1. Oil and the Global Economy
Despite a number of developments affecting the oil markets last week, New York futures still closed Friday at only $45.59 a barrel – down 6.4 percent during the week. London’s Brent did better, closing on Friday at $48.97, which widened the WTI/Brent spread from $1.04 to $3.20 during the week. Among the important developments that moved oil prices were the death of King Abdullah of Saudi Arabia; a lower IMF forecast for the growth of the global economy; a new quantitative easing program by the European Central Bank, which sent the euro down to the lowest in 11 years against the dollar; a 10 million barrel increase in US crude stocks the week before last; and an improvement in China’s economic outlook.
The death of the Saudi King roiled the markets for a few hours, but after firm assurances from Riyadh there would be no change in oil policies and that Oil Minister Al-Naimi and the other cabinet ministers would remain in place, market attention turned elsewhere.
The Davos economic summit in Switzerland and an energy summit in Abu Dhabi last week offered the opportunity for senior officials to comment on oil prices to the press. The Executive Director of the IEA sees no quick recovery for the global economy or for oil demand. The Secretary-General of OPEC says oil will rebound shortly because of supply and demand, and prices will not fall into the $20s. Saudi Prince Alwaleed said oil prices will not return to the $100/barrel level and that his country will not cut production because of the glut caused by the US shale oil industry.
Bad news from around the global oil industry continued to be released last week. As still more cuts in drilling and other forms of capital expenditures were announced, Wood Mackenzie said that the US onshore well count would decline from 37,000 in 2014 to an estimated 27,000 in 2015. Last year North American drilling and well completion expenditures exceeded $140 billion, but will likely fall to some $90 billion this year. Cuts of this size will have a considerable impact throughout the oil industry and its suppliers.
Discussion of the price decline; the level at which the markets will bottom; and the prospects for recovery continued last week. For now it looks as if there will be a considerable decline in US shale oil production in the second half of 2015; that OPEC will maintain its production in the vicinity of 30 million b/d unless there is some major geopolitical upheaval; and that oil importers are and will be getting a significant economic boost from low gas and oil prices throughout much of this year. Conversely, countries relying on oil exports for the bulk of their income are in a lot of trouble with several of them including Venezuela and possibly even Russia heading for default.
If gasoline prices stay low, US consumers should save some $125 billion in fuel costs this year. The Oil Price Information Service says that cost of regular gasoline this year will average somewhere between $2.35 and $2.45 a gallon. The shift to summer blends of gasoline usually results in increasing gasoline prices around the first week of February so we can expect prices to stop falling soon unless crude prices fall significantly from current levels. Increasing mileage in newly built cars will tend to dampen increased demand for gasoline due to low prices.
California’s oil industry is being hit particularly hard. The EIA’s revelation last year that the recoverable shale oil in the state was only a tiny fraction of previous estimates, coupled with the ongoing drought, were only the beginning of the bad news. California’s heavy Kern River crude has lost 66 percent of its value. It is now going for some $33 a barrel. Some two-thirds of the state’s drilling rigs have been shut down in the last five weeks suggesting that there is not much of the California oil industry left. The only good news is the drop in gasoline prices, which is of considerable benefit to consumers.
US natural gas prices bounced around wildly last week as increasing production faced ever-changing forecasts of cold or not-so-cold weather in the northern US. At the end of the week futures were trading at $2.96 per million BTUs.
2. The Middle East & North Africa
Saudi Arabia: Last week saw the death of the Saudis’ king; the swift transition to new leadership; and the collapse of the government in Yemen amid new fighting between the Sunnis and the Shiites living there. The new king is 79 years old and may not be in the best of health and has already appointed a 69 year-old as his successor and a younger successor’s successor insuring that the monarchy will, in theory, continue for some time to come. The kingdom is currently besieged with a numerous problems – some of them domestic and others evolving from the Kingdom’s position as the leader of the Sunni branch of Islam in an ever increasing fractious Middle East.
The Saudis are beset by unfriendly neighbors on many sides including ISIL and the Shiite government in Iraq; the uprising in the Sinai; Shiite restlessness in Bahrain; and Iran just across the gulf. Their only real asset is the 9-10 million b/d of oil production that they have been able to maintain well beyond what some observers thought possible by a vigorous program of drilling and reworking older oil fields. How much longer high levels of oil production can be maintained is an open question, for without it, Saudi Arabia has few other assets. In the meantime, however, the kingdom has a reported $750 billion in foreign reserves, which is clearly enough to take it through many years of low oil prices.
Iraq: Coalition air strikes on ISIL positions and assets continue as do the terrorist bombings in downtown Baghdad. With the support of coalition airpower, the Kurds are making progress in driving back ISIL forces from areas which the Kurds consider to be their own. The Kurds say they are not interested in moving against ISIL in other occupied areas as that is Baghdad’s problem. Preparations are being made for a government move on Mosel, but this may still be some time in coming. ISIL is having trouble administering Mosel, a city of 1 million people harboring many that do not agree with their brand of Islam. Food shortages are growing and communications with the city have been cut off.
Amidst all the turmoil, Iraqi oil exports continue to grow from the southern, northern, and Kurdish oil fields. The Turkish export terminal of Ceyhan received 450,00 barrels of crude from the northern Iraqi province of Kirkuk which is under Kurdish control. Baghdad’s state oil marketing company is selling the oil under a revenue sharing agreement with the Kurds.
Meanwhile efforts are underway to increase oil production in Iraqi Kurdistan. Genel Energy, which is headed by former BP CEO Tony Hayward, says it will increase production by 74 percent to 450,000 b/d this year. Gulf Keystone, another company working in Kurdistan, says it produced 40,000 b/d last month and will increase this to 70,000 b/d by 2017. Iraq is one of the last places on earth where it is still easy and relatively cheap to produce conventional oil.
Libya: The turmoil continues. Gunman kidnapped the deputy foreign minister from his hotel room in the eastern city of Al-Baida where the recognized government is currently headquartered. Libya’s OPEC governor who is also chief of planning for the National Oil Company was kidnapped in Tripoli last week.
Troops loyal to General Haftar, who is leading the fighting for the recognized government, seized the Benghazi branch of the central bank which, together with the central office in Tripoli, is the repository of the nearly $100 billion in foreign currency reserves. The bank has been one of the last functioning institutions in the country. It has attempted to remain neutral in the midst of all the chaos and has continued to pay for the nation’s bills and the salaries of millions of public employees on all sides of the conflict. If the bank falters, there is not much of the country left. The seizure of the Benghazi branch of the Central Bank by General Haftar’s forces raises fears that the Islamists may try to do the same thing with the Tripoli branch.
The New York Times reports that oil production is now below 250,000 b/d, which is not much above domestic needs.
Iran: The key issue at the minute is how the new legislation increasing the sanctions on Iran will fare in the US Congress, which says it is “helping” the nuclear negotiations by increasing the pressure on Tehran. Despite Presidents Obama’s announced intent to veto any new sanctions bill that emerges from Congress, Tehran says it is taking the matter very seriously as evidence of America’s bad faith in the negotiations. The Iranians say the current interim agreement forbids any new sanctions so long as it is in force.
Tehran is threatening to walk out of the talks, should a bill be passed by the Congress, but it is unclear whether they are considering the likelihood of a Presidential veto or are simply looking for a good excuse to blame the US for the collapse of the talks should this occur. Some hardliners in Tehran are also threatening to resume full-scale uranium enrichment in retaliation for any new sanctions. The talks are scheduled to resume in Geneva early next month.
The death of an Iranian general in an Israeli air strike in Syria near the Golan Heights has further increased tensions in the area. Some in Tehran are threatening a harsh retaliation on Israel, but most believe neither side want to undertake large-scale military action at this time. Tehran is stretched very thin confronting ISIL in Syria and Iraq at a time when is oil revenues are shrinking.
3. China
Economic growth problems are still the main issue confronting Beijing. The transition from 25 years of rapidly growing exports to an economy that focuses on domestic consumption has not been easy. Figures released last week show that GDP growth in 2014 was only 7.4 percent, down from 7.7 in 2013. The IMF is forecasting that growth will fall again this year to 6.8 percent. Some outside observers who study China’s economy say that real growth is substantially below official figures.
China’s oil imports from Russia increased by 36 percent last year to about 665,000 b/d. Imports from Saudi Arabia last year were about 997,000 b/d and falling as Beijing sought to diversify its sources of crude away from the turbulent Middle East. China purchased only 16 percent of its crude from the Saudis last year as compared with 19 percent in 2013. It is this decline that is part of the Saudis’ overriding concern about market share and the need to maintain production.
Despite the weak economy, China’s “apparent” oil demand rose to 10.6 million b/d in December. Forecasters are saying that consumption may increase by 5 percent or roughly another 500,000 b/d this year as Beijing attempts to fill out its strategic reserve and fuel the 20 million new cars that it produces each year.
4. Russia/Ukraine
As the violence in Ukraine increases, Moscow is coming under increasing pressure from the West to call a halt to the confrontation. Last week new fighting began in half a dozen areas along the ceasefire line as the number of civilian casualties increases due to indiscriminate shelling. Moscow vehemently denies that it is involved in the fighting, a position contradicted by Western and the Ukrainian governments who maintain the recent offensives have involved Russian troops. The volume and accuracy of the artillery fire coming from rebel held areas is well beyond what could be generated by the popular uprising that Moscow insists comprises rebel forces. NATO is noting the increasing number of new and sophisticated weapons in the hands of the insurgents. There now seems little doubt that the progress of the insurgents is directly tied to the direct support, both in manpower and material, that they receive from Moscow.
There no longer seems to another cease-fire in the immediate future and Moscow seems determined to beat down the Ukrainian armed forces until they come to its terms no matter what the West thinks. Some are saying that fighting in the Ukraine and confrontation with the West is strengthening President Putin’s domestic position during a time of increasing economic hardships.
It is hard to see where all this is going except for the movement in the West to disentangle itself from Russian oil and gas. So long as China continues to buy ever-increasing amounts from Russia, Moscow really does not care if it loses the EU’s except that the Europeans have been paying much more than the Chinese do.
5. Quote of the Week
- “We spent a lot of money to go out and drill and use new technologies just to stop production from depleting in our mature fields. It took us a lot of capital to basically run in place and now we’re looking at crude prices under $40 a barrel.”
— Rock Zierman, CEO of California Independent Petroleum Association
6. The Briefs
Saudi Arabia can cope with low oil prices for at least eight years, according to the former senior advisor to Saudi Arabia’s minister of petroleum. (1/20)
Total SA, the French oil and gas giant, plans to reduce group-wide capital spending by 10 per cent this year and speed up billions of dollars in asset disposals, under an accelerated cost-cutting plan. (1/21)
Repsol said it would abandon drilling off the Canary Islands, ending a year-long conflict that had pitted the Spanish oil company and central government against islanders worried about the effect oil extraction may have on the environment. An exploratory well reaching more than 3,000 meters below sea level found methane and hexane gases but it “lacked the necessary volume and quality to consider future extraction”. (1/19)
Ukrainian’s Prime Minister Arseniy Yatsenyuk announced a deal to build a pipeline with neighboring Poland that diversifies the energy sector with better access to liquefied natural gas hubs. The PM said the deal means access to gas from the LNG terminals that have already been built in Lithuania and Poland. (1/21)
Russian energy company Rosneft announced it joined its partners at Exxon Mobil in starting oil production from a Far East field. The Russian oil company said the production platform tied to the Arkutun-Dagi field yielded its first oil supplies Monday. Rosneft said the field should have a full-year peak production rate of roughly 90,000 b/d. (1/21)
Schlumberger will pay $1.7 billion for a stake in Eurasia Drilling Co., Russia’s largest driller, a bet by the world’s largest oilfield services provider that economic sanctions and the country’s sagging economy won’t hold back Russia’s energy industry. (1/21)
In Pakistan, Prime Minister Nawaz Sharif canceled a trip to attend the World Economic Forum in Davos, Switzerland, as the nation’s worst fuel shortages in memory threatened to revive street protests against him. The government has sold fuel from its reserves and private companies have boosted supplies as anger grows over long waits at petrol stations. A surge in demand developed after the government cut gas prices to match lower global costs, and supplies were insufficient. (1/24)
Pakistan: In yet another sign of a lack of coordination within the government, the water and power ministry denied that there was a fuel shortage at power plants, claiming that power generation companies had 10 days’ worth of fuel inventory. (1/23)
China is making the most of crude’s collapse as refiners process and import more oil than ever. Apparent oil demand, a measure of consumption, rose to an unprecedented 10.63 million barrels a day in December. This year, demand may expand by 5 percent, bolstered by about 7 million metric tons of crude being stockpiled for emergency use. (1/20)
Floating storage: The supertanker TI Oceania was built to ferry oil across oceans, but for the next year it is expected to remain anchored off the coast of Singapore, storing millions of barrels of oil for Vitol SA, a giant trading house. The strategy is simple: buy and store oil at cheap prices now, selling futures contracts to lock in the higher oil prices expected later. (1/20)
Australia’s BHP Billiton will reduce its US onshore rig presence from 26 to 16 by July in response to lower oil prices. The company said it will instead focus on improvements in drilling and completions efficiency, and concentrate on its higher quality liquids-rich Black Hawk acreage in southern Texas. (1/22)
Africa’s oil and gas boom is in jeopardy. The dash for resources that saw explorers invest billions of dollars to tap promising oil fields from Ghana on the west coast to Tanzania on the east is stalling as the global drop in crude prices pushes drillers to reconsider the high costs of exploration on the African continent. For many drillers, 2014 was already failing to reach the promise seen in 2013 when half of the world’s 10 largest oil and gas finds were made in Africa. (1/22)
In Venezuela, the sale of PDVSA’s subsidiary, Citgo Petroleum Corp., has been called off. The US-based oil refiner instead plans to raise $2.5 billion by selling debt that would raise funds for the cash-strapped country. Citgo, which operates three US oil refineries and related assets from its Houston headquarters, was expected to fetch between $8 billion and $11 billion should it have been sold. (1/21)
Pemex provides a third of all Mexican government revenue – but is vulnerable to fraud and waste. Reuters identified $11.7 billion in Pemex contracts flagged as problematic by government auditors. But records show that authorities rarely act on those warnings. (1/24)
The Canadian Association of Petroleum Producers said it expects oil production to decline by 65,000 b/d this year and 120,000 b/d in 2016 due to the slump in oil prices. (1/22)
The US drilling rig count fell 43 units to settle at 1,633 rigs working during the week ended Jan. 23, Baker Hughes Inc. reported. The count has now fallen in 8 consecutive weeks, losing 287 units during that time. Oil rigs plunged 49 units to 1,317. Gas rigs gained 6 units to 316. (1/24)
Potential labor problems: United Steelworkers leaders, representing employees at about two-thirds of US refineries, instructed members to reject the first three-year contract proposed by oil companies on Friday, describing the offer as “offensive.” The list of companies included Chevron Corp., Exxon Mobil Corp., Marathon Petroleum Corp., Royal Dutch Shell and Tesoro Corp. (1/24)
Oilfield services provider Baker Hughes said it expects to lay off about 7,000 employees, days after industry leader Schlumberger Ltd said it would cut jobs as drilling activity slows due to a steep fall in oil prices. The job cuts underscore the abrupt slowdown in drilling activity seen in the past few weeks. (1/21)
In California, little is going right for the oil industry. Turns out the state’s shale formation holds less promise than producers expected. Aging conventional wells are drying up. Then, of course, came the collapse in oil prices. No state is feeling that pressure more than California. Drillers there have idled more rigs — on a proportional basis — than those in any other part of the country. Drillers have idled two-thirds of their rigs in the state in five weeks, dragging the total down to the lowest since 2003. Oil output, which had been creeping up since 2011, is now little changed and a slide will probably follow. (1/23)
US demand increasing: Total US petroleum deliveries increased 5.1 percent last month from December 2013 to average nearly 20 million b/d, according to the American Petroleum Institute. For the fourth quarter, total US petroleum deliveries gained 2.9 percent compared with the same period in 2013. Gasoline demand last month rose by 5.4 percent from the prior year to average more than 9.1 million b/d, the highest December level since 2007. (1/24)
US gasoline prices appear headed below a nationwide average of $2 a gallon in coming days, extending one of the swiftest declines in decades and delivering a growing windfall to American consumers. The plunge is rippling through the US economy. Restaurants and bars are seeing their best sales growth in years. Americans are driving more—and buying bigger cars and trucks. Consumer confidence is sitting at an 11-year high, with lower-income households showing the biggest improvement. (1/23)
US airlines gave bullish guidance this week for their first-quarter results, buoyed largely by plummeting fuel prices. Four airlines said they would save hundreds of millions of dollars in fuel costs starting this year, with global oil prices down more than 57 percent since June. Fuel is the biggest variable cost for airlines, often representing a third or more of total operating expenses. Fourth-quarter results did not fully reflect the windfall, because many airlines failed to anticipate the steep oil price slide and made fuel hedges months ago that ended up costing those carriers hundreds of millions of dollars. (1/23)
US gasoline: The global glut of crude oil is turning into a glut of gasoline. Even though U.S. drivers are filling their tanks more often, they can’t keep pace with surging gasoline supplies. Gasoline prices are likely to average $2.33 this year, off 31 percent from 2014, according to the U.S. EIA. (1/22)
Though US gasoline prices continue to fall nation-wide, the trend may reverse as refineries start entering a maintenance phase next month. Retail gasoline prices are typically lower during winter months because refiners produce a type of fuel that’s cheaper to produce. A maintenance period typically precedes the April switch to summer-grade gasoline, which must be refined in such a way as to ensure fuel doesn’t vaporize in vehicle fuel systems. (1/21)
Tumbling oil prices look set to hit electric cars and biofuels harder than other parts of the green power industry, the head of the world’s leading renewable energy agency has warned. That is because they compete directly with rivals such as petroleum-fuelled cars that are becoming cheaper to run as oil prices fall. But wind farms, solar plants and other renewable electricity generators should not be affected by the price plunge because they do not face anything like the same level of competition. (1/19)
Michigan Governor Snyder is setting his energy position out early in the state’s two-year legislative session, saying he wants to look into weaning the state off coal-fired generation. Currently, Michigan sources about 50 percent of its power from coal-fired plants, but Snyder told the Michigan Conservative Energy Forum Thursday that “now is the time to look at a long-term transition away from coal.” (1/19)
In Brazil, Monday’s massive blackout is raising concerns that electricity rationing may hit this year, dealing a serious blow to the nation’s already fragile economy. Energy officials blamed soaring summer demand and a transmission glitch for Monday’s outage, which rolled through the capital Brasília and 11 states, including São Paulo and Rio de Janeiro. But power woes in Brazil, which is suffering from a severe, multiyear drought, won’t be easily solved. (1/21)
In Iraq, as the season for wheat planting
California will reach the halfway point in its rainy season this weekend. Hopes that the three-year drought will be washed away are already in the past. While December brought heavy rains that put the state on pace for a normal season, there hasn’t been much precipitation since then. (1/23)
The Panama Canal expansion project is now 85 percent complete. The expansion project involves the addition of a third shipping lane to the canal and will ultimately allow larger 14,000 twenty foot equivalent container sized vessels to transit the canal. It is set to be completed in December 2015 and be operational the following month. (1/23)
Beijing plans to start construction on four subway lines in 2015 as the city authorities continue to resort to the metro system to ease traffic jams. (1/24)
