Quote of the Week
“I never thought I would wish, let alone pray, for higher oil prices, but I am. The world badly needs higher oil prices.”
Han de Jong, chief economist at ABN Amro Bank NV in Amsterdam
1.  Oil and the Global Economy
It was a volatile week, with prices falling on Monday and Tuesday due to the oversupply situation and traders deciding that a grand agreement between Russia and OPEC to cut oil production was unlikely. However, prices climbedon Wednesday as talk of the Russia/OPEC deal revived, the US dollar underwent a sudden price drop, and a hedge fund that that held $600 million in short oil futures positions was liquidated. On Thursday and Friday, the markets were back to believing that the Saudis were not going to cut production as Riyadh lowered their prices for oil being sold to Europe and Asia as part of the new competition with Iran. A big jump in US crude and gasoline inventories announced on Wednesday helped with the downward pressure. At week’s end, New York futures closed at $30.89, down 8.1 percent for the week and London closed at $34.06, down 5.4 percent for the week.
Some observers believe that the increase in the spread between the US and Europe may be due to the tightening storage situation in the US which is forcing down US prices while there is still some storage space available in the EU. Concerns about capacity at the Cushing, Okla. tank farm are on the rise again as inventories there climbed to 62.4 million barrels, just 9 million below theoretical capacity. There are already signs that the smaller operators at Cushing do not have enough excess capacity to move around and blend the various grades of crude in preparation for contract deliveries. Should US crude and refined product stockpiles continue to grow in coming months as many believe likely, Cushing and other major tank farms may no longer be able to accept additional barrels forcing another round of rapidly falling prices. It was this concern that prompted Goldman Sachs to make its famous prediction last spring that the US could see $20 oil before the glut was all over.
Troubles in the US and global oil industries continue to grow. US drillers stacked 31 rigs in the week ending February 5th, a number much higher than the average weekly cut of 18 rigs we saw in 2015. As oil prices remain below costs of production, Wall Street is becoming increasingly impatient with the industry that received more than $100 billion in investments during the shale oil boom. As many of these investments are going bad, the prospects of raising more money to keep production going and to pay off interest on older loans is fading. Some are starting to call the shale oil and gas industries a giant Ponzi scheme in which new borrowing is only paying the interest on old borrowing.
It is interesting to note that a new analysis by Wood Mackenzie shows after a year of very low oil prices, global production as been curtailed by only 0.1 percent. Despite some cutbacks, the US shale oil industry is still pumping at levels higher than anticipated. Wood Mackenzie believes that oil prices are going to have to drop further or stay low for a lot longer to rebalance the oil markets. Other analysts such as those at Morgan Stanley have revised their forecasts for oil prices during the remainder of 2016 sharply downward and no longer see a price revival as the year moves on.
Concerns are increasing about US natural gas production which has almost never been profitable in the last six years. With natural gas price hovering around $2 – $3 dollars per million BTUs and costs of production closer to $6 for the average well, the shale gas industry has been operating on a constant insertion of new money from Wall Street in hopes of better days. There are now signs that US production is beginning to drop at the Marcellus and Eagle Ford shale gas fields just as it has at the Haynesville and Barnett fields where production has fallen 50 percent and 32 percent respectively from peak production about five years ago.  Some believe a drop in production of this size is about to happen at Marcellus and Eagle Ford leading to higher, but not necessarily profitable prices and threatening the prospects for LNG exports and increased utilization by power plants at the expense of coal.
For now, however, the gas markets are worried about oversupply and warmer winter weather with natural gas prices plunging from a high above $2.30 per million last week to trade below $2 on Thursday and Friday.
2.  The Middle East & North Africa
 Iran: There was little news from Tehran last week. The government is demanding payment for its oil in Euros rather than dollars in an effort to disassociate themselves from the US as much as possible. The first large tankers still capable of transiting the Suez Canal left Iran for Europe last week. The issue of insurance coverage for foreign tankers carrying Iranian oil is still an issue. Due to continuing US sanctions on Iran, many insurance carriers are reluctant to write policies on tankers carrying Iranian crude until the rules are clarified. In the worst case insurers could be barred from writing insurance on tankers bound for the US which is not worth the risk just to insure a few Iranian cargoes.
Funerals continue to take place for Iranian “advisors” taking part in the Syrian assault on Aleppo. Tehran is laughing at the Saudi threat to send troops in Syria to assist in the fight against ISIS. In comparison with Iran, that fought a bloody war with Iraq, the Saudis have had minimal military experience despite their large military budget and significant quantities of advanced US military equipment.
Syria/Iraq:  The government offensive against Aleppo with the aid of much Russian airpower continues to be the top story. However, the intensified Russian bombing of rebel military positions and towns has killed any possibility of peace negotiations for the time being.  The Assad government and Moscow seem to be aiming for a military victory over the rebels leaving much of the country a pile of rubble and a large portion of its citizens as refugees in other countries.
The Turks are coming under increasing pressure as tens of thousands of refugees from Aleppo, a city of 2.3 million, are fleeing north to the Turkish border. Turkey’s prime minister said some 70,000 refugees are heading to his country and the situation could get worse as food supplies to Aleppo are shut off.  The Turks say they now are letting new refugees across the border to add to the 2.5 million Syrians already in the country, but they have no more capacity to accept refugees. About 4.6 million of Syrian’s pre-war population of 23 million have fled to other countries due to the fighting.  Last week donor nations from the West pledged to give $11 billion in aid to the Syrian refugees over the next five years.
Four months after the intervention, Moscow’s campaign in Syria seems to be making progress against the rebels that were threatening the Assad government, with Foreign Minister Lavrov declaring that air strikes won’t stop until the “terrorists” are defeated. While Moscow believes it is shoring up its geopolitical position in the region and harassing its adversaries in the EU with hordes of desperate Syrian refugees, the situation is becoming increasingly unstable. In the long run this growing quagmire will affect the whole world, probably by reducing oil exports from the region about the time the oil glut is over and prices start to rebound.  
The situation is becoming increasingly unstable, with Western powers unable to do more than to send relief supplies and limited military support. King Abdullah of Jordan said last week that his country was at the boiling point with refugees now making up 20 percent of his population. Some 1 million Syrians made their way into the EU last year where they are becoming increasing unpopular and are setting off political backlashes across the continent.  It seems likely that many of Europe’s borders will be closed to free transit in the coming year. A reverse flow of Middle Eastern migrants to the EU already has started, as would be immigrants discover that there is little for them in the immediate future in Europe except life in isolated refugee camps.
In Iraq, things are not going particularly well either. Although oil production continues to climb slowly, low prices have left the government in dire financial straits and without enough money to prosecute the war against ISIL. The Kurds are threatening to declare independence and take the northern oil fields around Kirkuk with them as the Kirkuk fields were once part of traditional Kurdistan before Iraq was invented after World War I.
The Mosul dam requires constant maintenance to avoid being washed out and flooding much of the Tigris river valley. Last week the government was forced to open the gates on the dam to relieve pressure. The move also restored its electricity to the ISIL-occupied city of Mosul. An Italian firm recently was engaged to maintain the dam, but contingency plans are in place should the water pressure under cut and collapse it. The loss of the Mosul dam and the subsequent flood would be major blow to the future of Iraq.
Reports of fighting between tribes in southern Iraq near the Basra oil fields continue. Government security forces in the area have been reduced to bolster security in the Baghdad area. In the long run this could be a serious turn of events as Basra is the center of the country’s oil production.
Libya: Reports continue that a Western coalition including the US and UK are about to intervene in Libya to stop the advance of the Islamic State in the country. There were no new details of the plan released last week. Washington is struggling to find the right mix of air power and special forces to intervene in the situation, but has ruled out large scale use of military forces. There are reports that ISIL sending more of its senior commanders to Libya as the allied and Russian air offensive against its personnel and facilities in Syria and Iraq intensifies.
The Tunisians are building a 125 mile wall to keep Libyan “terrorists” out of their country. Parts of the wall, which is made of sandbags and water trenches to keep out vehicles, has already been completed.
Saudi Arabia/Yemen: The major news last week was the Saudis cutting prices on their crude shipments to Europe and Asia. Many observers took this as a solid sign the the Saudis are still not interested in cutting production despite the rumors to the contrary. Without Riyadh’s agreement, Moscow and Gulf Arab states are highly unlikely to go along with the production cut no matter how much economic basket cases such as Nigeria and Venezuela ask them to do so.  In the meantime, Riyadh says the oil price cash crunch will not deter it from carrying out King Salman’s aggressive military plans in the region.
A Saudi military spokesman said the kingdom is prepared to send ground forces to Syria to fight the Islamic state provided there is agreement at a coalition meeting which is to take place soon in Brussels soon. The Saudis have been taking part in air strikes against ISIL since 2014. The announcement was met by with much derision by Iran which considers the Saudis to be a military lightweight and no match for the forces fighting in Syria.
The Saudis bombed a cement factory in Yemen last week killing at least 15 including many civilians. The attack came just after the Saudis announced they were forming a high-level commission to investigate charges that they were killing too many civilians with their airstrikes in Yemen.
3.  China
China’s foreign exchange reserves fell by another $100 billion in January to $3.2 trillion, the lowest since May 2012.  In 2015, the reserves dropped by $513 billion. Trade imbalances and investment movements caused $342 billion of the loss last year, while the rest came from changes in asset prices and supporting the international price of the yuan. To keep its currency from depreciating faster than the government would like, the Bank of China must sell off foreign exchange reserves. Economists are expecting that the government will tighten controls and close regulatory loopholes to slow the flight of capital.
Last week the Chinese New Year’s festival when some 500 million traveled back home, mostly from coastal cities to their families further inland, generated nearly 1 billion trips – the largest mass migration in human history. This in turn prompted a short-lived jump in energy consumption as every available form of transportation was pressed into service to move the travelers.  Some acute observers note that the nature of the migration is changing as a new generation of younger, better educated, workers are on the move. This is opposed to earlier years when tens of millions of peasants who were brought into the cities to provide the labor to build modern China returned home once a year to see their wives and children.  The political orientation of this new generation of workers, who know only the boom years of China and none of the hardships of war and the cultural revolution, remains to be seen. Clearly the government crackdown on anything even remotely resembling dissent is a symptom of these concerns.
In the meantime, China’s manufacturing activity contracted for the 6thconsecutive month in January. China’s domestic oil output now is forecast to decline by 3-5 percent this year from last year’s record 4.3 million b/d.  If this happens, it would be the first decline in production in seven years and the biggest drop in the 25 years of available records.  The availability of cheap imported oil is seen as behind the projected drop. China’s oil fields are aging and in some cases producing oil that is far too expensive to compete at today’s prices.
4. Russia
Moscow is investigating the possibility of issuing international bonds for the first time since the Ukrainian sanctions were imposed. The bonds would partially offset the massive hemorrhaging of its national budget due to the low oil prices. Russia last issued bonds worth $7 billion in 2013, but this time are looking for only $3 billion.  The EU sanctions focus on only a few state-owned companies and banks, but many investors are wary of dealing with Moscow as long as the sanctions are in place.
Russia exported 20 percent less fuel oil during the January cold snap as more of the product was consumed domestically by Russian power companies. As prices for fuel in January 2016 were about 45 percent lower than in January 2015, they came in lower than natural gas prices which are purchased under fixed price long-term contracts by power companies. Not all Russian power plants can still burn fuel oil, but 207 Russian plants that can are finding it very advantageous due to the low oil prices. Power plants are not required to take a fixed amount of gas and can switch fuels at their discretion.
Most of the news this week was related to the announcement that Moscow was willing to talk with OPEC about lower production. This set off a brief market flurry sending prices higher until the realization that neither Iran nor the Saudis are showing any interest in cutting production at this time.
5.  The Briefs
Crash squared: For the last 75 years, almost every economic crisis has been preceded by an oil price spike. The worry now is that low energy prices are pushing the global economy into a tailspin. While the idea is counter-intuitive, it’s gaining traction because a growing share of the world’s consumers and investors are getting hammered by the rout in commodities prices. Apple Inc., for example, blamed weaker sales last quarter on lower economic growth in some oil-rich countries. (2/2)
Toxic debt: Beneath the surface of the global financial system lurks a multi-trillion-dollar problem that could sap the strength of large economies for years to come. The problem is the giant, stagnant pool of loans that companies and people around the world are struggling to pay back. Bad debts have been a drag on economic activity ever since the financial crisis of 2008, but in recent months, the threat posed by an overhang of bad loans, including loans to energy companies, appears to be rising. China is the biggest single source of worry. (2/5)
Offshore pain: As most of the battered oil industry looks ahead to 2017 for a solid recovery, signs are emerging that the downturn pain could last even longer for owners of the floating rigs that drill in water more than two miles deep. The world’s largest offshore rig contractors are expected to see sales tumble 25 percent this year and at least 10 percent in 2017. (2/5) 
Demand for offshore vessels and rigs was down 40% last year. (2/2)
The world’s biggest energy companies have a tough decision to make amid languishing oil prices: Do they keep their coveted investment-grade credit ratings or maintain century-old practice of paying shareholders annual dividends worth billions in cash? Exxon Mobil and its peers are grappling with the collision course between the two. Even with announced spending cuts that exceed $92 billion, producers are losing money on almost every barrel. (2/5)
De-ratings: Royal Dutch Shell had its debt rating cut from AA- to A+, the fifth-highest investment grade and the lowest since Standard & Poor’s began coverage in 1990. Shell was also placed on watch for another possible reduction. S&P also assigned a negative rating outlook to BP, Eni, Repsol, Statoil and Total. (2/2)
BP announced a $3.3 billion fourth-quarter loss to end 2015. For all of 2015, BP said it lost $6.48 billion—its worst loss in over 20 years—compared with a profit of $3.78 billion in 2014. (2/2)
BP revealed Tuesday that it expects to reduce its workforce by a further 7,000 employees in 2016 and 2017. (2/3)
Norway’s Statoil deepened investment cuts and offered to pay dividends in stock as a collapse in crude prices eroded earnings. The company said it plans to reduce capital expenditure to $13 billion this year from a revised $14.7 billion in 2015, after reporting a 63 percent drop in fourth-quarter profit. (2/4)
Lundin Petroleum, the Swedish explorer, suffered its biggest ever quarterly loss due to the collapse in oil prices.   The shortfall for all of 2015 was $862 million, its biggest annual loss since the company was formed and listed in 2001. (2/3)
Shell’s profit for 2015 slumped 80% to $3.8 billion from $19 billion in 2014. Despite the loss, investors reacted positively to the news. Shell’s shares rose 4% in early London trading. The sharp profit decline caps a week of dismal financial performances from the world’s largest oil companies. (2/4)
Saudi/UAE pain: As the price of crude has dropped from above $100 a barrel to below $30 in January, Saudi officials have cut spending, reduced subsidies and called for a wave of privatizations in unprecedented efforts to wean the kingdom off oil. A measure of growth in Saudi Arabia’s non-oil economy fell to a record low, driven by slower expansion in new business. The United Arab Emirates PMI also showed a loss in growth momentum. (2/3)
An Israeli electric company will purchase natural gas from the offshore Leviathan gas field.  The three partners controlling operations in the field announced they signed a deal for deliveries. (2/2)
In Malaysia, Royal Dutch Shell said it took in more than $60 million for the sale of a majority of its holdings (51%) in a Malaysian refining company to a national company there. Shell said the sale was consistent with its strategy to streamline its downstream, or refining, footprint. (2/2)
In Nigeria, the state oil company took a $1.34 billion loss last year, dragged down by its refining division. Analysts say it will take a while to reverse the situation because with lower oil prices the upstream businesses will also face lower revenues and profits. (2/4)
Nigeria’s government is in talks for concessionary loans worth $3.5 billion from the World Bank and African Development Bank to help finance a planned record budget this year. Nigeria depends on oil for almost all exports and two-thirds of government revenue. (2/1)
Venezuela has imported from abroad three-dozen 747 cargo plane loads of their hyper-inflated currency notes that were printed overseas to service the nation’s crippled economy.  The shipments were part of the import of at least five billion bank notes that were ordered during the second half of 2015 as the government boosts the supply of the country’s increasingly worthless currency. (2/4)
Venezuela’s PDVSA took delivery of its first US crude, a 548,000-barrel shipment, since export restrictions were lifted last year. PDVSA uses the imported lighter crude to blend with heavier crude that it produces making a saleable product. (2/3)
Mexico’s Pemex reported liquid hydrocarbons production in 2015 of 2.59 million b/d, down 7 percent compared with the 2014 total and down 10 percent compared with the 2013 total.  Offshore production accounted for 68 percent of the overall 2015 total.   The total included 2.27 million b/d of crude oil, also down 7 percent from the 2014 level and 10 percent from the 2013 level. Heavy oil comprised slightly more than half of Pemex’s 2015 crude production. (2/4)
Mexico’s Ministry of Energy is seeking to learn how it can replicate the success of South Texas’ Eagle Ford shale. Representatives met Jan. 28 with Texas Railroad Commissioner Christi Craddick to gain insight into the legal and technical factors and the overall regulatory structure needed to foster shale development. Mexico has access to many of the same geological formations that have driven the resurgence of Texas’ shale oil industry. (2/4)
In Puerto Rico, to understand how the island’s power authority has piled up $9 billion in debt, one need only to realize that the region’s municipal authorities and government agencies have received free electric power, in lieu of franchise fees and taxes—since 1941. In 2014, a consulting firm found that Puerto Rican cities had received $420 million worth of free electric power that they should have paid for. (2/2)
Suncor Energy, Canada’s largest crude-oil producer, reported a fourth-quarter net loss of $2 billion Canadian dollars and slashed its 2016 capital spending budget by hundreds of millions of dollars due to sharply lower oil prices. (2/4)
The US oil rig count declined by 31 last week, the biggest cut since April of last year, bringing the total rig count down to 467, Baker Hughes reported.  That compares with 1,140 oil rigs operating one year ago. During 2015, drillers cut on average 18 rigs per week and before this week drillers have cut on average 10 rigs per week in early 2016. (2/6)
Revenue squeeze: A deep and prolonged drop in oil prices is increasingly squeezing tax collections in energy-producing states, fueling calls for tax increases and cuts to schools, road projects and other government services in North Dakota, Oklahoma, Louisiana, New Mexico, Alaska, among others. (2/6)
ND devastated: Amid the worst bust in a generation, North Dakota’s economy is shrinking, employment is falling fast, and the state is imposing the deepest spending cuts in its history to help plug a $1 billion budget deficit…all of which traces back to the oil price crash. (2/5)
Exxon Mobil is cutting its drilling budget to a 10-year low and halting share buybacks after last year’s belt-tightening failed to shield the world’s biggest oil explorer from crashing energy markets. Exxon said it’s curbing its spending on rig leases, floating oil platforms, gas terminals and other projects by 25 percent this year to $23.2 billion. (2/3)
Credit downgrade: Chevron Corp., Hess Corp. and Continental Resources had their credit ratings cut by Standard & Poor’s as the worst oil-market collapse in a generation squeezes energy producers. Chevron’s rating was reduced to AA- from AA, Hess was lowered to BBB- from BBB, and shale driller Continental was cut to junk status. EOG Resources Corp., Apache Corp., Devon Energy Corp. and Marathon Oil Corp. also faced downgrades. (2/3)
Anadarko Petroleum anticipates an initial 2016 budget of $2.8 billion, a reduction of 50 percent from the company’s actual 2015 capital investments and almost 70 percent from the 2014 total.  The move follows a fourth-quarter 2015 net loss of $1.25 billion and full-year net loss of $6.692 billion. (2/2)
Marathon Petroleum said its fourth-quarter earnings fell 77 percent as weak fuel prices resulted in an inventory markdown that weighed on results at its refinery and Speedway retail divisions. (2/4)
Another chapter 11: Natural gas company Peregrine Midstream Partners filed for chapter 11 bankruptcy protection Tuesday, having run out of money with its natural gas facility only a few months from completion. Peregrine said it was two-to-three months away from finishing construction on its Ryckman Creek natural gas storage facility, a project that the company has been working on since 2011. (2/3)
Swift Energy received approval from a US Bankruptcy Court to sell the majority of its assets to Texegy LLC for $48.75 million. The deal covers 75 percent of Swift’s working assets, and the company said it would concentrate on its core operations in the Eagle Ford Shale formation in South Texas. Swift entered bankruptcy late last year with the bid from Texegy already lined up. Under the deal, Swift retains a 25 percent non-operating interest in the assets. (2/3)
Ethanol ache: When Archer Daniels Midland opened two of the country’s largest ethanol plants in Nebraska and Iowa six years ago, the biofuels market was on the cusp of a boom with prices and profits on the rise. Now, the plants are more of a headache. In the industry’s first major capitulation to depressed market conditions, ADM’s chief executive said he would consider options, including a sale, for those two plants as well as another in Peoria, Illinois. (2/3)
Oil tax:  President Barack Obama on Friday defended his proposal for a $10-per-barrel tax on oil companies to raise hundreds of billions of dollars to fund transportation and energy projects, arguing that low gas prices make this an opportune moment for such a policy. (2/6)
East coast lock-down? Environmentalists emboldened by President Barack Obama’s rejection of the Keystone XL pipeline are now trying to convince the administration to close a door it opened last year to allow oil drilling off the Atlantic coast. (2/4)
US consumers are cautious about spending their windfall from cheap gasoline and are saving more, suggesting low oil prices are less of a boon for the US economy than in the past. Commerce Department data shows that the crude’s 70 percent drop since mid-2014 cut households’ annual spending on gasoline and other energy products by $115 billion, while savings increased by $121 billion during the same time frame. (2/2)
US power generation from coal fell to the lowest monthly level in 35 years in November 2015 as generators switched to cheaper natural gas, according to federal data. Gas surpassed coal as the leading source of US power for a fifth month in a row in November.  (2/2)
Illinois coal: The start to 2016 has not brought any reported contract coal deals out of the US Illinois Basin, as utilities are largely out of the market and producers are reeling from higher costs. Mild winter weather and low natural gas prices have created a period of uncertainty about existing and future contracts. (2/2)
UK uber-wind: European renewables company DONG Energy said it was moving forward with plans to build the Hornsea wind farm off the coast of Yorkshire in the United Kingdom. Designed with a full capacity of more than 1,000 megawatts, it will be the world’s largest offshore wind farm ever built. Hornsea will cover more than 150 square miles at a development site located about 75 miles offshore. (2/4)