Quote of the Week

“Frack now and pay later.”  Business is so tough for oilfield giants Schlumberger and Halliburton that they have come up with a new sales pitch for crude producers halting work in the worst downturn in years. It amounts to this: “frack now and pay later.” The moves by the world’s No. 1 and No. 2 oil services companies show how they are scrambling to book sales of new technologies to customers short of cash after a 60 percent slide in crude to $45 a barrel. In some cases, they are willing to take on the role of traditional lenders, like banks, which have grown reluctant to lend since the price drop that began last summer, or act like producers by taking what are essentially stakes in wells.

Terry Wade and Anna Driver, Reuters

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

Oil prices continue to fall with New York futures closing Friday at $43.87 and London at $48.61, both down 7 percent for the week. There was the now usual mid-week bounce as traders anticipated that US crude inventories would decline. This time they did fall for the third straight week, but record refining simply turned the crude into inventories of oil products leaving the total stockpiles of commercial crude oil and products largely unchanged at the time of year when it usually drops due to heavier summer demand.

The usual forces, over supply (the US rig count was up by 32 rigs in the last three weeks) and bad economic news from China, continue to drive the oil markets lower. With only three weeks left in the summer driving season, the demand for gasoline will soon drop and the fall refinery maintenance season which reduces the demand for crude is about to begin. Hedge funds and other large traders continue to cut their positons in oil and many are forecasting that prices will soon be in the $30s.  Another important factor contributing to the decline is the increasing likelihood that the US will see an interest rate increase in September driving up the dollar and forcing down oil prices.

The second collapse of oil prices which started in July has the oil industry in a quandary. Many had thought that the rebound in oil prices we saw last spring signaled that the worst of last year’s price decline was over and, and as we have seen, reactivated drilling rigs in anticipation of better days ahead. The ability of the industry to keep shale oil production from dropping precipitously after a 40 percent decline in active drilling rigs came as a complete surprise.

While prices are likely to stabilize soon, the duration of the downturn is being hotly debated with some seeing two or more years of low prices ahead and some expecting a price rebound early in 2016.  What is clear, however, is that many oil producers and governments that had become accustomed to $100+ oil are hurting badly and that we will see much change before the year is out. In the US many, if not most, of the smaller shale oil producers are in serious trouble. Wall Street will not loan them money; equity financing has dried up since June; and for some the only solution is to sell off assets at fire-sale prices.

The billions in capital expenditure that oil companies have cut so far seem unlikely to reduce the oversupply in the near future. The US oil industry needs to cut production by at least 500,000 b/d in order to stop the over supply and send oil prices higher. US oil production rose through March, stayed about level in April and likely has been declining since then. When oil was $100 a barrel no one worried about how much it cost to produce oil. Now that prices are around $45, the industry is finding that it can continue to produce oil much more efficiently. Many are reporting they can pump the same or more oil with half the drilling rigs. Some are saying that there will have to be at least another 30 percent cut in the number of active drilling rigs before significant cuts in production will occur.

The longer term implications of the current price decline may be far more important. Over the next three years, lower prices could result in some $4.4 trillion in lower revenues for the world’s oil producers. Much of this revenue will be lost by the larger oil companies that are only maintaining production these days with very expensive deep-water oil fields. Moreover, these companies have long histories of paying generous dividends which they are loathe to cut. There is not as much room for efficiencies for large companies as there is for the smaller producers, so real reductions in capital expenditures by the major oil companies are taking place. Revenues for the service companies that support offshore drilling are already down by about one-third and additional cuts are coming.

All this means that in the medium-term, say three to five years, a lot less new oil production will be coming on line. This in turn implies that at some point before the decade is out, oil prices will rise again allowing expensive producers such as tar sands and deepwater oil producers to again increase production. There may be room for increased US shale oil production, but in three to five years, most of the “sweet spots” will be pretty well drilled out so that it may not be possible to regain the current levels of production at then prevailing oil prices.

Some see the current decline in US production as the signal we are currently in the vicinity of the all-time peak in world oil production. If this is indeed the case, it will be years before this can be confirmed. First we will have to go through the current dip in production due to low prices, endure a price rebound, and wait to see just how much production can recover at whatever price oil reaches before demand drops. If there is indeed some growth left in the global oil industry, then we may not be witnessing peak oil in this decade.

The peak oil story will be further complicated by the course of climate change and just how much we can bring ourselves to clamp down on the use of fossil fuels before climate change does real damage. It is also possible that one or more of the exotic sources of energy that are on the horizon will reduce the demand for fossil fuels. The future of China’s economy is another unknown. Some believe that Beijing’s current economic systrem is a house of cards based on an ersatz capitalism that is already in the first stages of collapse. While the outcome of all this is far too complicated to foresee, it is clear that many forces are in motion and that many changes are coming.

2.  The Middle East & North Africa


Most of the important news came from Washington last week where pro- and anti- forces continued to battle it out over the potential consequences of the nuclear agreement. The Congress has delayed voting on the sanctions bill until September thereby subjecting the public to increasingly apocalyptic assertions as to what will take place if the agreement is or is not ratified. A similar but more muted debate is taking place in Tehran where the Rouhani administration is talking about a bright new future, while the Iranian right is muttering about not trusting the Americans.

The big news of the week was the announcement that Democratic Senator Schumer will vote to oppose the agreement, amidst White House assurances that it still has the votes to sustain a Presidential veto of any bill which attempts to undercut the treaty.

If the agreement comes into force later this year, Tehran may be able to increase its oil sales into a glutted market, but many believe that it will some time before substantial Western investment in Iran’s oil industry takes place. The country is still a difficult place to do business and the dangers of a snap-back of the sanctions stranding new investment is always present.  Tehran has its fingers in at least four ongoing Middle Eastern wars/confrontations any one of which could escalate into an investment threating situation.


The situation in Syria remains as confused as ever. Since the US bombing of ISIL began one year ago, the US and its allies have conducted 6,000 airstrikes at a cost of $3.2 billion. ISIL has suffered considerable losses of heavy equipment, with some 1,500 tanks and other military vehicles being destroyed in the last year, but has been able to sustain an effective combat force of some 25,000-30,000 in the field despite the bombing.

For now, there is little that can be said except that the various insurgent groups continue to fight each other as well as the Assad government forces. The US and Turkey continue efforts to establish as “safe zone” for refugees along the Turkish border and the US has begun bombing from bases in Turkey which are much closer to the fighting.  There may be some progress in efforts to broker the departure of the Assad government, even while fighting among the insurgent groups is on the rise.

It was a very hot week in Iraq with the daytime temperature hitting 122o F. Given the humidity from the Gulf, some parts of Iraq had “feels like” temperatures of 159o. In this situation, little work got done and there was not much fighting. Citizens have taken to the streets, all around the country, blaming government corruption for the chronic electricity shortages that shut down air coolers and fans for all but a few hours a day. The power grid was gutted after the US invaded in 2003 and failed to prevent the looting of the grid infrastructure.  Insurgent attacks continue to do damage. This summer may be a harbinger of what to come in the Middle East as summer temperature rise and rivers run dry.

Iraq maintained near-record exports in July as shipments from Basra in the south increased while shipments through Kurdistan and Turkey were erratic due to political disputes and sabotage to the pipeline in Turkey.

Iraq’s prime minister is proposing reforms that would radically change the dysfunctional government that has existed since the US invasion in 2003. The reforms, which would mean the end of the post-2003 Iraq, are the result of protests sparked by the searing heat. The new reforms would likely eliminate many of the checks and balances among the Shiites, Kurds, and Sunnis that the US had tried to impose. Riyadh announced that it has arrested 431 suspected members of ISIL in recent weeks and has thwarted attacks on mosques, security forces, and diplomatic missions. The number of arrests suggest that ISIL is having no trouble recruiting new members inside the kingdom.


A new round of political reconciliation talks will begin in Geneva this week. There is still talk of an EU military intervention in the country to counter the Islamic State should an agreement between the two existing governments be reached. In the meantime, three tankers are scheduled to load some 3 million barrels of oil from ports in eastern Libya. This could be a sign that better times, or at least more oil exports, are ahead.

Saudi Arabia/Yemen:

The Saudi backed Sunni militia are making progress in efforts to dive the Houthis out of southern Yemenis cities. These forces recaptured Aden last month; a key airport to the north last week; and over the weekend drove the Houthis out of the important city of Zinjibar.  Yemen is completely surrounded by Saudi Arabia, and its coasts are under control of the Saudi Navy, leaving the Houthis with no source of supply besides what existed in Yemeni Army stocks or possibly was supplied by Iran before the fighting began.

A suicide bomber blew up a mosque inside a Saudi military compound near the Yemeni border. Some 15 members of the Saudi security forces were killed in the attack.

People are starting to say that the Saudis are losing the oil price war. Instead to driving high-cost US shale oil producers from the markets, the US shale oil companies are cutting down on exploration rather than cutting production. While some weaker companies are going bankrupt, their reserves are being acquired by better financed rivals at bargain prices that are holding the reserves for higher prices. Meanwhile, the Saudis, saddled with the war in Yemen and and the need to spend substantial sums keeping its domestic population quiescent in the face of political turmoil across the region, are facing a $140 billion fiscal deficit this year. This is eating into foreign currency reserves which are now about $650 billion.

Last week the Saudis announced that they were seeking to sell $27 billion worth of bonds to slow the hemorrhage of foreign reserves. If low prices continue for another few years, even the Saudis are going to be in fiscal trouble.

3.  China:

For now, it is all about the state of China’s economy and the implied prospects for oil imports in coming years.  Last week the official Purchasing Managers Index for July fell to 50.0 indicating that no growth in manufacturing was taking place. This was topped by July export data with showed an 8.3 percent drop in July, the largest in four months and far worse than expectations of only a 1 percent decline. Exports to the EU were down by 12.3 percent and those to Japan by 13. China’s trade surplus for July was $43.03 billion vs. an expected $53.25. Imports fell for the ninth month in row, this time by 8.1 percent.

China’s central bank issued a report last week warning that the country faces further economic weakness and said its economy needs a complete overhaul rather than a succession of short term stimulus measures. The government has cut interest rates four times since November.

All that can be said is that China’s economic prospects do not look that good. The government seems poised to embark on another round of dubious infrastructure projects to keep the economy growing at its hoped for 7 percent this year.

4. Russia/Ukraine:

The ruble underwent is seventh straight week of losses and is now trading at 64 to the dollar – a 14 percent depreciation since the end of June. The IMF says that Russia faces a loss of as much as 9 percent in the inflation-adjusted value of the goods and services it produces if the Western sanctions and retaliatory ban on food imports continue. Last week Moscow ordered the destruction of 350 tons of food that had been smuggled into the country and was being offered for sale in retail stores. The move resulted in widespread protests by people demanding that the food should be distributed to the poor that can no longer afford the increasing food prices.

The head of Russia’s biggest oil company is warning that the country could soon face a gasoline shortage as the result of new tax rules that favor exporting rather than refining oil; a weakening economy; and western sanctions that are blocking the import of critically needed refinery parts. Ironically, Russia’s defense department says it too is running short of the spare parts that were traditionally manufactured in the Ukraine during Soviet days. These parts continued to be exported from the Ukraine to Russia until hostilities began last year, but are now embargoed. Moscow says it may take several years to develop domestic sources of supply.

5.  The Briefs

Investment forecast: Magnus Nysveen, head of analysis at Rystad, said oil companies are likely to cut investment another 5 to 15 percent next year, after a 21 percent cut in 2015. Javier Blas, Bloomberg News

Russia formally staked a claim on Tuesday to a vast area of the Arctic Ocean, including the North Pole. If the United Nations committee that arbitrates sea boundaries accepts Russia’s claim, the waters will be subject to Moscow’s oversight on economic matters, including fishing and oil and gas drilling. (8/5)

The assumption that Iran will compete with Russia in exporting gas to Europe, hence improving European energy security, seems to be wishful thinking. It will take a decade for Iran to be ready to make a difference in the European gas market. Iran’s domestic needs will be dramatically increasing and will absorb a substantial portion of the country’s gas output for some time to come. What we may see is not competition, but cooperation. The two countries have roughly over 40% of world gas reserves. Iran and Russia will cooperate within an OPEC-like formula to influence prices. (8/4)

In Saudi Arabia, the widely reported fall in crude oil exports in May — the first time in five months — led many to assume that this may counter the fall in crude oil prices. This is not the case. The fall in crude exports hides the rise in domestic refining and product exports in addition to the seasonal rise in direct crude oil burn for power generation. (8/4)

Syria’s oil industry, like most of its industries, is in a state of collapse. And even recent gains, according to analysts, won’t come close to bringing it back. Since the onset of the Syrian war in 2011, government oil production has nearly stopped, with current production estimated at less than three percent of pre-war levels. (8/6)

In Venezuela, the Maracaibo basin is where the country’s enormous energy bounty, including oil reserves that challenge even those of Saudi Arabia, smacks up against the diminished capacity of the state-owned monopoly producer PDVSA to manage the twin demands of increased production and environmental protection. Today, the 13,200 square kilometer (5,097 square mile) body of water, a graveyard for everything from abandoned pipeline and tires to dreams of Venezuelan prosperity, stands as an emblem of a richly endowed resource nation descending into disarray. (8/5)

Canada relies heavily on export revenue from oil and natural gas. Most of the crude oil exported from Canada heads to the United States. In a weekly status report, the US Energy Information Administration reported total Canadian imports of 2.98 million bpd for the week ending July 31, down 3 percent from the previous week and nearly 7 percent lower year-on-year. In May, producers Canadian Natural Resources and Cenovus Energy curbed production, closed facilities and evacuated staff from Alberta operations during wildfire outbreaks. (8/8)

Gross inputs to US refineries exceeded 17 million b/d in each of the past 4 weeks. That’s a level not previously reached since the US EIA began publishing weekly data in 1990. The rolling 4-week average of US gross refinery inputs has been above the previous 5-year range during 2010-14 every week so far this year, reflecting both higher refinery capacity and higher utilization rates. Lower crude oil prices and strong demand for petroleum products, primarily gasoline, both in the US and globally, have led to favorable margins that encourage refinery investment and high refinery runs. (8/8)

Refineries: Low crude prices and strong demand for gasoline are creating near-perfect conditions for oil refineries across the United States, especially those geared towards maximizing gasoline production. Valero, the country’s largest independent refiner, made a gross margin of more than $13 on every barrel of oil processed in the second quarter, and a net margin of almost $8.50, both the highest since 2007. (8/7)

Falling diesel futures and ballooning supply have alarmed US refiners about when, or even if, demand may pick up ahead of the peak winter season, potentially hurting crude oil prices amid the year-long rout. Futures plunged 16 percent in July, stockpiles are at four-year highs and demand is down 3.7 percent. (8/8)

Companies that transport and store oil and refined products, as well as manage shipping terminals reported soaring profits this week. The glut of crude driving down prices is also creating more work for petroleum logistics firms, also known as midstream companies. Higher volumes of oil being brought to market generally means more business for operators of pipelines, tanker trucks, storage tanks and marine terminals. (8/8)

Selling assets: A slew of producers from Anadarko Petroleum Corp. to Comstock Resources Inc. announced more than $2.4 billion in asset sales last month, according to data compiled by Bloomberg. Selling oil and gas fields to pay off lenders and fund new drilling — often a wildcatter’s option of last resort — is surging after a six-month lull. There’s more to come — by one estimate, another $20 billion this year. (8/7)

Arctic exploration: Shell’s geologists believe that beneath their prospect Burger J—70 miles offshore and 800 miles from the Anchorage command center—lie up to 15 billion barrels of oil. An additional 11 billion barrels are thought to be buried due east under the Beaufort Sea. Logistical and legal obstacles have repeatedly delayed the Arctic initiative, on which Shell is spending more than $1 billion a year—more than $7 billion so far and counting. The single well in the Chukchi Shell aims to excavate this summer could be the most expensive on earth, and it hasn’t yielded its first barrel of crude. Even sympathetic observers find it curious, though, that Shell and Shell alone sees future profit in the Chukchi. (8/6)

The American Petroleum Institute said it wants to hear how presidential candidates will navigate the era of abundance. API President and Chief Executive Officer Jack Gerard said the next US president will oversee issues ranging from oil and gas exports to the emissions reductions scheme outlined this week from the White House. (8/6)

US natural gas exports to Mexico look to also sky rocket in the coming years. Due to changes in Mexican law in 2013 opening the electricity market to private investment, billions of dollars in contracts have been let to build power plants, electrical distribution facilities and natural gas pipelines. In turn U.S. pipeline companies and gas producers have moved to capture the lion’s share of that market. (8/4)

US shale gas is the unexpected loser from President Barack Obama’s climate plan, as the White House abandons its previous enthusiasm for natural gas as a cleaner alternative to coal.  Last year Mr. Obama called natural gas from fracking a “bridge fuel” to smooth the transition from polluting coal to emission-free renewable energy. But the shale industry was left reeling by a sudden reversal on Monday.  In its landmark plan to cut greenhouse gas emissions from power plants, the Obama administration eliminated an earlier projection that natural gas would contribute much more electricity, and instead upped the role of renewables. (8/4)

The total US trade deficit, bolstered by the surge in oil and natural gas production, dropped to $508 billion by 2014, after peaking at $762 billion in 2006. Today’s report from the US Dept. of Commerce, covering trade data through June, shows that the US trade deficit among petroleum and petroleum products fell 56.1% compared with first-half 2014. That growth helped to hold the total US year-over-year trade balance steady, despite a 23.1% increase in the trade deficit among nonpetroleum products. (8/6)

Pioneer Natural Resources said it lost $218 million in the second quarter, joining its peers struggling to generate revenue during the downturn in the crude oil market. Yet the company also said it would increase its capital budget for the second half and add more rigs, focusing its efforts on the Spraberry/Wolfcamp asset within the Permian basin in western Texas. (8/6)

Low natural gas prices continued to depress Northern Indiana Public Service’s coal burn in the second quarter, causing consumption to fall 36 percent and inventory levels to rise sharply. (8/5)

Alpha Natural Resources, one of the largest U.S. coal companies, became the latest in the hard-hit industry to seek bankruptcy on Monday. Alpha blamed its Chapter 11 bankruptcy on tougher regulatory standards and policies that favor renewable energy, as well tumbling prices for its coal. Alpha is the world’s third-largest supplier of metallurgical coal used in making steel and has also been hit by a slowdown in China. (8/4)

In New Zealand, coal-fired power is coming to an end as the country focuses on taking the global pole position in renewables, the energy minister said. Significant market investment in renewable energy in recent years, particularly in geothermal, means that a coal backstop is becoming less of a requirement. Utility Genesis Energy said Thursday it’s on pace to shut down its last two coal-fired power plants by December 2018. (8/7)