1. Oil and the Global Economy
Prices slipped a bit last week after three weeks of gains. New York futures were down to $50.81 a barrel after having traded above $54 earlier in the week, but still $5 above the recent lows set in late January. London’s Brent futures did better, closing at $60.22, down about $2.50 from highs set earlier in the week. Brent, however, is still about $12 a barrel higher than in mid-January when it traded below $48. Last week’s decline came mainly because the US rig count, although still falling, was not down as much as it had been in the previous three weeks leading traders to speculate that the rapid decline in active US drilling rigs might be leveling off. US crude stocks the week before last grew by another 7.7 million barrels to 4.25 million, the highest in at least 80 years. The Cushing, Okla. storage site is now above 46 million barrels. The EIA says Cushing has a capacity of 70 million barrels; however only about 56 million is available for storage.
The debate over whether oil prices will stay about the same or move higher from here, rather than falling to new lows, continues. Those seeing a further decline in oil prices to new lows are pointing to the capacity of US tank farms which are nearly full and the large backlog of wells that have already been drilled and only need to be fracked before coming into production. They also believe that global excess supply is still over two million b/d and that Iraqi and Saudi production will be picking up shortly. They also see the possibility that the sanctions on Iran will be lifted; that refinery maintenance outages and the problems associated with the refinery strike will lead to lower refining in the next month; and that harsh weather in the northeast will lower demand.
Those seeing higher prices in the next few months note that several major shale oil drillers have said that they will not complete many of the wells they have already drilled while prices are so low that it is cheaper to leave the oil in the ground. At least two major drillers have said they do not plan to increase production further this year.
The US refinery strike continues into its fourth week with workers at three more facilities going out, including those at Port Arthur, Texas, the nation’s largest refinery. Strikes are now taking place at 15 facilities, which carry out about 20 percent of US refinery operations. So far most facilities have been able to operate with management personnel. Improved safety conditions, which may translate into more personnel on duty, seem to be the union’s principal demand in the negotiations.
US natural gas futures surged last week to close at $2.95 per million BTUs after having traded below $2.60 earlier in the week as low temperatures enveloped much of the northern US. Forecasters now expect that cold weather will continue well into March.
2. The Middle East & North Africa
Syria/Iraq: The fighting continues across Iraq and Syria with mixed results. ISIL forces are making gains against the Iraqi Army in Anbar province, which has always been a Sunni stronghold. In the north, coalition aircraft continue to destroy a variety of ISIL targets. Shiite militia from the south have recently arrived in the vicinity of Kirkuk where they are assisting the Kurdish Peshmerga drive back ISIL forces that have occupied numerous villages in the region. In Syria, government forces and Hezbollah continue to make progress against non-ISIL rebels north of the Golan Heights. The prospect of Hezbollah, the Lebanese Shiites who are long-time foes of Israel, moving onto the Golan Heights has Tel Aviv very nervous.
The political situation in Iraq is going nowhere. Reports of Shiite militia committing atrocities against non-ISIL Sunnis has led some Sunnis to pull out of the Iraqi parliament lessening the chances there will ever be a working coalition government in Baghdad. The Shiite cleric Moqtada al-Sadr said he will pull back some of the militia he controls from the fight against ISIL in an effort to smooth relations with the Sunnis.
In the meantime the financial crisis caused by low oil prices is causing a new rift between Baghdad and Erbil. The central government does not have enough money these days to pay the Kurds their agreed-upon share of the federal budget for January and February leaving the Kurds in the lurch. Baghdad is now getting the revenue from oil produced in areas under Kurdish control, but this is not being passed on. Talks to resolve this problem continue. Iraqi oil exports were down in January due to bad weather and the problems with the Kurdish oil, but this could clear up in February as oil prices are somewhat higher and the weather has been better.
Iran: The nuclear talks which may be entering their final rounds resumed in Geneva over the weekend with Secretary Kerry, Energy Secretary Moniz and their Iranian counterparts in attendance. The Obama administration is interested in achieving the foreign policy victory that would come with the signing of the treaty; Tehran is interested in having the sanctions lifted as quickly as possible; Israel does not like any agreement that leaves the Iranians with a capability to enrich uranium no matter how well safeguarded; and many others are hoping to kill the talks in hopes that continued sanctions would further weaken Iran.
Last week, the IAEA said the Tehran is still failing to answer many remaining questions about their alleged efforts to develop nuclear weapons in the past. The Iranians continue to maintain that any evidence relating to a nuclear weapon development program in Tehran was fabricated.
The talks still have another three months before reaching the next self-imposed deadline. Next week Israeli Prime Minister Netanyahu comes to Washington to make the case that any treaty that leaves Tehran with any nuclear enrichment capability is unacceptable.
It is difficult to foresee how a stable nuclear agreement will emerge from the climate surrounding the nuclear negotiations. Iran clearly wants to maintain some degree of ambiguity about their nuclear programs for both foreign and domestic audiences, much as Israel has done for many years. In a new twist in the endless rhetoric surrounding the talks, last week Iran’s supreme leader, the Ayatollah Khamenei, threated to impose an oil and gas embargo on Europe if the sanctions are not lifted.
Until this issue is resolved or becomes irrelevant by changing circumstances, it will remain one of the major latent threats to Middle Eastern oil exports.
Libya: The National Oil Company reported that pipeline between Sarir, Libya’s largest oilfield, and the export terminal at Hariga was reopened on Sunday after having been blown up by insurgents, possibly ISIL. The oil company maintains that during the outage, oil shipments remained on schedule with oil being drawn from tanks at the port. With all the confusion, it is hard to determine just where Libyan oil exports are these days, but most reporting suggests it is around 250,000 b/d.
Most of the news from Libya last week concerned the growing role of ISIL in Libyan politics, highlighted by the execution of 21 Egyptian Copts and Cairo’s retaliatory airstrikes on the ISIL-held town of Derna. The murder of the Copts coupled with a bombing of the Iranian Ambassador’s residence in Tripoli shows the increasing organization of ISIL in Libya.
3. China
Beijing announced a 20 percent increase in the quantity of oil products that Chinese refiners can export this year. The government only allows oil product exports after assessing domestic needs and determining how much will be surplus. China has opened several large new refineries in recent years so that increased capacity coupled with lower economic growth has created a larger surplus. Some are noting that this move will only contribute to the world glut of oil products.
Beijing is also considering mergers among its big state-owned oil companies that will forge a giant capable of taking on Exxon-sized companies and will increase efficiencies in this time of low prices.
The director of China’s National Development and Reform Commission said recently that China needs a minimum of 6.5 percent annual GDP growth for its next five-year plan. This, of course, is well below what we have seen in recent years and below 2014’s 7.4 percent GDP growth. These numbers seem to imply that the annual growth needed in China’s oil supply will only be on the order of half what it was during much of the past decade.
4. Russia/Ukraine
The Ukrainian situation deteriorated sharply last week with as yet unknown impacts on the world’s energy situation. In violation of the ceasefire agreement, separatist forces with heavy support from Russia launched a major assault on Ukrainian forces holding the key railway hub of Debaltseve. Ukrainian forces were forced out of the town, suffering heavy casualties. Washington and other western capitals reacted strongly to the rebel assault promising still stiffer sanctions on Moscow for its role in the attack. Moscow in turn reacted with a major anti-western propaganda barrage sending east-west relations as far as rhetoric is concerned to their lowest point since the depths of the cold war.
Europe is far more entangled with Russia than is the US and there seems to be an increasing reluctance to strain relations with Russia much further at a time when the EU is so dependent Moscow’s gas supplies. Much depends on what happens next. Rebel forces are said to be massing for an assault on the port of Mariupol on the Sea of Azov. Should this occur, the situation would deteriorate still further.
Additional sanctions that could bring more pressure on Moscow are under consideration. Many in the US are calling on Washington to start arming the Ukrainian forces amid a debate as to whether this would do more harm than good. Ukraine is obviously no match for Russia in land war so that additional weapons would only prolong the situation. The most serious sanction that could be imposed on Moscow is to cut its ties with the Swift system for monetary transfers between countries. Russia is heavily dependent on this system and some Russian bankers are saying that cutting them off would be tantamount to war.
The Russian economic situation continues to spiral down with Moody’s joining S&P in downgrading Moscow’s debt to “junk” status. The recent jump in oil prices has given Moscow some respite so that its ruble is back up to 61 to the dollar. The falling ruble has led to a major exodus of central Asians from the former Soviet republics that in recent years have done much of the manual labor in Russia. During a recent snowstorm the streets of St Petersburg remained un-shoveled due to a lack of workers.
In the wake of the rebel attack last week, the natural gas flow into the rebel held areas was shut off during sub-zero weather. Rebels blamed the Kyiv government. Moscow says it will start supplying natural gas directly from Russian territory into eastern Ukraine. In the meantime there is much suffering in the rebel and Russian held areas, which are now cut off from many of their normal services.
This situation remains extremely dangerous with much room for miscalculation.
5. Quote of the Week
- “Maybe a month ago was the first time that I ever saw the price really move after the headlines [from Baker Hughes Inc.] on the rig counts hit the wire. You’ve got bond traders driving electric vehicles who wouldn’t recognize an oil well if it were in their back yard, and now even they know Baker Hughes.”
— Tim Evans, energy analyst at Citi Futures Perspective in New York
- [Following up on last week’s Quote”] “Goldman Sachs doesn’t seem to be cluing in to the notion of field decline, which is relentless, and what x wells per y unit of time means to field production. Also their chart of vintaged decline curves as proof that well productivity is going up is highly misleading, as it depends on which portions of a field are examined. I looked at vintaged decline curves in Drilling Deeper; in some counties they are going up, in some going down, and in old plays like the Barnett they are down 18% on average since 2011. Vintaged decline curves for a whole play like the Bakken are going up slightly but that is as much a result of concentrating drilling in sweet spots as better technology. Geology matters – it always trumps tech in the final analysis.”
— David Hughes, president of Global Sustainability Research
6. The Briefs
BP forecast: The boom in US oil output that has sent prices tumbling will slow sharply in coming years, leading to record demand for crude from OPEC producers. In its annual long-term energy outlook, BP forecasts rapid growth of so-called “tight” oil supplies, or shale oil, particularly in the US, until the end of the decade. However, the pace of output growth, which has contributed to a near 50 per cent fall in oil prices since last summer, will then slow, paving the way for a recovery in the global market share of Middle Eastern producers. (2/18)
An independent Dutch safety panel has found that the operators of Europe’s largest natural gas field, Royal Dutch Shell and Exxon Mobil, as well as the Dutch government, for years ignored the dangers posed by earthquakes in the field. That finding could add to growing pressure to reduce production at the field, in the Dutch province of Groningen, which has long been a crucial source of fuel for northern Europe and generates billions of euros in revenue annually for the Dutch government…On Feb. 18, Dutch Economy Minister Henk Kamp said he’ll set a new cap on Groningen output on July 1 and will act sooner “if we see good reasons.” (2/19)
Italy’s Eni has reported a larger net loss in the fourth quarter as the sharp drop in crude oil prices played havoc with the oil and gas group’s performance, knocking revenue lower and triggering hefty write-downs. (2/18)
Arctic oil production: Gazprom Neft said Friday it made its first ever winter shipment of oil from a field located above the Arctic Circle. The company said 117,280 barrels of crude was shipped on a tanker to European consumers from the Yamal Peninsula under the escort of an icebreaking ship. Greenpeace has objected to Russian efforts to extract oil from the arctic, saying it poses a risk to the pristine ecosystem there. (2/21)
Russian retail sales fell last month for the first time in more than five years as real wages plunged the most since 1999, underscoring the damage inflicted on the economy by a tailspin in oil prices and the ruble’s collapse. (2/19)
Ukraine announced plans to spend $1 billion to build up a strategic gas reserve in order to reduce its reliance on fuel imports from Russia. Gas imported from Russia accounted for 58% of Ukraine’s total consumption in 2013. (2/17)
Saudi Arabia’s refusal late last year to rein in oil production helped trigger the price crash that has hurt oil-producing countries and publicly listed energy companies alike. And now even the kingdom’s own oil company is feeling the pain. As a result, state-owned Saudi Aramco is looking for ways to cut costs everywhere, from pushing contractors for better deals on oil-well services to negotiating discounts on its phone and power bills. (2/20)
Saudi Aramco expanding and tightening? The rapid decline in oil prices since June last year may encourage a wave of consolidation and acquisitions in the energy sector. Saudi Arabian Oil Co., the world’s largest oil exporter, is in talks with banks to raise a $10 billion loan that could be used to fund acquisitions and other investments. Aramco is expanding into refining and petrochemicals and seeking to boost ties with Asia. (2/18)
Production from Saudi Arabia is rising, and demand has pushed it up to about 10 million b/d, according to energy consultancy PIRA. The estimate suggested the country is hewing tightly to the strategy of protecting market share rather than cutting production to try to inflate prices. Saudi production averaged about 9.7 million bpd since last June. (2/19)
In Saudi Arabia, when you are king austerity is not a problem — you just dole out billions and billions of dollars to ordinary Saudis by royal decree. Not surprisingly, Saudis are very happy with their new monarch, King Salman. One firm estimates that the king’s post-coronation giveaway will ultimately cost more than $32 billion. (2/20)
Saudi Aramco and its partner Dow Chemical Co. plan to start production this year at their $20 billion Sadara chemicals joint venture as other projects being planned in the region face the obstacle of falling crude prices. Ethylene and polyethylene will be the first products of Sadara Chemical Co. (2/17)
Pakistan is close to striking a long-term deal worth potentially $22.5 billion or more to import liquefied natural gas to help fuel the country’s power stations and ease its crippling electricity crisis. (2/18)
Uganda has rewarded a $4 billion oil refinery deal to a subsidiary of Russia’s Rostec, whose CEO has been subject to US sanctions. Uganda and RT Global Resources will now negotiate the terms of the joint venture to engineer and finance the $2.5 billion refinery plus a product pipeline and associated infrastructure. The decision to award the contract cements growing ties between Moscow and Uganda, which increasingly characterizes the west as a neo-colonial aggressor. (2/19)
Brazilians are paying more to fill their gas tanks even as oil’s 49 percent rout in the past year drives down prices from New York to Tokyo. Gasoline in Sao Paulo climbed 9.9 percent in the past three months. Petroleo Brasileiro, the state-run oil producer embroiled in a corruption probe, is keeping fossil-fuel prices high as it tries to bolster cash flow. (2/19)
In Venezuela, a new political crisis convulsed the country on Friday over the arrest of the Caracas mayor, one of the country’s top opposition figures, accused by President Nicolás Maduro of abetting what he called an American plot to overthrow the government. (2/21)
In Mexico, Pemex’s board has approved a $4-billion budget reduction for 2015, an 11.5 percent decrease compared with the previous expenditure program authorized by Congress. Pemex says the cuts, which come amid lower oil prices, are imperative in achieving financial targets set by Congress. Two thirds of the company’s $36.3 billion budget—$24.6 billion—will be allocated toward the company’s investment plans. The remaining one third will go toward operating activities and meeting labor and pension obligations. Pemex says its budget formulation process considered a $79 barrel average price for the Mexican crude oil export basket. (2/19)
LNG kick-start: The Canadian government unveiled tax breaks for developers of liquefied natural gas export projects in an effort to kick-start investment amid a low energy-price environment. LNG developers would be eligible to write off industrial equipment and real estate at a faster pace. The write-off is eligible for equipment and real estate acquired after Thursday up until 2025. (2/20)
Canada said it would create a compensation fund to cover the potential costs of oil-train derailments and finance the move with a new levy on crude shippers. The planned fund was one of several new measures Canada unveiled to bolster the safety of a rail system carrying growing volumes of crude. (2/21)
The total US drilling rig count fell 48 units—markedly fewer compared with declines in recent weeks—to settle at 1,310 rigs working during the week ended Feb. 20, Baker Hughes Inc. said Friday. Rigs targeting oil in the U.S. dropped by 37 to 1,019, a notable slowing. This drug oil prices to an intraday low on speculation that crude production won’t fall fast enough to balance the market. (2/21)
Rig count mania: The sudden interest in Houston-based Baker Hughes’s rig counts shows how desperate traders have become to find the bottom of the oil market after the biggest collapse since 2008.
Production charges on: Despite US drillers using the fewest rigs in almost four years, the nation will pump 9.3 million b/d this year, the most since 1972, Energy Information Administration forecast last week. (2/19)
Offshore upper: While US drilling on land has fallen along with the price of crude, the risky and expensive drive to pull oil from the Gulf of Mexico is showing little evidence of a slowdown. Oil rigs working in the Gulf will increase by more than 30 percent this year compared with 2014, according to data from Wood Mackenzie. The rise in deep-water drilling stems from years of planning and billions of dollars already invested, and the payoff can be considerable. (2/19)
EOG Resources: The biggest, fastest-growing oil producer in the US said it plans to halt output growth this year, delivering a signal that shale companies are beginning to do what it takes to reduce oversupplies. EOG, which has boosted its oil production by almost 50 percent annually for the past five years, is slashing spending 40 percent and will drill half the wells it did in 2014. The company joins Apache Corp. in its plan to pump about the same volume of oil as last year. The cutbacks are a sign that shale producers can slow down a lot more quickly than forecasters are expecting. (2/19)
Marathon Oil Corp., which previously said it was slashing 2015 spending about 20 percent in December, said it would make a second budget cut of another 20 percent. The company said its output, excluding Libya, would rise 5-7 percent this year. (2/19)
BP on the hook: A US judge rejected BP’s attempt to reduce the maximum civil fine it could face for its role in the 2010 Gulf of Mexico oil spill, leaving it potentially liable to pay $13.7 billion under the federal Clean Water Act. (2/20)
Chevron Corp. said its oil and natural gas reserves fell 1 percent last year largely due to the sale of its stake in a Chad oil field. The company had proved reserves of 11.1 billion barrels of oil equivalent on Dec. 31, about 1 percent lower than a year earlier. Even as Chevron has five major projects coming online by the end of the decade, dwindling reserves have become a key concern for international energy companies, many of which have massive capital budgets to find and extract oil and natural gas. (2/21)
Chevron Corp.’s exploration failure rate almost doubled last year as the energy producer shifted more drilling efforts to American fields from other parts of the world. Dry holes represented 30 percent of the total drilled last year, up from 18 percent in 2013. Chevron plans to quit searching Romania’s shale fields this year after abandoning Polish and Ukrainian prospects in 2014. (2/21)
Chesapeake Energy Corp. sued its ousted founder, Aubrey McClendon, claiming Tuesday that he stole sensitive data in the days before he left in 2013. (2/18)
BP is a shadow of its pre-Gulf of Mexico spill self, having sold more than half its pipelines, 35 percent of its wells and 12 percent of its reserves. Of all the UK major’s rivals, Exxon, the world’s biggest energy company, has the resources to swallow BP whole. Could it happen? (2/16)
Fractured rule-making: An Ohio city lost a battle for control over oil and gas drilling permits within its borders with the Ohio Supreme Court saying the authority belongs to the state. The ruling runs counter to decisions issued by New York’s top court last year and the highest Pennsylvania court in 2013 as local municipalities concerned over the effects of hydraulic fracturing seek to limit the practice. More than 400 measures to prevent or control fracking have been passed by US cities and counties. (2/18)
Another oil train derailment: Video images of a giant fireball boiling from the wreckage of a derailed train hauling Bakken crude are adding to pressure on federal regulators to act on new safety standards for oil shipments. While there were no fatalities in the CSX Corp. accident in rural West Virginia on Monday, the footage of flames and smoke rekindles public alarm over the prospect of tank cars rumbling through urban areas. (2/18)
Canadian National Railway shut its main line linking western and eastern Canada after a 100-car eastbound train carrying crude oil derailed in Ontario. (2/16)
In Texas, consumption of gasoline and diesel is growing faster than at any time since the financial crisis, as an improving economy and lower fuel prices encourage more use of cars and trucks on the state’s roads. Receipts of motor fuel taxes in January 2015 were 9 percent higher than the same month in 2014. Tax rates have not changed so the revenue rise is directly attributable to increased sales volumes. (2/20)
The PJM Interconnection recorded a new winter demand peak Friday as frigid weather fueled electricity demand across its region. PJM said demand topped out at about 143,800 MW around 8 am EST. Real-time power prices at the peak of demand were around $500/MWh for many of the major PJM zones. PJM Interconnection is a regional transmission organization that coordinates the movement of wholesale electricity in all or parts of Delaware, Illinois, Indiana, Kentucky, Maryland, Michigan, New Jersey, North Carolina, Ohio, Pennsylvania, Tennessee, Virginia, West Virginia and the District of Columbia. (2/21)
Arctic drilling rules: The Obama administration issued proposed Arctic-specific drilling regulations that will apply to potential exploration operations in the Beaufort and Chukchi seas. The regulations include new requirements for operators to submit “region-specific” response plans for oil spills, have “prompt access” to source control and containment equipment, and have a separate relief rig available in case well control is lost. (2/21)
The growth in U.S. residential energy use has slowed to below the rate of household growth, meaning that energy efficiency has helped drive down per-household energy consumption in ever-larger homes. Between 1980 and 2009 (the most recent survey year), delivered energy used by U.S. households increased from 9.3 quadrillion British thermal units (quads) to 10.2 quads, an average growth of 0.3% per year. (2/19)
The US economy is off to a slow start in 2015 as factory production rose in January by only 0.2 percent–less than forecast–and home construction fell 2 percent. Figures for output at factories for the previous three months were revised lower. Total industrial production, which also includes mining and utilities, climbed less than projected as oil well drilling slumped. (2/19)
Wal-Mart Stores finally hit its number, posting its first quarterly gain in store traffic in 24 months. This may be cause for other retailers to celebrate as well, as Wal-Mart welcomed cash that would have otherwise have been spent on gasoline. (2/20)
Apple Inc., which has been working secretly on a car, is pushing its team to begin production of an electric vehicle as early as 2020. The timeframe underscores the project’s aggressive goals and could set the stage for a battle for customers with Tesla Motors and General Motors, both of which are targeting a 2017 release of an electric vehicle that can go more than 200 miles on a single charge and cost less than $40,000. (2/20)
In the UK, the world’s biggest offshore wind scheme has been given the go-ahead off the coast of Yorkshire, in a move the government said was likely to create hundreds of jobs. The Dogger Bank Creyke Beck project is expected to be one of the UK’s biggest power stations, second only to the Drax coal-fired plant in North Yorkshire and capable of supplying about 2.5 per cent of the country’s electricity. (2/18)
Thirteen Indian cities are now included on the World Health Organization’s list of the world’s 20 most polluted. That pollution burden nationwide is estimated to be costing more than half the population at least 3.2 years of their lives. The study’s authors acknowledge their estimations may be too conservative. (2/21)
Brazil is sometimes called the “Saudi Arabia of water,” so rich in the coveted resource that some liken it to living above a sea of oil. But in Sao Paulo, Brazil’s largest and wealthiest city, the taps are starting to run dry as southeast Brazil grapples with its worst drought in nearly a century. (2/17)
The chairman of the China Iron & Steel Association said that as China’s economy enters a “new normal”, the steel industry faces unprecedented challenges. “China’s steel production has already hit a peak, or to put it another way, it has hit a turning point.” Zhang Guangning said the industry must shift its focus from expansion to quality and efficiency. After growing at an average rate of 15 per cent between 2000 and 2013, a peaking of China’s steel production would be a powerful symbol of a shift in the industry’s future. (2/17)
The US says it will expand air-quality monitoring at some overseas diplomatic missions, following several years of reporting pollution data in China. The goal is to increase awareness of the health risks of outdoor air pollution, which easily spreads across borders. The program is intended to help U.S. citizens abroad reduce their exposure to pollution and to help other countries develop their own air-quality monitoring through training and exchanges with American experts. (2/19)
New population data and an accompanying report from the World Bank shows that almost 200 million people moved to urban areas in East Asia from 2000-2010—a figure that would be the world’s sixth-largest population for any single country. The Pearl River Delta in China—which includes the cities of Guangzhou, Shenzhen, Foshan and Dongguan—has overtaken Tokyo as the world’s largest urban area in both size and population. At the same time, most of East Asia’s population is still non-urban, meaning the region will likely face decades of further urbanization. (2/17)
