Quote of the Week

“The fact that some oil is being sold at $10 per barrel – like some Canadian and Venezuelan crude grades – shows that the strain on producers has rarely been so big. At this level, some producers are not covering capital and operating expenses. And costs are even higher to shut down production. These prices will serve as destabilizing factors in many producing countries and on many bank loans.”

Marco Dunand founder and CEO of trading house Mercuria

1.  Oil and the Global Economy
2.  The Middle East & North Africa
3.  China
4.  Russia
5. The Briefs

1.  Oil and the Global Economy

Last week there was a surge in oil prices based on rumors and statements from Iraq’s oil minister and a Russian pipeline official that Russia and the Saudis might be considering a meeting to discuss “coordination” of their oil production. The merest hint of a supply cut was enough to send traders into a frenzy. Short positions were covered and prices rose from below $30 a barrel to nearly $36 in London. The story was quickly denied by numerous OPEC officials and even by Russia’s deputy prime minister, but oil prices stayed firm closing at $33.62 in New York and $34.74 in London.

The bottom line in this frenzy, which took oil prices up nearly 25 percent, is that Iran says flatly it will not cut oil production until its exports increase by 1.5 million b/d; the Saudis say they will not cut unless other exporters including Iran and Russia do; and Moscow says it will not cut unless it is in coordination with OPEC, but hopes for higher prices die hard. This week Venezuela’s oil minister will make the rounds, visiting Russia, Qatar, Iran and Saudi Arabia in an effort to set up a meeting in February to “coordinate” oil production. Numerous outside observers have termed the rumors of coordinated production cuts as rubbish and expect further declines in oil prices this winter.

In the meantime, fundamentals continue to worsen. US crude inventories increased by 8.4 million b/d in last week’s stocks report; Iraq announced record-high oil production; and OPEC output continues to grow.  According to a Reuters survey, OPEC oil production climbed to its highest level in recent history in January as Iran increased production and sales following the lifting of sanctions, and the Saudis and Iraq increased output.

EIA’s Monthly Energy Review is out with new production numbers. US production (crude and condensate) in December is given as 9.19 million b/d down 500,000 b/d from the 9.69 million produced in April. Non-OPEC production was down by 763,000 b/d from 47.2 million b/d in December 2014 to 46.4 million last October. World production (crude and concentrate) which peaked in July at 80.5 million b/d was down by 461,000 b/d to 80.0 million in October.  While non-OPEC production will likely continue to fall for a while due to the massive reduction in capital investment that has and continues to take place, OPEC with increasing Iranian production seems destined to offset the non-OPEC production decline for this year at least.

Last week brought a plethora of bad news concerning falling oil company profits, reduced capital investment, pending bankruptcies, and scrapping of expensive drilling rigs. All this is bound to greatly lower oil production by the end of the decade.

2.  The Middle East & North Africa

Iran: Tehran had a big week as President Rouhani stormed around Europe signing oil contracts and spending Iran’s windfall of newly freed up cash by making many major purchases. In Italy, he signed deals including shipbuilding, steel, and energy worth some $18 billion. In France, he bought 118 Airbus airliners for $24 billion, made a $400 million car manufacturing deal with Peugeot, and signed a deal with Total for 200,000 b/d of Iranian crude. This should help Rouhani in the upcoming elections as a man who keeps his promises to revive the Iranian economy.

Beijing is making a major effort to improve its relations with Tehran.  During the sanctions, China continued to build a new $200 million steel mill for the Iranians, circumventing the restrictions imposed by the US and Europe. Last week a freight train set off on the 6,000 mile trip to Tehran from eastern China, marking the first rail connection between the two countries along the new “silk road.”  China is hoping that Iran will become a major gateway for selling its products into the Middle East and will become a source of oil.

Based on tanker loading schedules, Tehran is due to increase its oil exports in January and February by 20 percent over last year.  Iran’s exports look to be about 1.5 million b/d in January and 1.4 million in February. This compares with an average of 1.2 million b/d last year. Much of this oil was already stored on tankers which provided storage for unsold crude during the sanctions. How much oil was in storage has been debated, but a recent Reuters report puts the amount at 40 million barrels– mostly condensate which has to be sold quickly to free up Iran’s tankers for regular crude deliveries. Many western shippers still have concerns about doing business with Tehran as there are still numerous sanctions in place which could lead to heavy penalties for doing business with Iranians, especially if the Republican Guard is somehow involved.

Syria/Iraq: The peace talks have started in Geneva. Although an important rebel delegation has arrived in the city, it is refusing to participate until Damascus and its allies free the prisoners they are holding, stop the bombing of civilians, and allow relief supplies into areas the government has surrounded causing mass starvation. As Damascus is unlikely to agree to these demands as long as they have the active support of the Russian Air Force, the talks seem destined to go nowhere. The Syrian Kurdish delegation already has left Geneva after being excluded from the talks.

A new report from the respected UK-based Syrian Observatory for Human Rights says that 1,400 civilians have been killed by the Russian bombing along with 965 ISIL fighters and 1,233 from other rebel groups. Reports of mass starvation are growing as Damascus is systematically cutting off food supplies to many surrounded areas in an effort to enhance its position prior to any settlement. Senior UN officials have warned the Security Council that there are now 18 areas, containing half a million people, that are surrounded and are unable to get food. A total of 4.6 million Syrians live in besieged or hard to reach areas. The government is actively hampering UN relief convoys from reaching these people. The situation continues to get worse with no end in sight.

Down in Iraq, the Baiji refinery which once supplied half of Iraq’s refined oil products has been declared a total write-off. The refinery was damaged by ISIL attacks beginning in June 2014 and in April of 2015 ISIL forces overran the facility, but it was recaptured by government forces last October. For a while the Oil Ministry believed it could be partially restarted, but has now decided it is beyond repair. It is this gradual depletion of infrastructure by the fighting as towns and cities are turned into rubble that leaves little hope for the future of Iraq no matter how much cheap oil foreign oil companies can extract and sell for them.

Kurdistan’s leaders are planning to hold a referendum on the region’s independence from Iraq before November. Such a move would obviously be the first step in taking Iraq apart. For now, Baghdad does not have the military strength to resist a declaration of independence on the part of Erbil. As the Iraqi government is no longer contributing to the province’s budget and the Kurds are making many friends due to their staunch resistance to ISIL and their increasing oil supplies, this may be a good time for Erbil to declare independence from a weak Iraqi government. The Turks who fear a large part of their country would seek to join an independent state will not be happy about the move. Damascus nor Tehran, both of which have large Kurdish populations, will also be unhappy seeing either mass migrations or more trouble with their Kurds as they seek to join the new state.

On Friday, somebody blew up the gas pipeline that supplies the fuel necessary for generating about half of Kurdistan’s electricity. The perpetrator of the explosion could be ISIL or even Kurds who are becoming increasingly unhappy with the government as they are not being paid.

Libya: Reports are circulating in Washington that the US, probably in conjunction with European allies, is preparing to intervene in the Libyan situation now that Islamic State forces have begun to attack oil export terminals in hopes of weakening the government. Western intelligence believes that stronger controls along the Syrian-Turkish border are diverting more would-be Jihadists to Sirte, Libya where the Islamic State forces have complete control. So far the US is said to be considering air strikes and limited special forces operations against the IS which has little means of supply and is largely dependent on weapons left over from the Gadhafi era.

Should a major Western intervention take place that would stabilize the situation and stop the warring militias, there is a possibility of a major increase in Libyan oil production which has been largely unharmed but is being held back by local squabbles for control. In theory Libya could increase its oil production by 1 million b/d if it were not for the political squabbles which has cost the country some $60 billion in oil revenues since the revolution.

Saudi Arabia/Yemen: The Saudi led coalition continues the airstrikes which are causing many civilian casualties. So far about 5,800 hundred have been killed in the fighting and according to the UN some 80 percent of the country is in dire need of food, water, and medical supplies. The Saudi war in Yemen, which is now 10 months old, is going nowhere. The war is costing the Saudi government considerable amounts of money, and can only result in a devastated country, mass starvation, migration, and hatreds which will last for generations further exacerbating tensions in the region.

The US-Saudi relationship which has been a keystone of Middle Eastern politics since World War II is coming into question. Saudi support for Islamic extremism that led to the 9/11 attacks and its war against the Shiite rebels in Yemen, and the Iranian nuclear deal are raising questions about the relationship. Washington’s implicit support of the Yemen war by resupplying the munitions the Saudis are using against the Houthi rebels is causing some US politicians to question the relationship. The Iranian nuclear deal which has given Tehran a big economic and prestige boost has already soured the Saudi view of Washington as a reliable ally.  Another aspect to the relationship is the billions of dollars’ worth of military equipment and capital goods that the Saudis buy from the US each year has fostered many friends for the Saudis. Some US towns have become highly dependent on the sale of things to the Saudis.

Although far from becoming a threat the the government, another suicide bomber attacked a mosque in Shiite dominated eastern Saudi Arabia last week killing four and wounding 18. There are reports that Saudi Security services have arrested nine US citizens in the roundup that took place after the bombing.

3.  China

In 2015 the Chinese imported more that 60 percent of their requirement for oil for the first time. This year, further increases in China’s imports are expected to raise the share of imported oil to 62 percent as more cars are built, state reserves increase, and additional refined products are exported to regional markets. It is numbers like these that bring home Beijing’s vulnerability to disruptions in its oil supplies. Beijing would like to see more of its oil and gas purchases imported via pipeline from Russia and Central Asia and is building a larger navy to protect its imports via tanker.

China’s oil product export boom continues. In its annual report, the China National Petroleum Corp said that net exports of petroleum products will increase by 31 percent this year to 25 million tons. Refineries are expected to increase processing by 5.3 percent in 2016 and crude imports are expected to increase by 7.3 percent. This jump, which will take place despite slowing domestic demand, will only exacerbate the oversupply of oil products in the region.  China has several new and highly efficient refineries which will allow its refiners to offer highly competitive prices in an effort to increase market share.

China’s stock markets, which are not as reliable an indicator of economic expectations as those in the West, fell more than 6 percent on Tuesday after a drop in oil prices. The markets are now down about 22 percent this year on concerns over the slowing economy and foreign exchange policy. What is happening to China’s economy remains something of a mystery. A new investigation of corruption in China’s National Bureau of Statistics has been started, which is raising concerns about the veracity of the growth numbers it has been reporting in recent years. China’s leaders are having an increasing problem explaining to the outside world just what is happening as its equity and currency markets undergo wild gyrations.

4. Russia

Low oil prices and the plunging ruble are causing considerable hardship for most Russians. Average monthly incomes are now about half what they were in 2013; food prices are up about 30 percent and the quality of food products has deteriorated markedly due to sanctions against Western food imports; taxes are on the rise as the government tries to balance its budget; sales of consumer electronics and cars have plummeted; and foreign travel to favored places is banned or has become prohibitively expensive.

Major Russian financial institutions such as the the Alfa Bank and the Central Bank itself foresee more contraction in the year ahead as there is no sign of a major surge in oil prices in sight and the Chinese economy which was Russia’s greatest hope for increased oil and gas sales continues to contract.  To make matters worse, the Putin government is clearly more interested in strengthening its military forces and security services than in helping the economy.

The political scene is Russia has evolved to the state where the Putin government and security services now have nearly complete control of the political process. Corruption at the highest levels is rampant. Whether the deteriorating economic situation in Russia will reach levels where the Putin government is forced to make major policy changes remains to be seen.

5.  The Briefs

Global energy demand will increase 25 percent between 2014 and 2040, driven by population growth and economic expansion, ExxonMobil forecasts in the 2016 edition of its annual The Outlook for Energy. At the same time, energy efficiency gains and increased use of renewable energy sources and lower carbon fuels, such as natural gas, are expected to help reduce by half the carbon intensity of the global economy. (1/26)

Oil and stock markets have moved in lockstep this year, a rare coupling that highlights fears about global economic growth. (1/26)

Worldwide offshore rig utilization stood at 57.2 percent on Jan. 21, 2016, which was far below the 74.2 percent posted a year ago and the 78.5 percent recorded two years earlier.  Once a rig is cold-stacked, bringing it back to work require further investment which may no longer be worth it.  Combine that with an over-supplied market and a broad industry downturn and there may be a lot of scrapping of jackups during 2016. (1/30)

International Monetary Fund and World Bank officials are heading to Azerbaijan to discuss a possible $4 billion emergency loan package in what risks becoming the first of a series of bailouts stemming from the tumbling oil price. Might Brazil, Ecuador and Venezuela be next? (1/28)

Tanker slowdown: The world’s biggest oil companies are asking tanker operators to slow down delivery of crude amid an ever-expanding supply glut on land. Tankers hauling 2 million-barrel cargoes are delivering them at speeds of about 13 knots, compared with a maximum of 15. The slower speeds might result in a voyage that would normally take 40 days instead lasting 48. (1/28)

WTI vs. Brent pricing: A change to the North Sea Brent crude oil futures contract will alter the way prices for Brent futures are compared to futures prices for West Texas Intermediate (WTI) crude oil. (1/27)

In the United Arab Emirates, the price of the cheapest grade of gasoline is $1.55 a gallon. That compares with $1.32 a gallon for the lowest regular fuel in Houston, where drivers haven’t paid less on average than Abu Dhabi pump prices since 2008.  While low prices for crude oil are cutting gas costs to US consumers, Saudi Arabia, the U.A.E., Qatar, Oman and Bahrain have reduced or eliminated fuel subsidies over the past six months, effectively raising their prices. (1/27)

Japan’s crude oil imports last year fell to the lowest level since 1988 as demand weakened 2.3 percent over 2014 amid a declining population and more efficient vehicles. (1/27)

CNPC, China’s largest energy company, said that in collaboration with Chevron it started commercial gas production from a field located in the Sichuan basin in southwest China. The Chuandongbei project has a production capacity of around 345 million cubic feet per day. China’s demand for natural gas is expected to increase from around 6 percent of total energy consumption to more than 10 percent by the end of the decade. (1/27)

PetroChina, China’s biggest oil and gas producer, expects its 2015 profit to have fallen 60 percent to 70 percent from a year earlier because of the slump in energy prices. (1/29)

African downer: Years of rapid economic growth across sub-Saharan Africa fueled hopes of a prosperous new era. To many, the world’s poorest continent was finally emerging, with economies that were no longer dependent on the fickle global demand for Africa’s raw resources. But as China’s economy slows and its once seemingly insatiable hunger for Africa’s commodities wanes, many African economies are tumbling, quickly. Since the start of this year, the outlook across the continent has grown grimmer, especially in its two biggest economies, Nigeria and South Africa. (1/26)

Egypt will get about $20 billion in oil products from Saudi Arabia over five years, a government official said, marking the kingdom’s latest display of support for its struggling North African ally. The deal grants Egypt easy payment terms. (1/25)

Nigeria is set to take back one of Africa’s richest oil blocs from oil giants Shell and Eni. Not only will the two oil giants lose OPL 245, they will also be fined billions of dollars for illegal activities, including paying bribes to public officials and private citizens in order to secure the bloc. The controversial oil bloc is estimated to contain about 9 billion barrels of crude. (1/26)

The markets expect Venezuela to default on its debt in the very near future. The country is basically bankrupt. That’s not an easy thing to do when you have among the larger oil reserves in the world, but Venezuela has managed it. (1/30)

The Mexican government is considering a capitalization of Pemex to bolster its working capital, but requires that the state oil company come up with a plan to cut costs and maximize profitability at a time of low oil prices. The government is concerned about Pemex contractors and suppliers who last year saw their payment times increased from 20 days to 180 days. (1/28)

Investment in Canada’s oil and gas industry is forecast to fall 13 percent this year, making for a total decline of 48 percent less than during 2014. That is a steeper decline than investment in oil and gas production worldwide, which is expected to drop by 40 per cent over 2014-16 as forecast by analyst Wood Mackenzie.  Some oil-sands companies are losing money on every barrel they sell, and are looking at ways to cut production.  (1/26)

In Canada, two proposed pipeline projects will have to wait longer for a verdict from the government and will have to submit to carbon-emissions testing to gain approval as part of temporary measures announced Wednesday. The interim measures, which affect Kinder Morgan’s proposed Trans Mountain Pipeline and TransCanada’s Energy East project, come as Ottawa plans broader changes to Canada’s environmental-assessment process. (1/28)

Canada’s efforts to curb greenhouse-gas emissions are calling into question oil majors’ ability to tap the world’s third-largest oil reserves. (1/25)

Alberta on Friday said it would introduce a new oil-and-gas royalty rate system next year designed to penalize higher-cost producers. Oil-sands producers will be exempted from the new system and retain their existing rates. The royalty review keeps the current commodity price-based system, but will levy rates once the cost of a well has been recouped based on whether it is above or below industry expense averages. The revised royalty rates, which will be calculated based on industry averages for drilling costs in Alberta, will apply only to new wells from 2017 onward. (1/30)

The US oil-rig count dipped below 500 for the first time in years.  It fell by 12 to 498 in the latest week, according to Baker Hughes Inc., accelerating a recent streak of declines.   There are now about 68 percent fewer rigs from a peak of 1,609 in October 2014.  According to Baker Hughes, the number of U.S. gas rigs declined in the latest week by 6 to 121. (1/30)

In North Dakota, the number of rigs exploring for oil and natural gas is down roughly 20 percent from the start of the year. The North Dakota Industrial Commission reports 47 rigs in active service as of Monday.  A state report from mid-January said the drilling rig count was more or less steady from October through December, but has fallen dramatically this month. There were no major weather events that would account for a drop in rig activity. (1/26)

TX downer: Though oil production continues to withstand weaker prices, the Texas oil and gas sector is in decline. Last week, the state-wide rig count fell below 300 for the first time in more than 15 years. Continued deterioration of market conditions likely signals additional industry downsizing and job loss in the coming months. Crude oil production in Texas last year outpaced the previous year by 11.5 percent, with each month of the year in 2015 eclipsing the output from the same month in 2014. Nevertheless, this resilience may be short-lived.  (1/28)

Total US petroleum deliveries, a measure of consumer demand, averaged 19.7 million b/d in December, a 1.1 percent increase over December 2014, according to the American Petroleum Institute. (1/29)

Oil markets might be nearing readjustment as the pain for producers becomes overwhelming with some grades selling at below cost and products such as fuel oil fetching almost nothing, one of the biggest oil traders said. Some fuel in the U.S. is currently sold close to zero due to the application of contractual discounts to the benchmark. (1/27)

The value of debt issued by junk-rated US energy companies has plummeted to the lowest level for more than two decades, sending a warning signal about the outlook for the North American oil industry.  The average high-yield energy bond has slid to just 56 cents on the dollar, below levels touched during the financial crisis in 2008-09, as investors brace for a wave of bankruptcies. (1/25)

California imports of crude-by-rail averaged 4,800 b/d in 2015, down 69 percent from a modest 15,700 in 2014. The economics of crude-by-rail are very poor right now. (1/29)

Oklahoma’s governor approved $1.38 million in one-time costs to support earthquake research to be directed by the Oklahoma Corporation Commission and the Oklahoma Geological Survey. A study from the US Geological Survey found the rate of seismic activity in Oklahoma has increased since 2009 at a faster rate than any other time during the 20th century.

Offshore California: The federal government has agreed to stop approving oil fracking until it studies whether the practice is safe for the environment, according to legal settlements filed Friday. (1/30)

Not so swift: The US government has objected to Swift Energy’s Co.’s proposed sale of most of its oil and gas assets in Louisiana, saying the company can’t transfer rights to drill on federal land without first receiving its consent. The government says it requested information about the federal interests—which constitute at least 25 leases in Louisiana — from the US Department of the Interior. (1/27)

Chevron, the first super-major oil producer to report fourth-quarter results, posted its first loss since 2002 on Friday and said it’s bracing for a review of its credit rating. The oil price crash has forced the company to write down the value of its fields. (1/30)

Halliburton reported a $28 million loss for the 4th quarter of 2015, driven largely by steep declines in North American market revenues (down 39%).  Total revenue was down 9%. (1/26)

Phillips 66 on Friday reported its profit dropped 43 percent in the final quarter of the year as low commodity prices dragged on the energy giant’s results. (1/30)

Bakken shale producer Oasis Petroleum unveiled a rough capital spending plan that would allow production to drop 5 percent in 2016 while spending 33 percent less than last year. Oasis expects to produce 46,000-50,000 b/d of oil equivalent this year, down from 50,477 boe/d in 2015. Still, last year’s 50,477 boe/d of output was 11% higher than in 2014. (1/29)

Continental Resources said first quarter production will average around 215,000 barrels of oil equivalent per day and drop around 13 percent to 185,000 boe in Q4. For the year, Continental said it had a budget of around $920 million, a 66% reduction from last year. (1/28)

Hess said it took a net loss of $396 million for the fourth quarter against $53 million in income year-on-year, after announcing that their 2016 exploration budget will be 40 percent below their 2015 spending. (1/28)

More M&A coming: A year-and-a-half on from the start of the worst crude-oil price crash in a generation, the biggest US and European energy companies have delayed projects and made such deep budget cuts that they will soon struggle to replace the oil they pump out of the ground with new reserves. In some cases, it is now cheaper for energy companies to buy one another rather than drill for crude. Expect more mergers and acquisitions this year. (1/29)

Northeast pipelines: because infrastructure projects often have longer lead times than production projects, infrastructure growth in the Northeast has not kept pace with production growth, and capacity has been insufficient to move natural gas out of the Northeast to demand centers and export locations.  In the past several months, several new pipeline projects have come online to move natural gas either to nearby market areas in the Mid-Atlantic area (New York, New Jersey, and Pennsylvania) or to feed into existing infrastructure that delivers natural gas to more distant regions, especially to the US Gulf Coast. (1/29)

American drivers are close to paying $1.50 a gallon for the first time since 2009.  Pump prices nationwide are down about 23 cents a gallon from a year ago, which is translating into almost $80 million a day in savings for US drivers. (1/30)

US airlines historically pay about one-third of their operating costs for fuel. Consumers have benefited somewhat from the lowest jet-fuel costs in more than 12 years, but not nearly as much as the companies. While travelers are paying less on average for trips, base fares — the prices assigned to each seat — have remained essentially unchanged since 2014. (1/27)

While US airlines are in no rush to pass on fuel savings to passengers brought by the collapse in oil prices, the Houston travel market has left them little choice. Airlines serving the US oil capital have resorted to steep discounts to lure newly budget-conscious energy executives back into the air. (1/28)

The US coal glut is not being slowed by bankruptcies. Production at coal mines that declared bankruptcy in the past four years rose 3 percent on average, through the third quarter. The glut — at least 100 million tons, according to Bloomberg Intelligence — threatens to depress prices for years, prolonging a global rout in an industry that has already eliminated more than 26,000 jobs, 29 percent of the workforce, since 2012. (1/29)

The lowest electricity prices in more than a decade are testing the whole business model of independent power-generation companies. While most companies are thrilled when their fuel costs drop, plunging natural-gas prices have pushed wholesale electricity prices down to rock-bottom levels. That trend is pressuring the sales and stock prices of some of the biggest power-plant owners in the U.S. (1/27)

Cutting global-warming pollution in the U.S. may not be so costly after all.  A shift to wind and solar power and an expanded electric grid would allow the US to reduce greenhouse-gas emissions from electricity production by as much as 80 percent without raising power costs, according to a study published Monday in the journal Nature Climate Change.(1/27)