Peak Oil Review – Jan 19

January 19, 2015

1.  Oil and the Global Economy
After falling on Monday last week, oil prices remained relatively stable for the rest of the week, closing on Friday at $48.65 in New York, up 50 cents for the week and at $50.17 in London down nearly a dollar for the week. Traders continue to seek a bottom to the precipitous price decline and now react to any news suggesting oil production might start falling soon or that demand might increase. On Friday the IEA released a new forecast saying oil production in 2015 would not increase as much as the Agency had said previously.  The news sent the NY market up by $2.44 per barrel for the day. Last week, however, saw the eighth weekly price decline capping the longest string of weekly price drops since 1986.
An interesting technical feature has entered the futures markets. In the past six weeks some $2.3 billion has been poured into funds that track oil futures. As the markets are now in contango with nearby contracts going for less than future ones, unless there is a major jump in oil prices, fund managers are forced to sell nearby contracts as they expire and buy more distant ones at a loss – thereby depleting the fund.
Reports of cutbacks in exploring and drilling for oil continue to come in from all over the world due to the low market price of crude.  The major forecasting agencies, the IEA in Paris and the EIA in Washington, released reports last week saying that while non-OPEC oil production will continue to grow this year, it will be at a slower pace. The EIA now forecasts that non-OPEC production will increase by only 950,000 b/d this year, a drop of 350,000 b/d from the previous assessment.  Half of the 350,000 b/d decline in the forecast growth of oil output is expected to come from Columbia, while the rest will come from cutbacks in the US and Canada.
In its Short-Term Energy Outlook released last week, the EIA, which only projects US production, says that US crude and condensate output will continue to grow to a peak of 9.47 million b/d in May of 2015 and then drop until September when it will start growing again. Presumably this increase will come because there will have been a substantial increase in prices.  Production is then supposed to surpass the May of 2015 production peak by July of 2016.  US oil output is to increase by 720,000 b/d in 2015 to 9.3 million b/d and by another 200,000 b/d in 2016 to average 9.5 million b/d during the year. When the size of the cutbacks throughout the industry that are currently underway are considered, these sound like very optimistic projections.
Wall Street is not as optimistic as the government agencies. Goldman Sachs says that oil will have to remain in the vicinity of $40 a barrel for the first half of the year to reduce supplies enough to ease the glut.
Last week, the Obama administration announced a plan to cut methane emissions from oil and gas production by using executive action to create new regulations. The plan calls for a 45 percent reduction in emissions by 2025 from 2012 levels. The new plan was immediately denounced by the oil and gas industry as a threat to the oil boom.
With the Keystone pipeline bill coming up for a vote in the next couple of weeks, oil industry officials are ambivalent over whether they would like to see an amendment eliminating bans of exports attached to the bill. The industry is afraid that elimination of an export ban would be seen as the cause of any increase in gasoline prices that could occur later this year. As the Keystone bill is likely to be vetoed by President Obama, many think this is not the right time to lift the export ban. Oil refiners that are benefitting from the oil glut and low crude prices are opposed to the ban leaving many in Congress in a quandary.
Natural gas prices jumped from circa $2.80 per million BTU’s last week to $3.35 on expectations of colder weather just ahead. By week’s end however, prices has sunk to $3.12 on new forecasts that the cold wave would not be as severe as expected.
2.  The Middle East & North Africa
Iraq:  The fighting continues with coalition air strikes hitting ISIL targets and suicide bombers attacking Baghdad’s forces. Controversy is arising as to whether the air strikes are weakening ISIL’s forces. Official Washington is claiming progress while Baghdad, which of course hopes that the airstrikes alone will defeat ISIL, are calling for the pace to be increased. Fears are increasing that there will be major outbreaks of disease across the ISIL-held parts of Iraq and Syria as health programs and facilities have nearly disappeared amidst the chaos.
Work is underway on a new network of pipelines around the northern oilfields near Kirkuk to increase exports via Iraqi Kurdistan from the current 150,000 b/d to 300,000 b/d within the next few weeks.  Iraq exported 2.94 million b/d in December, which was the most since the 1980’s and if it were not for the 60 percent plunge in oil prices the country’s finances would be in good shape. Some are already worried that additional exports of Iraqi oil will simply add to the global glut.
Libya:  Peace talks are scheduled for this week in Geneva, but the Islamist government in Tripoli says it will not send representatives. A ceasefire was declared over the weekend; however, scattered fighting between forces loyal to the two governments continues. ISIL is claiming credit for the car bombing of the Algerian Embassy in Tripoli on Saturday. As the embassy staff, along with most other diplomats in the capital left months ago, only embassy guards were wounded in the attack.
The EU is considering a range of options to bring pressure on the disparate factions to come to the peace table. Among these are a boycott of Libyan oil exports and a freezing of all monetary relations with Libya’s central bank. Whether financial and oil boycotts would do much good in the midst of so much chaos and passion is an open question. The press is still reporting that Libya is exporting about 300,000 b/d, but these numbers are suspect given the turmoil.
Iran:  Tehran came around to facing reality last week and revised its budget to assume that oil revenues will only bring $40 a barrel in the coming year rather than the $72 it had been counting on.  A senior Iranian official said last week that the sanctions have cost the country some $100 billion in export revenue.
Over the weekend, Tehran cancelled a long-scheduled trip to Saudi Arabia by its foreign minister in an effort to patch up the disagreements between the two countries. The cancellation was said to be due in part to the Saudis refusal to cut oil production in the face of the price decline. Iran’s oil minister described the price drop as a “political plot” to weaken his nation.
Most attention has switched to Washington where Congress is pushing ahead on tougher sanctions for Iran despite warnings from the White House that additional sanctions would kill the nuclear talks. Some in Congress are afraid that the administration will let the Iranians off easy by negotiating an agreement that eases the sanctions without getting ironclad guarantees about Tehran’s nuclear weapons programs in return. One bill would give Tehran until the end of June to reach an acceptable agreement before adding to the sanctions.  Another bill entitled the “ Nuclear Weapon Free Iran Act of 2015” would close perceived loopholes in existing petroleum sanctions.  President Obama says he will veto any bill that emerges from the Congress.  Tehran is well aware of what is happening in Washington and is saying flat out that it will stop negotiating if Congress approves new sanctions.
Should a bill pass the Congress, Iran’s parliament could pass its own legislation requiring the country to start enriching uranium beyond 5 percent again, which would reduce the time necessary to produce weapons grade uranium.
Talks are expected to resume in Geneva this week, but the outlook has soured as opponents of the treaty on both sides take the initiative.  Looming in the background is the Israeli threat to take matters into their own hands.
3.  Venezuela
No country has suffered as much from the drop in oil prices as Venezuela.  For the last two weeks, President Maduro has been flying around the world asking for financial assistance from Russia, China, Iran, Saudi Arabia, Qatar, Algeria and Portugal.  He also asked the oil producing countries to cut back production so that Venezuela could benefit from any ensuing price increase. While Maduro seems to have garnered a few unspecific promises of foreign investment, he accomplished nothing in pushing up oil prices.
Meanwhile, the country is coming apart and foreign bankers say it is likely to default on its debt before the end of the year.  There are shortages of food and other essentials across the country. Venezuela imports about 70 percent of its consumer goods, including much of its food, and there is simply not enough money to pay for the imports. Caracas exports about a quarter of its daily oil production, some 600,000 b/d, to China with half of this going to repay the $51 billion it has borrowed from Beijing in the past decade.
The US was importing about 800,000 b/d of Venezuelan oil and products as of October or about 10 percent of imports. Should the situation deteriorate to the chaos we have in several Middle Eastern countries, there is a possibility that oil exports could come to a halt. Ten years ago this would have been a serious matter for world oil prices, but given the current situation they could likely be replaced from other sources.
4. Russia/Ukraine
Net capital outflows in 2014 hit $151 billion, more than twice as much as in 2013.  The 4th quarter was particularly bad when outflows surged to $73 billion.  Many believe that Russia is getting to the point where it may have to impose controls on capital outflows, which have been allowed since 2006. There is little question that Russia’s economy is in serious trouble.  Moody’s has cut its bonds to close-to-junk status and signaled that it may cut them further.  Inflation and interest rates are high and the government has announced a 10 percent cut in spending.  Russia’s media are reporting little or no economic news which is a sign that the situation is not good.
Russia’s ruble, which is now around 65 to the dollar and has fallen 18 percent since the first of the year, is causing hardship in countries along its periphery, which receive large remittances from their citizens working in Russia. Economists calculate that collectively these counties may lose as much as $10 billion in remittances as compared with last year. European forecasters see the ruble continuing to fall until there is a rebound in oil prices. Last week President Putin fired the central bank official in charge of supporting the ruble and announced that new policies are coming soon.
Moscow reacted strongly to a European Parliament resolution last week giving carte blanche to member states to supply arms to the Ukrainian government.  Heavy fighting took place around the Donetsk airport over the weekend as the rebels attempted to seize what is left of the airport and government forces drove them back.  Whenever the Ukrainian government starts to make progress against the rebels in eastern Ukraine, Russian troops intervene briefly and drive the government forces back.
Moscow apparently cut back by 60 percent the volume of natural gas flowing through Ukraine to six countries in Europe last week.  Although this development received little attention because of the terrorist situation in Paris, it could mark a major turning point in Moscow’s relations with the EU.
5.  Quote of the Week

  • “You can never have an agreement whereby everybody cuts production. We can’t trust all OPEC countries. And we can’t trust the non-OPEC countries. So it’s not on the table because the others will cheat. The past has proven that. When Saudi Arabia cut production in the ’80s and ’90s, everybody cheated and took market share from us. Plus, remember there is an agenda here also. Although Saudi Arabia and OPEC countries did not engineer the reduction in the price of oil, there’s a positive side effect, whereby at a certain price, we will see how many shale oil production companies run out of business. So although we are caught off guard by this, we are capitalizing on this matter whereby we’ll live with $50 temporarily, to see how much new supply there will be, because this will render many new projects economically unfeasible.” 

                                       — Prince Alwaleed bin Talal, Saudi billionaire businessman 
6.  The Briefs
In the North Sea, Wood Mackenzie said exploration activity in 2014 was off 18 percent from 2013. Only four fields were brought online. The current oil price means 2015 will unsurprisingly bring further budget cuts, with exploration spending at the top of the list. (1/13)
BP said it would lay off about 300 people in the North Sea hub of Aberdeen, Scotland. While the world-wide slide in the price of oil has focused attention on the U.S.’s relatively new shale fields—which are partially responsible for the global oil glut—it is the mature, high-cost fields such as those in the North Sea that seem likely to suffer most. At prices much below $75 a barrel or so, some of the North Sea’s reserves might be too expensive to develop. (1/16)
Offshore Egypt, Eni SPA will resume exploration under concession agreements based on production sharing it has signed covering two deep-water blocks.  Eni has worked in Egypt since 1954. It has interests in about 210,000 b/d of Egyptian production. (1/16)
In the United Arab Emirates, Lamprell said Monday it expects the weak market for crude oil will impact its ability to land new rig-building contracts in 2015. (1/13)
Chinese oil data show crude production in 2014 increased nearly a full percentage point, staying above a threshold rate for five straight years. The Ministry of Land Resources reported total crude oil output increased 0.7 percent from 2013 to 1.53 billion barrels (4.19 million b/day) for full-year 2014. (1/14)
China’s production of unconventional gas in 2014 totaled 4.9 billion cubic meters, soaring 42 percent year on year, although this pace of increase will still fall short of official targets for 2015. (1/14)
China is emerging a winner from the collapse in commodities prices to the lowest in 12 years as the world’s second-largest economy buys a record amount of raw materials. China is seeking to benefit by filling its stockpiles even as economic growth slows. (1/13)
Growth in auto sales in China, the biggest market by number of vehicles sold, slowed last year but reached 19.7 million vehicles. The China Association of Automobile Manufacturers, said Monday sales for the full year rose 9.9 percent. That was down 5.8 percentage points from 2013. (1/12)
Pirates hijacked more oil tankers in Southeast Asia during 2014 even as attacks at sea declined globally to the lowest level in eight years. Fifteen ships carrying mainly marine-fuel cargoes were attacked in Malaysia, Indonesia, Thailand and the Malacca Strait. (1/14)
Suncor Energy, Canada’s largest oil company, said it will cut 1,000 jobs, lower its 2015 capital budget by about 13 percent and delay projects to weather collapsing prices. The company will spend C$1 billion ($836 million) less this year than originally forecast in November. (1/14)
Canadian exports of natural gas to the US were 5 percent lower year-on-year thanks in part to the US shale gas boom. Pipeline exports to the U.S. averaged 7.3 billion cubic feet per day during the first 10 months of last year, a 5 percent decline from the same period in 2013. Exports have declined steadily since 2008. Canadian leaders have said that it’s time to start courting Asian consumers. (1/17)
The US drilling rig count plunged 74 units—all on land—to settle at 1,676 rigs working during the week ended Jan. 16, Baker Hughes reported. That’s the lowest total since the Oct. 29, 2010, rig count, which totaled 1,672. The count has now fallen in 7 consecutive weeks, during which time it has lost 244 units. (1/17)
There were 1,366 rigs drilling wells primarily for oil in the US, the lowest number since October 2013, according to Baker Hughes. The number of oil-directed rigs has now fallen 15 per cent from its recent peak of 1,609 in October last year. The figures show a broad-based decline in activity in all regions that have led the US shale oil boom, reinforcing expectations that US crude production growth will slow sharply this year, or even go into reverse. (1/17)
The U.S. oil rig count has fallen by 209 since Dec. 5, the steepest six-week decline since Baker Hughes began tracking the data in July 1987. (1/17)
A recent analysis by Wood Mackenzie found that 1.6 percent, or 1.5 million b/d of the global oil supply could be cash negative on an operating basis if Brent crude falls to $40/barrel. Production from US onshore ultra-low production volume “stripper” wells could be the first to be halted. Approximately 1 million b/d comes from these wells; many produce only a few barrels per day and have operating costs between $20 and $50 per barrel. At the $40/barrel price point, several Canadian oil sands projects are also vulnerable. (1/13)
New Seaway pipeline under capacity: Current low crude oil prices could tamp down shipments on the new 450,000 b/d Seaway “twin” pipeline to the US Gulf Coast, which came online in December and is now running at about half that capacity. The “twin” pipeline parallels and augments the original 400,000 b/d Seaway pipeline, which was reversed and put into service in 2012, connecting the oil storage hub at Cushing, Oklahoma, with US Gulf Coast refining markets. (1/17)
Budget haircuts: Major oil-producing states in the US are paring budget forecasts and planning spending cuts amid a plunge in prices that is testing their reliance on revenue from the oil patch. States like Texas and North Dakota are bracing for reduced collections of extraction levies known as severance taxes and royalties as prices fall and companies cut back on drilling. In turn, income- and sales-tax growth could slow as producers cut jobs. (1/13)
There has been no change in US policy regarding the export of domestically produced crude oil, the president’s spokesman said. However, the Commerce Department’s Bureau of Industry and Security said in a late 2014 policy overview condensate produced in a certain way is not crude oil, but a petroleum product subject to few export restrictions. (1/15)
Storage at sea: Supertanker owners from Tokyo to Athens said demand to store oil on vessels is strengthening, with Morgan Stanley and Evercore Partners Inc. predicting the highest shipping rates in six-years are possible. The price of oil for delivery at later dates is so far above current costs, a market structure known as contango, that it can be profitable to store cargoes and lock in returns now in the futures market. (1/15)
Oil trading companies have taken at least 22 supertankers on time charter this month with an option to store crude. This will translate into floating storage of almost 45 million barrels of crude. Traders want to store the commodity for the time being, hoping to sell it later at higher prices. (1/14)
Offshore wind vs. offshore oil: A US ocean advocacy group said an offshore wind sector in the Atlantic Ocean could produce twice as many jobs and twice as much energy as offshore drilling. By comparison, the National Ocean Industries Association, a petroleum industry group lobbying for more offshore work, said about 1.34 million barrels of oil equivalent per day could be produced from the Atlantic basin by 2035. (1/15)
Prices for crude oil and gasoline are in a “free fall,” suggesting it would take a major market event for US. gas prices to go up, an AAA spokesman said. The motor club reports a national average price Tuesday at $2.11 for a gallon of regular unleaded gasoline. (1/14)
US automakers are on a collision course with regulators over the timetable to achieve stringent fuel-economy standards as cheap gasoline sends consumers flocking to less-efficient pickup trucks and sport-utility vehicles. Car companies are laying the groundwork to seek some relief when the targets come up for review by regulators in 2017. They are already lobbying for possible changes to fuel economy standards that take effect in 2022.  But National Highway Safety Transportation Administration chief  Mark Rosekind said the nation’s fuel efficiency mandate isn’t going to be sacrificed because gasoline has fallen to a six-year low in the U.S.  (1/14)
The average retail price of diesel fuel slipped below $3 this week for the first time in four years. Diesel’s drop will aid everyone from truckers to industrial users. (1/17)
Heating oil costs have declined sharply, thanks to the 50 percent drop in crude oil prices, potentially saving billions of dollars this winter for the estimated 6.2 million U.S. homes that use the fuel for warmth. (1/17)
Spending on renewable energy, which surged 16 percent in 2014, will remain strong this year, largely unaffected by the slumping oil prices that have artificially depressed their shares. That’s the message from renewable energy analysts with Goldman Sachs and Deutsche Bank AG, who pointed out that very little U.S. electricity (1%) is generated by oil.
Breakthrough for biofuels? Scientists at the US Department of Energy’s National Renewable Energy Laboratory have developed an enzyme that can enable the conversion of biomass to sugars up to 14 times faster and more cheaply than competing catalysts in enzyme cocktails today. The enzyme called CelA, a cellulase from the bacterium Caldicellulosiruptor bescii, could change the economics of biofuel conversion. (1/13)
GM plans to introduce a next-generation Chevrolet Volt later this year that will go 50 miles on a full charge, 30 percent farther than the current model. Like its predecessor, the new Volt automatically switches to gasoline when its charge is depleted. The auto maker also intends to launch a $30,000 all-electric vehicle in 2017 called the Chevrolet Bolt, which would be capable of driving 200 miles on a single charge. (1/12)
GM’s Chevy Bolt will join several other manufacturers of electric vehicles, including Tesla and BMW, which will be launching in 2017 EV’s with 200+-mile ranges. Nissan announced it has plans to upgrade its best-selling Leaf but didn’t elaborate on details. (1/13)
China’s ambitions to be a leader in nuclear technology have been dealt a fresh blow, as construction of its most advanced reactor is facing a new delay. The project—which China is developing with Westinghouse Electric — faces new development problems and now isn’t expected to start up until 2016 at the earliest. (1/15)
Earth’s average surface temperature was the warmest since record keeping began in 1880, according to NASA and the National Oceanic and Atmospheric Administration. December also was the warmest month ever recorded, and was among five months last year that set records, bolstering the argument that combustion of fossil fuels by man is playing a critical role in that warming. (1/17)
New population growth perspective: A new statistical projection concludes that the world population is unlikely to level off during the 21st century, leaving the planet to deal with as many as 13 billion human inhabitants—4 billion of those in Africa—by 2100. (1/17)

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, Russia/Ukraine conflict