Quote of the Week
“Oil prices have so many moving parts that it’s exquisitely challenging to predict.”
Jan Stuart, Credit Suisse Group AG global energy economist [Commenting on his February forecast that oil would average around $67/barrel at year-end 2015.]
1. Oil and the Global Economy
Oil prices have now had a 7th consecutive weekly loss with New York futures closing Friday at $42.50 and London at $49.19. Last week Beijing’s devaluation of the yuan joined the 2 million b/d oil glut and an unplanned outage at a major US refinery to send oil prices lower. Traders now are talking about prices falling into the $30s. The week’s new data included: US crude stocks falling a bit, but not as much as expected; new forecasts from the IEA and EIA which predict that the glut will continue and US production will fall until late in 2016 at which time production and oil prices will rise; the monthly report from North Dakota saying that shale oil production continued to rise in June and that its well-head prices are now down to $28 a barrel; and that the US rig count was up slightly the week before last.
The North Dakota report notes that a combination of the 80 or so active rigs and the 848 wells that were awaiting fracking at the end of June is enough to maintain the state’s oil production in the vicinity of the current 1.2 million b/d for the next 24 months. This assertion does not agree with the EIA’s latest forecast that has US production falling from 9.7 million b/d of crude+condensate to 8.8 million b/d by the fall of next year. While there is more to US oil production than North Dakota, it seems reasonable to assume that producers in Texas may also maintain production level for a while despite the very low prices. The EIA says that in September US shale oil production will be down by 93,000 b/d to 5.27 million. Given that it also says production from the Permian Basin will increase in September, and North Dakota says Bakken production should remain the same, we should be expecting a very large drop in Eagle Ford production. It will be mid-November before we can find out who is right
In the meantime, the Canadian government says that production from the tar sands in May was down 15 percent from a year earlier as operators cut back on very expensive syncrude production and spent more time on maintenance.
Last week BP’s Midwest refinery at Whiting, Indiana was mostly taken offline for unexpected repairs which could last for a month. The outage of much of this 413,000 b/d refinery’s production could have consequences beyond what is normal for such events. Gasoline prices in the region are already up by 48 cents a gallon and there are fears that the lack of demand for crude from the outage could push the Cushing, Okla. storage depot close to capacity. On top of this outage we are entering the season when many US refineries shut down for maintenance, reducing the demand for crude and putting pressure on prices.
In other major news, Washington announced that it will allow limited sales of US crude to Mexico for the first time, a step towards lifting the ban on US crude exports to other than Canada. The exports to Mexico will come as a swap in which heavy Mexican oil which is suitable for US refineries will be traded for lighter shale oils which will allow Mexico’s aging refineries to produce more premium fuels.
US natural gas closed last week at around $2.80 per million BTUs, about in the center of the range it has maintained since last May. France will start importing US LNG from the new Sabine Pass Liquefaction plant next year. Washington granted a special permit for the deal despite France not having a free trade agreement with the US.
2. The Middle East & North Africa
Iran: Despite much bluster regarding the nuclear agreement coming from the Congress and Presidential candidates, currently analysts expect that the Congress will not have the votes to overcome a Presidential veto in September and the agreement will come into effect later this year. Switzerland announced that it was lifting its sanctions on Iran. Most of those concerned seem happy with the agreement except in the US where the issue has become ensnared in Presidential politics.
A key issue is how fast Tehran can increase its exports and what will be the effect on world oil prices. The EIA says that the Iranians could be exporting an additional 600,000 b/d by the second half of 2016. How much oil Tehran has stored on tankers which could be brought to market immediately is another issue. The Iranians say they have no crude in floating storage, but most observers believe they have had some 30-40 million barrels aboard tankers for many months. A new study of the issue by an Israeli maritime surveillance firm, Winward, came out last week putting the number at 50 million barrels. Other observers agree that Iran indeed has more oil including Platts which puts the number at 52 million. Iranian oil tankers have a history of turning off their location beacons to keep foreign observers from knowing their movements.
Tehran has selected 45 new oil and gas projects that it plans to present at a conference of international oil companies in December. The Iranians hope to attract enough foreign investment to increase their oil production to 5.7 million b/d from the current 2.8 million in the next few years. European oil companies have expressed interest in these projects, but so far there has been little interest from US firms in doing business with the Iranians.
Syria/Iraq: The ceasefire in Syria over the weekend quickly broke down. Meanwhile the various rebel groups are making slow progress against Assad’s forces, and quiet negotiations for a regime change are going on. It is difficult to see how a new government in Damascus would settle anything given diverse groups fighting the government and each other. This week’s top issue is whether ISIL used mustard gas against Kurdish positions. If this proves to be the case, Washington will be under pressure to step up its involvement in the conflict.
It has been unusually hot in Iraq this week with temperatures forcing the government to shut down during the day. ISIL car bombs continue to kill and maim large numbers of Shiite civilians. The government reforms which largely undo the ethnic checks and balances in the US imposed constitution have passed parliament and seem to be popular. These reforms eliminate three vice presidents and three deputy prime ministers and could streamline government operations. In the oil capital of Basra there has been a major reshuffling of the offices that deal with the foreign oil companies operating there.
The government offensive to retake Anbar province and eventually Mosel from ISIL force is making little progress. Despite the presence of Iranian advisors, the Shiite militia which is doing the government’s fighting show little appetite to go on the offensive against ISIL forces in traditionally Sunni territory. What little progress has been made usually has come after heavy airstrikes by US and coalition aircraft. The lack of competent forward air controllers embedded with the government forces is proving to be a major handicap in the effective use of the available airpower.
Libya: The chaos continues with heavy fighting taking place between the Islamic States forces that have taken control of Sirte and the Libya Dawn militiamen that have been sent to force them out. Reports are spotty, but some are claiming that 200 have already been killed and the the IS are beheading and burning wounded captives alive. The IS says it has suppressed the local uprising against their rule. The government in Tripoli is asking for foreign intervention by the EU to crush the Islamic State in Libya. No word this week on how oil production is going.
Saudi Arabia/Yemen: Gulf-backed forces loyal to the government-in-exile extended their gains in southern Yemen over the weekend and are now moving to retake parts of central Yemen. The loyalist forces have access to Saudi weapons, supplies, munitions, and air support while the Houthis, who may be fierce fighters, are largely isolated from outside support. The stocks of government weapons and munitions that became available to the Houthis must be dwindling. Still no sign of new peace negotiations.
Riyadh’s sale of $27 billion in bonds last week is raising concerns about the long-term stability of the country which is ruled by a clan of 15,000 cousins and is dependent on massive social spending to keep the populace quiescent. Some 90 percent of the government’s budget comes from oil exports and revenues have been more than cut in half by the fall in oil prices.
The sudden devaluation of the yuan by 3 percent last week suggests that China’s economy is in much deeper trouble than the official 7 percent growth rate indicates. Numerous indicators are saying that Beijing’s economy continues to slow. Fixed investment, led by collapse in property investment, is now the slowest in 15 years. Manufacturing in July remains at a four-year low. Cement output was down by 5 percent last month, glass by 13 percent and steel by two percent. The real indicator will come when we get updated numbers on electricity consumption which closely tracks actual economic growth.
Our interest here is what happens to China’s demand for oil which has been the main driver in the increasing global demand for oil during the past decade. While western demand for oil slowed, demand grew steadily in China and other related Asian economies. In the past year Beijing’s demand has continued to grow, but this has been largely due to one-time occurrences. Beijing has been taking full advantage of the record low oil prices to fill its strategic reserve with imported oil. In addition, in the last two years the Chinese have completed several large new oil refineries that have been exporting petroleum products all over Asia undercutting local refineries. The demand for crude for these refineries simply cuts the demand by other refineries as overall consumption in Asia does not increase.
The gigantic warehouse explosion in downtown Tianjin last week and the new report saying that 1.4 million Chinese are dying prematurely each year from air pollution underscores the problems that ensue when environmental and safety issues are ignored in the rush for economic growth. Beijing is already concerned about widespread environmental degradation, but has yet to appreciate the significant costs involved in mitigating these problems.
With every passing month troubles mount – explosions, stock market crisis, devaluation, sagging exports, sagging GDP— so it is beginning to look as if the China’s economic miracle and its demand for ever-increasing amounts of oil may be drawing to a close.
Russia’s economy continues to deteriorate along with the price of oil and the value of the ruble. Official figures show the economy contracting by 4.6 percent in the second quarter but as usual, outside observers suspect the economic toll is worse. Among the worst hit entities are local and regional governments who are dependent on local taxes to finance their operations and do not have the economic tools available to Moscow. So far, however, there have been minimal political repercussions that could force a change in policy as would be happening in most democratic countries. The Kremlin, which controls 90 percent of the domestic news flow, has most Russians convinced that the US and the EU are out to get them much as the Nazis did nearly 80 years ago, so the Putin government remains incredibly popular.
Russia’s oil production is staying relatively stable for now as the drop in the value of the ruble has matched the decline in oil prices. As Moscow sells its oil in dollars, the revenue when converted to rubles is sufficient to maintain the status quo and oil production remains about the same. The Western sanctions which prevent technology transfer to Russia’s oil industry are slowing projects to exploit arctic and shale oil from which the future of Moscow’s oil industry is expected to come.
Russia’s natural gas company, Gazprom, that has dominated the European gas markets for decades is running into trouble. Foreign observers have accused Gazprom of being an extension of Russia’s Foreign Office which uses the company to punish its foes and aid its friends. Due to the EU’s desire to wean itself from natural gas and the loss of Ukraine as a customer, Gazprom’s production this year will sink to an all-time low. Sagging oil prices are hurting natural gas revenues as well.
While the new deals to supply natural gas to China may look good on paper, Beijing, realizing the trouble Russia was in, drove a hard bargain. The Putin government, interested in finding a customer in the East, may have forced the company into a long-term deal that is barely profitable.
Worries are increasing that a sagging economy may tempt President Putin to increase military pressure on Ukraine to counteract domestic dissidence at home. Kyiv is saying that the numbers of Russian forces in eastern Ukraine is increasing and that Moscow is supplying the dissidents with the latest in its military technology. Shelling of Ukrainian military positions along the battlefront is on the increase and the Ukrainians are saying that the Russians are using drones and other advanced sensors to target their positions.
5. The Briefs
The North Sea’s crude output is defying the doomsayers during the current low-price environment. After an increase last year, the region’s production will rise again in 2015 to almost 3 million b/d, the first consecutive annual gains in 15 years. (8/13)
UK shale gas rush: The British government said it plans to fast-track the permit process for shale oil and gas exploration to ensure the industry can gain traction. Shale oil and gas exploration is in its infancy in a country looking to reduce its dependency on foreign reserves. The government also said it was calling on local councils to decide on shale permits within 16 weeks of an application. (8/14)
The Russian squeeze: Royal Dutch Shell’s plans to build a strategic alliance with Russia’s Gazprom could be in jeopardy after the United States added one of Gazprom’s biggest gas fields to its list of Russian sanctions on Friday. (8/11)
OPEC on Tuesday raised its forecast of oil supplies from non-member countries in 2015, a sign that crude’s price collapse is taking longer than expected to hit U.S. shale drillers and other competing sources. (8/12)
In Nigeria, President Buhari intends to break up the opaque bureaucracy, which manages the oil assets of Africa’s biggest crude producer, to ensure taxpayers get their fair share. History isn’t on his side. (8/10)
Kenya and neighboring Uganda agreed on the route of a planned $4.5 billion oil pipeline to the Indian Ocean, ending months of debate on the link that will export crude from companies including Tullow Oil Plc. Tullow has found oil in both countries, with Uganda estimating finds at 6.5 billion barrels and Kenya at 600 million barrels. (8/11)
In Brazil, a sweeping anticorruption crusade is ensnaring one major political figure after another, throwing the country into upheaval at a time when the national mood is souring and the economy is reeling from a painful downturn. A colossal graft scandal is upending the political system, engulfing politicians, business leaders and a vast web of others surrounding Petrobras, the state-controlled oil company whose executives were paid $3 billion in bribes. (8/13)
Cash-strapped Venezuela is pushing for an emergency OPEC meeting and joint coordination with Russia to stem a tumble in oil prices, President Maduro said on Tuesday night. (8/12)
In Canada, lower crude oil prices and reduced demand resulting from a global economic downturn could reduce oil sands capital expenditures through 2017, the Canadian Energy Research Institute said. Production from Canada’s oil sands reached 2.34 million b/d in 2014, 11% higher than 2013’s 2.08 million b/d. (8/13)
Oil from Canada’s tar sands has skidded towards $20 a barrel, a level not seen for international crude prices in 12 years, tightening the screws on energy companies and the economy of the world’s fourth biggest supplier. At $23, it was less than half the price of Brent, the global oil benchmark listed in London. The results have spilled beyond the oil market into Canada’s economy, forcing the central bank to twice cut interest rates, driving the Canadian dollar to a decade low and coloring the debate ahead of an October federal election. (8/12)
Pipeline company TransCanada pointed to a study by the Fraser Institute that suggests the increase in the rail transport of crude oil is a risky option for the industry. The report shows transport of crude oil and natural gas in Canada by pipelines is 4.5 times safer than rail. (8/15)
Total US rigs are down 1,029 from a year ago, with oil rigs down 917, gas rigs down 110 and other rigs down by two, Baker Hughes said. However, the rig count rose slightly for the 4th consecutive week.
Bakken still strong: The lowest crude prices in six years might not be enough to put the brakes on some parts of North Dakota’s Bakken shale play. They remain profitable at less than $30 a barrel as companies tap bigger wells and benefit from lower drilling costs, according to a Bloomberg Intelligence analysis. That’s less than half the level of some estimates when the oil price rout began last year. (8/14)
Arctic oil: Shell may soon get the permits necessary to start drilling into potential oil basins in an exploration well off the coast of Alaska, a federal regulator said. (8/13)
Ending the ban on the export of crude oil sourced from US basins would result in a per household income increase of $158 per year, according to a report from oil industry consultant firm HIS. (8/13)
US LNG exports: French energy company EDF secured a deal for liquefied natural gas drawn from reserves in the United States, Cheniere Energy announced. Cheniere and EDF signed a sales agreement for up to 26 cargoes of LNG from its Sabine Pass export terminal through 2019. (8/13)
If BP’s Whiting refinery remains offline and the oil is sent to Cushing (OK), storage levels at Cushing could fill up in a matter of months. That prospect has already pushed down oil prices. The refinery also sources a lot of the oil it processes from Canada, and its outage is another blow to Canada’s oil patch, which is already suffering from having to heavily discount its oil compared to WTI. Western Canada Select, a benchmark for heavy Canadian crude, dropped to just $23 per barrel, well below WTI’s $43. (8/15)
The disruption of the Indiana-based Whiting refinery could lead to a spike in gasoline prices in the Midwest as the region suddenly encounters shortages of fuel supplies. Gas prices in Chicago are above $3 per gallon, while the national average is $2.61. (8/15)
Top US hedge funds made bullish bets on the energy sector in the second quarter even as companies’ shares began a slide toward multi-year lows on concerns about oversupply. During the second quarter, the S&P 500 energy index lost 2.6 percent. That decline has since accelerated, with the S&P energy index now down about 13.7 percent for the year, largely reflecting renewed fears of crude oversupply and weak global demand. (8/15)
M&A and/or bankruptcy: A renewed slide in crude prices is having the effect US energy sector dealmakers and private equity managers have been looking for: oil companies are now returning calls from potential buyers. Since crude prices began tanking again in early July after a partial three-month recovery, oil firms have finally started to feel the squeeze. (8/14)
Bankruptcy: KKR’s Samson Resources plans a Chapter 11 filing by mid-September. The filing would represent the biggest corporate casualty yet of a slump in oil and gas prices and another black mark in energy for the private-equity pioneer. The Tulsa, Okla.-based oil and gas producer agreed to hand ownership to a group of its lenders in bankruptcy. The move would wipe out the roughly $4.1 billion in cash KKR and its partners invested in the company. The private-equity firm led a $7.2 billion leveraged buyout of Samson in 2011. (8/15)
Bankruptcy: Rig company Hercules Offshore announced it filed for bankruptcy as part of a financial restructuring effort in an era of lower crude oil prices. (8/15)
Pipeline blues: A doubling of pipeline capacity in one of the most prolific US shale plays may have gone overboard in its rush to move oil to market. With more than 1 million b/d of additional pipeline capacity moving oil from the Permian Basin of West Texas added since early 2014, companies dependent on new projects to drive revenue growth are now faced with a limit. The build out has also caused some temporary imbalances in spot prices, traders say, as pipelines flood Houston-area refiners with surplus crude. (8/10)
The number of fracs in the United States declined from around 2,300 in October 2014 to 1,350 in February 2015, as companies refocused their efforts on their core regions and most economic resources, according to a recent study by Boston-based Lux Research. (8/13)
More oil price pain: The energy bust has touched off a wave of consolidation among the trucking companies that haul equipment around the oil patch, where business is shrinking along with the tumbling price of crude. Flatbed truckers have fallen on hard times after several years of rapid expansion driven by the shale oil boom. (8/12)
US oil exports: Big voices in the oil industry and Congress now support a move that would have been unthinkable not long ago: opening the US oil industry to exports. The House now looks likely to vote as early as September to lift the oil-export ban, with Senate action anticipated early next year, which would mark a milestone few saw coming. (8/10)
EPA rules battle: Industry representatives and a group of state attorneys general are preparing to file lawsuits soon to challenge Obama administration rules requiring significant cuts in power-plant carbon emissions. The move, expected in the coming weeks, would open up a legal battle by contesting the authority of the Environmental Protection Agency on a wide range of grounds, some of them little explored by the courts. (8/10)
Fifteen states asked a federal court Thursday to temporarily block Obama administration carbon regulations while they mount a full legal challenge to the rules. The move is the first step in what is expected to be a years long court battle over recently completed Environmental Protection Agency rules that call for carbon emissions from power plants to be cut 32 percent by 2030 from 2005 levels. The rules are the cornerstone of President Barack Obama ’s climate agenda.
A US regulatory judge ruled BP manipulated the Texas natural gas market in 2008 and said fines against the British energy company could increase because the scheme took place after earlier market manipulation. The ruling found BP flooded a Texas delivery point with natural gas to drive down prices there in the physical market, while at the same time placing trades in related financial markets that would benefit from the reduced price. (8/14)
The premium for US gasoline prices over benchmark crude has surged by more than $6 in three days, its biggest such rise in more than four years, as a series of refinery disruptions toward the end of an unusually strong summer driving season squeeze supplies. (8/13)
Natural gas-fired combined-cycle units, which have emerged as perhaps the most important elements of utility and independent power generation fleets, have been costing less than was initially expected to build, and per-kW costs of less than $1,000/kW of installed capacity have become common. (8/12)
US coal: A 30-year-old mining technique—long-wall mining–is becoming all that’s keeping a group of US coal producers from joining their competitors in bankruptcy. Coal, already locked in a battle with cheap natural gas, now faces federal environmental rules that threaten to reduce its share of power generation to the lowest in 66 years. (8/11)
Offshore wind: In July, American offshore wind developer, Deepwater Wind, installed the first foundation for what is expected to be the first offshore wind farm in the United States. The project will be located three miles southeast of Block Island, Rhode Island. With five turbines totaling 30 megawatts (MW) of generation capacity, the Block Island Wind Farm is expected to come online in 2016. (8/15)
Utility and power grid managers in the US are learning that the best way to cut carbon emissions and improve efficiency is the easiest: Just change your light bulbs. The nation’s largest grid, serving more than 61 million customers from Washington to Chicago, is revising its demand forecasts after recognizing that better lighting has undercut its projections. (8/15)
Japan is rejoining the group of nations using atomic power as it sweeps aside public opposition and fires up one of the reactors shuttered for safety upgrades after the Fukushima nuclear disaster more than four years ago. Kyushu Electric Power Co. will begin bringing online the No. 1 reactor at its Sendai facility on Aug. 11, start power generation as early as Aug. 14 and return it to normal operations next month. (8/11)
The Panama Canal Authority said it will temporarily slightly lower the maximum allowable draft for vessels transiting through the Canal in September due to El Nino-related droughts, the first such restriction in nearly 20 years. The move could affect almost 20 percent of vessels transiting the canal. (8/11)
China’s automobile production and sales grew negligibly in the first seven months of 2015. Auto production rose 0.8 percent year on year to 13.6 million vehicles in the first seven months, while sales increased 0.39 percent to 13.3 million, the China Association of Automobile Manufacturers (CAAM) said in a press release. CAAM attributed the slower growth mainly to the fall in commercial vehicle output (-14.6%) and sales (-13.9%). (8/11)
In China, outdoor air pollution contributes to the deaths of an estimated 1.6 million people every year, or about 4,400 people a day, according to a newly released scientific paper. The paper maps the geographic sources of China ’s toxic air and concludes that much of the smog that routinely shrouds Beijing comes from emissions in a distant industrial zone. (8/14)
In Australia, Prime Minister Abbott announced a greenhouse gas reduction goal that he said struck “the right balance” between economic concerns and the need to address climate change, but scientists and environmental groups said the plan fell short of what was needed. (8/12)
World population is growing at an unprecedented rate. Currently, world population is 7.3 billion. It will be 9.7 billion in 2050 and will cross 11 billion by the end of the century, according to UN’s Population Division. (8/13)