1. Oil and the Global Economy
In volatile trade last week, oil prices rose about 5 percent to close at $51.64 in New York and $57.87 in London. The continuing drop in the number of rigs working in US oil fields and growing uncertainty over whether an Iranian nuclear agreement can be reached were the major factors behind the gains. Although the EIA continues to report small weekly increases in US oil production, most analysts are expecting that US crude output will stop growing within the next few months, if it has not done so already. Uncertainty as to just how quickly there will be slowing in the growth of in US shale oil production is the reason for the current volatility.
US crude stocks grew by 12 million barrels the week before last, the dollar has been stronger, and most analysts believe there still is an oversupply of 1-2 million b/d worldwide. These factors tended to keep a lid on markets’ general optimism that prices have to go higher, due to the falling US rig count. Many continue to ponder why the low oil prices are not stimulating more economic growth.
The Saudi Oil Minister said last week that his country was ready to help push oil prices higher through production cuts, but that the Saudis would not do it alone. He implied that there must be cutbacks in non-OPEC production, particularly in the US, which the Saudis see as responsible for the current glut.
US natural gas futures fell sharply last week as warmer weather collided with robust production leading to a larger-than-expected increase in natural gas stocks. At the close Friday futures were trading a $2.51 per million BTUs which is the lowest for a front month in the last three years.
2. The Middle East & North Africa
The overall Middle Eastern/North African situation continued to spiral downwards last week with heavy fighting in Syria, Iraq, and Yemen and lesser violence taking place in a half dozen other countries. The fighting in Yemen is drawing more countries, especially Gulf oil producers, into direct military conflict. US policy in the region has become schizophrenic with support going to both Sunnis and Shiites depending on the country involved. In the longer run the increasing violence, which is likely to last for years or perhaps decades, is bound to impact still more oil exports from the region.
Iraq/Syria: Violence increased last week, with ISIL forces making gains in Anbar province northwest of Baghdad and seizing a major Palestinian refugee camp just 10 miles from downtown Damascus. These gains are coming despite continuing air strikes by US and coalition forces. Baghdad’s forces are consolidating their capture of Tikrit after several weeks of siege capped by US airstrikes on key ISIL defensive positions in the city. The humanitarian crisis in Syria and Iraq continues to get worse with thousands fleeing their homes and cities that are rapidly turning into piles of rubble. The resilience ISIL is showing in the wake of months of continuing coalition air strikes suggests that this is going to be long struggle. Gains by ISIL and other rebel groups in Syria last week suggest that a turning point may be approaching for the Assad government.
Baghdad, however, seems to be having some success with its oil business. A long line of tankers is waiting off Basra to pick up oil shipments that have been delayed by bad weather. The Kurds report that they expected a $439 million budget from Baghdad last week and Russia’s Gazprom said it received its first payment in the form of a batch of oil from the Badra field that it is developing for the Iraqis. While the Iraqis are busy shoring up their relations with the Kurds and foreign oil companies, Iraq’s prime minister is expected in Washington this week to ask for more military equipment on credit to fight ISIL.
Libya: Scattered fighting continued across the country last week including an attack on the South Korean embassy that killed two local guards. So far as anyone can tell, oil production remains in the vicinity of 500,000 b/d with exports going to western countries. Most of the action at the minute deals with the internationally recognized government now in Tobruk/Beida efforts to gain control of the oil revenues which are still being deposited in Tripoli’s central bank, currently under control of the Islamists, as has been done for decades. The Tobruk government would like the revenue to go into an offshore account which it controls, something the oil companies purchasing the oil are unlikely to comply with.
The purchasers are not interested in negotiating new contracts with an entity other than the Libyan National Oil Company which produces and ships the oil. The central bank is currently distributing the oil revenues to government employees, which seems to include many if not most Libyan citizens on all sides of the three way war going on in the country. The Tobruk government has no access to the payroll lists from its small town in eastern Libya without which the whole country would stop and complete chaos would ensue. Most thinking Libyans would prefer to leave the current arrangements in place under which everybody gets paid from the oil revenue.
Foreigners continue to flee the country in the wake of the ISIL beheadings in February. So far some 50,000 Egyptian workers have left which is not doing much for the Libyan economy. Cairo continues to call for foreign intervention in Libya to stop the growing threat of ISIL-like terrorism.
Iran: The fate of the nuclear agreement, which could increase Iranian oil exports by as much as 1 million b/d adding to the oil glut and reducing the impact of any decline in US shale oil production, became cloudier last week. Most Iranians seem to be going along with the proposed framework for an agreement and criticism from hardliners in Tehran was muted last week. The open issues as to how quickly the sanctions would be lifted and just how intrusive the UN inspections of Iran nuclear facilities became more contentious when the Ayatollah said last week that sanctions must be lifted on signing of the agreement. The Iranians consider it an insult to their integrity that the West assumes they would not comply with any agreement and that the sanctions would only be lifted slowly after they fully demonstrate compliance with the terms of an agreement. Whether this is a showstopper remains to be seen.
Many opponents of the agreement, mostly in Israel and Washington, still believe that the proper course is to continue and strengthen the sanctions on Tehran until it knuckles under to foreign demands and gives up all efforts to development nuclear energy in any form. This hardliner position is something that Tehran is unlikely to do and likely will not sit well in Beijing and EU capitals causing the sanctions to largely unravel.
The Iranians were in Beijing this week attempting to involve the Chinese more deeply in the post-agreement development of their oil industry. The Chinese have already announced that they will finance the long-stalled pipeline that will move Iranian natural gas to Pakistan. Tehran likely sees the Chinese as more reliable future partners than Western oil companies in the development of their oil industry.
Yemen: Although the country produces only a small amount of oil, the implications of the Sunni/Shiite confrontation which is bringing in foreign powers in support of one side or the other is a bad omen for the region. Heavy fighting is now reported in Aden through which much of the nation’s food supply is imported. The Saudis continue to bomb Houthi forces, which in turn are seeking cover in civilian neighborhoods contributing to the mounting civilian casualty count. So far foreign intervention consists mostly of air and sea bombardment leaving various Yeminis factions to do the ground fighting. Last week Pakistan, a nation of nearly 200 million people and up to its ears in debt to Riyadh, turned down a Saudi request that it send ground forces to fight the Shiites in Yemen.
Although the situation has been cast as a Sunni/Shiite confrontation, tensions between the two religious groups traditionally have been much lower than elsewhere in the Middle East. In reality the civil war is more of a tribal power struggle than a religious conflict as is seen elsewhere. The Houthis, however, did open doors to Tehran when they seized the capital and there are reports of Iranian officers advising Houthi forces in Aden. This situation has further exacerbated relations between Iran and Saudi Arabia. Even the US is becoming involved with expedited shipments of weapons to the Saudis to aid their attack on the Houthis.
There is no clear political path out this complex situation. As Yemen imports some 90 percent of its food and the main seaport is mostly closed, a major humanitarian crisis possibly surpassing those in Syria and Iraq is developing in this nation of 24 million people.
3. China
Reports from across the country speak of slowing economic growth as the government tries to transition the economy from one dependent on debt-fueled apartment construction, massive infrastructure projects, and heavy industry to one based on consumer consumption. The drive to reduce deadly levels of air pollution, which seems to be taken seriously this time, is also slowing economic growth. Most observers believe Beijing will achieve a 7 percent GDP growth rate this year as compared to 14 percent back in 2007. This is likely to reduce the growth in demand for oil imports.
Some are calling the new Beijing-dominated Asian Infrastructure Investment Development Bank (AIIB) as the next step in China’s drive to dominate the world economy. The new bank which will act in a similar fashion to the IMF and World Bank will channel China’s massive foreign currency reserves into the global investment. In opposition to Washington’s wishes, France, Italy, Germany, and the UK will all be founding members of the Bank. Beiing has already pledged the first $50 billion of the bank’s $100 billion of start-up capital.
Beijing announced last week that the third phase of its strategic petroleum reserve program will bring the program’s total capacity to 232 million barrels or about 37 days of current imports. China has been purchasing low-priced crude to fill its new reserve of late, but there is no definitive word as to how far along they are or when imports will fall.
4. Russia/ Ukraine
A new economic phenomenon is causing Moscow still more economic grief. This time it is a strong ruble which is up 14 percent in the last month. As the ceasefire took hold in the Ukraine, extremely high interest rates reaching 17 percent have attracted more foreign investment which has driven the demand for rubles higher. As the price of Russia’s exports expressed in dollars has remained about the same in recent weeks, the value of those exports expressed in rubles has fallen.
Moscow is considering establishing its own credit rating agencies to escape the lowered ratings that the international firms such as Moody’s and Standard & Poor’s have been awarding to Russian businesses as its economy has weakened. In February Moody’s lowered its assessment on seven Russian financial institutions citing the expectation of a “prolonged recessionary environment” in Russia. At least one Russian bank is seeking a rating from a Chinese credit rating firm, hoping to be treated more fairly than what Western agencies have been saying about their prospects lately.
6. The Briefs
Royal Dutch Shell agreed to buy smaller rival BG Group for $70 billion in the first oil super-merger in more than a decade to close the gap with ExxonMobil. Britain’s BG had a market capitalization of $46 billion as of Tuesday’s close; Shell was worth $202 billion while Exxon was worth $360 billion. (4/8)
Mergers anyone? Now that Royal Dutch Shell has made its move for BG Group, Exxon Mobil and BP could contemplate deals — perhaps even with each other. Possible takeover targets include Anadarko Petroleum, Cabot Oil & Gas, Pioneer Natural Resources, Occidental Petroleum and Tullow Oil (4/9)
An oil find near London’s Gatwick airport contains much more oil than first estimated, an independent report commissioned by the field’s developers said on Thursday. London-listed UK Oil & Gas Investments said the report estimated 158 million barrels per square mile could be lying below the site just north of Britain’s second-largest airport, much more than first thought. (4/9)
UK Oil & Gas Investments announced there may be as much as 100 billion barrels of oil in the Horse Hill license area of the Weald basin in southern England, with recovery of 3% to 15% of the oil in place possible. “Appraisal drilling and well testing will be required to prove its commerciality, but this Weald hybrid play has the potential for significant daily oil production,” UKOG Chief Executive Officer Stephen Sanderson said. (4/11)
With major oil deposits uncovered in England, British Friends of the Earth said it was concerned about the pace of the fledgling shale industry in the country. (4/11)
The UK government on Friday confirmed its ambassador in Buenos Aires had been summoned to a meeting at Argentina’s foreign ministry in the latest flare-up of the long-running diplomatic row over the sovereignty of the Falkland Islands that has engulfed oil and gas exploration companies. (4/11)
Russia’s aging and leaking pipelines are wasting millions of tons of oil a year, causing widespread environmental damage that largely goes unreported, according to Greenpeace Russia. The pressure group says the problem is getting worse as Russia battles against falling oil prices and continued Western sanctions at a time when its pipelines need urgent repairs or replacing altogether. (4/11)
Unplanned crude oil supply disruptions among OPEC producers during February 2015 averaged 2.7 million b/d, an increase of 0.1 million b/d compared with the previous month. According to the US EIA, this increase was mainly attributable to rising outages in Iraq, Nigeria, and Libya. It noted that unplanned OPEC crude supply disruptions averaged 2.4 million bpd in 2014, 0.5 million bpd higher than in the previous year. (4/9)
Iranian companies are trying to buy a Swiss petroleum refinery, according to people familiar with the deal, as Tehran seeks outlets for oil if western sanctions are lifted later this year. The refinery is current controlled by Libyan interests. (4/9)
In Israel, a 2014 agreement to ship natural gas from the Tamar field off the coast of Israel to Jordan was backed by the Israeli government, an operator said Tuesday. Jordan in the past has struggled to find a reliable source of natural gas in part because of downstream problems in Egypt. (4/8)
PetroChina passed Exxon Mobil as the biggest energy company by market value for the first time since 2010. Exxon’s capitalization was $352.6 billion compared with PetroChina’s $352.8 billion. The Chinese company’s A shares surged about 61 percent the past year, versus Exxon’s 14 percent drop. (4/9)
In Australia, Royal Dutch Shell is seeking an outlet for its stranded natural gas reserves in Queensland. Its $70 billion purchase of BG Group provides a solution, through use of BG’s $20 billion Queensland Curtis LNG development. (4/8)
Brazil opened the door for a debate on allowing foreign oil companies to operate in a region holding some of the world’s biggest discoveries this century as the state-owned producer struggles to emerge from a graft scandal. Energy Minister Eduardo Braga said for the first time that Petrobras shouldn’t be forced to operate all fields in the so-called pre-salt region, while adding that now isn’t the time to make changes. (4/9)
US production volumes of petroleum and natural gas remained tops in the world in 2014, exceeding that of both Russia and Saudi Arabia. The EIA specifies that its petroleum production figures include crude oil, natural gas liquids, condensates, refinery processing gain, and other liquids such as biofuels. (4/9)
The US oil-rig count fell by 42 to 760 in the latest week, according to Baker Hughes, an acceleration in the decline over recent weeks. There are now 53% fewer oil rigs compared with a peak of 1,609 in October. The count has declined for 18 straight weeks. Including gas rigs, the total US rig count fell to 988, the lowest since August 2009. (4/11)
Oil services company Baker Hughes announced that, due to the need to cut costs in the face of the industry-wide downturn, it was suspending its publication of quarterly US onshore well data, (4/11)
The growth in oil-train shipments fueled by the US energy boom has stalled in recent months, dampened by safety problems and low crude prices. The number of train cars carrying crude and other petroleum products peaked last fall. In March, oil-train traffic was down 7 percent on a year-over-year basis. Rail shipments of oil had expanded from 20 million barrels in 2010 to just under 374 million barrels last year—an average of 1 million b/d. (4/7)
Crude oil swaps may be a realistic short-term alternative to outright repeal of the US crude export ban for US refiners as well as producers, a speaker suggested at a Center for Strategic and International Studies forum. Federal approval for swaps with Canada and Mexico are easier to obtain because they are immediately adjacent countries. Exporting some light crude enables medium and heavy crudes to come in—a sort of swap trade without major refining investments. (4/7)
Exxon Mobil has rejected a contract offer from the United Steelworkers local chapter representing hourly workers at the company’s Beaumont, Texas, refinery and renewed its offer of a six-year contract. Exxon has been campaigning for a longer agreement, offering first a five-year agreement and then a six-year pact. Exxon wants a longer pact to avoid work stoppages if it expands the 344,600 b/d Beaumont refinery into the nation’s largest, possibly reaching 850,000 b/d by the end of the decade. (4/9)
Gasoline budget: The average U.S. household expenditure on gasoline in 2015 is expected to be about $1,817, about $700 lower than during 2014 and the lowest level in more than a decade. (4/11)
US drivers are projected to pay an average of $2.45/gallon for regular gasoline this summer (April through September), according to EIA’s Short-Term Energy and Summer Fuels Outlook released yesterday. (4/9)
More than $1 trillion in US real estate debt from the last decade’s property boom is starting to come due as oil prices stagnate, squeezing property owners in cities and towns centered around the energy business. The 50 percent plunge in crude values since June is already dragging down property prices in Texas. (4/7)
California’s pipeline-safety regulator slapped PG&E Corp. with fines totaling $1.6 billion for the deadly natural gas explosion that rocked San Bruno, Calif., in 2010. The blast, which killed eight people and destroyed a neighborhood in the suburb of San Francisco, was caused by an aging, poorly maintained pipeline with faulty welding work that dated back to the 1950s. (4/10)
Revenue sharing: US senators from four southern Mid-Atlantic coastal states asked Energy and Natural Resources Committee leaders to consider comparable federal Outer Continental Shelf revenue sharing for oil and gas activity off their shores to what four US Gulf Coast states now receive. (4/11)
The Obama administration is planning to impose a major new regulation on offshore oil and gas drilling to try to prevent the kind of explosions that caused the catastrophic BP oil spill in the Gulf of Mexico. The announcement of the Interior Department regulation, which could be made as soon as Monday, is timed to coincide with the five-year anniversary of the disaster. (4/11)
A White House official said that Venezuela was not a threat to the national security of the United States, backing off language in an executive order that had inflamed relations with the South American nation and drawn criticism from other countries in the region. The comments came as President Obama prepared to leave for a trip to the Caribbean and Latin America that will include a meeting of heads of state from the hemisphere. (4/8)
US coal production this year could drop to a low not seen in almost 20 years, the US EIA said in its Short-Term Energy Outlook for April. EIA predicts US coal production will now total 926 million st in 2015, down 17 million st from its estimate last month, as both domestic demand and exports continue to decline. (4/8)
China’s environment ministry has refused approval for a hydropower dam on an ecologically vulnerable river already damaged by construction, a rare setback for the country’s extensive dam-building program. While the 1,000-megawatt project near the western metropolis of Chongqing appears scrapped, experts said China’s overall plan for dams was on course given pressure to cut smog from coal-fired power plants. Hydropower capacity is due to rise another 60 gigawatts (GW) in five years as new projects get approved. (4/9)
India has launched its first air quality index, to provide real time information about pollution levels. The index, announced by Prime Minister Narendra Modi, will initially monitor air quality in 10 cities. Last year the Environmental Preference Index ranked India 174 out of 178 countries for air quality. The rising and health-endangering pollution has been mainly blamed on a huge increase in vehicles, particularly diesel-driven cars, on Indian roads. (4/6)
California’s climate right now is shattering modern temperature measurements—as well as tree-ring records that stretch back more than 1,000 years. It’s no longer just a record-hot month or a record-hot year that California faces. It’s a stack of broken records leading to the worst drought that’s ever beset the Golden State. (4/11)
Oil wastewater helps drought: For every barrel of oil Chevron produces in its Kern River oil field, another 10 barrels of salty wastewater come up with it. So Chevron is selling “at cost” about 500,000 barrels of water per day, or 21 million gallons, back to the Cawelo Water District—the local water district that delivers water to farmers within a seven-mile slice of Kern County. It’s a good deal for farmers. They understand that using the salty wastewater on their crops is an emergency measure. If all goes as planned, when the rains come back the excess salt will be flushed through the soil. (4/7)
The glaciers of the Canadian West could shrink by 70 percent by 2100, according to new research that has implications for predicting glacier loss around the world. The loss of mountain glaciers contributes to the rise in sea levels. As glaciers dwindle there could be also be pronounced effects on availability of water for aquatic creatures and for agriculture as well as water quality issues. (4/7)
