1. Oil and the Global Economy
New York futures continued to slide last week closing Friday at $81.01 for the fifth weekly loss. London oil traded quietly around $86 a barrel to finish out the week at $86.13, also down for the fifth consecutive week. There has been no change in the markets’ perception that there is still too much oil chasing too little demand. The only foreseeable change in the situation will come at the November 27th OPEC meeting when we will know whether the Saudis and other Gulf Arab states will cut their production in an effort to raise prices. The other major exporters, particularly Russia, Iran, and Venezuela, are in near desperate need of all the oil revenue they can get and are unlikely to cut anything.
There was a rebound in the markets at mid-week when it was reported that Saudi sales in September were 328,000 b/d lower than in August, but the rally died when it was further reported that Saudi production had increased by 100,000 b/d last month with the rest of the oil going into storage. The weekly US stocks report showed the crude inventory increased by 7 million barrels the week before last. The stockpile at Cushing, Okla. was up a bit to 20.6 million barrels which about what is necessary for a smooth flow of futures market deliveries.
Of long-term interest was the EU leaders’ agreement last week for a mandatory 40 percent cut in emissions between 1990 and 2030 and a major emphasis on renewables. With several Asian nations cutting government subsidies for oil products, a marked economic slowdown in China, and a sluggish US economy, large increases in demand for oil products seem unlikely in the immediate future.
US natural gas futures continue dropping from a high of $4.15 per million at the beginning of the month to a close on Friday of just above $3.60. The weekly natural gas inventory report showed a build of 94 billion cubic feet which was well above the five-year average build for the week of 70 billion. Weather forecasts are pointing to milder than normal temperatures across the US in November.
2. The Middle East & North Africa
Iraq/Syria: Fighting continued across the region last week as the US and allied forces stepped up airstrikes against ISIL targets. In those areas where the Kurd’s Peshmerga is doing the fighting, the combination of airstrikes and an effective fighting force seem to be making progress against ISIL. In Anbar province to the west of Baghdad, however, the Iraqi Army, which is run by Shiites, seems to be slowly losing ground. The security situation in Iraq’s oil capital of Basra seems to be deteriorating with killings and kidnappings on the rise. In June, Baghdad moved a considerable share of the security forces in and around Basra to defend the capitol against ISIL advances.
The US-led coalition has begun to bomb the oilfields in Syria that are under the control of ISIL. The coalition has been bombing oil facilities for several weeks now in an effort to cut off a major source of funds that ISIL has been receiving from oil sales in the region. Some of the oil has even been sold to ISIL’s enemies in the region such as the Assad government. While the amount still being produced in Syria is insignificant on a world scale, it is vital to ISIL plans to dominate the region since without it carrying on desert warfare against well-supplied enemy forces will be difficult.
Libya: The situation is becoming more bizarre all the time. The Islamist government in Tripoli and the internationally recognized government in Tripoli seem to have come to an agreement that both sides need oil revenues. Although there is little in the way of firm export numbers that can be believed, some oil does seem to be leaving the country. The revenue for the oil is paid into a Libyan-owned bank abroad which then transfers payments to the Central Bank in Tripoli. This bank then pays salaries to thousands of government employees, regardless of which side in the civil war they are on. Under Gadhafi, most workers were state employees so the payment mechanisms are well established.
None of this says how much oil is actually being exported. Production claims are coming from Tobruk, while the National Oil Company is 600 miles away and under the control of an Islamist government with its own oil minister. There are few reports from Tripoli and nearly nothing on the oil situation is being published. Prior to the revolution, Libya had a large robust oil industry that was producing 1.6 million b/d. Most of the facilities were far from population centers and thus were not immediately affected by the turmoil which broke out after the revolution. An oil industry of this size certainly has the facilities in place to continue producing some oil for a long time, but maintenance, management, and investment is certainly lacking as is foreign expertise.
Over the weekend, heavy fighting continued in Benghazi including a report that what is left of the Libyan Army overran a large militia camp in the city.
Iran: The nuclear negotiations seem to be nearing some sort of a turning point. With only a month to go and little apparent progress, attention is turning to whether to extend the talks or let them collapse. A collapse could trigger action on the part of Israel to take matters into its own hands and carry out its long-standing threat to bomb Iranian nuclear facilities. This in turn obviously would have important, but unknown consequences for the world’s oil supply. Alternatively, an open path for Tehran to becoming a nuclear-armed state could open the door for the Saudis to demand nuclear weapons too. The situation is complicated by Tehran’s involvement in much of the Middle Eastern turmoil.
The Obama administration is aware of the dangers inherent in this situation and is pushing to reach an agreement soon. This in turn has Republicans in Congress, and others, fearful that the Administration will give in to Iranian demands for relief from the sanctions without getting sufficient guarantees in return.
In the meantime, this year’s precipitous drop in oil prices are causing the Iranians almost as much economic grief as did the sanctions.
Egypt: The insurgent attacks on Egyptian soldiers in the Sinai last week, killing 33, serves as a reminder that Cairo’s troubles continue to increase. The government has declared a state of emergency in the Sinai which includes a 5pm-7am curfew and has started a large military operation to root out insurgent groups. The Ministry of Defense reports that nearly 1000 people have been killed in insurgent attacks, including 664 security personnel since January 2011. Cairo says the people involved in the current attacks came into the Sinai from Gaza with the backing of Hamas.
The government is now planning for a 1.5 – 3km buffer zone along the Gaza Strip to deter tunnel building and the infiltration of terrorists. The plan, however, will involve the relocation of thousands of Bedouin living along the border. Last week’s attacks only serve to increase the tensions between the military government in Cairo and radical Islamists across the region. Government repression is growing with the addition of military courts and lengthy prison sentences for taking part in unauthorized demonstrations. Some 1,500 have been killed in clashes between Islamist protestors and government forces since the Morsi government was overthrown.
While Egypt is not an oil or even a natural gas exporter, it is still the largest country in the region and is clearly on track for greater involvement in the turmoil. In recent weeks we have reports of aircraft attacking Islamist militias in Libya with some sort of Egyptian support. With its army still the most powerful institution in the country there seems little danger to shipping through the Suez Canal, but this week’s developments are just one more step in a downwards spiral that could eventually impact exports.
Moscow’s economic problems brought on by falling oil prices and sanctions over the Ukraine situation continue to grow worse. Not only are oil prices continuing to fall, but the ruble hit an all-time low against the dollar last week. Russia’s economic ministers are starting to say publicly that Moscow’s economy is in real trouble. Moscow obviously has no interest in cutting oil and natural gas sales to the EU, unless someday it can direct most of its exports to China. Inflation in Russia has now hit 8.5 percent as Moscow thrashes around in an effort to come up with counter-sanctions that will hurt the West such as restricting food imports. In response, President Putin unleashed a furious attack on the US last week, accusing Washington of undermining the post-cold war order so that the world will collapse into chaos and anarchy.
Russia’s largest oil company has asked the government for $49 billion to weather the Western sanctions as foreign financing of Russian economic projects has all but dried up. Moscow has built up large sovereign wealth funds from its oil sales in recent years, but these are not likely to last long in face of capital flight and the lack of access to foreign loans – except from the Chinese who drive hard bargins. Last week Moody’s downgraded Russia’s credit rating.
There may have been some movement in the Russia/Ukraine natural gas dispute as colder weather approaches. Kyiv says it has set aside $3.1 billion to pay back its natural gas debt to Gazprom which Moscow says total $5 billion. Ukraine says that it will pay only if Moscow guarantees that supplies will flow all winter. Russia is insisting on a $3.1 billion payment on the outstanding debt and prepayment for November and December shipments. The EU says it might be able to chip in $1 billion to help pay the bill. The size of bill is a matter of dispute as Moscow charges politically friendly governments far less for natural gas than ones it does not like such as Ukraine.
4. Quote of the Week
“Europe has the opportunity to show the world how we can cut emissions while creating investment, jobs and growth, but only if we reform the system and reform it fast,” he said in a statement. “Otherwise we’re facing increasing costs for businesses, uncertainty for investment and ultimately higher costs for consumers, which isn’t acceptable.”
— British Energy Secretary Ed Davey
5. The Briefs
— Total SA: Patrick Pouyanne, the successor to Christophe de Margerie, the outspoken Total boss who died in a Moscow plane crash, will have to contend with a slump in the company’s output and the failure of its exploration strategy in the face of slumping oil prices and weak returns from refining. (10/22)
— Several UK-focused oil and gas companies reported Friday that an oil discovery of perhaps up to 20 million barrels has been made near London’s Gatwick Airport in southern England. (10/25)
— Russia limited: U.S. energy company Exxon Mobil has a partnership with Russian oil company Rosneft for work in the arctic waters of Russia. With Western sanctions impeding developments, the Russian government has placed a greater emphasis on domestic exploitation of arctic reserves as they will probably be forced to go it alone. (10/24)
— Israeli and Egypt: The consortium in charge of Israel’s Tamar offshore natural gas field, led by Texas company Noble Energy and Israel’s Delek Group, said they’re negotiating the sale of at least 175 billion cubic feet of natural gas per year over the next three years with an Egyptian buyer. (10/21)
— Iraq’s Kurdistan Regional Government (KRG) is racing to expand the capacity of its oil refineries – a critical step toward addressing weaknesses in the KRG’s oil sector and economy. (10/20)
— Despite reports the project has been abandoned, the Iranian government said it was determined to push ahead with a gas pipeline for Pakistan. (10/20)
— India announced over the weekend that it would end a decades-old policy of controlling the retail price of diesel fuel. Providing diesel at below-market rates cost the government about $10 billion last year, hampering India’s ability to spend on other things. (10/22)
— PetroChina, China’s biggest oil and gas producer, is on course to surpass a 2.6 billion cubic meter target for shale gas production in 2015 from fields in Sichuan. The estimate is “very conservative” and newer technology may push the number much higher, a spokesman said. The country halved its target of producing 60 billion cubic meters by 2020 because of geological challenges. PetroChina aims to produce 5 billion cubic meters by 2017 and 12 billion cubic meters by the end of the decade. Output this year may reach 200 million cubic meters in the first quarter of next year. (10/20)
— Oil Search Ltd., after the start up earlier this year of a $19 billion LNG project in Papua New Guinea, expects two or three more LNG production units to be built in the country with the development of InterOil Corp.’s Elk and Antelope discoveries. (10/23)
— China is reviewing its relationships with Sudan and South Sudan following years of growth that changed both sides. South Sudan may be only a few years old as a country but its oil fields are very mature and need new investment. (10/22)
— In Nigeria, Royal Dutch Shell said it has signed agreements to sell all of the Nigerian oil assets it put up for sale last year, the latest move by the Anglo-Dutch oil major to reduce its exposure in the West African nation. (10/22)
— A Nigerian labor leader berated the government for what he described as its lackluster plan for dealing with the fall in the international price of crude oil. He reasoned that the fall in price of crude should have been used by the federal government as an opportunity to phase out fuel subsidies to petroleum marketers. (10/22)
— Shell announced Wednesday it made a substantial discovery of natural gas in the deep waters off the coast of Gabon. The West African country’s geological similarities to Brazil raised hopes for oil production among energy explorers, but so far the region has turned up mostly natural gas. (10/23)
–Mexico’s state-owned oil company Pemex reported a third quarter loss of 0.7 percent on falling crude output, higher interest rates, foreign exchange losses, and lower prices. Pemex’s crude oil production was down 4.3 percent during the quarter to 2.398 million b/d, compared with 2.506 million during the third quarter of 2013. Meanwhile, the average price of Pemex’s crude exports fell 8.4 percent to $92.08 per barrel, compared with $100.53 per barrel during the same period last year. (10/25)
— TransCanada Corp. will have to spend $1 billion more than planned on an oil pipeline to Canada’s Atlantic Coast if natural gas customers get their way, a move it says would threaten the viability of the project. The spat centers on TransCanada’s plan to convert a 3,000-kilometer (1,865-mile) stretch of its mainline gas conduit to carry oil. Gas distributors claim that converting the pipeline to oil in eastern Ontario would lead to fuel shortages and higher prices. (10/22)
— Oil majors’ decline: Last year, Exxon, Chevron and Shell failed to increase oil and gas production despite having spent $500 billion over the previous five years, $120 billion in 2013 alone. Under pressure from investors, the world’s largest oil companies are now forced to cut capital expenditure and sell assets to boost cash flows. (10/24)
— US oil producers are forming a coalition—the Producers for American Crude Exports—dedicated to ending the four-decade U.S. ban on crude exports, signaling a more serious turn in their push to sell to overseas customers. (10/25)
— US companies will export more energy than they import by 2025 as shale oil and gas production keeps climbing and the transportation sector becomes more efficient, Wood Mackenzie Ltd. said. (10/24)
— A report from the Government Accountability Office found consumer fuel prices would decline if the US ended the 1970s ban on crude oil exports. The study will add fuel to the growing debate over whether to lift the nearly four-decade ban. U.S. refiners have expressed concern that easing the ban on crude oil exports would mean higher costs per barrel in the U.S. market. The GAO found that exports would raise domestic crude oil prices by as much as $8 per barrel. In terms of consumer benefits, the report found domestic fuel prices would fall because those prices follow international market conditions. (10/22 and 10/21)
— LNG exports: construction began in Louisiana on a plant to export around 1.7 billion cubic feet of U.S. natural gas per day by 2018. Development group Cameron LNG, including Sempra Energy and Japan’s Mitsubishi Corp., said the Hackberry plant will cost $10 billion. (10/25)
— New orders for drilling rigs continue even amid the recent drop in oil prices. With 10 new rigs ordered from Patterson-UTI and Nabors during the third quarter, analysts and drillers insist that industry’s appetite for new state-of-the-art drilling units has not been slaked. (10/25)
— Data overload: Rapid growth of shale exploration and production is creating an exponential amount of data from not only production volumes but costs, royalties, liabilities and taxes. Fines and penalties by government agencies for misreporting, higher administrative costs, and inaccuracies in master production data are some of the issues that could result if oil and gas companies fail to update their business systems and processes to handle this rise in data volume and complexity. (10/23)
— BNSF Railway Co. plans to apply a $1,000 surcharge for each older tank car that hauls oil, as the railroad owned by Warren Buffett’s Berkshire Hathaway Inc. encourages shippers to scrap the puncture-prone cars. The charge, which will take effect Jan. 1, will add about $1.50 a barrel to the cost of shipping oil across the country.
— In Oklahoma, the Springer reserve area is emerging as one of the premier oil basins in the region, Continental Resources said Thursday. The company, which has nine rigs active in the area, said four wells in the Springer play inside the South Central Oklahoma Oil Province, known by its initials SCOOP, are large producers. (10/24)
— Pennsylvania’s natural gas drillers are facing a growing threat—from their own productivity. New drilling techniques have caused the amount of natural gas flowing out of the state’s Marcellus Shale to soar in recent years. Production is expected to hit 16 billion cubic feet a day next month, nearly double what it was two years ago. The fracking surge has overwhelmed pipelines, creating a local glut that has caused gas prices to crater. The situation became more pressing when federal regulators delayed construction of a pipeline meant to move more gas by the end of next year. Some analysts say they don’t expect enough new pipeline capacity to be available until 2017. (10/23)
— Better fuel efficiencies and a change in fuels used for home heating means most people are spending less on energy than before. Edmunds.com said the average new vehicle sold in January got 24.9 miles per gallon of gasoline, an increase of nearly 5 mpg from October 2007. The number of consumers using natural gas for home heating has increased more than 3 percent from 2007. (10/22)
— US household energy expenditures ranged between 4 and 8 percent of disposable income since 1960. Consumer energy expenditures today are a lower percentage of disposable income than the average (5.5 percent) from1960 to present. (10/22)
— While the US coal industry is in its worst decline in decades, it’s boom times in Wyoming for embattled U.S. coal companies, where the mining industry is hiring workers while shedding them in Appalachia. (10/23)
— British Energy Secretary Ed Davey said Monday the EU can lead the fight against climate change, but only if certain reforms are enacted. Davey said his government was proposing a way to make an emissions trading system work better in the European economy. As it stands, with a skewed trading balance, the system is increasing the overall costs of meeting future carbon reduction obligations. (10/21)