1. Oil and the Global Economy
The price rebound, which began on Friday a week ago, continued with a vengeance with prices posting the biggest one-week gain in nearly four years. At the week’s end, New York futures had climbed from circa $44 a barrel to $51.69; and London had gained from $48 to $57.80. The move was sparked by the decline in the number of rigs drilling for oil in the US, which now have fallen by 25 percent since October; numerous announcements of cutbacks in capital expenditures by large and small oil companies; and a decline in the dollar which had been rising for many weeks.
The financial press was quick to point out that a drop in active drilling rigs does not necessarily lead to an immediate decline in production, as only the least productive rigs are being stacked and that the shale oil industry has a backlog of many hundreds of wells that have been drilled and are waiting for completion. It could be many months before reduced drilling translates into a production drop that would eat into the circa 1.5 million b/d surplus that global oil industry is currently producing. In recent days a few in the industry have been claiming that for some producers costs have now fallen as low as $40 a barrel – due to “efficiencies” and price cuts by oil well service companies anxious to stay in business. These claims are likely aimed at Wall Street, which will have to decide on the continued financing of many increasingly unprofitable drilling operations. The Federal Reserve reports that some banks are already tightening standards for oil industry loans due to the low price of oil. Many small shale oil drilling companies will be forced to turn to new sources of finance such as hedge funds and billionaires in April when banks re-price the collateral used for lines of credit.
Oil market observers are at a loss as to where prices are going in the next year or so with forecasts ranging from $30 to $200 per barrel. There is even confusion about the coming week with some saying the markets will drop to test a $50 support level and others saying they will climb to test a $60 ceiling. Everybody seems to agree that by the second half of 2015 the 1 million b/d annual increase US oil production we have seen in the last two years will slow if not actually start to recede. However, a new Deloitte survey of new oil projects suggests that 1.8 million b/d of new production will come on the global market in 2015. If this turns out to be the case, prices seem likely to stay low for a while.
The US refinery strike, which continued last week, has brought another layer of uncertainty to the markets. Over the weekend two more refineries went on strike bringing the number to 11 out of the 200 odd refineries, oil terminals etc. represented by 30,000 members of the Untied Steelworkers who are asking for better pay and improved safety standards. So far the strike has not affected much production as refineries are now highly automated and can be staffed with management personnel – until it comes time for maintenance and overhaul.
The outlook for demand is mixed. Last week’s employment numbers were better than expected, but US factory orders fell sharply in December for the fifth straight month. The low gas prices have sparked brisk sales of new cars with the less-than-stellar efficiency light trucks and SUVs leading the way.
A few scattered observers are ruminating about whether the coming six months could see the all time peak in world oil production as capital expenditures on oil exploration are falling substantially all over the world. The ever-increasing hatreds and turmoil across the Middle East and North Africa brings with it the likelihood of still further cuts in exports from the region.
Natural gas prices fell to another 2½ year low last week of $2.58 per million BTUs as forecasters called for above normal temperatures across much of the US next week.
2. The Middle East & North Africa
Syria/Iraq: Last week saw more bombing of ISIL from the air by coalition air forces and a declining number of bombings of Shiite civilians by ISIL suicide and car bombers. The general consensus is that ISIL is now on the defensive under the steady coalition aerial bombardment and the successes by the Kurds and Shiite militia in slowly regaining territory from ISIL. Coalition aircraft have now conducted some 2,400 air strikes against ISIL in Syria and Iraq. The problem, however, is that Sunni-Shiite hatreds are increasing as reports of atrocities against captive Sunnis by Shiite militia continue. Even if ISIL is driven out of Iraq in the next year or so, the outlook for a united Iraq that can export millions of barrels of oil over the long term remains dim.
Low oil prices have led to a financial crisis in Baghdad where a combination of lousy governance, pervasive corruption, and the demands of fighting ISIL are forcing the government to make large budget cuts and to borrow from the country’s foreign currency reserves. Oil exports fell 14 percent in January due to bad weather, technical problems in Basra, and worsening relations with the Kurds.
Exports from Iraqi Kurdistan are suspended while Erbil and Baghdad wrangle over payments for exported oil, which are being channeled through Baghdad’s oil marketing organization rather than coming directly to the Kurds.
Libya: The turmoil continues with renewed fighting at Benghazi and near Libya’s largest oil export terminal. Oil production is thought to be about 300,000 b/d. One hundred thousand b/d of this comes from offshore oil platforms, which are not affected by the turmoil. Much of the rest comes from desert oil fields, which are far from the fighting. For the last few years there was a general agreement among the various militia groups vying for power not to touch the oil facilities from which the whole country benefited. Now this attitude is changing as the militias realize that control of the oil is power and have begun to fight over control of the facilities.
Neither the recognized government in Bayda or the Islamist one in Tripoli can provide much in the way of governance or public services, so life in the country is deteriorating with continuing power outages and lines at the gas stations. On top of all this, ISIL in Libya seems to be growing in organizational strength as everything else deteriorates.
Iran: For the time being, the nuclear negotiations remain at the center of Middle Eastern security issues and possibly the fate of the region’s oil exports. Should the talks fail, the Israelis say they will take military action against Tehran to ensure that it will never be able to build the nuclear weapons that could completely destroy the small Israeli state. Both sides, however, are under pressure to reach an agreement that will satisfy hardliners in Washington, Tehran, and Tel Aviv before the end of March. Tehran is anxious to remove the economic sanctions that have brought the country’s economic progress to a halt while preserving some unacknowledged capability to build nuclear weapons some day. The rest of the world, led by Israel, want to ensure that Iran will remain a non-nuclear weapons state.
With only weeks to go, all sides to the debate are posturing with various carrots and threats of what will happen if their position does not prevail. In Washington, many members of the Congress are muddling around with legislation that depending on one’s point of view will either help or kill the negotiations.
Over the weekend Iran’s Supreme Leader Ali Khamenei said that he would go along with a nuclear deal if it did not go against the (undefined) interests of Iran. Khamenei of course is looking to have the sanctions removed as quickly as possible with as few restrictions to his nuclear program as he can get away with. Last week the Washington Post editorial board weighed into the debate by expressing concern that the Obama administration seems to have lost sight of the goal of eliminating Tehran’s capability to make nuclear weapons and has morphed into a plan to tolerate and temporarily restrict that capability.
The key to all this is what the Israelis decide after any nuclear agreement is reached. Tel Aviv, of course, would much prefer that the US take the lead in any military action against Iranian nuclear facilities, but maintains it is willing to go it alone rather than face a nuclear armed Iran. It should never be forgotten in this game of threats and counter threats that Israel’s trump card is the stockpile of nuclear weapons and delivery systems to attack everything from Iranian underground nuclear facilities to destroying Tehran’s military capability or worse. The use of such weapons would naturally send the world’s geopolitical situation careening off into a whole new and uncharted direction which would almost certainly not be good for oil exports.
Newly released trade data show China’s exports slumped by 3.3 percent year over year in January and that imports were down by a whopping 19.9 percent. This largely unexpected decline raise fears that China’s economic slowdown is accelerating with implications for oil imports as the year progresses. This year the New Year’s holiday, which can distort economic data as many workers go on vacation, comes in February which means that January should be been a normal business month. Beijing is expected to announce a GDP growth target of around 7 percent shortly, which would be the lowest in 24 years.
China’s imports have now fallen in every month since October. Coal imports were down by nearly 40 percent from December and crude oil imports were down by 7.9 percent despite the strategic stockpile buildup. Export to the US were up by 4.8 percent year over year, but those to the EU which are of similar size were down by 4.6 percent. Exports to Asian countries were also down with those to Japan falling by 20 percent. Some observers are still worried about whether export data was inflated by fake invoices as firms speculated abroad.
During the week, the state owned Chinese National Offshore Oil Company, which traditionally has scoured the globe in search of bargains during oil price slumps, announced that it would cut its capital spending by 26 to 35 percent year over year in 2015. This cutback is in line with what most other major oil companies around the world are doing, but is surprising in the case of China which has very large foreign currency reserves and has always to been quick to take advantage of an opportunity to purchase overseas hydrocarbon assets at bargain prices.
Analysts are starting to note that the Chinese are not getting much economic benefit from lower oil prices for a country that imports some 60 percent of its oil consumption. Beijing which sets oil prices has raised taxes to offset the falling price of imported crude. Chinese are still paying a maximum price of $3.50 a gallon for their gasoline as compared to circa $2 in the US. Low inflation rates which discourages consumption and investment is largely attributable to the low oil prices. Much of the benefit that China is getting from low imported crude is going to fill its new strategic reserve, which does not do much for the economy as a whole.
Amidst renewed fighting in Ukraine, West European leaders struggled last week to re-implement the September ceasefire agreement as worries increased that the situation is only going to get worse. Another round of peace talks is due to begin in Minsk this week. In recent days the rebels have made progress against the Ukrainian army, which is armed mostly with equipment left over from Soviet days while the rebels are being supplied with some of Russia’s more recent military hardware. Ukrainian commanders are complaining the rebel forces now have sophisticated equipment that can jam its army’s communications circuits and drones to spot artillery targets. The rebels’ leader in eastern Ukraine announced plans to recruit 100,000 additional men, who will presumably be armed by Russia.
Washington is considering sending military equipment to Ukraine, but West Germany contends that sending military aid to Ukraine will only make matters worse as there is such an imbalance between Ukraine’s and Russia’s military capabilities. For now there is no end to the struggle, which has already taken some 5,000 lives, in sight.
The ruble climbed a bit last week as the price of oil rebounded, but Russia’s economy is in serious trouble and some analysts are talking of a meltdown coming within 12 to 18 months if oil prices remain low and no settlement is reached. The pace at which Moscow’s hard currency reserves depleted while trying to support the ruble and payoff the large indebtedness to western banks is thought to be the key to the timing of any meltdown. Last week Russia’s reserves fell to the lowest in six years as a weakening euro caused a currency revaluation as Russia’s central bank intervened to support the ruble.
Russia’s oil output in January dropped less than 0.1 percent to 10.6 million b/d despite the low oil prices, but the government says production will increase marginally in 2015. Moscow’s energy minister, however, said that Russia might cut its capital investments in oil and gas projects by 15 percent this year if oil prices remain low. S&P downgraded several major Russian oil and gas companies last week following the downgrading of Russia’s sovereign debt to junk status the week before last. Moscow responded to these developments by saying that the West has declared economic war on Russia and is politically motivated.
5. Quote of the Week
- “The U.S. growth story has been central to the oil market story. In a few months, that month-to-month growth is going to flatten out.” IHS predicts the “sensational” growth will level off at 9.5 million barrels per day in the second quarter of 2015, assuming the benchmark West Texas Intermediate (WTI) prices remain below US$60… From 2009 to 2013, U.S. upstream spending exceeded cash flow by an average of US$54 billion annually — amounting to more than a quarter of a trillion dollars (US$272 billion)
— Jim Burkhard, vice-president of IHS Energy
6. The Briefs
Big oil companies had a poor record of finding and producing oil and gas last year, according to figures out in the past week – and big cuts in spending in response to falling crude prices could undermine their plans to turn that around. Four of the world’s six biggest oil firms – Shell, Chevron, BP and ConocoPhillips – released provisional figures showing together they replaced only two-thirds of the hydrocarbons they extracted in 2014 with new reserves. Combined, those four and industry leader Exxon Mobil posted an average drop in oil and gas production of 3.25 percent last year. (2/6)
Arctic oil efforts ailing: Achieving the goal of tapping the extensive oil reserves in the Arctic has been much harder than previously thought. Oil companies are scratching their heads trying to figure out how to deal with a collapse in oil prices, now below $50 per barrel. With virtually every upstream company around the world slashing spending, it is the highest-cost and riskiest projects that are getting scrapped first. Statoil and Chevron recently put off Arctic drilling plans. (12/3)
Oil traders are keeping record amounts of fuel in independent storage tanks in Amsterdam, Rotterdam and Antwerp, the continent’s oil-shipment hub. The expectation is that in the near-term future oil prices will recover, thus creating a financial incentive to store oil in hopes of earning a higher return. (2/6)
OPEC on price: Right now the oil market is totally focused on finding a bottom for oil prices. However, according to OPEC’s Secretary-General Abdulla al-Badri we’ve already hit bottom. Not only that, but he sees a real possibility that oil prices could explode higher to upwards of $200 per barrel in the future. (2/4)
A year ago, Russia’s lunge into Ukraine focused European minds on the dangers of depending on Moscow for their energy supplies, starting to find shale gas in a quest to copy the US. But now, after a series of disappointments from one end of Europe to the other, Europe’s shale dreams seem to have all but evaporated. That will have implications for both Europe’s economic competitiveness and its energy security at a time when a sluggish economy and Russia worry European leaders in equal measure. (2/7)
In the North Sea, Shell will soon begin decommissioning the legacy Delta platform in the Brent field. Shell acknowledged that taking down a legacy platform is part of the natural stage of maturation of old fields. The Brent basin in the North Sea is one of the most mature offshore fields in the world and its crude oil blends make up the global benchmark price for oil. (2/4)
In the U.K., the British Environment Agency gave Cuadrilla Resources permits to carry out shale gas exploration at its Roseacre Wood site in Lancashire. (2/7)
In the U.K., an environmental advocacy group said it’s time for the British government to follow its peers and enact a moratorium on hydraulic fracturing. The Welsh parliament voted in favor of a measure to ban the shale drilling practice of fracking. (2/6)
In Yemen, Shiite rebels proclaimed a formal takeover of the Arab nation Friday, dissolving parliament in a dramatic move that completes their power grab in the region’s poorest nation where an al-Qaida terrorist offshoot flourishes. Angry demonstrators protested the rebels’ move in street rallies in several cities, raising fears of a full-blown sectarian conflict between Yemen’s new Shiite tribal rulers, known as Houthis, and the disenfranchised Sunni majority. (2/7)
In Iraqi Kurdistan, foreign oil producers are resorting to selling crude at about $30 a barrel in the domestic market as the government hangs on to companies’ export earnings amid weaker world prices and a costly battle with Islamic State. (2/6)
Saudi Arabia’s move to slash the price it charges in Asia for its oil this week to the lowest in more than a decade is the latest aggressive action by Gulf states to defend market share in the world’s top oil consuming region. A price war between producers has raged since last November. Since then, Gulf producers have steadily increased shipments to Asia at the expense of West African and Latin American supplies. (2/6)
In Saudi Arabia, drivers pay roughly 45 cents a gallon to fill up their cars, and in Venezuela even less. But governments around the world are beginning to take advantage of plummeting oil and natural gas prices by slashing the subsidies. I2/4)
Angola should raise taxes and eliminate fuel subsidies to help offset reduced revenue as oil prices plunge, the International Monetary Fund said. Angola spent about 4 percent of its 2013 budget subsidizing fuel prices and lowered them twice since September. The government has already cut education spending, frozen government hiring, set import quotas, rationed foreign exchange and made arrangements to borrow $8.4 billion through treasury bills and bonds. (2/7)
Alberta, Canada’s third-largest provincial economy, will lean on consumers to help offset a drop in oil royalties that has led to the “evaporation” of 17 percent of its revenue. Albertans should expect increases to user fees and personal taxes over three budget cycles to help pay for the most expensive public services. (2/7)
Suncor Energy will push ahead with its planned Fort Hills oil sands project even as the price of oil hovers around $50 a barrel. Suncor will spend $1.3 billion this year as it advances construction of the project, the Calgary-based company said in a statement Wednesday. The operation will begin producing oil at the end of 2017. (2/5)
In Canada’s oil sands, University of Alberta economist Andrew Leach says on-going operating costs at several major open pit mines run between $31 and $39, but that others with production problems have much higher costs. Yet despite recent layoffs and slowdowns in the sector, most oil sands operators plan to keep producing at today’s oil costs; instead, their cutbacks focus on new projects. (2/3)
The Canadian dollar will sink as low as 69 U.S. cents with little to drive the economy after oil’s collapse, according to Macquarie Group Ltd, joining a growing list of forecasters lowering their projections. (2/3)
US oil rigs continued to be stacked this week despite record levels of production. Drillers idled 83 rigs, following a decline of 94 rigs in the prior week, Baker Hughes reported Friday. The total U.S. rig count is down 25 percent since October, an unprecedented four-month retreat. The collapse in oil prices is wiping out more than 30,000 oil jobs, according to a tally of announced layoffs by Bloomberg News. Cowen & Co. estimates that spending on exploration and production are declining more than $116 billion, a 17 percent decline. (2/7)
US oil production will continue to grow in 2015, but at a slower pace, according to recent analysis by Deloitte. U.S. oil production will continue to increase this year due to companies continued investment in projects underway. (2/7)
In North Dakota, tumbling crude oil prices have started the clock ticking on a potential $5.3 billion, two-year tax break for oil producers. The state’s officials designed the tax waiver in 1987 to encourage drilling. North Dakota waives its 6.5 percent oil extraction tax if the monthly price of benchmark West Texas Intermediate crude at the Cushing, Oklahoma hub falls below $52.59 per barrel for five consecutive months. (2/6)
A study of 39,000 oil wells in the US indicates month-to-month growth will cease in the latter half of 2015 if the price of West Texas Intermediate crude remains below $60/bbl. About one fourth of new wells in 2014 had break-even WTI prices below $40 per barrel according to the study by IHS. Slightly less than half the new wells had break-even prices below $60 per barrel. Nearly 30 percent of new wells had break-even prices above $81 per barrel. The study defined “break-even” as the WTI price needed to cover capital and operating costs and yield a 10 percent return. (2/4)
In North Dakota, Halliburton, Statoil, Hess Corp, Whiting Petroleum and other energy companies have decided, for now, not to lay off staff, hoping to be prepared for any prolonged rebound in crude prices. Many oil producers and their contractors are trying to strike a balance between cutting costs and maintaining workforce after a more-than 50 percent drop in oil prices since last June. (2/5)
Keystone pipeline: A statement from the EPA on how low oil prices may influence decisions on Keystone XL pipeline ruffled feathers, with the industry crying foul. The Agency said assessments made to date on the pipeline meant to cross the US-Canadian border should be re-evaluated because crude oil prices are about 40 percent lower than when most recent considerations were made. (2/5)
In California, Standard & Poor’s Ratings Services revised the outlook for Kern County to negative, after the county declared a fiscal emergency last week, citing lower oil prices. The rating agency said it was concerned with a projected $27 million budget shortfall in fiscal 2016. By declaring a fiscal emergency, the county can access a $40 million general fund reserve to cover the gap. (2/5)
The US labor market recovery gathered momentum in January as employers added more jobs than expected and wages rebounded, raising the odds of an interest-rate hike in the middle of the year. The dollar jumped against the euro after official figures showed US employers added more than a million jobs in the past three months alone, the most since 1997. (2/7)
Falling fuel prices and a strong US economy pushed domestic new car sales back to near-record levels, as the latest figures for January surged past already optimistic expectations for most manufacturers. Two of the market’s most conspicuously fuel-hungry vehicles — General Motors’ vast Cadillac Escalade sports utility vehicles and Ford’s Mustang performance car — recorded sales more than double those for last January. (2/4)
In the US, new orders for factory goods fell for a fifth straight month in December, but a smaller-than-previously reported drop in business spending plans supported views of a rebound in the months ahead. (2/4)
US consumer spending recorded its biggest decline since late 2009 in December (down 0.3 percent) with households saving the extra cash from cheaper gasoline. Other data showed factory activity cooled in January, suggesting the economy may have entered the new year on a slightly softer footing than had been expected. (2/3
President Obama’s fiscal 2016 budget plan would pour billions of dollars into climate-change and renewable-energy technologies, and repeal nearly $50 billion in tax breaks from the oil, natural-gas and coal industries. (2/3)
A new poll of American scientists by the Pew Research Center suggests that a large majority of them (82 percent) regard population growth as a major challenge, almost as many as those who believe that climate change is mostly due to human activity (87 percent). (2/2)