1. Oil and the Global Economy
Oil prices continued to fall last week with NY futures touching a low of $83.59 a barrel on Friday, the lowest since July 2012, before rebounding to close the week at $85.82. London oil did little better, touching $88.10, the lowest since 2010, closing at $90.21 – down 2.3 percent for the week. Prices are now down over 20 percent or over $20 a barrel since mid-June. The price decline was furthered along last week by OPEC’s monthly report which said the cartel’s production rose by 400,000 b/d in September; the US’s weekly stocks report which showed US crude inventories increasing by 5 million barrels; a cut in official Iranian selling prices to compete with those of the Saudis; and an increase in Russian oil production to 10.61 million b/d last month.
Although many oil traders believe that prices are nearing a floor of around $85 per barrel, speculative bets that prices will be as low as $77 a barrel by December increase. The IMF continues to forecast that the global economy will contract next year especially in Asia and the EU. Russia’s economy is contracting due to the Ukrainian sanctions. Moreover, adding to declining demand is the reduction in state subsidies in several Asian nations thereby reducing demand. Only the US economy which is benefiting from increasing quantities of cheap domestic natural gas and falling oil imports seems to be doing a bit better.
The reaction to the steep price drop over the last four months is beginning to appear. Except for a few of the gulf Arab states, most of the major oil exporters are hurting from the price decline as they can no longer meet their national budgets which are mostly financed by oil exports. Splits in OPEC are starting to occur with Venezuela, which is in a lot of fiscal trouble, calling for a special OPEC meeting to cut Gulf Arab oil production (not Venezuelan of course). Tehran has warned the Saudis about what happened in 1998 when over-production sent oil prices down to $10 a barrel. The situation was not helped by the Saudi announcement last week that they had increased production by 105,000 b/d in September and the Iranian oil price cut last week which is beginning to look like a price war. Conspiracy theorists are already saying that there is a secret deal between Washington and Riyadh to keep prices low to punish Moscow for the Ukrainian situation.
The second major problem of rapidly falling oil prices is the effect it will have on US shale oil production, much of which is on the margin of profitability at today’s prices. Analysts say the cost of producing a barrel of US shale oil varies from $50 to $100 depending on the location of the well. Some are saying that 70 percent of US shale oil production would still make money if selling prices fell as low as $75 a barrel. The Deutsche Bank, however, says that 9 percent of US shale oil production would be uneconomic at prices below $90 a barrel and 40 percent would be uneconomic below $80. In mid-September, Bakken crude was selling for $74 a barrel at the well-head, down $15 a barrel since June. US crude prices have fallen another $10 a barrel in the last month and drillers in North Dakota are facing mandates to reduce flaring of natural gas associated with oil production and ship their oil in a safer manner thereby further increasing costs of production.
The EIA projects that US domestic oil production, mostly shale oil, will increase by 1.1 million b/d this year and 900,000 b/d next year. If oil prices continue to fall much more, some of the plans to continue the unprecedented pace of drilling will likely be curtailed and production could even start to slip due to rapid depletion of existing wells.
Traders of natural gas futures are torn between the increasing production and mild temperatures which are combining to refill storage caverns at an unprecedented pace; and forecasts that we might see a return of the polar vortex this winter. If that should occur we could once again see unprecedented withdrawals and the danger of shortages. These two competing concerns have had natural gas futures on a roller coaster since July with prices fluctuating between $3.80 and $4.25 per million BTUs. Natural gas futures are currently trading near their lows, closing at $3.86 on Friday while awaiting the next round of winter weather predictions.
2. The Middle East & North Africa
Iraq/Syria: Heavy fighting continues across the region, as the IS pours in more jihadists, some with little experience, to take the town of Kobani on the Turkish border. The IS is facing fight-to-the-death resistance by Syrian Kurds and US air strikes on its vehicles, heavy weapons and positions. Taking of the town is now considered critical to the Islamic State as failure would greatly damage its image in the region. In Iraq, suicide bombers continue to take their toll of Shiite officials north of Baghdad, with several bombings a day now becoming the norm.
IS fighters continue to make their way closer to Baghdad from Anbar province in the Northeast, but few observers believe they have the strength to enter the capital in force given the size of the Shiite militia defending the city and the pledge by Washington to use all necessary air power to keep the IS out.
More disturbing, however, are reports of increasing violence in Basra, which has been relatively free of terrorist activity and is the center of the Iraqi oil industry. Gains made by the IS in northern Iraq have forced the withdrawal of security forces that were guarding the southern oil facilities, opening the way to more terrorist activity. One of the quickest ways for the Islamic State to weaken Iraq’s government would be to reduce its revenues by attacks on southern oil facilities.
Coalition air power continues to target oil refineries and other facilities in Syria that have fallen into IS hands in hopes of not only reducing fuel supplies to IS forces, but also eliminate a major source of the revenue funding its operations.
Libya: A member of the Libyan Parliament holed up in Tobruk far from the capital told the Wall Street Journal last week that Libyan oil production will hit 1 million b/d this month and 1.2 million early next year. This claim seems to run counter to other information which says the turmoil in increasing across the country and a UN estimate that some 300,000 Libyans have been displaced by the fighting and are living in emergency shelters.
Fighting between militia groups, sometimes heavy, continues outside Tripoli and Benghazi as Islamic militias vie with more secular groups for control. Very little foreign presence remains in the main population centers so reporting on the situation is markedly reduced as is management of much of Libya’s oil production and marketing.
While most of Libya’s oil production and export facilities are located far from the fighting and could in theory be producing and exporting close to a million barrels per day, there is no reporting suggesting that this is actually happening. To move that much oil out of country would require that several large tankers a day visit Libyan export terminals, load and depart. It is difficult to see where the administrative apparatus to organize such an effort remains functional in Tripoli. While tanker trackers may be seeing the movement of substantial amounts of oil out of Libya, so far all the reports that Libya’s oil production is close to normal have come from far-from-disinterested politicians and the financial press.
Iran: Tehran clearly is becoming worried about the fall in oil prices and the deteriorating situation in Syria. Over the weekend Iran’s deputy foreign minister confirmed that his country is in discussions with Washington over what to do about their joint enemy the Islamic State, but also warned that any coalition move against the Assad government, as is advocated by the Saudis, would result in attacks on Israel, presumably by Hezbollah. Iran’s oil ministry also warned that any further decline in oil prices would be disastrous – presumably for oil exporting nations that are already strapped.
The nuclear talks are set to resume in Vienna this week amid reports that the deadline for an agreement may be extended for second time. In recent days, Tehran has taken a more hard-line position, prompting to the UN to decry the lack of cooperation from Iran on the IAEA’ efforts to dig deeper into Tehran’s programs to build nuclear weapons. A spectacular explosion at Iran’s main weapons development base occurred last week damaging several buildings, but did not occur in an area of the base believe to be related to nuclear weapons development. Iran will likely suspect any explosions in their facilities were due to US or Israeli sabotage.
The World Bank announced last week that East Asian economies will slow down, but continue growing next year. The Bank forecasts that Beijing’s GDP will be only 7.2 percent next year keeping a lid on increases in oil demand which have been a key factor in increasing global oil consumption.
A Chinese diplomat has decried the recent decision by Canada to restrict investment in its energy sector by China’s state-owned enterprises, which Ottawa considers to be little more than branches of the Chinese government.
The first serious smog of the winter settled on Beijing last week reminding all concerned that the country still has very serious pollution problems. Ironically the Asian-Pacific Economic Cooperation Conference will convene in Beijing this week.
Beijing announced this week that the CEOs of it major state owned enterprises will take pay-cuts of up to 60 percent next year under the doctrine of “we all grow together.” The CEO of China’s major oil firm Sinopec earned $141,000 last year which is trivia in comparison to the multimillions paid to the CEOs of western oil companies.
There was little movement in the Ukrainian standoff last week. Moscow has agreed on a date for the next talks on solving the Ukrainian natural gas import issue before winter sets in. Needless to say Kyiv is very concerned about the humanitarian consequences of a winter without Russian natural gas. Moscow has been moving in recent weeks to ensure that other European countries are not importing more than their normal quantities of Russian natural gas with the intention of piping it back into Ukraine.
Fighting in Eastern Ukraine continues as the separatists attempt to improve their position prior to any settlement that involves the creation of a more independent province of Ukraine.
There is little doubt that falling oil prices combined with the West’s sanctions on Moscow are creating serious economic problems. The value of the ruble is falling; inflation is rising; Morgan Stanley’s deal to sell an oil trading business to Rosneft has collapsed; as have various deals to exploit Russia’s Arctic oil deposits. There is said to be a struggle in Moscow between various factions concerned that their economy is grinding towards recession. One group is concerned about Russia’s alienation from the global financial system, while another group favors a return to the command economy of the Soviet era.
Some western analysts see recent changes in Russia’s method of reporting oil production as an effort to cover up declines in the industry in the face of growing economic problems.
5. Quote of the Week
- "Oil companies are in a period of circumspection, which will only be prolonged with the oil price pullback… It is quite clear the business cannot sustain itself with Brent below $100.”
–Charles Whall, fund manager at London-based Investec Asset Management,
6. The Briefs
— The average price of benchmark OPEC crudes dropped below $90 a barrel for the first time in more than two years amid muted demand and ample supplies. The OPEC Basket, a weighted average of main grades, slipped to $89.37 a barrel mid-week. Global demand growth slowed in the second quarter to the weakest since 2011, while U.S. output climbed to the highest in three decades. (10/8)
— Poland’s ambition to achieve energy independence from Russia is being undermined by drillers giving up on the nation’s shale wells after disappointing results. The highest test flows during the country’s five-year search for unconventional gas were just 30 percent of what’s needed for commercial production. (10/11)
— Offshore Norway, a small natural gas discovery in the arctic Barents Sea waters by Statoil shows the risky campaign isn’t worth it, Greenpeace said Friday. The Norwegian Petroleum Directorate characterized a discovery in a wildcat well in the Johan Castberg area of the Barents Sea as a small find for the Norwegian energy company. (10/11)
— The cost of Kashagan, at $50 billion already the world’s most expensive oil project, is set to rise by nearly $4bn as the companies developing it are forced to replace 200km of leaking pipelines. The consortium marked first production at the Kazakhstan field in September last year, but production was shut weeks later when sulphur-containing gas was discovered leaking from pipelines. (10/9)
— China National Petroleum Co. said it received consent from the government to start work on the Power of Siberia natural gas pipeline from Russia. CNPC said construction of the 1.5 Tcf/year pipeline was slated for early 2015. Putin said the new 2,500-mile gas pipeline to China will tie the Russian energy sector to both poles of the economic world. (10/9)
— In many Asian countries, the race to cut fuel subsidies is part of an effort by new governments to rein in spending and cut deficits. But the moves threaten to suppress fuel demand growth in Asia at a time when energy use is already crippled by weak economic activity. (10/9)
— Pirates released a Vietnamese oil tanker and its 18 crew members yesterday after siphoning off part of its diesel cargo, according to the Vietnamese coast guard. (10/9)
— In Nigeria, Shell has agreed to sell a productive oil block to a consortium led by oil-trading firm Taleveras Group, say people familiar with the matter. Nigeria’s Taleveras will pay Shell more than $2.5 billion for the block and an associated pipeline. (10/9)
— Angola, Africa’s biggest oil producer after Nigeria, plans to increase output to 2 million b/d by 2017, according to Finance Minister Manuel. That would be two years behind an earlier target. Angola will budget next year for oil prices from $88 to $92 a barrel, said Manuel, who is urging OPEC producers to take steps to avoid more declines. Brent is down 16 percent this year in London, the most since a 51 percent drop in 2008. (10/7)
— Off the coast of Gabon, the oil encountered so far is non-commercial but “encouraging” according to Tullow Oil. Reserves there are similar to those in Brazil in that they’re located beneath a thick layer of submarine salt. Gabon’s geological similarities to Brazil raised hopes for oil production among energy explorers, but so far the region has turned up mostly natural gas. (10/11)
— In Egypt, BG Group PLC has received a $350 million payment following the commitment from the Egyptian government to repay outstanding debts to the energy industry. BG said this reduces the company’s domestic receivables from Egypt to around $1.2 billion. (10/6)
— Venezuela must pay Exxon Mobil $1.6 billion for taking over assets in 2007, according to a ruling by the International Center for Settlement of Investment Disputes, which receives funding from the World Bank. That’s far less than the $16.6 billion Exxon wanted, giving the government in Caracas a claim to victory. (10/11)
— In Canada, Malaysian energy company Petronas said Tuesday it may have to suspend plans to develop a Canadian liquefied natural gas project because of fiscal uncertainty. Members of the government in British Columbia are debating tax and regulatory policies on planned West Coast LNG projects. With falling energy prices, Petronas said the company needs to hedge its bets on its project investments. Potential regulatory policies in Canada could threaten the competitiveness of the western LNG project. (10/8)
— Chevron said it would sell a 30 percent stake in its Duvernay shale properties in Canada to Kuwait Foreign Petroleum Exploration Co for $1.5 billion. Chevron Canada will remain the operator and will hold a 70 percent interest in the partnership following the deal expected to close in November. The price includes a portion of Chevron Canada’s share of future capital costs for the joint venture. (10/7)
— Oil sands emissions: Advocates for a low-carbon economy cried foul over a European decision to ease restrictions on oil produced from Canadian oil sands fields. The European Commission ruled Tuesday to pull back on some of the low-carbon policies governing oil sands. (10/9)
— The Canadian tar sands industry has seen better days. Energy giant Statoil announced last week that it would postpone a major mining project in Alberta for at least three years. It was just the latest in a string of major setbacks for tar sands oil. (10/8)
— Getting around the Keystone XL pipeline: Fairly soon, TransCanada is expected to file an application to build the proposed Energy East pipeline with Canada’s National Energy Board, according to people familiar with the plan. Approval for the 2,858-mile $10.7 billion pipeline may come in early 2016, with the pipeline put in operation by 2018. (10/9)
— US imports of Canadian crude rose 494,000 b/d to 3.248 million b/d for the reporting week ended October 3, US EIA data showed. This beat the previous weekly high of 2.994 million b/d. (10/9)
— US oil exports: A Singapore-flagged tanker set sail with little fanfare from the port of Galveston, Tex., on July 30, loaded with crude oil destined for South Korea. The 400,000 barrels the tanker carried represented the first unrestricted export of American oil to a country outside of North America in nearly four decades. (10/9)
— Oilfield services company Baker Hughes says the number of rigs exploring for oil and natural gas in the US increased by eight this week to 1,930. BHI said 1,609 rigs were exploring for oil and 320 for gas. (11/10)
— With alternative fuel vehicles now approaching 1 percent of new vehicle production, the EPA says they are beginning to have a “measurable and meaningful impact” on overall new vehicle fuel economy and CO2 emissions. In model year 2014 there are 12 electric vehicles (counting the Tesla Model S 60 and 80 as one) on the market and 10 plug-in hybrids, along with the lone CNG car, the Honda Civic. (10/11)
— US auto makers engineered big gains in fuel efficiency during the past decade, but the pace is slowing as consumers buy more pickups and sport-utility vehicles. The EPA estimates fuel efficiency of 2014 vehicles would rise just one-tenth of a mile per gallon from 2013, a sharp slowdown from the half mile a gallon increase the agency calculated between 2012 and 2013. (10/9)
— US gasoline prices, thanks to refinery startups and a steady supply of oil from the Middle East, are at multi-year lows. The AAA reports a national average price at $3.27 per gallon. Prices tend to decline after September because refiners start producing a winter blend of fuel, which is cheaper to manufacture. Last week, the AAA said $3 per gallon could become commonplace by the end of the year. (10/9)
— For the past decade, the U.S. shale boom has mostly passed by California, forcing oil refiners in the state to import expensive crude. Now that’s changing as energy companies overcome opposition to forge ahead with rail depots that will bring in cheaper oil from North Dakota’s Bakken Shale. (10/8)
— Cheap natural gas in the U.S. has delivered a significant boost to manufacturing exports, the IMF has found. US gas sells for $4 per million British thermal units, compared with $10 in Europe and close to $18 in Asia. The price gap has led to a 6 per cent average increase in US manufactured product exports. (10/8)
— At the Fukushima nuclear disaster site, TEPCO is preparing to use lots of energy to freeze the soil around the four damaged reactor buildings to create an impermeable, 1.5km barrier. The frozen wall of soil is meant to block the flow of groundwater through the site. The water will then flow around the perimeter and into the sea without becoming contaminated."
— Climate change: Daily flooding caused by high tides will occur in Washington D.C. and Annapolis within three decades as sea levels continue to rise due to global warming, a new study says. The Union of Concerned Scientists predicts that by 2045 the nation’s capital and the capital of Maryland will experience about 400 floods per year, sometimes twice in a single day, and several other cities and towns on the Atlantic coast will have tidal flooding almost as bad. (10/8)
— The effects of California’s drought extend to the state’s energy sector. According to data from the EIA, California has seen a significant drop in hydropower as its dams slow electricity production from lack of water. California now relies more heavily on natural gas and renewable energy—mainly wind and solar—than it did before the drought to produce electricity, with wind energy surpassing hydro for the first time. (10/7)