Peak Oil Review - Jan 5

1. Oil and the Global Economy

Oil prices continued to slide last week in light trading surrounding the New Year’s holiday. At the close Friday New York and London futures were both down about $2.50 for the week with NY closing at $52.69 and London at $56.42. Bad Chinese and EU economic news coupled with excess oil production was given as the reasons for the continuing price slump. Expansion of global manufacturing has fallen to the slowest pace in more than a year.

Despite all the reports of falling drill permits, rig counts, and capital budgets, the EIA still expects that US shale oil production will continue to grow this year although the Administration now forecasts average US production will be 9.3 million b/d in 2015, up by 700.000 b/d from 2014, but down by 200,000 b/d from last month’s forecast. Nearly all observers, whose comments make their way into the financial press, are saying that oil prices will continue to be weak in the first half of this year with some expecting a recovery in the second half.

A few observers believe there has been a paradigm shift in the global oil markets, usually attributed to the Saudi’s refusal to cut production in order to preserve market share. Some of these believe that prices are unlikely to climb back to over $100 a barrel in the near future. There is much discussion in the financial press as to just how far prices will fall with cases being made for technical resistance points at $45, $35, and even as low as $15 a barrel. Some believe that the Saudis will reverse their no-production-cut position should prices ever get at low as $30.

US natural gas futures also continued to fall last week with prices getting as low as $2.85 per million BTUs before rebounding to close at $2.96. Natural gas held around $4.50-5.00 per million in the first half of 2015; then held around $4 to $4.25 for most of summer and fall; and only collapsing in November as unusually warm weather combined with steadily increasing production to result in surpluses.

2. The Middle East & North Africa

Iraq: Oil exports hit a 35-year high in December of 2.94 million b/d according to an oil ministry spokesman. The exports however brought only $57 a barrel last month as compared to over $100 in the first half of last year. Iraq is one of a half dozen exporters that are being hit hard by the lower prices. The 2015 budget, which was based on $60 oil and already contained a $19 billion deficit, likely will have to be redrawn, as oil exports are nearly the country’s only source of revenue.

With the help of increasing numbers of collation airstrikes, government forces, mostly Shiite militias and the Peshmerga, are making some progress in driving ISIL out of captured Iraqi towns. The sectarian conflict seems to be getting worse however as we are starting to get reports of Shiite militia executing captured Sunnis whether they were part of ISIL or not.

Trouble is starting to appear in the southern oil city of Basra, which is deep in Shiite territory and has been relatively immune to violence since the British left. Last week a carload of five Sunni clerics was ambushed near the city with three being killed and five seriously wounded. A campaign is already underway to create an autonomous region around Basra, similar to the one the Kurds have. The establishment of such a region, of course, would immediately launch another round of feuding over the division of the oil revenues.

Libya: The country slipped further into chaos last week as fighting between the Islamist militias, which have captured Tripoli, and the Tobruk-based government increased. Government aircraft continue to launch airstrikes against the Islamist stronghold and seaport of Mistrata. Tobruk’s forces are reported to be making some progress in driving west to retake Tripoli. The brutality of the civil war is increasing. Supporters of ISIL are now appearing in Libya and over the weekend beheaded 14 captured Libyan government soldiers. Twenty Egyptian Christians working in Libya were kidnapped over the weekend and may suffer a similar fate. Cairo has long complained over the growing threat of Islamist militants running loose in Libya. France is calling the country a terrorist sanctuary.

The fire caused by an Islamist rocket attack at Libya’s largest export terminal, As Sidra, was extinguished over the weekend after seven of the 21 large storage tanks at the facility were destroyed. A spokesman for the National Oil Company said it is not yet known when the 400,000 b/d export terminal can reopen. The spokesman also put Libya’s current oil production at 315,000 b/d of which more than half is going to domestic consumption. The fighting and the fire at the oil terminal forced two large power plants with a combined output of 500 megawatts to shut down. Power shortages have been endemic across Libya since the revolution and are only likely to get worse as the civil war grows. On Sunday a government plane attacked an oil tanker bring fuel for power generators at the port city of Darnah, which is an Islamist stronghold. A cargo ship carrying grain was also kept from docking at the town’s port.

Iran: Reports that the Washington and Tehran have reached a tentative agreement on a plan that would have Iran ship its excess enriched uranium to Russia for safekeeping have been rejected by Iranian spokesmen. This scheme, which has been around for many years, would seem to offer the best hope for an agreement under which Tehran could enrich as much uranium as it wants without raising fears that it was building a nuclear arsenal.

Tehran says that its non-crude exports have increased by 20 percent since last spring. Some of this may be coming from its increasingly close relationship with the Shiite government in Iraq. Among the products being exported are construction materials and petrochemicals, which of course is just another form of oil.

3. China

It was another rough week for the Chinese economy. The December purchasing managers’ index shows the while the economy is still growing, it is just barely doing so. Most analysts expect that Beijing will start another round of stimulus shortly. Oil prices are very sensitive to the state of China’s economy these days. Nearly every oil price decline in recent weeks has been attributed in one fashion or another to the weak Chinese economy.

4. Russia

The country’s oil production for 2014 rose slightly to a post-Soviet high of 10.58 million b/d, while December production hit a monthly high of 10.66 million b/d. Most of the increase came from an 11 percent jump in production from small, privately owned production companies. Crude exports in December fell by 5 percent due to increasing domestic demand. Exports to China were at a new high of 452,000 b/d up 43 percent year over year.

It was another rough week for the ruble. Russia’s currency is now trading around 59 to the dollar, which is an improvement over recent lows of 65 to the dollar. Last week the central bank said it spent $80 million on the national currency market in an effort to stabilize the ruble. If oil prices continue to fall, however, it will take more than bank intervention to save the ruble. In recent years President Putin has undertaken large increases in military spending as part of his objective to reestablishing the country to its glory days as one of the world’s two superpowers. Unless military spending is curbed, Putin is faced with raising taxes, increasing the pension age, or turning on the printing presses in a country already troubled by excessive inflation.

5. Quote of the Week

“If prices go down, we are going to cut back to save our wealth—which is oil in the ground. I’ve seen this six or seven times. We have ample liquidity, our total revolver available, no near-term debt, a lean organization with just 1,100 people, production of 200,000 barrels per day, and a low-cost, high-margin operation. We’re going to navigate right through it.”

— Bravado from Harold Hamm, CEO Continental Resource.

6. The Briefs

In Iraq, Gazprom Neft said a third well now in service at the Badra oil field ensures a production level of at least 15,000 b/d. The Russian company said it brought its third well into production under the terms of a contract concluded previously with its Chinese counterparts at Zhongman Petroleum and Natural Gas Group. The terms of its Iraqi contract call for the eventual production of 170,000 b/d. (12/31)

King Abdullah of Saudi Arabia has pneumonia and needs temporary help from a breathing tube, the royal court said Friday. The king, who is 90, has a history of medical problems, and his health is scrutinized for any hint of a leadership change in Saudi Arabia. (1/3)

Indonesia will scrap gasoline price subsidies starting Thursday as part of President Joko Widodo’s push to free up more funding for infrastructure spending. At the same time, the price of gasoline will be cut to about 61 U.S. cents a liter to reflect falling global oil prices. State-owned oil and gas company PT Pertamina is the sole seller of gasoline and diesel fuel in Indonesia and will decide on a monthly basis whether to make any changes to the fuel prices. The government will continue to subsidize diesel prices. (12/31)

Daqing, China’s largest inland oil field and in long-term decline, is strained further by the low and falling price of crude oil. A staff member said the field’s declining production should accelerate next year. The field has produced more than 15 billion barrels since operations began in 1960, and produced roughly 800,000 barrels per day in 2013. (12/30)

Shenzhen, one of China’s richest cities has issued restrictions on new car sales, highlighting another constraint on growth for an industry already feeling the effects of the country’s slowing economy. Shenzhen, in southern Guangdong province, was the last of China’s four “tier-one” cities — large urban clusters with high per capita gross domestic product figures — to limit the issuance of new license plates, following similar moves by Beijing, Shanghai and Guangzhou. Effective immediately, only 100,000 new license plates will be issued annually. (12/30)

Environmental groups fighting pollution in China got a big boost when a court imposed the country’s biggest environmental fine from public interest litigation against a corporate polluter. On Tuesday Jiangsu provincial high court ordered six unnamed companies to pay a total of $26m for dumping waste chemicals into rivers. (12/31)

Scotland is concerned about how low oil prices may impact North Sea operations, but is confident about future growth, the deputy first minister said Tuesday. The Scottish government said its economy is on pace to turn in its strongest performance in seven years as well as marking its second straight year of continuous growth. (12/31)

Venezuelan President Maduro said he’d unveil economic reform efforts in 2015 as an economy linked strongly to oil prices slips into recession. The Central Bank of Venezuela said the collapse in oil prices was in part to blame for a 2.3 percent drop in third quarter gross domestic product. That marks three straight quarters of decline for the OPEC nation. (1/1)

The US drilling rig count dropped 35 units to settle at 1,840 units working during the week ended Dec. 26, pushed down entirely by losses on land, Baker Hughes reported. During the week, US land rigs fell 35 units to 1,770. Offshore rigs held steady at 58 units. Oil rigs lost 37 units to 1,499. Gas rigs gained 2 units to 340. (12/30)

LNG setback: Excelerate Energy’s Texan liquefied natural gas terminal plan has become the first victim of the oil price slump. The oil price decline has upended assumptions by developers that cheap US LNG would muscle into high-value Asian energy markets, which relied on oil prices staying high to make the US LNG affordable. The floating 8 million ton per year export plant moored at Lavaca Bay, Texas has been put on hold. The project was initially due to begin exports in 2018. (1/1)

The main US export authority is telling some oil companies that they should consider exporting a lightly processed form of crude oil called condensate without formal permission. The message, though carefully couched as an informal suggestion, marks the first sign that the administration is becoming comfortable about allowing companies to work around the nation’s four-decades-old ban on exporting untreated crude oil. (1/1)

US oil exports: The Obama administration’s move to allow exports of ultralight hydrocarbons produced with crude oil without government approval may encourage shale drilling and thwart Saudi Arabia’s strategy to curb US output. A type of hydrocarbon known as condensate can be exported if it is run through a distillation tower, which separates the hydrocarbons that make up the condensate, according to US government guidelines. That change may boost oil products that can be sold overseas to as much as 1 million b/d by the end of 2015. (12/31)

North Dakota’s population reached an all-time high of 739,482 residents, an increase of roughly 15,600 from last year’s count, largely due to the increased activity in western North Dakota’s oil patch. The state’s population has increased 2.2 percent since last year, the largest percent increase in the nation. (1/1)

Continental Resources, for the second time in as many months, announced budget-cutting details, including plans to slash their 2015 capital expenditures to $2.7 billion. Additional cuts will come as they decrease the number of operated rigs, which they predict to drop from 50 to approximately 31 by the end of 2015. (12/31)

Sand sales for fracking: “This isn’t our first rodeo” has become a catchphrase among oil-industry executives who are laying off workers and dialing back spending in the wake of tumbling crude-oil prices. But for many sand producers, this is their first time on the bucking bronco that is the cyclical energy business—and not all of them are ready for the wild ride, industry analysts say. Sand sales for fracking, now 60 percent of sales, dwarf other traditional uses such as for golf courses and glass making. (1/2)

Oil worker layoffs: The price of oil continues to drop, and that now means mass layoffs for oil workers in Bakersfield. The Employment Development Department showed 700 people to be laid off by Ensign Energy Services, but that bad news came very suddenly for families, and for many of them just before Christmas. (1/2)

US pipeline slowdown: the lower price for crude oil will likely slow the recent pace of pipeline build-outs and focus attention on regions where the production plays are most economic. Many oil industry analysts expect to see a slowdown in new midstream projects as production begins to wane, which is expected by the middle of 2015. (12/31)

Texas oil switcheroo: Five years after one of the biggest oil booms in decades boosted royalty checks, a steep decline in oil prices has Texans seeking new ways to stay ahead. About 70 farmers across the state — up from 24 in 2008 — are hoping to cash in on America’s growing appetite for olive oil, a small part of the latest effort to diversify the economy. In 2013 Texas farmers planted about 500,000 olive trees, up from 80,000 trees in 2008, according to figures from the Texas Olive Oil Council. The council expects around two million trees to be planted by the end of next year. (12/29)

The US Interior Department, which has jurisdiction over public lands, is planning to propose a rule in April that would set a first-ever standard for how much methane can either be vented into the atmosphere or burned as part of drilling operations. The coming rules—at least nine in total—would also include stricter controls on hydraulic fracturing, drilling requirements in the Arctic, new rules governing oil shipped by trains and tougher standards on offshore drilling technology. (12/30)

Alaska Governor Walker ordered a halt to money being spent on a state-led North Slope natural gas pipeline as a budget contingency. The order affects unencumbered state funds appropriated for a 36-inch pipeline being planned by the state gas corporation as a backup in case an industry-led 42-inch pipeline plan associated with a large LNG export project does not proceed. (12/31)

Ethanol makers are bracing for a drop in earnings as cheap crude pushes down the prices they get from refiners to blend the corn-based fuel additive into gasoline. Ethanol producers also face a recent jump in the price of corn, their main raw material. Falling profit margins for the $40 billion US ethanol industry may cause some companies to scale back production in 2015. (1/3)

Truck/SUV sales still gaining: Fresh from a fifth year of growth in the US, carmakers are rolling into the new year with yet another sign of good fortune: cheap fuel is pushing up truck sales. Consumers bought more pickups, minivans and sport utility vehicles than cars in every month of 2014. The full-year vehicle sales will likely total 16.5 million and cap a 58 percent increase since 2009. Light-vehicle sales in the U.S. averaged 16.8 million from 2000 to 2007. The record, set in 2000, was 17.4 million. (1/2)

Gasoline $$ savings: The rout in crude oil prices may mean as much as $75 billion in gasoline savings for US drivers in 2015, according to AAA. Americans saved $14 billion on the motor fuel last year compared with 2013. Pump prices dropped a record 97 consecutive days to a national average of $2.26 a gallon yesterday, the lowest since May 12, 2009. AAA reports a retail national average price of $2.27 for a gallon of regular unleaded gasoline. That’s down about 50 cents, or 18 percent, from one month ago. (1/2)

US House Republicans will work to create the “architecture of abundance” needed to take advantage of North American energy leadership, a lawmaker said. The House Energy and Commerce Committee published a 105-page strategy document meant to highlight the agenda of the incoming Republican-led Congress. It says federal policies are ill suited to develop the infrastructure needed to take advantage of the oil and gas production boost in the United States, thus the need to “get out of the private sector’s way.” (12/31)

The Vermont Yankee Nuclear Power Station in Vernon, Vt., which had been generating electricity since 1972, shut down for good last week, moving to full retirement amid growing competition from cheap natural gas from the shale boom. Environmentalists, who had waged a lengthy fight to close the General Electric Type 4 boiling-water reactor, applauded the news. Others lamented the loss of a source of low-cost, carbon-free electricity and jobs in the region. (12/31)