1. Oil and the Global Economy
New York oil prices were little changed last week opening and closing around $50 a barrel. London prices fell sharply on Monday, but then traded around $60 for the rest of the week. The oil markets have been relatively steady recently after rising some $16 a barrel in London and $4 a barrel in New York from lows set in mid-January. London prices have increased largely in reaction to the turmoil in the Middle East particularly that in Libya where exports seem to stop and start every other day. The revival in world prices has done little for US shale oil industry with wellhead prices in North Dakota still in the vicinity of $30 a barrel, clearly below profitability for most if not all wells in the state.
The EIA continues to report large increases in domestic storage of crude and in US oil production. Some observers, however, are suspicious that the Administration’s continuing production increases (the week before last had it up another 40,000 b/d) may be due to projections of trends rather than actual production increases.
The state of the US economy is becoming another issue in the oil-price equation. Although US employment was reported to have gained by 295,000 jobs in February, some are noting that average worker productivity has been stagnant for years. Moreover, US factory orders fell for the sixth straight month in January, as the precipitous decline in capital spending by the oil industry, coupled with sluggish consumer spending, has weakened demand. The job numbers increase sent the US dollar higher, contributing to the lower oil prices on Friday. In today’s market, developments, which should send prices higher or lower, frequently do the opposite.
The issue of whether there will be a second price plunge before summer continues to be bandied about in the press with some seeing the US running out of useable crude storage capacity relatively soon. Conventional wisdom has it that the recovery from last year’s price plunge will be more of an “L” rather than the “V” or “U.” Even the CEO of Exxon weighed in last week saying that prices collapsed because demand growth in China and elsewhere had slowed so that the world should “settle in” for a period of relatively weak oil prices. Optimists now are hoping that prices will go up another $10 or so by the end of the year.
A Wall Street newsletter noted last week that after adjustment for inflation, a barrel of oil that went for $13 in 1970 would now be selling for $78, making today’s inflation-adjusted oil prices the lowest in 45 years.
The US refinery strike has entered its second month with little progress. Another round of negotiations is to take place this week. Some oil workers are starting to return to work as companies are stepping up pressure on striking workers. Several plants are said to be hiring new non-union workers to replace the strikers; refiners are making complaints to the NLRB about harassment of those crossing picket lines; and in a few places, management is threatening to pull bonuses for those who remain on strike. The union, of course, could extend the strike to other facilities. Although wages are clearly an issue at a time when refiners are doing well, tired, overworked, employees that constitute a safety concern is also a key issue. US gasoline prices are up by nearly 30 cents a gallon in the last month which some attribute to the strike.
There were two more oil train wrecks in remote areas last week, one in Illinois and a second in northern Ontario, that resulted in fires. On April 1st new rules come into effect that will require shippers to reduce the volatility of light shale oil before dispatching it on the nation’s rail lines. The tank cars involved in last week’s explosions were of a more recent vintage raising concerns about whether just stronger cars can guarantee against explosions of highly volatile shale oil. So far only the explosion in Quebec two years ago resulted in large numbers of casualties, but another high-casualty explosion is likely to bring far more stringent regulation of oil shipments by rail.
Natural gas prices jumped by nearly 20 cents per million BTUs last week as very cold weather settled in over much of the US. By Friday, however, weather forecasters were saying temperatures would be back to normal in another week or so and that it was unlikely that there would be another cold snap. Baker Hughes reported last week that rigs drilling for natural gas in the US have now fallen to 268, the lowest level since 1993.
2. The Middle East & North Africa
Iraq/ Syria: Most attention last week was focused on Baghdad’s offensive against the ISIL forces holding Tikrit, which is on the road to Mosel. Some 30,000 Iraqi troops, mostly Shiite militia, have surrounded the city with strong backing from Iran. The US has not been asked to participate in the operation, hence only Iraqi government aircraft, which may be flown by Iranians, are doing the bombing. ISIL set fire to some oil wells northeast of Tikrit hoping the smoke would hide them from government airstrikes.
Many fear that the assault on Tikrit could turn into a massacre as Shiite militia overrun large numbers of Sunni civilians who are unable to get out of the way. Should large-scale Shiite atrocities occur during the offensive to retake Tikrit and Mosel, the Iraqi situation could careen off in a new direction—possibly with adverse consequences for long-term oil production. The Saudis are saying that the US policy of no-boots on the ground is turning Iraq over the Iranians, something they clearly don’t like.
The good news of the week is that Iraqi oil exports and revenues increased in February. Baghdad is seeking to borrow billions of dollars by issuing bonds so that it can pay their contractual obligations to the international oil companies that have been steadily increasing its oil production in recent years. The Kurds received their first payment of 2015 from Baghdad as part of the new revenue sharing agreement made last year. As the money for direct oil exports to the Kurds flows through Baghdad, the Kurdish government has been flat broke in recent months and unable even to pay its employees.
Baghdad is asking the international oil companies that are drilling in Iraq to propose amendments to their multi-billion dollar contracts. Like everyone else, Baghdad is seeking to cut back on investment in new oil production during a time of low prices.
With ISIL distracted by the government offensive in Iraq and the steady rain of coalition bombs on its military forces, positions, and infrastructure, the Syrian government with the help of Iran and its proxy Hezbollah is making progress in recapturing towns held by the moderate opposition forces. Last week a key moderate group dissolved itself; further weakening US plans to defeat the Assad government. Key leaders of the Nusra Front, a major jihadist group fighting in northern Syria, were killed in a bomb blast of undetermined origin last week. It is too early to see what effect this will have in the war, except to add to the general turmoil.
The most interesting news about Syria came in a report from the National Academy of Sciences. The report said that the uprising in Syria was partly the result of the extreme drought, caused by man-made climate change, which enveloped the country between 2006 and 2009. The New York Times calls this report one of the strongest links yet between global warming and human conflict.
Libya: UN sponsored talks to end the split between the Islamist and secular governments took place in Morocco last week and are to continue this week. The rise of ISIL related jihadists in Libya might be contributing to the recognition that a coalition government is the only way to keep the jihadists in check. Attacks by the ISIL- affiliated jihadists led to the National Oil Co. to close 11 oil fields in central Libya; to withdraw all personnel from the sites; and declare force majeure on production from the fields. A Czech and an Austrian oil worker are reported to be missing after one of the attacks.
It is nearly impossible to tell how much oil is getting out of Libya these days with frequent stops and starts of production taking place around the country. The national oil company keeps talking about 500,000 b/d of production and sometimes less. The European oil markets keep reacting to the attacks so traders must believe some exports to be disrupted.
Iran: The nuclear talks continue with US Secretary of State Kerry taking the lead in the negotiations as well as conducting frequent consultations with Western foreign ministers and other interested parties. With only two weeks to go before the self-imposed deadline for a preliminary agreement, where this situation is going is impossible to say. Some in the US Congress see an agreement as an opportunity to politically damage President Obama by refusing to permanently lift sanctions on Iran which could kill any agreement. As is well known, the current Israeli government is not willing to accept a compromise on Iran’s uranium enrichment activities.
Tehran, however, is anxious to get the sanctions removed. Unemployment is running at 20 percent; inflation is at 25 percent; oil exports are down by 1.4 million b/d; $100 billion in assets held abroad have been frozen; and automobile production is down by 40 percent. All this says why the Rouhani government wants to get the sanctions lifted as soon as possible and why additional sanctions, which would have only marginal affect are unlikely to add to the pressure. On top of all this Iran is facing a serious air pollution problem, as cleaner burning oil products are not readily available in the country and the smogs are getting worse.
The only thing that seems certain is that whatever happens will have an effect on the Middle Eastern oil situation and oil prices. If the sanctions are even partially lifted this year, Tehran will be in a position to increase its oil shipments, although it will like take many months to get production back to pre-sanction levels. If this should happen in the next six months, larger Iranian exports could at least partially offset the decline in US oil production that is expected in the second half of the year. Over the longer term, Iran is likely in a position to significantly increase its oil and gas production, if Western firms and technology are allowed into the Iranian market. The Iranian press is already talking about the economic resurgence that will then occur.
Failure of the talks and continuation of the sanctions would likely lead to an Iranian push to at least enrich more uranium in an effort to keep pressure on the outside powers. Europe might lift the sanctions anyway if they see the failure of the talks as primarily due to domestic US politics. The Iranians, of course, must be very careful not to leave any indications that they have resumed a nuclear weapons program or they may cross an Israeli red line. Any attack on Iran is likely to result in a major reduction of Middle Eastern oil exports one way or another. This is still a dangerous situation.
3. China
The economy and what to do about pollution remain the top issues for Beijing. Last week the annual meeting of the National People’s Congress lowered the official growth target for 2015 to “around 7 percent” as compared to 7.4 percent last year. This suggests that even the normally optimistic government is seeing slower economic growth, and of course smaller growth in oil imports in the years ahead. February’s export numbers showed an unexpected jump in exports of 48 percent year over year, but much of this may to due to unusually low exports in February 2014 as the government was cracking down on export fraud and front loading to February due to the annual lunar holiday which came later this year. Imports were weaker and are a better indication of the state of China’s economy.
Pollution and the toll it is taking on China’s people were back in the news last week. A Documentary on Beijing‘s pollution problems entitled “Under the Dome” was pulled off line by order of the Communist Party after it went viral and was viewed by more than 175 million Chinese in just a few days. The government has appointed a distinguished environmentalist as its new minister of environmental protection—probably one of the hardest jobs in China as it tries to balance the need for fast economic growth with a steadily deteriorating environment. Interestingly, the new environmental minister praised the “dome” video just days before it was pulled off the air – suggesting that there is high-level controversy in Beijing over how to deal with the pollution issue.
The government soon will enact the first legislation to curb soil pollution. This is a tough one as much of China’s soil has become laden with heavy metals from burning so much coal that dangerous metals are making their way into the nation’s food supply.
4. Russia/Ukraine
The ruble climbed to its highest level of the year as oil prices held steady around $60 a barrel and the ceasefire in Ukraine seemed to be holding. High oil prices allowed Moscow to build up a foreign currency reserve that hit $600 billion back in 2008. That reserve is now down to $346 billion and last year the Kremlin spent $100 billion defending the ruble since July. Fifteen prosperous years in which Russia’s GDP per capita doubled brought Putin a popularity which still seems be holding throughout the Ukrainian crisis, sanctions, rapid inflation and a shrinking economy.
A debate is starting over who will be hurt the worse in the long run – Russia or the West? The sanctions, which are clearly hurting Russia today, will obviously teach Moscow a lesson about becoming too deeply involved with the West. One major development is that Moscow is planning to send an increasing share of its oil and gas exports to China, which in the long run is large enough to absorb all Russia can produce. All this has a long way to play out.
5. Quote of the Week
- “[I]s there a black swan that we don’t know about which will come by 2050 and we will have no demand [for oil]?”
— Saudi Arabia oil minister Ali al-Naimi
Norway’s oil and gas companies expect spending to drop 12 percent this year after reaching an all-time high in 2014 as plunging oil prices compound an expected slowdown after years of double-digit growth. Spending last year reached an all-time high but was up only 1 percent from the previous year. (3/5)
Exxon Mobil ignored the sanctions and has continued to snap up oil drilling rights in Russia, giving it larger exploration holdings in Putin’s backyard than in the US. Taking the long view, Exxon boosted its Russian holdings to 63.7 million acres last year from 11.4 million at the end of 2014. That dwarfs the 14.6 million acres of rights Exxon holds in the US, which until last year was its largest exploration prospect. (3/3)
Royal Dutch Shell’s Chairman Ollila is joining Chief Executive Ben van Beurden in backing efforts to limit carbon emissions ahead of international climate talks in Paris later this year. Mr. Ollila told employees Wednesday that society must find a “middle way” that “doesn’t threaten economic growth.” (3/5)
Planners behind the new natural gas pipeline—the Trans Adriatic pipeline—for the European market said contractors are invited to bid on offshore construction work in the Adriatic Sea. (3/5)
In Turkey, agreements with Iraqi administrations open the door for Turkish oil exploration in the Kurdish north, the Turkish energy minister said Monday. (3/3)
In Yemen, the political upheaval has dealt a powerful blow to the country’s oil industry, forcing companies—most recently Occidental Petroleum Corp.—to abandon productive oil patches and evacuate staff as a rebel group consolidates power. (3/5)
Egypt plans to repay its $3.1 billion debt to international energy companies operating in the country by mid-2016, almost a year later than initially planned, the country’s oil minister said. (3/4)
Saudi Arabia’s subtle change of energy policymaker line-up since the accession of new King Salman in late January appears to give the monarch’s inner circle a firmer hand on the kingdom’s oil strategy than previous rulers have enjoyed. However, major policy changes are not expected. (3/3)
In Nigeria, a fresh round of gasoline shortages has hit as fuel importers drastically cut imports following the government’s delay in settling over $1.41 billion on debts owed on subsidies for previous imports. Moreover, Nigerian businesses, hard hit by the fuel shortage, restated their demand that the government completely abolish subsidies on imported fuel, saying it would avoid recurring shortages and free up resources. Motorists formed long queues at gas stations in major cities. (3/2)
Ecuador’s crude oil export revenue totaled $598 million in January, down about 44% from a year earlier, due to lower oil prices. Lower oil prices are expected to drag down economic growth, in a country whose oil sector generates about one-quarter of total government revenue and about half of exports. (3/7)
Venezuela, once an exporter of premium coffee, has been reduced to swapping crude oil for Nicaraguan coffee beans to make sure worsening economic turmoil does not prevent people from getting their caffeine fix. (3/3)
Since Venezuela’s diplomatic relations are fraying rapidly with the United States, the government of President Maduro has given the American Embassy here 15 days to come up with a plan to drastically shrink its staff. Mr. Maduro has repeatedly accused the U.S. of backing a plot to overthrow him. (3/3)
Falkland Oil and Gas Limited said Friday that Premier Oil, the operator of the Zebedee prospect in the Falklands islands, had begun drilling the first exploration well of the current drilling campaign at the prospect. (3/6)
Mexico’s Pemex can’t recover hundreds of millions of dollars lost on Mexican condensate smuggled across the Texas border by bandits and sold to Shell Chemical LP, ConocoPhillips Co., BASF Corp. and other buyers that didn’t know the feedstock was stolen, a federal appeals court ruled. (3/6)
The US oilrig count fell for the 13th straight week as the US sinks deeper in a glut of excess oil. Drillers idled 64 oil rigs, dropping the number to 922, Baker Hughes reported on Friday. The rig count is down 43 percent since October, an unprecedented retreat. The total US rig count stood at 1920 as late as the first week in December and has dropped 728 rigs to 1192, a drop of 38%. From that same date oil rigs have dropped 41.5% and gas rigs have dropped 22%. (3/7)
“Fracklog:” Oil drillers expecting prices to rebound after the biggest drop in six years have come up with an alternative to storing their crude in tanks: They’re keeping it in the ground, creating a so-called “fracklog.” From North Dakota to Texas, there are more than 3,000 wells that have been drilled but not fracked, based on estimates from Wood Mackenzie Ltd. and RBC Capital Markets LLC. Waiting gives producers a better chance of receiving a higher price. It could also delay a recovery by attracting more supply every time prices rise. (3/7)
US exports of petroleum products averaged a record 3.8 million b/d in 2014—an increase of 347,000 b/d from 2013—based on data from the US EIA. Exports of motor gasoline, propane, and butane increased, offsetting a decrease in exports of distillate. (3/6)
In the deep-water Gulf of Mexico, the recent downturn in oil prices is expected to have minimal direct impact on crude oil production through 2016. EIA projects GOM production to reach 1.52 million b/d in 2015 and 1.61 million in 2016, or about 16 and 17 percent of total US crude oil production in those two years, respectively. The forecasted production growth is driven primarily by deep-water projects, five of which began in the last three months of 2014. (3/4)
In North Dakota, the clock is still ticking on a potential $5.3 billion, two-year tax break for the oil industry after a state-calculated average of February’s crude price fell below $52.59 per barrel last month. The state waives its 6.5 percent oil extraction tax if the monthly price of benchmark West Texas Intermediate crude at the Cushing, Oklahoma, transport hub falls below an inflation-adjusted limit for five consecutive months; so far, two down and three to go. But if the price rises above $52.29 per barrel for even one month, the clock resets. (3/4)
In North Dakota’s oil patch, it is getting cheaper to rent an apartment. Prices, which only last year rivaled levels in New York City and Geneva, have slipped about 15 to 20 percent in the past two months as dozens of new apartment buildings opened in Williston, Watford City and other oil hub cities. Growth in demand has slipped because the plunge in crude oil prices has led to cuts in capital spending by energy producers. There are still about 1,800 energy-related jobs unfilled in the No. 2 U.S. oil-producing state, and there is still demand for apartments. But the accommodation shortage is nothing like it was when the state’s oil boom began six years ago. (3/3)
Relief for New England: The US Federal Energy Regulatory Commission on Tuesday approved a key natural gas pipeline aiming to boost deliveries into supply-strapped New England. It will supply gas to local utilities in Connecticut, Rhode Island and Massachusetts. The project is expected to be in service in November 2016. (3/4)
Gasoline prices are rising five times faster than crude oil as refinery outages and shutdowns limit supplies. Retail gasoline increased 0.3 cent to $2.458 a gallon Thursday, the highest level since Dec. 17, and up 20 percent since Jan. 31. Refineries are operating at the lowest rate in six weeks. (3/7)
Oil ETFs: Billions of dollars are pouring into oil exchange-traded funds as investors, many of them small savers more familiar with stocks than commodities, risk big losses and focus on the chance of huge rewards. Five of the biggest oil ETFs have seen their assets more than quadruple since July to $5.4 billion as the oil market has had a roller-coaster ride, collapsing by 60 percent then rallying by almost a third. (3/6)
In West Virginia, the crude oil aboard the train that derailed and exploded two weeks ago contained so much combustible gas that it would have been barred from rail transport under safety regulations set to go into effect next month. Tests performed on the oil before the train left North Dakota showed it contained a high level of volatile gases. (3/3)
In Pennsylvania, noting that 60-70 trains/week carry Bakken crude oil across the state to East Coast refineries, Gov. Tom Wolf asked US President Barack Obama for stronger federal regulations to prevent derailments and improve safety. (3/3)
Canadian Pacific Railway’s CEO said his greatest fear in moving crude by rail is the prospect of a terrorist attack on the company’s trains. (3/3)
Ohio is suing BP for more than $33 million, alleging it double dipped by taking state funds and money from insurers to clean up accidental leaks from underground storage tanks at hundreds of its gas stations around the state. (3/3)
Beach vs. oil: Hermosa Beach, near Los Angeles, has had a conflicted relationship with the oil industry for close to a century. It has variously approved oil drilling, banned it, approved it and prohibited it again. On Tuesday, the residents of Hermosa Beach are going to vote yet again on an oil and gas drilling initiative — whether to allow a contract with the energy company E&B Natural Resources Management to proceed despite a current drilling ban. The contract, which could mean hundreds of millions of dollars for the local government, received final approval from the City Council in 1992, but it has been in limbo ever since. (3/3)
California’s drought: the latest snow survey found that the Sierra Nevada snowpack is far below normal and could end up being the lowest on record in nearly 25 years. Snow supplies about a third of the water needed by state residents, agriculture and industry, The latest survey makes it likely that California’s drought will run through a fourth consecutive year. (3/4)
The European Union will fail to meet an ambitious goal of significantly reducing greenhouse gas emissions by 2050 unless it takes more aggressive measures to limit the use of fossil fuels and adopts new environmental policies, according to a report scheduled for release on Tuesday. Although European countries are on track to meet, and even surpass, the goal of reducing 1990-level greenhouse gas emissions by 20 percent by 2020, existing policies are not robust enough to ensure that the 2050 targets are met. (3/3)
