1.  Oil and the Global Economy
2.  The Middle East & North Africa
3.  China
4. Russia/Ukraine
5.  Quote of the Week
6.  The Briefs
7. Commentary – Deja Vu with a Twist

1.  Oil and the Global Economy

Oil prices continued to slide until Friday when a new report indicated that active drilling rigs in the US were dropping rapidly and that shale oil production was likely to drop later this year.  The report triggered a wave of short-covering in New York that sent prices up 8.3 percent to close at $48.24 after trading as low as $43.58 a barrel, the lowest since March 2009. London’s Brent was not far behind, climbing 7.9 percent on Friday to close at $52.99 for the biggest one-day gain since 2009.

In addition to Friday’s rally, last week saw a number of other developments most of which suggested that oil prices may fall still further in the short term.  US economic growth slowed to 2.6 percent in the fourth quarter from the 5 percent pace seen in the third; US crude stocks rose by 8.9 million barrels the week before last to 407 million, the highest level in 80 years; several major and numerous smaller oil companies reported lower earnings or announced major cutbacks in capital expenditures during the coming year; and US CEO’s are more pessimistic about corporate earnings at any time since the 2008 financial crisis.

The debate over the future of oil prices continues. Some see the rapid decline in drilling as indicative that crude will be back over $100 a barrel soon and a few are even talking about a spike to $200 if shale oil drilling slows enough. Others are saying that we are in a new era of low oil prices and that slowing economies in the EU, Asia, and even the US means that oil prices will remain relatively low for an indefinite period and certainly will not climb back in the $100-range later this year. A few, however, are worried that the growing geopolitical problems in Eastern Europe and across the Arab world will result in lower oil exports.

US natural gas prices continued to fall last week as ample supplies and a milder winter combined to keep natural gas supplies adequate for the rest of the winter. At one point on Wednesday, natural gas futures traded as low as $2.63 per million BTUs before closing the week at $2.69.  A lot of people are losing a lot of money on shale gas production at these prices, but as yet the natural gas drilling boom goes on.

2.  The Middle East & North Africa

Iraq: Despite continuing coalition aerial bombardment, ISIL launched a large-scale attack on Kirkuk over the weekend and managed to capture and temporarily hold a small oil facility. Kurdish Peshmerga forces, with the help of more coalition air strikes, drove the ISIL forces back after heavy fighting. The UN reports that some 1,400 Iraqis, mostly civilians, were killed in January. ISIL car bombs continue to go off in Shiite areas of Baghdad. Concerns are arising as to whether some Shiite militia are summarily executing Sunni soldiers and civilians in areas they retake.

Bloomberg reports that Iraqi oil production rose by 200,000 b/d in January to 3.9 million b/d. Production is helped by increases in areas held by the Kurds as well as in southern Iraq where foreign oil companies are making large investments. Although the Iraqis would like to increase their production to 7 million b/d in the next few years and ultimately overtake the Saudis’ 10 million b/d, a lot will depend on rebuilding the aging infrastructure in southern Iraq. New pipelines, export facilities, and a new water-flooding system will be needed before a major increase in production can be achieved. While these improvements have been underway for many years, progress has been slow largely due to the corruption and inefficiency of the Iraqi bureaucracy.

Libya:  The chaos in Libya came to a head last week when five Islamic terrorists overran the luxury Corinthia hotel in Tripoli, killing an American and nine others in revenge for the death of a terrorist who died of cancer in US custody. There is no longer any central authority in the country – just groups of heavily armed militia patrolling their own turf. Most Libyans are on the dole from the central bank, which is slowly spending its way through the large horde of foreign currency that was built up during the Gadhafi era.  There are continuing reports of ISIL (Libyan branch) gaining strength in the country as the attack on the Corinthia hotel last week clearly shows.

A new number for Libyan oil production, 363,000 b/d, emerged last week. This number came from the Islamist oilminister who has the benefit of at least being in the same city with the headquarters of Libya’s National OilCompany. The minister said that 200,000 b/d was being exported. Libya has some offshore oil production, which is relatively immune from the chaos. Crude oil from Libya, roughly 1 million barrels, was imported to refiners in the US Gulf Coast in November for the first time since August 2013, according to data released Wednesday by the US EIA showing that some oil is getting out of the country.

Libya, however, is well on its way to becoming a completely “failed state” with only chaos and lawlessness in its future. The prospects for much oil coming out of the country continue to dim.

Iran:  The Iranian oil story has largely shifted to Washington, where Congressional efforts to toughen the sanctions on Iran continue, and to Europe where the nuclear negotiations are taking place. After some weeks of optimism that a settlement might be reached, the prospects now seem to be dimming. Iranian President Rouhani and his foreign minister still want a settlement, but Supreme Leader Ali Khamenei is saying that the sanctions on Iran must be lifted first: a demand that simply is not going to happen.

In Washington, the Senate Banking Committee approved a bipartisan bill increasing the sanctions on Iran. In Tehran 80 legislators signed a motion that would cancel the interim agreement if the US passes new sanctions.
Tehran clearly is not as yet willing to make the concessions necessary to insure that they will not have the capability to quickly and surreptitiously build nuclear weapons. Even with the plunge in oil prices, which along with the sanctions have cut Tehran’s oil revenues to a fraction of their former size, Iran is still not feeling enough pressure to come to an agreement.

Where we go from here is up in the air. Most observers believe that the interim agreement will be extended yet another time, but there is a feeling that these extensions must eventually come to end which means failure of the negotiations. From there we will likely see a revival of Israeli threats to bomb Iranian nuclear facilities and Iranian threats to close the straits of Hormuz thereby interdicting much of the Middle East’s oil exports and giving rise to more serious hostilities in the region.  The threat implicit in the failure of the talks does not seem to be fully appreciated by many in Washington and Tehran.

3.  China

As has been true for many years, China’s part in the global oil story is the growth of its economy and tits demand for imports.  As is well known, China’s economic growth, while spectacular by world standards, has been slipping in recent years as its export markets contract; its housing market stalls; and it must increasingly deal with the long-ignored environmental impacts brought on by its economic growth. Last year China’s GDP growth fell to a 24-year low of 7.4 percent, and the overall target for 2015 which will be announced in March is said to be “around” 7 percent.

Over the weekend, newly released numbers showed that China’s factory sector slipped into contraction in January for the first time in two years and that more trouble is ahead. The decline was unexpected as the January numbers, which come just before the spring national holiday, is usually a good month for the economy as factories rush to get orders out. Last week new data showed that profits in the industrial sector were the lowest on record for December.

From the peak oil perspective the key question is how quickly the contraction of China’s economy will affect its demand for imported oil. China just opened a number of new refineries, which increased their demand for crude that can be turned into exportable petroleum products at a profit while undercutting other Asian refiners. Beijing is also making every effort to build up its strategic and commercial crude reserves at a time when prices are low. Last week the government ordered its refineries to keep 10 days of crude supply in local stockpiles.

As the year goes on, it will be interesting to see what happens to China’s demand for imported oil, which has been an important factor for global demand and high oil prices in recent years. If Chinese demand weakens in 2015 if would seem to be difficult to get oil back above $100 a barrel as most oil exporters are hoping for.

4. Russia/Ukraine

There has been little progress in the Ukrainian situation where fighting is taking place and negotiations have come to naught. Ukraine has appealed for western help in countering the advantage the insurgents have gained by having access to the latest Russian electronic warfare equipment, such as reconnaissance drones and radio jammers. Ukraine’s economy is suffering mightily under the strains of fighting the insurgency so that without significant western help, which will only prolong the fighting, it may eventually be forced to negotiate an unfavorable settlement.

Russia’s economy continues to contract under the weight of low oil prices and the sanctions. Moscow’s economics minister announced that the economy is expected to contract by 3 percent this year, but foreign observers are putting the figure higher.  The ruble is now trading close to 70 to the dollar after Moscow cut interest rates from 17 to 15 percent in an effort to mitigate the economic slump and aid the ailing banks. Some Russian bankers are saying that unless interest rates fall below 10 percent they will not stimulate the economy.

For now Moscow seems to be doing little about its sagging economy or the EU’s sanctions, except throw money from its shrinking foreign exchange reserves at the problem and hoping that oil prices will go up again.

5.  Quote of the Week

“The problem is that the US shale sector in aggregate is still not free cash-flow positive even after five years of soaring production, and if the shale model was not able to show positive free cash-flow even when prices were averaging around $100/bbl from 2011 until mid-2014, then investors and lenders will clearly be very nervous about increasing their exposure to the sector in the current price environment.  On the contrary, we think they are more likely to be looking to reduce their exposure, which explains why yields on the debt of independent US energy companies (much of it sub-investment grade or “junk”) have been rising sharply, as oil prices have fallen in recent months, and why the share prices of independent US energy companies have been tanking.  In short, investor patience in the US shale-oil story is now being tested as never before, and the obvious risk is that more bankruptcies could occur in the coming months if prices persist at current levels…
“In short, given the pressure that low oil prices are now putting on capex plans for 2015, and hence on new drilling, we think shale-oil production growth will begin to stall in late Q2 2015 or early Q3 2015.  And when this happens, we think market expectations of continuing rapid growth in shale-oil supply will have to be revised downwards, thus prompting an upward price correction, as the market realizes the outlook for future shale-oil supply, and hence for the global oil supply more generally, is in fact more constrained (and perhaps much more constrained) than it currently thinks.”

                       — Kepler Cheuvreux, European-based market analysts

6.  The Briefs

Peak oil demand extended: The recent rout in oil prices could delay the onset of “peak oil demand,” or zero global demand growth, by around five years to beyond 2030, Bank of America Merrill Lynch said. The bank had earlier expected that the continuation of high oil prices above $100 per barrel since 2011 would result in peak oil demand by 2025 as consumers moved to smaller and more fuel efficient cars. (1/27)

In Poland, Chevron said on Friday that it would abandon efforts to find and produce natural gas from shale rock, in perhaps the biggest setback yet to efforts to start a European shale oil and gas industry. Chevron announced it was abandoning the Poland project the same day the company reported that its earnings for the fourth quarter of 2014 fell nearly 30 percent over last year, to $3.5 billion. (1/31)

The Scottish government has placed a moratorium on fracking, citing need for more research. (1/30)

European natural gas consumers need to prepare the infrastructure needed to bypass Ukrainian territory by 2019, an official from Russia’s Gazprom said Wednesday. Europe gets about a quarter of its natural gas needs met by Russian suppliers though the majority of that runs through a Soviet-era transit network in Ukraine. (1/29)

UK Ministers have imposed a series of Labor demands on the UK’s fracking industry, in a last-minute move to avert a House of Commons defeat and pave the way for the development of shale oil and gas across Britain. The government accepted an opposition amendment that will strengthen controls on the industry. (1/27)

Royal Dutch Shell pledged to do all it can to maintain payments to shareholders after crude prices fell by more than half in the past six months. Shell plans to pay a first-quarter dividend of 47 cents a share, unchanged from the previous two quarters. The company is cutting its capital spending by $15 billion over three years to help it weather the collapse in oil prices and keep paying shareholders. (1/29)

Russian state-controlled gas group OAO Gazprom said net profit plunged 62 percent in the third quarter of 2014 compared with same period the previous year, hit by the slide in the ruble and a lack of deliveries to key customer Ukraine. (1/29)

China is poised to maintain its commercial hoard of more than 245 million barrels of crude even if oil rallies toward $130 a barrel. Refiners have been asked to hold inventories equal to at least 15 days of the volumes they can process. (1/29)

Jet fuel boon: Many Asian airlines are seeing a strong boost in profitability due to the slump in oil prices since the middle of last year, because they are typically more exposed to fuel-price swings compared with their counterparts world-wide.  Jet fuel typically accounts for as much as 50% of Asian carriers’ operating costs, higher than the global average of 30%, so the improved outlook for the global industry is more pronounced in Asia than Europe. (1/27)

Economic growth in Nigeria, Africa’s biggest crude producer, is projected to slow from 6.2 percent last year to 5.5 percent this year after oil prices plunged, the statistics office said. (1/30)

In Nigeria, the pipeline which carries crude oil from production facilities to export terminals in Forcados has been attacked once a week by vandals and oil thieves since the beginning of this year alone. About 1000 million cubic feet per day of gas are lost too, which means several power plants are also shut down. (1/26)

South African energy giant Sasol said Wednesday it was shelving an $11 billion project on Louisiana’s Gulf Coast, imperiling one of the largest foreign investments on US soil because of the plunge in oil prices. The plant was to convert natural gas into diesel fuel. (1/29)

Venezuela’s President told lawmakers last week he’s considering raising gasoline prices. It’s been two decades since the government last lifted state-set local prices, the result of politicians’ concern that the move could spark protests like those that swept across the oil-rich nation following an increase in 1989. In the interim, a string of currency devaluations has pushed down the cost in dollar terms to about 0.2 U.S. cent to buy a gallon of gasoline in Venezuela, at black-market currency conversion rates. (1/26)

The Dominican Republic paid off $1.93 billion against a $4.1 billion debt owed to Venezuela for years of oilshipments after raising funds through a bond sale last week.  But thanks to a discount of more than 50%, the overall $4.1 billion has been mostly credited as paid. The deal will immediately reduce the Dominican Republic’s public debt by about 3.3 percent of gross domestic product. (1/30)

The US drilling rig count plunged 90 units—a majority of which were in Texas—to settle at 1,543 rigs working during the week ended Jan. 30 according to Baker Hughes.  That total is the lowest since June 18, 2010. The count has now fallen in 9 consecutive weeks, losing 377 units during that time. Oil rigs plummeted 94 units to 1,223. Gas rigs, meanwhile, continued their upward shift, gaining 3 units to 319. (1/31)

US crude exports rose 126,000 b/d to a record 502,000 b/d in November, US EIA data showed Thursday. (1/30)[Editor’s note: EIA data also showed US net petroleum imports of 5.125 million b/d in November.

Kinder Morgan Inc. is proposing a 300,000 b/d pipeline that would ship ultra light oil from Texas fields to central California. From there the condensate could move to Asia, where petrochemical plants are boosting demand for lighter oil. Condensate has emerged as one of the few exceptions to a four-decade ban that keeps most crude from leaving the country. (1/29)

Americans favor easing a ban on exporting crude oil, by a 45-to-30 margin, so long as it does not lead to higher gasoline prices that have recently sunk to near $2 a gallon, according to a new Reuters-IPSOS poll. (1/30)

In Alaska, President Barack Obama’s call to restrict oil exploration on 12 million acres of the Arctic National Wildlife Refuge probably won’t have much practical impact for an area already off-limits to drillers, though it’s created a new fault line with the Republican-led Congress. (1/27)

Senator Lisa Murkowski (R-AK) said the Obama administration has declared war on the economic future of Alaska by proposing new acreage as protected wilderness, congressional leaders said. (1/27)

Drilling brick wall: The natural gas industry sharply criticized Pennsylvania Gov. Tom Wolf’s decision Thursday to reinstate a moratorium on future drilling in state parks and forests, which includes cases where private individuals own the mineral rights beneath parks. (1/30)

Oil and tax revenue pickle: Plunging oil prices led California’s Kern County to declare a fiscal emergency on Tuesday, a move that allows officials to tap into a reserve fund as tax revenue faces a $61 million decline due to the lower oil prices. Oil companies account for about 30 percent of the county’s property tax revenues. (1/29)

Fracking moratorium voted down: The Board of Trustees of Erie, Colorado voted 4-3 against imposing a moratorium on fracking in the Front Range town Tuesday evening. ((1/29)

North Dakota’s oil industry is pushing to change the state’s radioactive waste disposal laws as part of a broad effort to conserve cash as oil prices tumble. The waste, which becomes slightly radioactive as part of the hydraulic fracturing process that churns up isotopes locked underground, must be trucked out of state through a law that took effect last year. (1/29)

The Obama administration proposed opening up new areas of the nation’s federally owned waters to oil and natural gas drilling, including areas along the Atlantic Coast, during 2017-2022. (1/27)

Oil on rails: Rail yard projects vital to the flow of crude from the shale oil boom are being waylaid in court by legal challenges. Crude-oil handling facilities along rail lines in cities from Albany, New York, to Richmond, California, are mired in lawsuits by community and environmental groups claiming they were kept in the dark about the projects. (1/30)

Residual oil spill problems: Between 6 and 10 millions of gallons of oil from the Deepwater Horizon oil spill didn’t get cleaned up, and instead settled in the sediment of the Gulf of Mexico’s floor, a new study has found. (1/31)

Prices for regular grade gasoline fell to $2.07 a gallon in the survey dated Jan. 23 from the previous survey on Jan. 9, according to the Lundberg Survey. The recent drop has taken prices down more than $1.24 a gallon from the same period a year ago. (1/26)

Gasoline savings: Americans are taking the money they are saving at the gas pump and socking it away, a sign of consumers’ persistent caution even when presented with an unexpected windfall. (1/31)

Oil price crash benefits uneven: Car drivers from Beijing to Mumbai aren’t getting the same financial benefit fromoil’s plunge as peers in Phoenix or Boston as governments use low oil prices as an excuse to reduce subsidies.(1/30)

VMT vs. mass transit: High gasoline prices in recent years helped give public-transit agencies across the U.S. their best ridership numbers in half a century. Now, falling prices run the risk of putting those gains in reverse. Thanks to the swift drop to $2 gasoline, Americans drove 3% more miles in October from a year earlier and advanced 1.1% in November, according to the U. S. Federal Highway Administration. A lasting shift could boost pressure on governments from Seattle to Salt Lake City to Cleveland to re-evaluate their expansion plans for buses, subways and trains. (1/29)

Methane leaks: A group of Harvard researchers writing in current issue of the Proceedings of the National Academy of Sciences found that in the Boston area alone, $90 million worth of natural gas — 15 billion cubic feet of potent greenhouse gas — escapes from its network of aging cast iron pipes each year. (1/27)

Chinese-Louisiana connection: A prominent Chinese tycoon and politician — whose natural gas company has a dubious environmental and labor rights record that recently started coming under fire in the Chinese press — is parking assets in a multibillion dollar methanol plant in a Louisiana town. (1/27)

China’s coal consumption has fallen for the first time this century, according to preliminary data from both the Chinese Coal Industry Association and the National Energy Administration. The amount by which coal use declined last year remains an open question; one source reports a reduction of around 3.5% but another shows a fall of only 0.4%. The small reduction may actually be due to under-reporting of consumption in previous years. (1/29)

Towns and cities across Pakistan plunged into darkness early Sunday when what officials said was an attack by militants on a transmission line short-circuited the national electricity grid, presenting a new indictment of the government’s faltering efforts to solve the country’s chronic power crisis. (1/26)

Climate change: An overwhelming majority of the American public, including half of Republicans, support government action to curb global warming, according to a poll conducted by The New York Times, Stanford University and the nonpartisan environmental research group Resources for the Future. (1/31)

The world has entered an era of “peak food” production with an array of staples from corn and rice to wheat and chicken slowing in growth – with potentially disastrous consequences for feeding the planet. New research finds that the supply of 21 staples, such as eggs, meat, vegetables and soybeans, is already beginning to run out of momentum, while the global population continues to soar. (1/29)

In East Asia, almost 200 million people moved to urban areas in the decade to 2010, creating a massive challenge to the region’s planners. About 36 percent of people in the region were living in urban areas as of 2010, up from 29 percent ten years before. This suggests the region will see decades more of further population shifts. (1/27)