Quote of the Week
"It’s disappointing that American Petroleum Institute continues to look for reasons not to engage in improving safety of oil transported by rail."
–Suzanne Emmerling, spokesperson for the Federal Department of Transportation
1. Oil and the Global Economy
One of the most active weeks for oil futures in recent months began with prices climbing steadily for three days as the US dollar showed weakness after many weeks of climbing against most foreign currencies. Prices then spiked on Thursday as Saudi Arabia began bombing Houthi rebels in Yemen as they advanced southwards towards Aden. Many traders feared that the fighting could threaten oil shipments through the Strait of Bab el Mandeb. By Thursday’s close, NY oil had advanced by 4.5 percent for the day and was close to achieving the biggest weekly gain in more than four years.
On Friday, however, cooler heads prevailed. The markets realized that Thursday’s gains were an overreaction as there was really little threat to oil shipments from the fighting in Yemen; US crude inventories were still growing rapidly; and the pace of the continuing drop in the US rig count was beginning to slow. There also were reports of weakness in the US and Chinese economies and optimistic reports concerning progress in the Iranian nuclear negotiations were coming out of Lausanne. All this was too much for the oil markets which fell 5 percent on Friday afternoon and then extended losses in after hours trading to finish out the week at $48.28 a barrel. Likewise, London oil futures fell 4.7 percent to close at $56.41 after having flirted with $60 a barrel on Thursday. Despite the price collapse on Friday, New York oil still had a good weekly gain, up 4.9 percent, largely on dollar weakness.
The US Commerce Department announced on Thursday that GDP increased at an annual rate of 2.2 percent in the fourth quarter as compared with 5 percent in the third. US corporate profits fell 1.6 percent in the fourth quarter, including an 8.8 percent decline in profits earned outside the US. Part of this decline in GDP comes from reduced government spending as sequestering of federal expenditures takes hold.
The weekly stocks report showed US crude inventories up by 8.2 million barrels which was more than analysts had expected. Crude stocks at Cushing increased by 1.9 million barrels to a record 56.3 million. Talk in the financial press that a shortage of storage capacity could drive oil prices lower seems to be receding. Most outside analysts do not see a shortage of storage capacity as a real possibility as US oil production will soon be dropping and demand increasing as the summer driving season approaches.
The EIA also reported last week that capital expenditures for exploration and oil field development were down 12 percent year over year in the fourth quarter. While this will have little immediate impact on production, it suggests that production will be falling substantially in the years ahead. Some even see these numbers as a harbinger of peak oil.
Natural gas prices fell last week as the winter heating season draws to a close and the possibility of another spike in demand recedes. Prices on Friday closed down 8.2 percent to $2.59 per million BTU’s which is close to the lowest we have seen in recent months. Some analysts fear that a plunge in natural gas prices, similar to the one which took place in the oil markets, is in the offing due to overproduction. Wellhead prices for natural gas have fallen below $1.50 per million due to limited transport for the gas and saturation of local demand. While the natural gas rig count has fallen of late it has only decreased by half as much as rigs drilling for shale oil, suggesting that there are still too many active rigs.
2. The Middle East & North Africa
From the perspective of oil exports, the Middle Eastern situation took a turn for the worse last week when the Saudis responded to the Houthi offensive into southern Yemen by launching air strikes and forming a coalition of like-minded Sunni states to force the Iranian-backed Houthis from power. Thus we seem to have started yet another of those interminable Middle Eastern civil wars to join the four major and numerous minor conflicts that are underway in the region. While Yemen was only a small oil exporter whose 130,000 b/d will not be missed, the further hardening of the lines between Sunnis and Shiites will not be good for the future of the region. The direct involvement in the fighting by the region’s major oil exporter is even more troubling as prolonged Saudi participation in the region’s turmoil is likely to have unhappy consequences for the Kingdom in the years ahead. Saudi oil exports become an obvious target for numerous malcontents waging Jihad in the region.
Yemen: Heavy fighting continued in Aden over the weekend as an Arab summit declared that the military intervention would continue until the Houthis were vanquished. The military intervention is being seen by many as a “proxy war” to constrain further Iranian involvement and influence in the Arab world. Tehran is already playing a major role Syria, Iraq, Lebanon, Palestine and Gaza, so Yemen just adds another conflict to the list that Iran must support. The impromptu alliance between Tehran/Baghdad and Washington to drive ISIL from Tikrit is leading to concern amongst the Sunni Arab countries about the US commitment to their defense against Iran, further complicating the Middle Eastern mess.
Iran: The nuclear talks continued over the weekend with the two sides still apart on what it take to ensure that it would take at least a year for Tehran to build a bomb and how soon the sanctions would be lifted following an agreement. The latter is the issue dear to the Iranians’ heart as they are currently involved in several expensive proxy wars at a time when their oil revenues are at a nadir. Both sides are expressing some optimism that an agreement will be found in the next few days or at least enough progress can be made to justify an extension.
The closer we get to an agreement the more Israelis and their friends in the US howl that a terrible agreement is being negotiated that will only lead to a nuclear armed Iran or military conflict. Some note that a traditional Iranian negotiating tactic is to wait until the last possible minute before making concessions — so the next few days may be important.
Concerns are rising that Tehran may be facing a leadership crisis soon which could derail any agreement that is reached this year. While the Iranians still elect a President in a more or less democratic manner, the Supreme Leader, an Ayatollah, is selected through a power struggle among the various factions close to the center of power in Tehran. Given the poor state of Iran’s economy, the numerous military conflicts that the country is involved with across the region, and its confrontation with the US and much of the West – the selection of a new Supreme Leader could become contentious with numerous possible outcomes.
Some observers are concerned that Iran could flood the markets with up to 37 million barrels of oil they could have in floating storage. Others discount this idea and hold that it will take several months to Tehran to ramp up oil production that has been shut-in for the last two years.
Iraq/Syria: North of Baghdad, the battle to recapture Tikrit continues, with US airpower now being employed to help the government’s ground forces, largely Shiite militia, drive ISIL from the town. In a new wrinkle to this bizarre situation, some Shiite militias are threatening to go home as they do not like US involvement in what they regard as their holy war despite the benefits that US airpower brings to their position. In Syria, anti-government Islamist forces, but not those of ISIL, which is busy keeping out of the way of coalition air strikes, overran the key city of Idlib on the highway between Damascus and Aleppo. This development could prove to be a major setback for the government in its long-running struggle to maintain power with Iranian and Russian help.
In Iraq, the Kurds received a second payment from Baghdad, this time of $408 million, as part of the new agreement to share oil revenues between the government and Erbil. As the fighting continues and more and more Iraqis become refugees, talk of a three-way partition as the only possible solution is on the rise. A key issue in coming weeks is how the Tehran-sponsored Shiite militias treat the Sunni civilians they overrun in recaptured towns. So far the record is not good and more atrocities would likely lead to a fight-to-the-death mentality that would last for many years.
Libya: The three-way fight amongst the Tripoli government, the Tobruk government and the Islamic state continues with the two governments occasionally diverting forces to fight against the Islamic state insurgents as needed. The UN passed resolutions calling for a ceasefire and a partial lifting of the arms embargo to help fight the Islamic State which is thought to be getting help from the outside. Italy has deployed naval forces along the Libyan coast to protect shipping and oil platforms; to deter the Islamic state from attacks on Italy; and to slow the flood of refugee boats arriving on Italian shores from Libya.
There was little news on Libyan oil production last week. It probably remains in the vicinity of 300,000 b/d. Efforts by the recognized government in Tobruk to divert the oil revenues from Tripoli to banks in eastern Libya will likely fail as the Libyan Oil Company which manages the money will not cooperate.
3. Russia/Ukraine
The fragile ceasefire in the Ukraine continues. The ruble continues to hover around 60 to the dollar after having briefly touched 70 a few weeks ago. A split is developing between Washington and the EU over what, if anything, to do about Ukraine. While nobody in the West is advocating direct military intervention some believe that military aid should be supplied to Kyiv. The US is saying that Moscow continues to supply advanced weapons to the Ukrainian separatists, something that most EU countries prefer to ignore.
In the meantime, Russia continues to be slowly squeezed by the sanctions and low oil prices while the Ukraine is facing serious economic difficulties as well as natural gas shortages. Moscow’s objective seems to involve continued military and economic pressure on Ukraine until it becomes a failed state and returns to Russia’s sphere of influence rather than flirting with the EU. This story has a long ways to play out – including what happens to oil prices in the next year.
6. The Briefs
Norway’s Statoil said Friday it started the pioneering project of laying a 300-mile long gas pipeline across the arctic waters of the Norwegian Sea to a gas processing plant in the northwest of the country. This is the first large-diameter pipeline of its kind to be placed in waters of up to 4,150 feet deep and is the first pipeline to carry gas across the Arctic Circle. (3/28)
In the U.K., Royal Dutch Shell said Thursday that it would eliminate at least 250 jobs in its North Sea operations this year, the latest workforce cut for big energy companies trying to reduce spending. (3/27)
In the U.K., total domestic production of oil in the three months ending in January dropped off 3.6 percent while gas production declined by 1.1 percent compared with the same period last year. Total 2014 production of petroleum was down 2.3 percent as a result of long-term decline and maintenance activity, though natural gas production was up slightly by 0.3 percent. (3/26)
Kuwait oil officials, stymied by political opposition to foreign oil companies, have privately acknowledged the country won’t meet a goal of boosting oil-production capacity 25% by 2020. The delay throws a spotlight on the fractious politics of a rare Middle Eastern country where an elected parliament holds real power, and the constitution bans foreign ownership of natural resources. (3/26)
Nigeria exported 2.05 million b/d of crude oil and condensate to Europe and India in 2014. The United States changed from being the largest importer of Nigerian oil in 2012 to the 10th largest in 2014. India is now the largest importer of Nigeria’s oil, purchasing about 370,000 b/d or 18 percent of Nigeria’s total crude exports in 2014. (3/25)
In Nigeria, Royal Dutch Shell’s subsidiary said it made further progress in its divestment strategy by selling Niger Delta assets—a pipeline plus an oil lease—for $1.7 billion. (2/26)
Lawmakers in New Brunswick voted on Thursday to prohibit fracking in the eastern Canadian province for one year. They will study the controversial method of extracting oil and gas for a year before reconsidering the ban in 2016. (3/27)
U. oil rigs fell by the smallest number in 15 weeks, a sign that America’s oil-drilling crash may be tapering off. Drillers idled 12 oil rigs, dropping the number to 813, Baker Hughes reported on Friday. The oil rig count has dropped 49 percent since October. Gas rigs were down 9 to 233 this week. The US offshore rig count is at 34, down 3 from last week and down 16 from the previous year. For all rigs, including natural gas, the week’s drop was 21 to 1048, and down 761 from last October’s peak of 1809. (3/28)
According to the National Petroleum Council, the US should immediately begin to push exploitation of its enormous trove of oil in the Arctic waters off of Alaska, or risk a renewed reliance on imported oil in the future. (3/27)
The U.S. Justice Department said a division of the oil services company Schlumberger agreed to enter a guilty plea and pay a $232 million penalty for conspiring to violate sanctions against trade with Iran and Sudan over a six-year period ending in 2010. Schlumberger also agreed to halt all activity in those countries for a three-year period. (3/27)
A recent US rule about hydraulic fracturing on federal and tribal lands will have limited effect on existing US oil and natural gas production, said a Barclays Research analyst in New York. Officials with the US Bureau of Land Management said the regulations, effective in 90 days, will improve safety and help protect groundwater by updating requirements for wellbore integrity, wastewater disposal, and public disclosure of chemicals. Onshore oil production from federal and tribal lands accounted for less than 10% of US oil production. (3/24)
In North Dakota, business and community leaders in the western oil patch have launched an aggressive campaign to convince more manufacturers to set up shop locally, part of a push to expand the area’s economy beyond crude production. The effort comes as plunging crude prices threaten the economy of a region overly reliant on one industry – pumping of oil out the ground. (3/26)
Advanced drillships costing more than half a billion dollars each and capable of operating in ever-deeper waters practically guaranteed big profits for oil-rig operators not long ago. Now, with oil prices down by half since June, many have become a burden on their owners as drilling activity slows. Drillship operators face the huge cost of maintaining the more than $10 billion worth of state-of-the-art vessels that have been idled at sea. Maintaining an idle dynamic-positioning rig costs up to $200,000 a day at sea, compared with less than $100,000 for older rigs that can be towed to port. (3/28)
Rig services company Transocean is bracing itself for an uncertain and difficult road ahead in the offshore drilling market. While the company held its ground last year as oil prices fell, this year may be different for the rig builder. Transocean last week said it was scrapping four of its for-sale rigs. (3/28)
Halliburton will no longer have a presence in Minot, North Dakota as of April 1, transferring employees to their Williston and Dickinson locations. Earlier this year the company reported worldwide layoffs of 6,500 people followed by an announcement that they would close their facility in Regina, Saskatchewan in March. (3/28)
Chevron announced that it will divest its 50 percent stake in refiner Caltex Australia following an underwriting agreement. The company said it remains committed on moving forward its Australian LNG projects Gorgon and Wheatstone. The first LNG shipments from the Gorgon project are expected before the year’s end while Wheatstone is on track to start by end 2016. (3/27)
Royal Dutch Shell is moving two drillships to Alaska in anticipation of the short operations window during the summer ahead as the oil major awaits the green light from US authorities,. The company has little to show after spending years and more than $5 billion preparing for work in the Arctic. (3/28)
The Pentagon has cut the price it charges the US Air Force and other military branches for refined fuel by 12% in a rare midyear change following the large drop in global oil prices. (3/23)
Traffic on US highways has hit a new record as the economy recovers and the lower cost of gasoline and diesel encourages more travel. Cars and trucks drove a record 3.050 trillion miles on U.S. highways in the 12 months ending in January, passing the previous peak of 3.039 trillion set in the 12 months to November 2007. In January, traffic was 4.9 percent higher than in the corresponding month in 2014. (3/26)
Coal’s share of the US electric power sector totaled 36.8 percent of all generation, down from the previous month as more power was generated. In December, coal accounted for 40.7 percent of all generation. Natural gas made up 28 percent of generation in January and 29.4 percent of generation in December. Coal accounted for 46.5 percent of power generation in January 2014. (3/28)
Big solar: California has become the first state with more than 5 percent of its annual utility-scale electricity generation from solar power, according to EIA’s Electric Power Monthly. (3/25)
New Zealand says it’s on pace to use renewable resources for nearly all of its electricity. The share of electricity generated from renewable resources last year was 79.9 percent, a 5 percent increase from the previous year. (3/26)
Egypt, Sudan, and Ethiopia took a step Monday to defuse tensions around Ethiopia’s construction of a massive dam on the Blue Nile, which has threatened to upset the geopolitical balance in the region over how to share water from the River Nile. (3/24)
French authorities have introduced measures to combat a sharp increase in pollution affecting Paris and other cities in northern France. On Monday the number of cars on the road in Paris will be cut in half – only motorists with odd-numbered plates will be allowed to drive. Public transportation will be free as well as car-sharing and bike-sharing programs. Similar measures were put in place last year when pollution soared in Paris. The city saw a severe spike in smog on Wednesday last week and briefly had the world’s dirtiest air. (3/23)
