Peak Oil Review – Jan 12

January 12, 2015

1.  Oil and the Global Economy
It was another week of falling prices with Brent declining from $56 a barrel to close on Friday at a five year low of $50.11.  During the week Brent traded as low as $48.90. New York futures closed the week at $48.36. The spread between NY and London oil has narrowed considerably in recent days and now stands at $1.75 a barrel, down from over $5 in mid-December.  Some are saying that the days of a large differential between US and London crude, which at one point was as much as $28 a barrel, are over and that the two will be entering a time when they will trade within $1 or $2 of each other.
There still is no sign that anyone will cut oil production unless they are forced out of business in the near future.  OPEC continues to maintain that it will not meet again on production quotas until next June. The cartel’s output rose by 20,000 b/d in December. The Saudis maintained an average production of 9.6 million b/d during the month.
Rapidly falling prices are bringing numerous changes to the international oil markets. As there seems to be more surplus oil outside of the US, the spread between WTI and Brent is setting recent lows. US exports of crude hit a record 502,000 b/d in November as companies find ways around export restrictions. Mexico has asked permission to import 100,000 b/d of light US crudes to mix with the heavier oil it produces.
The futures markets are in contango with nearby contracts going for less than more distant ones. This is leading to chartering of some 20 million barrels of oil tanker capacity in which to store oil with investors hoping to sell it at a profit later in the year.  Reports of reductions in drillers’ capital spending continue to come in. Baker Hughes reported that the number of active US drilling rigs fell by 61 the week before last. The US rig count is now down by 188 units from the October high. Asian oil companies that are flush with cash are on the prowl for assets that can be purchased cheaply from companies in trouble around the world.
The debate over just how far prices will fall this year continues with discussions focusing on the 2008 – 2009 price plunge when Brent traded below $40 a barrel and NY futures fell to below $34 a barrel. Traders are saying that so long as there is no evidence that production is being cut substantially or that low prices are spurring demand for more oil, prices will continue to fall simply from momentum.
Concerns are increasing about the possibility that many small shale oil drillers will be forced to declare bankruptcy in coming months. Wellhead prices for some Bakken crude has fallen as low as $32 a barrel, which is clearly below the costs of production.  Some are worrying about what will happen to currently producing wells should the companies operating them go into bankruptcy. These people believe that the wells belonging to bankrupt companies would have to be closed while the courts sort out disposition of the remaining assets. Others, however, believe the wells could remain in production despite the continuing losses. There is also the possibility that creditors of bankrupt firms would insist that the oil, which is the only asset to settle their claims, remain in the ground while awaiting higher prices.
Conventional wisdom is saying that US oil production will likely continue to increase for the next few months simply due to the inertia in the drilling and fracking process. By summer, however, most see a drop in US oil production unless there has been a major rebound in prices. While it is too early to make judgments, many are talking about some sort of peak in US oil production coming in the next few months.
The economic situation in Europe continues to decline. The euro fell to recent lows last week, and industrial production in France and Germany fell slightly. This does not bode well for any demand increase from the EU.
Despite the cold weather settling in across much of the US last week, there has been little increase in natural gas prices which have continued to trade around $2.90 per million BTU’s for most of last week. Production increases and forecasts that more moderate temperatures are in store are said to be responsible for the flat prices.
2.  The Middle East & North Africa
Iraq:  Fighting between ISIL and their Kurd/Shiite opponents continued last week with the requisite numbers of air strikes, suicide bombings and clashes between ISIL and government forces taking place. The Pentagon released a tally of some 3000 ISIL targets that have been destroyed since the bombing began in August, which included some 303 tactical vehicles, 670 ISIL fighting positions and 259 ISIL petroleum infrastructure targets. Among the more notable targets of ISIL suicide bombers was one in the city of Samarra, which contains the Al Askara shrine, of great importance to the world’s Shiites. Tehran has said that if any of the sacred Shiite shrines are threatened by ISIL, it will intervene with ground forces.  In general, ISIL now seems to be on the defensive and is putting most efforts into protecting the lines of communication between the cities it has overrun and preparing to repulse the planned offensive to retake Mosel.
Iraqi oil exports hit a record high of 2.94 million b/d in December up by 430,000 b/d from November and well above the 2014 average of 2.51 million. Much of the increase has come because the pipeline through Iraqi Kurdistan now is allowing some 180,000 b/d to be exported to the world through Ceyhan, Turkey.  This pipeline is carrying oil coming from Iraqi Kurdistan as well as oil from the northern Iraqi oilfields that were taken over by the Kurds during the ISIL offensive last summer.
Libya: Not much news last week. Oil production seems to be continuing at around 300,000 b/d, much of which is going to domestic consumption.  Libya’s factions have agreed to a new round of talks in Geneva this week and Italy has said it would consider a peacekeeping role in Libya if some sort of agreement can be reached. Scattered fighting is taking place around the country.
Iran:  The nuclear negotiations seem to be getting close to a critical point. Iranian President Rouhani and President Obama clearly want an agreement, but there are powerful forces in Tehran and Washington who do not want a settlement and are taking steps to undercut any treaty that might be reached. Last week Iran’s Ayatollah expressed doubts that the US can be trusted to lift the sanctions as many in the US Congress are pushing to make the sanctions still tougher rather than discontinue them. Increasing sanctions seems to be near the top of the new Republican majority’s to-do list.  Some see disagreements in Tehran as the main stumbling block to an agreement. Without the final word from the Ayatollah, which he has not yet given, there will be no agreement.
There seems to be little appreciation by some in Tehran and Washington as to what failure of the talks could lead to.  The Israelis frequently reiterate their intentions to bomb Iranian nuclear facilities rather than permit Tehran to continue on its present course of enriching large amounts of uranium. This threat continues to overshadow the whole situation. However, Iran’s economy continues to deteriorate putting pressure on the those against a settlement.  The talks will resume this week with a meeting between Secretary Kerry and Iran prior to the formal meetings.
3. Russia/Ukraine
Russia’s ruble, which had been steady recently, resumed falling last week as oil prices continued to fall.  Airport money exchanges are refusing to convert rubles because of the volatility of the currency.  The price Moscow receives for its natural gas exports is adding to the long list of Russia’s problems. Despite many natural gas export contracts being linked to the price of oil, Moscow’s earnings from natural gas sales have only fallen about half as much as those from oil. Energy traders are now saying they expect that the average cost of Russian gas on the open market will fall 13 percent next year as increasing amounts of LNG are shipped into Europe.
Despite assurances from President Putin that Moscow would not demand early repayment of Ukraine’s $3 billion debt, sources in Russia were saying that it is “highly likely” that repayment will be demanded soon, as Ukraine has violated the terms of the loan.  The $3 billion was loaned to pro-Moscow Ukrainian government in December 2013.
A British firm that has been exploring for shale gas in Ukraine is pulling out, saying that the economic climate there is unfavorable. Chevron pulled out of its shale gas exploration project in December.
4.  Quotes of the Week

Saudi Arabia and their allies have been very clear about not giving up market share.  It’s making development in the U.S. and other places sub-economic. There’s not much in the world that looks good at $50 oil.”  

                    — R.T. Dukes, upstream analyst at Wood Mackenzie
“Sweet crude from the Bakken fetched less than $32 per barrel on Jan 6, and sour crudes were worth less than $23, according to posted prices from Plains Marketing.  At these price levels, there are no parts of the Bakken, whether in the core areas of the play or on the periphery, where drilling new wells makes financial sense.” 
                     — John Kemp, oil market analyst for Reuters
5.  The Briefs
Floating storage trading: Oil companies are seeking supertankers to store 20 million barrels of crude as a collapse in the price of the commodity creates a trading opportunity last seen during the 2008-09 recession. Oil collapsed 48 percent in 2014 and prices for later this year are now so far above current costs that traders can make money from buying cargoes and storing them on ships. (1/10)
In Norway, Statoil said that it is planning on extending the life of its Norne field from the initial closure date of 2014 out to 2030.  The field has produced 700 million barrels of oil equivalent since 1997. (1/10)
Norwegian energy company Statoil said it started operations at a North Sea platform that will eventually be run by remote control from the shore. The North Sea platform has accommodations for as many as 40 workers, but long-term the facility will be unmanned. (1/6)
The euro extended its longest uninterrupted losing streak since its creation and fell below the $1.18 mark for the first time in more than nine years, to trade at about the same level as when it was introduced in January 1999. (1/9)
Oversupply in crude markets could take months or even years to fix depending on when producers outside OPEC cut their output, according to comments by U.A.E. Energy Minister Suhail Al Mazrouei. (1/8)
A Saudi delegation will travel to Baghdad in the coming week to start preparations to reopen an embassy in the Iraqi capital for the first time in 25 years. Saudi Arabia closed its Baghdad embassy in 1990 after former Iraqi dictator Saddam Hussein invaded Kuwait. (1/6)
Asia and LNG: Wood Mackenzie said low demand from Asian economies pushed LNG prices lower last year, dropping from $20 per million BTU in mid-February to less than $10 by late November. The report finds the market price for LNG has followed the steady decline in crude oil prices. Output, meanwhile, is on the rise. Wood Mackenzie said global LNG production was up around 5 million tons per year to 245 million tons. (1/9)
China pledged billions of dollars of financing to Venezuela and Ecuador, two South American energy exporters battered by falling oil prices, as Beijing moved to secure resources and allies in the region. (1/8)
In India a five-day strike by coal miners, the nation’s biggest walkout in four decades, shut down about half of monopoly Coal India Ltd.’s production and shipments. The unions are protesting Prime Minister Narendra Modi’s plan to end the state’s monopoly fearing job losses and cuts in benefits. (1/7)
In Nigeria, Royal Dutch Shell Plc agreed to pay compensation to thousands of residents of the Bodo community in the crude-rich Niger River delta region for two “highly regrettable” oil spills in 2008. Shell will pay a total of $83.3 million to individual claimants. The settlement follows a three-year legal tussle between Shell and 15,600 Nigerians from Ogoniland, mostly fishermen, in a London court. (1/7)
In Egypt, political and economic instability has left the government in debt to energy companies eager to tap the country’s reserve potential. The government recently agreed to cover at least $2 billion owed to a group of operators collectively, which opened up the chance for Italy’s ENI, a long-time producer in Egypt, to sign an expanded production agreement. (1/10)
In Morocco, Gulfsands Petroleum, a company exploring the country’s emerging shale potential, said that exploration results there were better than expected. The company said its drilling operations in a permit area in northern Morocco yielded significantly elevated gas readings. (1/7)
In 2013, Brazil produced 2.0 million b/d of crude oil and nearly one trillion cubic feet of natural gas. The share of production from presalt resources found under thick layers of salt thousands of feet below the ocean’s surface remains small but continues to increase, with crude oil production from the presalt at 15% of total production in 2013. That’s a significant increase from 0.4% of total production in 2008 when oil from the presalt was first produced. Brazil’s presalt natural gas production represents 14% of total production, up from 0.5% of total production in 2008. (1/10)
US rig count: In what is the strongest sign yet of the damage that plunging crude prices are doing to the U.S. oil industry, drillers idled more rigs last week than they have at any point since 1991. Oil rigs fell by 61 to 1,421, Baker Hughes Inc. said, extending the five-week decline to 154 and the decline from the 2014 peak to 188. (1/10)
US well count: Baker Hughes Inc. said there were 9,544 wells in service onshore in the United States in the fourth quarter relatively unchanged from the third quarter of 2014 but 5% higher than the well count year-on-year. (1/10)
US energy policy steady: Crude oil prices below $50 per barrel could force some producers to reduce capital expenditures if they go on for long, but are not likely to change US energy policies, according to US Sec. of Energy Ernest G. Moniz. “We will still see increases in our oil production in 2015. It has been tempered, but should reach 9.3 million b/d.” (1/10)
TransCanada Corp.’s Keystone XL pipeline faces one less hurdle after Nebraska’s highest court cleared its path through the state, sending the matter back to Washington. The pipeline would funnel crude from Alberta’s oil sands to a network junction in southeast Nebraska, for transport to Gulf Coast refineries. Friday the House of Representatives passed a bill that would force approval of the pipeline. (1/10)
US energy company Chevron made what it described as a “significant” oil discovery at the Anchor prospect in the deep waters of the Gulf of Mexico, its second such discovery in less than a year. (1/7)
Gasoline tax increase? The sharp drop in gasoline prices over the past few months is providing a rare political opening for state and federal officials who want to raise gasoline taxes to repair highways and boost construction jobs.  States considering an increase include Iowa, Michigan and Utah. In the nation’s capital, several top Senate Republicans—supported by some Democrats—are signaling an openness to raising the federal levy from the 18.4 cents a gallon it’s been at since 1993. The backers include business groups and corporate leaders. (1/9)
Peak auto? It’s looking increasingly likely that we’ve reached peak car, the point at which overall automobile usage tops out. The US and Europe appear to be at that point now; the rest of the world may follow within a decade. (1/7)
California’s high-speed rail project reached a milestone Tuesday as officials marked the start of work on the nation’s first bullet train, which will whisk travelers at 200 mph between Los Angeles and San Francisco in less than three hours. The ceremony in Fresno comes amid challenges. Central Valley farmers in the train’s path had sued to block it and are now contesting that those behind the project have fallen short of responsibilities under a 2013 legal settlement. Meanwhile Republican members of U.S. Congress have vowed to cut funding for the $68 billion project on the grounds of its expense. (1/7)
As oil prices have plunged, US gasoline demand has soared, something that seemed unlikely just a few years ago. Morgan Downey, CEO of, said the recent surge in demand is unusual because oil has a low price elasticity of demand, meaning demand is not very sensitive to changes in price. Yet Downey said demand has recovered to all-time seasonal highs and likely to be at a record high throughout 2015. He said this 2014 demand rally is a little unexpected and shows that oil consumer behavior changes during 2008-2013 were temporary and not permanent like many claimed they would be.  (1/9)
Diesel prices in the US declined for a ninth straight week, their longest losing streak on record, and are down 29 percent during that stretch as continued moderate weather in the Northeast kept heating-oil demand subdued. (1/5)
Oil price crash layoffs: US Steel Corp. said it would idle plants in Ohio and Texas and lay off 756 workers, becoming one of the first big U.S. industrial casualties of the recent collapse in global oil prices. The plants make steel pipe and tube for oil and gas exploration and drilling. (1/7)
Utica decline rates: An analysis of Utica wells in Ohio tapped in each of the first four quarters — from July 2013 through June 2014 — shows natural gas production had dropped 65 percent, said Dr. Jeffrey C. Dick, chair of the geology department at Youngstown State University and an expert on Utica Shale. He estimated that Utica Shale production will drop 33 percent in the second year of a well’s life, 22 percent in the third year, 17 percent in the fourth year, followed by 13 percent and 11 percent in the next two years. (1/6)
A continued increase in demand for natural gas for use in power generation is expected to be the biggest driver for US gas demand in the coming year, the chief economist of the American Petroleum Institute said. Vehicle use of natural gas is very small–only about one-tenth of 1 percent of the gas consumption. As for the potential future LNG export market for U.S. producers, API says approve applications and let the market work and see who’s going to be able to spend the $10 billion or so that it takes to build an export terminal. (1/9)
After two mild earthquakes jolted the normally steady terrain outside Youngstown, Ohio, last March, geologists soon decided that hydraulic fracturing operations at new oil-and-gas wells in the area had set off the tremors. Now a detailed study has concluded that the earthquakes were not isolated events, but merely the largest of scores of quakes that rattled the area around the wells for more than a week. (1/8)
Renewables: Despite years of successful experience, dozens of studies, and increasing utility support for clean energy, urban myth holds that electricity from renewable energy is unreliable. Yet over 75,000 megawatts (MW) of wind and solar power have been integrated, reliably, into the nation’s electric grid to date. That’s enough electricity to supply 17.9 million homes. (1/5)
The falling price of crude oil is threatening long-term global pollution-control efforts. Reduced national income from energy taxes and “a low-growth economic environment” might spur countries to curtail their emissions-curbing pledges for after 2020, leading to more emissions of carbon for a longer time. (1/8)


Tom Whipple

Tom Whipple is one of the most highly respected analysts of peak oil issues in the United States. A retired 30-year CIA analyst who has been following the peak oil story since 1999, Tom is the editor of the long-running Energy Bulletin (formerly "Peak Oil News" and "Peak Oil Review"). Tom has degrees from Rice University and the London School of Economics.  

Tags: Middle East conflicts, oil prices