate rebels directly threatening the Assad government. In essence, Moscow has become the Syrian Air Force. In the early days of the campaign there were a few strikes against ISIL targets, but these have been stepped out after international condemnation and reports of large number of civilian casualties that the Russian bombing is causing. The EU is concerned that the non-precise strikes which are hitting villages and market places are adding to the refugee flow. Since the fighting began, some 4.4 million Syrians have fled to neighboring states with many trying to get to Europe.
In Iraq, the government has split the South Oil company which was responsible for for the bulk of the country’s oil production into the Basra and the Dhi Qar oil companies. The Basra Company which has a smaller area of operations gives in to the demands for more local control of oil production around the city. The Dhi Qar company plans to revive talks with the international oil companies about increasing production at the Nassiriya oil field and building a new refinery. In 2014 after an ISIL attack on Iraq’s main refinery, interest in building a new refinery in the south which would be safer from ISIL attacks began to grow. The Nassiriya oil field is said to have reserves of 4 billion barrels and the potential to increase production from 70,000 to 200,000 b/d. Given the current world oil situation, it seems doubtful that any foreign oil company would want to invest in Iraq for the immediate future.
Foreign oil companies working in Iraqi Kurdistan report that they are starting to receive payments from the government for their oil production. The Kurds, desperately short of money, have been slow in paying the foreigners for oil production, but that can only go on for so long before the foreigners slow production.
Libya: Following a power-sharing agreement that would form a single Libyan government, the Islamic State has become more aggressive. On Thursday, the group ran a massive truck bomb into a police training school, killing at least 60 police trainees and wounding 200. Islamic State militants also attacked two major oil terminals at Es Sider and Ras Lanuf, setting fire to 7 oil storage tanks; the fires are now out.
Artillery fire in Benghazi hit a key power station that provides electricity to much of the country’s east. Five of the six transformers were hit. Power shortages are now occurring from Benghazi to the Egyptian border.
The power-sharing agreement signed in December and due to come into force in the next two weeks calls for EU military assistance in backing up the new government. There is currently little appetite in Europe to back up the Libyan government with boots on the ground and it is believed that initially military aid will be in form of advisors and training.
Iran: Secretary of State Kerry said on Thursday that implementation of the nuclear deal is “days away”. In the meantime, hardliners in Washington and Tehran are still trying to torpedo the agreement. In the US Congress the Republicans are working on a bill, the “Iran Terror Finance Transparency Act.” The idea would be to impose such humiliating sanctions on Iran that they would claim the US was violating the agreement and pull out. Given that all of the other powers involved in the sanctions want to see them lifted, it is unclear if the US has the power to keep the sanctions in place by itself. We could be facing the worst of all possible worlds in which Tehran would be both free of the sanctions and free probably go back to enriching uranium and even working on nuclear weapons – a recipe for still more trouble.
In Tehran, hardliners with police powers and consent of the Ayatollah are cracking down on people they don’t like prior to the February 26th national elections. Many who benefit from Iran’s theocratic government fear that the nuclear agreement will lead to more openness, exposure to Western ideas, and culture changes which in the long-run could change the nature of the country – particularly among the youth. Many new arrests have been reported in the arts, media and business community aimed at creating favorable results in the national elections. These arrests are in addition to the highly publicized arrests of dual citizenship Iranians on trumped up charges.
Where the growing Shiite-Sunni split leads is hard to say – after all it is now 1384 years old. Some are saying that Tehran over reacted by burning down the Saudi Embassy in response to the execution of a Saudi Shiite cleric. Attacking foreign embassies in retaliation for some perceived outrage is a tradition in Iran which may be doing the country more harm than good. The attack on the US embassy in 1979 has resulted in 35 years of bad relations and much harm to the country’s economic growth. Iran has done well from high oil prices in the last ten years, but this era is coming to an end. Current trends suggest that the country will be so busy dealing with the effects of climate change, the demise of the oil industry, and fighting foreign wars that in ten or twenty years that it will have time for little else.
Saudi Arabia: The kingdom was much in the news last week on topics ranging from the dispute with Iran, through OPEC, Yemen, a partial sale of Aramco, to the stability of the monarchy itself. The only thing observers can agree on is that the war in Yemen is a disaster and the chance of Iran and the Saudis getting together on restricting oil sales is now about zero.
The Saudi Arabian Oil Co. confirmed last week that it is considering an IPO that would offer shares in the world’s largest oil company to the public – once again confirming the precarious state of Saudi finances. The company controls oil reserves of about ten times those of Exxon and is generally thought to be worth about $2.5 trillion or more. The Economist says that about 5 percent of the company would be offered for sale, which in theory could bring in about $125 billion. In 2014 before the oil slump took hold, the company earned some $285 billion from export sales. One of the major issues related to an IPO would be the requirement to open up the company and its numbers to outside scrutiny – which is something the Saudis have been loath to do. It is likely to be months before a decision on an IPO is made.
The increase in Iranian/Saudi animosity has set the region on a destructive path as each tries to become the most influential state in the region. Both are involved in unwinnable proxy wars that are bleeding their treasuries. Recent Saudi opposition to the nuclear agreement, support for Sunni terrorists, the war in Yemen and the executions have hurt relations with Washington. The newly aggressive Saudi government is faced with declining revenues and the need for belt tightening and even asset sales. The main danger in all of this is the 17 million b/d that flows out of the Gulf and keeps much of the world electrified, warm, and mobile. Loss of even a fraction of this oil flow would be a major setback for the global economy.
The new stock market circuit breaker which suspended trading after a 7 percent fall was inaugurated on Monday and scrapped on Thursday after two disastrous trading sessions forced the markets to close within minutes. Added to a further drop in the renminbi world stock markets fell out of concern about what was happening in China. Beijing’s efforts to establish a new economic era based on increased consumer consumption seems to be coming unstuck with serious implications for the global economy and the demand for oil. The slide of the renminbi in the international markets has spurred capital flight from China as wealthy Chinese seek safer investment abroad while their currency is still relatively strong. Chinese foreign exchange reserves fell $107 billion in December to $3.3 billion, the steepest monthly decline on record. In 2015 the drop in reserves was $512 billion – like Saudi Arabia, Beijing is eating through the wealth built up in good years.
So far government efforts to stimulate the economy have had little visible effect. At least one respected observer is saying that it would take $5 trillion in debt-financed investment this year to get the economy moving again. In the meantime, a number of economic indicators continue to slide. A combination of growing debt, overbuilt state enterprises, and an unwillingness to let market forces take control is threatening to derail Beijing’s economy. While some believe an actual decline in GDP is possible, the general consensus is that Beijing will find a way to muddle along by propping up failing enterprises and continuing to invest in non-productive projects.
The trade-off between air pollution and economic growth is becoming more important. Last year, in an effort to meet production goals, the government allowed heavy industries in the northeast to pump out smoke well into winter leading to major air quality issues in Beijing and neighboring cities. The same air quality problems are back this year. The only choice is to close factories and increase unemployment which leads to another set of problems.
State-owned companies, many of which are bloated and losing money, are sucking up 80 percent of the nation’s bank loans which are not going to smaller more profitable firms. There are no easy choices anymore for the Chinese Communist Party, but something has got to give.
Last week there was a report that China is building underground caverns to hold up to 25 percent of its expanding strategic oil reserves. This storage method may be less expensive and certainly is less vulnerable than building large tank farms along the coast lines where land is scarce.
As could be expected, the ruble continues to fall and is now about 75 to the dollar, down some 18 percent in the last 12 months. Any further drop in the ruble is likely to delay further interest rate cuts from the current 11 percent, which in turn will hamper economic growth in the coming year. Moscow faces a very uncertain year ahead — not only is the Ukraine situation stalemated, so is the intervention into Syria which is turning in a long-term quagmire. Moscow’s continued indiscriminate bombing of Syrian civilians is not earning it many friends in the world – especially in Europe where more Syrians are migrating to escape the bombs.
One good development in Russia is that President Putin seems to be coming around on the environment. Putin just declared 2017 the year of the environment in Russia. As a country that earns its living from exporting fossil fuels, Moscow is obviously not enamored with the idea of cutting back on oil, gas, and coal production. For a while the Russian government clung to the notion that a few degrees of warming would help develop the economy in Siberia, but now that idea seems to be changing.
6. The Briefs
Developing economies last year recorded their slowest growth since the immediate aftermath of the 2008 financial crisis and are facing the prospect of an equally grim 2016, the World Bank has warned. Developing economies as a group grew at a rate of 4.3 per cent in 2015, the slowest pace since 2009, and the bank predicted they would grow 4.8 per cent this year. (1/7)
Global oil and gas investments are expected to fall to their lowest in six years in 2016 to $522 billion, following a 22 percent fall to $595 billion in 2015, according to the Oslo-based consultancy Rystad Energy. (1/4)
The world drilling rig count, excluding North America, was at 1,095 in December, down 20 percent from 2014 levels and down 6 percent from November, according to Oil field services company Baker Hughes. (1/9)
For many Asian shipyards, 2015 was a brutal year. This year could be even worse. With oil prices still falling and China’s growth slowing, orders for offshore projects and new vessels are hard to come by for the world’s three biggest shipbuilders. As the industry struggles with overcapacity customers have been pushing back delivery schedules or canceling orders outright. (1/4)
In South Delhi, India, traffic was flowing smoothly Monday morning on Outer Ring Road, usually jammed at that hour by subway construction and cars. It was the fourth day of government traffic restrictions, part of a series of measures meant to reduce pollution. The two-week experiment, which began on Friday, has been derided in many quarters of Delhi. (1/5)
In Nigeria, the head of the IMF, Christine Lagarde, met with President Buhari and industry leaders to discuss the country’s economy and the challenge posed by falling oil prices. Because the price of oil is weak, the IMF wants Nigeria to look towards other means to generate revenue – notably income tax. (1/7)
Nigerian authorities are facing growing pressure to devalue the naira as the price of oil fell to the lowest since 2004. The Central Bank of Nigeria may revise its target for the naira by about 20 percent to 240 to 250 per dollar after oil continued its decline. (1/7)
Venezuela’s opposition took majority control of the National Assembly on Tuesday after 17 years in the political wilderness, setting the stage for a potential power struggle with embattled President Nicolas Maduro. But the two-thirds opposition majority won by a landslide last month, giving it unprecedented strength to challenge President Nicolas Maduro’s rule, was in doubt after a government-stacked Supreme Court barred four lawmakers from taking their seats. The Assembly seated the newly elected lawmakers anyway. (1/6)
Canadian LNG? The federal Canadian government said it approved a 40-year export license for liquefied natural gas from a facility set for the shores of British Columbia. The maximum term limit prior to the amendments was 25 years. (1/9)
In Canada, the deepening oil market slump is adding fresh pain for producers of the world’s cheapest crude as the heavy grade reached a record low, raising the prospect of more production going offline. Spot prices for Western Canadian Select fell to $19.81 a barrel on Wednesday, the lowest since tracking began in 2008. The benchmark is made up of heavy conventional production and bitumen blended with synthetic crude and condensate. (1/7)
At Syncrude Canada’s oil sands operation, crude oil production averaged 238,800 barrels/day in December, down 26 percent from November, the joint venture’s largest-interest owner, Canadian Oil Sands, said. (1/5)
TransCanada this week said it filed a lawsuit in a federal court in Houston challenging President Barack Obama‘s decision on Keystone XL and was reviewing possible additional claims under the North American Free Trade Agreement. The U.S. government said it was confident the decision made on the Keystone XL oil pipeline was in line with the law. (1/9)
The US oil rig count dropped by 20 to 516, according to Baker Hughes Inc. That’s down 68% from the peak of 1,609 in October 2014. Natural gas rigs declined 14 rigs to 148. (1/9)
US gasoline futures plunged Wednesday, dragging global oil prices to 11-year lows, meaning that a drop in retail prices won’t be far behind. Robust gasoline demand has been one of the few bright spots for beleaguered oil investors in the past two years. But U.S. gasoline consumption waned in December. (1/7)
Fuel prices: Since 1918, the average U.S. domestic price of gasoline has rarely fallen below $2 or risen above $4 as measured in 2015 dollars. At today’s price of $1.99, gasoline is approaching its all-time low in inflation-adjusted terms. In 1965, gasoline sold for 30 cents. In 1965 dollars, today’s price is 26 cents. So, yes, the current oil price depression is not ordinary. (1/6)
Gasoline prices: Motor club AAA calculates US consumers paid $2.40 per gallon on average last year, the lowest full-year average since 2009. They report a national average retail price for a gallon of regular unleaded gasoline at $1.99 for Tuesday. (1/6)
Moody’s Investor Service, in its latest industry outlook, foresees capital spending reductions of at least 20-25% in 2016 across the exploration and production business, with oil field services and drilling remaining the most stressed energy segment. Moody’s believes the difficult credit conditions will ultimately lead to an increase in defaults for those companies experiencing reduced cash flows, higher debt service costs, and a lack of sources of liquidity. Moody’s last month also projected average prices of WTI crude at $40 in 2016, $45 in 2017, and $50 in 2018. The 2016 price is down $8 from the firm’s earlier forecast. (1/5)
Industry employment: Despite the United States adding 292,000 jobs in December, jobs in mining (which includes oil and gas) continued to decline – this month by 8,000. The majority of those job losses (5,500) were in support activities for mining, according to the jobs report released Friday by the U.S. Bureau of Labor Statistics. Industry analysts and experts have expressed that 2016 will be another difficult year for the oil and gas industry, which saw a quarter of a million jobs lost globally in 2015. (1/9)
US “stripper well” operators, the nation’s smallest oil producers seen as most likely to succumb to the crude price slump, are hanging in tough, reducing the chances of near-term production cuts needed to rebalance the domestic oil market. The conventional wisdom is that “strippers” would be the first to fold in the face of oil’s slide below $40 given their tiny size – some may pump as little as few hundred dollars’ worth of oil a day – limited access to capital and high costs. Yet interviews with executives and experts show those smallest, often family-owned, businesses are also among the most resourceful. (1/4)
Oklahoma Governor Mary Fallin said in a New Year message that the state is facing 2016 with a major gap in its budget. The Governor anticipates a $900.8 million appropriated budget hole caused in large part by a 70 percent drop in oil prices over the past 18 months. (1/7)
In Oklahoma, the U.S.G.S. reported a magnitude 2.6 tremor struck Helena on Tuesday and a magnitude 4.2 earthquake was recorded in Edmond on New Year’s Day, about 100 miles south. The Oklahoma Corp. Commission’s Oil and Gas Conservation District said it was working on plans to respond to recent quakes. The commission’s director said operators are called on to reduce their well wastewater disposal volumes by as much as 50 percent. (1/6)
A financially strapped Oklahoma oil company is defying the state regulator’s request that it shut down six wells used to dispose of wastewater, despite fears they may be contributing to earthquakes. Sandridge Energy Inc. has complied with similar requests in the past. A growing body of research links temblors in Oklahoma and other oil-and-gas-producing states to the use of disposal wells, though Sandridge and other prominent shale producers have been vocal critics of those geologic reports. The Oklahoma Corporation Commission is working on legal action to modify Sandridge’s permits in order to force it to abandon the wells. (1/7)
Aliso Canyon gas leak: California Gov. Jerry Brown this week declared a state of emergency “given the prolonged and continuing duration” of the leak. The U.S. government said it was providing technical support to California utility regulators working to stem a leak from a natural gas storage facility. (1/9)
Southern California Gas Company says it will take at least another month and a half to shut down the Aliso Canyon leak. Early efforts to halt the leak or kill the well by injecting liquids into it failed because the liquids were not heavy enough to overcome the gas rushing up at nearly 200 times normal atmospheric pressure. So the utility is now pinning its hope on a relief well. The gas company says it thinks the leak was caused by corrosion of the steel casing about 500 feet below the surface. (1/8)
Two massive and permanent shifts in energy took place in 2015. The first was the beginning of the end of the oil age as Saudi Arabia led OPEC on a mission to destroy long-term competition and preserve market share. The second was the fortification of a move toward alternative energy as 196 nations agreed to sign a U.N. agreement in Paris to avoid dangerous climate change. (1/6)
US coal production has fallen to its lowest level in nearly 30 years as cheaper sources of power and stricter environmental regulations reduce demand. EIA estimates 900 million short tons of coal were produced last year, a drop from about 1 billion short tons in 2014. That’s the lowest volume since 1986. The slump has led to bankruptcies and layoffs at mining companies, but the effects have rippled outward, stressing state budgets and forcing layoffs in other sectors such as railroads. (1/9)
Coal exports from terminals in Virginia’s Hampton Roads region totaled more than 26.8 million tons in 2015. The 2015 total was down 35% from 2014 and down 46% from the peak of 49.7 million tons in 2013. The ongoing downturn in US coal exports is largely the result of low global prices for thermal and metallurgical coal. Compared with January 2014, current US thermal coal prices for the front-month futures contract have fallen 42% while current US met coal prices have declined 39.5%. (1/7)
Although sales of electric and hybrid vehicles have struggled, automakers are charging ahead to bring new battery-powered vehicles to market. General Motors on Wednesday introduced the production version of its Chevrolet Bolt. GM’s CEO said the Bolt was a big step forward in the electrification of vehicles because of its affordable price and ability to travel 200 miles on a fully charged battery. (1/8)
Ford Motor said it plans to triple to 30 the size of its fleet of self-driving test cars as part of an effort to accelerate autonomous vehicle development. Ford said it will begin using a new, lower cost LiDAR sensor made by California-based Velodyne. (1/5)