Quote of the Week
“On the face of it, the Saudi-led OPEC strategy to defend market share regardless of price appears to be having the intended effect of driving out costly, ‘inefficient’ production.”
International Energy Agency, September Oil Monthly Report
1.  Oil and the Global Economy
Oil traded in a narrow range last week between $44 and $46 per barrel in New York and $48 to $50 a barrel in London.  Increases mostly came from news suggesting that better economic times might be ahead in some part of the world, while declines came when concerns about high inventory numbers, oversupply, and the outlook for China took precedence.  US natural gas futures have cycled steadily between $2.73 per million BTUs and $2.64 for over a month now with little news to drive prices out of their trading range.
Last week several of the major oil organizations that watch the oil markets issued pessimistic reports covering the rest of this year and on into 2016.  The EIA now says that US oil production, which peaked at 9.6 million b/d in April, was down 500,000 b/d by the end of August. US production is forecast to decline by another 500,000 b/d in the next year so that US production will be only 8.6 million b/d by the end of August 2016. The EIA also reported that US stocks were up by 2.6 million barrels the week before last. On Friday Baker-Hughes reported that the oil-rig count fell by ten, the second weekly drop in a row.
These reports were followed by a report from Goldman Sachs which lowered its short and mid-term oil price outlooks, saying US oil could fall to $38 a barrel next month. Goldman’s even raised the possibility of prices falling as low as $20 per barrel if US oil storage capacity becomes scarce.
When the IEA’s monthly Oil Market Report came out last week, it seconded the gloomy outlook by forecasting that non-OPEC oil production will fall by 500,000 b/d in 2016, which would be the largest drop in 20 years. The IEA also has US production falling by 400,000 b/d next year. Although stockpile builds are expected to rise through the first half of next year, the increase will not be as large as in the past six quarters.
Some are saying that the decline in US shale oil production is a victory for the Saudi’s policy of driving high-cost oil producers from the markets by keeping OPEC production high. While US shale oil producers were able to hold production fairly level for longer than expected, low prices, with no end in sight, are now clearly below costs of production. The decline in US production is not expected to lead to higher oil prices in the immediate future as the Gulf Arab states are expected to keep production high in order to compete for market share with Iran which should be increasing exports after the sanctions are lifted.
Even the OPEC Secretariat, which is usually bullish about the future of oil, has turned pessimistic on concerns about oversupply and the future of China’s demand. OPEC’s Gulf Arab members are leading the strategy of letting the markets control output and continue to say that a meeting to cut production is not coming in the immediate future.
The US House of Representatives passed a bill to repeal the oil export ban last week. Some in Congress are so enthusiastic about the prospects for exporting US crude, despite the circa 7.5 million b/d of US imports, that they are talking about “containing Iran” with US oil.  The prospects for the bill in the Senate are still uncertain.
2.  The Middle East & North Africa
Iran: Although the Republicans in Congress are still looking for ways to block the nuclear accord, most observers believe that the deal has been done and are looking forward to its implementation. The agreement is to be formally adopted on October 19th – 90 days after it was endorsed by the UN Security Council. On that date, the six powers that negotiated the agreement – the US, Germany, France, Russia, and China – are to start taking steps to comply. Most of the burden is on Iran to carry out the steps specified in the treaty before the sanctions can be lifted.
Before the sanctions can be lifted, Tehran has to ship 12 tons of partially-enriched uranium out of the country, dismantle and store more than 13,000 centrifuges and convert its underground nuclear enrichment facility into a research station. The Iranians must also dismantle the core of their heavy water reactor which is capable of making plutonium for atom bombs, make arrangements for IAEA inspections, and answer questions about past efforts to build nuclear weapons. Western experts expect that it will take six to nine months to accomplish these steps.  Tehran, anxious to get its economy moving again, say they can be completed much quicker.
On October 19th, the US and EU are to lift many of the sanctions on doing business with Tehran and grant access to some $125 billion in frozen Iranian assets, only some $60 billion of which are liquid enough to be of much use. Critics of the plan say that this money will be used to spread terrorism across the globe.
Iran was producing some 3.6 million b/d before the sanctions and exporting to 21 countries. After the sanctions, Iran’s customers were down to six countries and production fell to 2. 5 million b/d and is now thought to be about 2.9 million. To avoid cutting production further, Tehran began storing crude aboard its tanker fleet and is now believed to have some 50 to 60 million barrels in floating storage which could be dispatched to customers immediately.  Tehran says it can increase its production by 500,000 b/d immediately and and by another 500,000 barrels after four to five months. It should be noted that Tehran’s projected increase should just about offset the projected decline In US production over the next year.
Syria/Iraq:  Rebel advances in northern Syria, which are threatening President Assad’s base in Latikia Province, left Moscow with little choice but to increase its military assistance to its long-time ally or face the possibility that the government will be driven from power in the near future. Although the scope of Russia’s new round of military support is not yet clear, fears are growing that it could result in inadvertent clashes with US and allied forces operating in the area.  Moscow’s move is likely to prolong the war even further even though the aftermath of a government collapse may lead to still worse conditions that will force even more Syrians to start on the road to refuge in Europe.  All this is shaping up into the biggest humanitarian crisis since World War II.
The news from Iraq is about the same. The US and allies continues to bomb a dwindling number of meaningful ISIL targets, while the Baghdad government which is trying to carry out a massive reform to reduce corruption and other ills facing the country is running into increased opposition from Shiites satisfied with the status quo. Low oil prices have forced Baghdad to seek $500 million in loans from the Islamic Development Bank.  An increased number of Iraqis are trying to join their brethren in Syria and get to Europe via the now familiar Turkey, Greece and travel north route. There was little news on oil production or exports last week.
Libya: There were reports over the weekend that the UN sponsored reconciliation talks may be making some progress and that some sort of settlement that would result in a single government may be possible. Such a settlement could result in EU military intervention to stem the refugee flow and stop further ISIL advances, but it could also stabilize the oil production situation and result in increased Libyan oil production. It is much to early to tell if these possible developments have a chance of coming to fruition.
Saudi Arabia/Yemen: A meeting of Gulf Arab oil ministers last week discussed a Venezuelan proposal for a summit of OPEC and non-OPEC oil exporters to formulate plans to drive oil price higher—presumably by having the Gulf Arabs and Russia cut oil production. The Saudis rejected the proposal for a summit saying that it would do no good and it is better to let the markets determine oil prices.
In Yemen, forces loyal the the exiled government and backed by the Saudi-led coalition have launched a major ground offensive against the Houthi-occupied capital of the country, Sanaa. There are reports that some 800 Egyptian troops have been moved to Yemen and have joined the coalition attacking the Houthis and their allies. Some sources say there are now at least 10,000 foreign troops fighting in the country. Given that the Houthis have little in outside support outside of what their friends in Tehran can smuggle to them the civil war is starting to look very one sided.
Given the military situation, the exiled government is refusing to negotiate further until the Houthis withdraw from the territory they have overrun. The humanitarian situation is not getting any better.
3.  China
More bad economic data continued to come out of China last week. The latest news has factory output in August growing by only 6.1 percent year-over-year as against an expected 6.4 percent. August electric power output, a key indicator of economic growth, was up only 1 percent in August. Premier Li still says the county is on track for a planned 7 percent growth this year as evidence to the contrary continues to grow.  China has cut its interest rates five times since November to stimulate economic growth.
China’s foreign exchange reserves fell by a record $93.9 billion in August as the government intervened in the currency markets to keep the yuan from free-falling.
Despite the closure of the steel plants in Hebei province near Beijing to clear the air for the WWII victory celebrations, Chinese steel production still increased by 1.7 percent last month. Given the slowdown in China’s economy, especially in auto making and construction, the increasing steel output is expected to add to the global steel glut and force prices lower.
Wall Street analysts now are seriously contemplating the likelihood that a further slowdown in China’s economy will lead to a global recession starting in countries that are dependent on exports to China. Trade data out last week showed a 14 percent drop in the value of China’s imports in August. This was the 10th consecutive fall in Beijing’s imports.
The Shanghai International Energy Exchange is about to establish a crude derivatives contract to rival that of New York’s West Texas Intermediate and London’s Brent.  As the world’s biggest oil importer, China is likely to play a major role in the oil markets in coming years. Beijing will likely move to have its futures contracts denominated in yuan as a means of undercutting the dollar in the global oil markets.
4. Russia/Ukraine
A cease-fire in eastern Ukraine appears to be holding after two weeks. Germany’s foreign minister who is taking part in the negotiations for a permanent truce along with the foreign ministers of France, Russia and the Ukraine says that the two sides are very close to broader agreement to pull heavy weapons back from the front lines to end the artillery shelling of towns and military positions. Negotiations over a ceasefire are scheduled to resume in Paris on Oct 2nd.
Russia’s economy continues to deteriorate. Hopes of establishing a booming trade with China are deteriorating with the price of oil. Moscow’s Central Bank is now forecasting that the economy will shrink by 3.9 to 4.4 percent this year. Last week the Bank of Russia announced that they will keep interest rates at 11 percent ending a string of five rate reductions since January. The move sent the ruble down again last week to 87 to the dollar. About the only firms that are doing well are the oil companies that are able to sell their oil for dollars and then convert the dollars in rubles thereby offsetting the drop in oil prices. Conventional wisdom says Russia’s economy will continue to shrink until oil prices recover.
5.  The Briefs
The IEA’s new chief, economist Fatih Birol, called on Wednesday for a “greater partnership” between his organization and China, the world’s largest energy consumer, during his first official trip. (9/9)
Investment in U.K. North Sea oil and gas projects could drop as much as 80 percent by 2017 as the collapse in oil prices forces the industry to cut back. Capital investment across the industry of 14.8 billion pounds ($22.8 billion) last year will probably decline by 2 billion to 4 billion pounds annually to 2017. (9/9)
Norway said total revenues for the oil-rich economy were down by nearly 5 percent for the second quarter of 2015. Its oil-driven economy has been pressured by lower crude oil prices, with overall investments expected to decline by 12 percent this year. (9/9)
Norway’s Statoil said development of the giant Johan Sverdrup field is moving swiftly. The field is expected to be operational during 2019.  At peak Norway’s 5th largest field is expected to produce up to 650,000 b/d. (9/12)
Italian energy company Eni said the republic of Cyprus could serve as a strategic energy hub and a possible conduit for future Egyptian natural gas supplies. (9/11)
In Russia, at a time when the collapse in crude prices pushes the economy into a recession, the nation’s oil producers are managing to beat their western counterparts. On measures including cash flow, profit margins and share prices, Rosneft, Lukoil – Russia’s two largest oil producers — and Gazprom are performing better than Royal Dutch Shell, BP or Exxon Mobil. (9/8)
Rostneft’s CEO said the Golden Age of OPEC countries to keep oil markets balanced passed when the group decided not to cut production in November last year to end a price rout. (9/7)
A shake-up of Saudi Arabia’s oil leadership by King Salman has introduced a new element of unpredictability to its energy policymaking at a moment when Riyadh is grappling with slumping crude prices and its war in neighboring Yemen. State oil giant Aramco has been without a permanent chief executive since April, leaving analysts and traders guessing as to King Salman’s long-term vision. (9/9)
Iran is preparing to welcome Austrian oil and natural gas company OMV back to the energy sector as sanctions pressure eases, a deputy Iranian minister said, as part of Iran’s broader reopening of its doors to investors. Using new technologies, the minister claims OMV is ready to double production of Iran’s oil and gas fields through enhanced oil recovery and improved oil recovery methods. (9/9)
Iran hopes to bring its gas to the European Union by shipping liquefied natural gas (LNG) to Spain.  Iran has no ability to freeze its gas into LNG for tanker exports beyond the reach of pipelines, after several projects stalled due to Western sanctions that forced foreign companies to pull out of Iran. Experts reckon it will take around two years to build LNG export terminals, if partners are found. (9/7)
In Israel, parliamentary support for a framework agreement for Israeli oil and gas development is a welcome step, but full backing is needed, Noble Energy said. The two fields in which Noble will now hold shares, after a swap, are Leviathan and Tamar.  Together they hold an estimated 28 trillion cubic feet of natural gas reserves, with Leviathan accounting for more than half of the aggregate. (9/10)
Israel should be a hotbed of solar, thanks to its 300 days of sunshine per year, but it has lagged behind places such as cloudy Germany and the rainy Netherlands. That’s because in recent years geologists have discovered huge gas fields just off Israel’s coast, making the country a potential energy exporter and allowing its power plants to burn cheaper and cleaner gas instead of coal — and shifting the government’s focus away from renewables. (9/11)
Indonesia is on track to resume full OPEC membership in December after a break of almost seven years. The Asian nation suspended membership in January 2009, at its own request, after becoming a net oil importer. The country pumped 852,000 barrels a day of oil in 2014 and consumed almost twice as much. Indonesia’s role as both energy consumer and producer will help OPEC “bridge” the divide between consumers and producers, deepening the organization’s ties with the region where demand growth is strongest. Apparently the benefits to Indonesia from staying with the group outweigh the cost of membership. (9/8)
Nigeria has finally bowed to the pressure mounted by the International Association of Independent Tanker Owners and lifted a ban on 113 foreign vessels, mostly very large crude carriers, entering into Nigeria’s territorial waters less than two months after the ban was imposed. Acting on the directive of President Muhammadu Buhari, the national oil company imposed the ban shortly after Buhari assumed office over concerns that most of the tankers were complicit in incidents of crude oil theft from Nigerian oil terminals. (9/12)
Very large crude carriers, the tankers that move as much as 2 million barrels of oil across oceans on a single trip, should see prices rebound during the fourth quarter. Since July, shipping rates have dropped by 47 percent after later-than-usual maintenance caused Asian refineries to close and demand to fall. Now thanks to increased shipments from Nigeria and Angola, rates are poised to reach their highest levels in a final quarter since 2008. (9/10)
In Venezuela, a judge on Thursday found opposition politician Leopoldo López guilty of inciting violence and other charges stemming from his leading role in a large antigovernment protest, according to government television reports. Mr. López, a Harvard-educated former mayor of a wealthy section of Caracas, was sentenced to more than 13 years in prison, the television reports said. Critics said the trial was politically motivated and lacked basic guarantees of due process. (9/11)
In eastern Saskatchewan, Gear Energy is doing what Saudi Arabia and fellow OPEC producers are loath to do: shutting the taps on active wells. The company has already done so hundreds of times this year, making the Lloydminster industry among the first in the world to yield in a global battle for oil market share that has sent crude prices tumbling to six-year lows. (9/8)
Refineries in Ontario have shifted from foreign to domestic supplies of crude oil in the 14 years ending in 2014. The National Energy Board attributed pipeline developments from Enbridge for the turnaround beginning in 2000, when 46 percent of the crude oil refined in Ontario came from foreign supplies. By 2014, foreign supplies were nearly eliminated from the provincial downstream sector as more domestic crude oil moved east. (9/11)
The US oil-rig count fell by 10 to 652 in the latest reporting week, the second straight decline after six consecutive weeks of increases, according to Baker Hughes. There are still about 59 percent fewer oil rigs working since a peak of 1,609 in October 2014. The number of gas rigs declined by six to 196. For all rigs, including natural gas, the week’s total was down 16 to 848. (9/12)
US imports: The EIA reports Saudi Arabian oil accounts for roughly 17 percent of all crude oil imported into the US, putting it at the No. 2 spot behind Canada. Total imports of Saudi crude for the week ending Sept. 4 were 1.06 million barrels per day, down 15.2 percent from the same week in 2014. (9/12)
US commercial crude stocks are still close to their highest levels in over 80 years, but operational requirements prevent refineries filling on-site storage facilities to their maximum capacity. (9/12)
US distillate stocks rose yet again in the week ended September 4 to the highest level since 2011, US Energy Information Administration data showed Thursday, marking the latest move in an upward trend that has pushed some East Coast storage operators to switch gasoline tanks to distillate service in recent weeks. (9/11)
Refinery issues kept some US retail gasoline prices elevated, but a slow return of the off-line refinery plus switch to a different blend of gas will be a net industry win, GasBuddy.com reports. National prices of regular unleaded gasoline averaged $2.39 per gallon, about 2.8 percent less than last week and 8 percent lower than one month ago. The national average price is 30 percent, or $1.04 per gallon, less than this date in 2014. (9/9)
Thousands of stripper-well operators in the US are losing money and some are shutting in their wells.  This step could turn out to be a key element in ending the oil-price rout, rather than the difference being made by a large producing country like Saudi Arabia or a big public company. (9/8)
US shale producers lost more than $30 billion during the first half of 2015, as the prolonged slump in oil prices takes its toll. Bankruptcies and restructuring are on the rise as independent oil and gas companies do what they can to survive. Data company Factset reports that capital spending exceeded cash from operations by about $32 billion in the first six months of the year and is quickly approaching the deficit of $37.7 billion reported for the whole of 2014. (9/10)
Cutting the fat: A slump in oil prices is forcing the oil and gas services industry for the first time in 15 years to trim costs in a way that executives say will create a lasting change away from their usual lavish way of doing business. (9/12)
Costly sales: Some U.S. oil producers are trying to sell parts of their lucrative saltwater disposal businesses in a sign that cheap crude is already forcing cash-starved companies to sell assets so oil can keep flowing. (9/11)
Continental Resources cut its 2015 budget for at least the third time on Tuesday, as it grapples with the reality of cheap crude, but North Dakota’s second-largest oil producer said it still expects double-digit production growth this year. Founder and Chief Executive Harold Hamm canceled all of Continental’s oil hedges last fall after calling OPEC leader Saudi Arabia a “toothless tiger” in a bet that a price rebound would soon materialize. But no such sustained rebound has yet occurred. (9/9)
North Dakota Senator Heidi Heitkamp is pushing back against the latest federal mandate to reduce methane emissions. Senator Heitkamp is proposing bipartisan, “commonsense solutions” to reduce methane emissions including speeding up the permit approval process for gas-gathering lines and pipeline projects to reduce flaring. (9/9)
Royal Dutch Shell shelved its Louisiana-to-Texas Westward Ho pipeline after years of delays, reductions in scope and after other new pipelines began flowing. Proposed in 2011 at a top capacity of 900,000 barrels per day, Westward Ho would have moved Gulf of Mexico and imported crudes from the St. James, Louisiana oil hub to Houston. (9/9)
Automotive supplier Bosch is offering a new heat-pump for heating and cooling EVs that it says can enable an increase in effective range of up to 25% without modifications to the battery. (9/9)
Peak steel: BHP Billiton last month revised downwards its forecast of “peak steel” production in China, the world’s largest producer. It will happen, BHP said, some time in the mid-2020s and the peak will be between 935 and 985 million tons. Rio Tinto, by contrast, is sticking with its call that the peak will come around 2030 and will be around one billion tons. (9/12)
Exxon Valdez: Federal scientists may have found a link between the 1989 oil spill and a decline of herring and pink salmon populations in Prince William Sound. In a study published Tuesday in the online journal Scientific Reports, researchers from the National Oceanic and Atmospheric Administration (NOAA) found that herring and pink salmon juveniles that were exposed to crude oil as embryos grew slower and swam slower, making them vulnerable to predators. (9/9)
Limiting fossil-fuel supplies to combat climate change may be more attractive for governments than trying to negotiate a global emissions cap, according to Andy Howard, an adviser to Critical Resource Strategy & Analysis Ltd. Nations producing coal, oil and natural gas could protect revenue by applying “supply-side discipline” such as handing out fewer drilling licenses. (9/12)
Climate change $$: The World Bank’s special envoy on climate change on Friday expressed confidence that industrialized countries will open their wallets when they gather in Paris later this year to bankroll a global strategy to reduce greenhouse gas emissions. (9/12)
Over-burn? Burning all the Earth’s remaining coal, oil and natural gas would trigger enough warming to melt the entire Antarctic ice shelf, eventually obliterating coastal regions around the world, researchers said in a report Friday. (9/12) (NOTE: Likely not a realistic assumption — “burning all the remaining” fossil fuels.)