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Quote of the Week

“Generally, it takes 18 months before the world has a decent picture of supply and demand. This is little consolation to those trying to do real time analysis on the direction of prices. That is why I can say categorically “the fix is in”. In other words, fields are declining, meaning investment is far below levels required just to replace production. The only thing that will change the vector of these declines is more spending, lots more spending, and the only thing will spur lots more spending is higher prices. Significantly higher than $40/bbl.”

Brad Beago, Oilprice.com, in Fortune magazine

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

1.  Oil and the Global Economy

Oil prices surged 8 percent last Friday and are now back at levels seen at the top of the last price surge in mid-March. This time strengthening the US and German economies, a falling dollar, and the OPEC price freeze meeting on April 17th was seen as the trigger behind the rally.  Friday’s rally was the 12th time in the last two months that daily prices have surged by 5 percent or more showing that there is a lot of money eager to participate in big price rise that will come someday. However, this rally was mostly based on hopes that things are going to get better rather than any specific news, other than the recent increases in US gasoline consumption which are likely to short-lived as retail prices move higher.

Many traders and fund managers believe that the $26 bottom we saw on February 11th was the end of the nearly two-year price decline and are ready to buy into oil futures on any good news. Other traders continue to warn that the oil production remains relatively steady, oil stocks are still close to an all-time high, and that the OPEC meeting likely will turn out to be meaningless for global production. There is still talk that storage capacity is running short in some areas which could lead to a downturn in prices once again. New York futures closed the week at $39.72 and barrel and London at $41.94.

US natural gas prices jumped 10 cents per million BTU’s on Friday to close above $2 for the first time in nearly two months. The move was attributed to cooler-than-normal weather in the Northeast and came despite US natural gas stocks increasing to 2.48 trillion cubic feet, a record for this time of year. Prices have been at historic lows in recent weeks because to the continuing glut of natural gas which is 54 percent larger than normal for this time of year. The low prices are starting to lure speculators who see the bottom as being reached and the prices have nowhere to go but up.

Last week the infamous Keystone pipeline, which moves 590,000 b/d of Canadian crude to the US, ruptured in South Dakota.  The leak released about 17,000 gallons of crude but did little environmental damage. After a week of repairs, the pipeline was to reopen at reduced pressure over the weekend. Due to the glut of oil I US storage facilities, the markets largely ignored the one-week shutdown.

Goldman Sachs published an interesting theory last week that a price of $35 a barrel is the ideal “Goldilocks” price for US crude oil. The idea is that prices around $30-35 a barrel are enough to keep many oil producers in business until the markets are again rebalanced, but is not high enough to stimulate a surge in production that will only prolong the glut.

2.  The Middle East & North Africa

Iran: Tehran has reversed its long-standing tradition selling its oil at a premium to the world level and has started to offer substantial discounts to regain market share. Starting on Friday, the Iranians began to sell oil to Asian customers at 60 cents a barrel below benchmark prices. This policy change confirms that the trouble Iran is having in increasing its exports at the pace that it had hoped for last winter. The government also reaffirmed last week that it will not restrain production increases in line with the proposals that are to be discussed at Doha next week. They have called on other oil producing countries to reduce their oil production to allow Iran to return to its previous share of the markets.

Syria/Iraq: Exports from Iraq’s southern oil terminal have risen to an average of 3.5 million b/d in April from 3.2 million in March. Production is increasing so rapidly that 30 large oil tankers are waiting off the port for a chance to load. Officials say it may be weeks before the backlog is cleared as oil production is clearly outrunning the capacity of the terminal which was rebuilt two years ago to load the crude. Iraq is one of the last places on earth that has a large amount of easy-produce-conventional crude. With the assistance of competent international oil companies, new production has increased rapidly despite widespread corruption and political unrest in the country. Some are noting that the increase in Iraqi production is largely offsetting the decline in high-cost US shale oil output.

Government forces continue to make progress against the ISIL forces that are defending the approaches to Mosel. In this action, ISIL is forced to fight in relatively open terrain and small villages, where the are highly vulnerable to the Western airstrikes that are accompanying the government offensive.  ISIL can do better when fighting in cities where the defenders are intermixed with the civilian population and airpower is less effective. A humanitarian catastrophe in shaping up in Fallujah where some 90,000 civilians are trapped in an ISIL-occupied city cut off from food. ISIL has been executing people attempting to leave, and widespread starvation is expected.

The fate of Iraq’s northern oil fields is in the balance. The region was traditionally Kurdish, but the Sadam government attempted to replace the Kurds with Arabs. During the ISIL offensive, the Kurds took over the oilfields to prevent them from falling into ISIL hands and have been exploiting the oil output. Now that ISIL is being driven out of the territory between the Kurds and the government this question of who will ultimately gain control of the oilfields, which were among the first to be discovered in the Middle East. A referendum among the mixed population living there is being proposed to decide whether the region will become part of Iraqi Kurdistan. This province is also talking about declaring its independence from Baghdad is raising the question of just how much of Iraq will be left after the dust settles.

To counter its reverses on the battlefields in Iraq and Syria, ISIL is stepping up its suicide bombings in southern Iraq where the targets are easier to access. Last week a wave of such bombings targeted security forces and crowded civilian areas in southern Iraq. A new wrinkle to the attacks was an attack in Basra which far to the south and so deep in the Shiite-populated parts of the country that it has been relatively immune from the ISIL-Baghdad fighting.

As in Iraqi, government forces, supported by heavy Russian air strikes, Iranian “advisors,” newly acquired military supplies, and Hezbollah fighters, are making progress against ISIL forces. The Islamic State has almost no friends, no sources of supply, and is slowly being cut off from access to Turkey.  In northern Syria, US and Turkish-backed rebels have seized the town of Al Rai which was ISIL’s main entry point into Turkey. As the ISIL forces are forced back, there is a rush among government forces, the Kurds, and the numerous flavors of anti-Assad groups to take over territory that had been occupied by ISIL.

Libya: The new Libyan Unity government seems to be settling in at a well-guarded naval base in Tripoli. Last week one of Libya’s rival governments the “National Salvation” in Tripoli dissolved itself declaring that it was no longer a government. The UN has sanctioned key members of the New Dawn and the Tobruk parliamentary government in hopes of encouraging them to step down. The new unity government headed by an unknown technocrat is backed by the UN and presumably all of its members including the US and EU governments.

Small teams of US, UK, French and Italian special forces are in the country to counter the Islamic State threat US intelligence now places at 4,000 to 6,000 fighters. Many are saying the Islamic State threat will soon result in a larger foreign intervention by US and European armed forces. The bombing of Islamic State facilities has already begun.

Over the weekend, the staff was evacuated from three oil fields in eastern Libya due to fears of Islamic State attacks. The Islamists have already launched several attacks on oil export facilities in recent months, causing considerable damage but not occupying any facility. Oil production remains at about 300,000 – 400,000 b/d or about one-fifth its size before the uprising.

There is a lot of easy-to-exploit oil in Libya and production could easily be raised to pre-uprising levels should the political situation ever settle down. For now, it seems that foreign intervention seems the best way pacify the squabbling the militias, however, some are calling for a partition of the country along pre-colonial tribal lines much as that which seems to be underway in Iraq.

Saudi Arabia: There is increasing talking of what the country will be like in a post-oil economy. For now, the main Saudi plan is the creation of a $2 trillion Sovereign Wealth. Many see this as an impractical goal as low oil prices have resulted in a massive budgetary deficit, and the country is rapidly running through its financial assets to stay afloat.  A “National Transformation Plan” is due to be announced soon that seek to increase the flow of non-oil revenues from increased taxation and fees on other parts of the economy.

The country’s leaders hope that the plan will raise some $100 billion in new non-oil revenue by 2020. The government is also planning to issue some $10 billion in bonds later this summer.

Talk is starting that the Saudi’s might unpeg their riyal from the dollar and let it drop. This would make Saudi oil cheaper in terms of dollars and more competitive against US shale oil other crudes. The downside would be capital flight from Saudi Arabia and higher prices nearly everything the Saudis purchase abroad including food.

3.  China

Small independent refiners, known as “teapots,” account for some 20 percent of China’s refining capacity and have recently been granted authority to import foreign crude. As a result, the teapots are now a growing piece imports. Currently, there is a 30-day backup of tankers waiting to unload crude at Qingdao, the main import terminal use by the teapots. Sixteen teapots now have gotten together in a coalition to manage the oil imports. Larger orders insure that the teapots will get the best prices and the coalition can guarantee that money and paperwork are always available when imports arrive.

The teapots are beginning to export large quantities of diesel, to markets across Asia. Having newer and more efficient refineries, the teapots also have been able to sell fuel domestically at lower prices than the gigantic state-owned oil companies, thus helping China’s sagging economy.

Numbers released last week suggest that China’s economic slowdown may be easing. Although recent purchasing managers’ indices still indicate contraction, the situation is not as bad as many had feared, and fears of a hard landing are receding.  Property and manufacturing are still a major problem as is the massive overcapacity in many basic industries and the scheduled layoffs of workers which could reach into the millions.

4. Russia/Ukraine

Unless a production freeze is negotiated at Doha next week, Goldman Sachs expects that Russian oil production will increase from 11.1 million barrels in 2015 to 11.2 in 2016 due to the weak ruble, low production costs, and favorable tax rates. Moscow says it is still committed to signing a deal at Doha, but given the limited room it has to increase production, a small additional production is not particularly important to the Russian oil industry. Goldman’s believes that the weaker ruble and tax rates that fall with lower international oil price have left the oil industry with $6 a barrel of free cash flow with oil at $40 a barrel as compared with only $8 a barrel when oil was at $100. Russia’s oil industry is clearly not being hit as hard by low oil prices as has the Russian government and many other oil exporters.

Russian planners believe that $45-50 a barrel would be an “acceptable” level for oil prices, which would drive high-cost producers out of the markets allowing a rebalancing while still keep its oil industry solvent. Russia’s oil minister says he will meet with the Saudi minister before the Doha conference to see if there is any movement in the Saudi position that they will not freeze production as long as Tehran continues to increase its oil output as fast a possible. Thus, the results of the meeting are still very much up in the air.

The World Bank said last week it expected Russia to return to economic growth in 2017 despite another down year in 2016. Russia’s poverty rate is expected to increase to 14.2 percent this year. If this projection turns out to be true, Russia will have erased the progress it made in fighting poverty during the ten years of high oil prices.

5.  The Briefs

Capex crash: For the first time in more than three decades global capital spending in the oil and gas industry, known as capex, is set to fall for the second year in a row. (4/9)

The worldwide drilling rig count declined by 210 during March to 1551, according to Baker Hughes Inc. Year-on-year, the March worldwide rig count was lower by 40 percent. (4/8)

In Norway, oil major Royal Dutch Shell has pulled its application from the country’s Arctic-focused oil licensing round, the firm said on Monday, in a blow to the Nordic country’s ambitions to explore for oil and gas in its northern offshore areas. (4/5)

Royal Dutch Shell is under pressure from shareholders to cut annual spending below $30 billion after buying BG Group to ensure it can maintain its dividend given the slow oil price recovery. Shell reduced spending by $8.4 billion to $28.9 billion last year. (4/9)

Saudi Arabia plans to nearly double the size of its stock market, among the most closed in the world, by adding dozens of companies and making it easier for foreigners to invest. The kingdom aims to attract privately owned firms to list while privatization by the government will also boost the market, said Mohammed Al-Jadaan, chairman of the Capital Market Authority, the country’s regulator. (4/5)

Gas to Pakistan: Bringing natural gas through a pipeline from Turkmenistan will help address chronic energy shortages in Pakistan, the Asian Development Bank said at a kick-off event. (4/9)

India, in the energy world, is becoming the new China. The world’s second-most populous nation is increasingly becoming the center for oil demand growth as its economy expands by luring the type of manufacturing that China is trying to shun. And just like China a decade ago, India is trying to hedge its future energy needs by investing in new production at home and abroad. (4/8)

Vietnam’s government on Thursday said it had told China to pull an oil rig from waters between the two countries that haven’t been demarcated and urged Beijing not to drill for oil or gas in the area. (4/8)

Nigeria, despite being one of the world’s biggest oil producers, imports most of its fuel and is currently facing a severe shortage. It does not have enough oil refineries and even if the four it has were running at full capacity, they would only supply a quarter of the country’s needs. To meet demands, the national oil company imports around 50 percent of its fuel needs. The remainder is supposed to be imported by private fuel distributors. (4/8)

Venezuela’s main steelmaker Sidor has been shut down for 25 days, a union leader said on Wednesday, blaming the situation on the military officers who run the state-owned firm. Leonardo Azocar, the leader of the largest union representing Sidor workers, said, “The plant is paralyzed because of bad management, it’s not the workers’ fault,” The company has said in the past that constant labor disputes and obsolete equipment have hindered its performance. (4/7)

The Canadian Association of Petroleum Producers estimated capital on oil and gas production spending will be expected to decline 62 percent from 2014 levels to $24 billion, the largest two-year decline since record-keeping began in 1947. (4/9)

In Canada, after almost two years of sinking oil prices and at least 40,000 job cuts, the petroleum industry still isn’t finished tackling its bloated operations. The next round of layoffs has already begun with Cenovus Energy Inc. and Murphy Oil Corp. announcing workforce reductions last week. Ongoing cuts by Suncor Energy Inc., Encana Corp., and others will likely result in thousands more jobs lost by the end of the year as the Canadian industry shaves billions worth of spending in order to continue operating in one of the world’s most expensive oil-producing regions. (4/5)

In Canada, new pipelines built in an environmentally sound way and with the blessing of aboriginal communities are crucial to economic growth, the country’s resources minister says. Compounding the outlook for Canada’s slowing energy sector is a lack of pipeline infrastructure to transport landlocked crude oil to new markets. (4/6)

The US oil rig count declined by 8 to 443 while the number of U.S. gas rigs rose by one to 89 from a week ago, according to Baker Hughes Inc.  (4/9)

Credit ratings knocked: Oil companies big and small are having their credit ratings cut as the collapse in crude prices reduces cash flows and limits their ability to sustain debt payments. Chevron and Royal Dutch Shell had their ratings reduced by Moody’s Investors Service by one level, while Total’s was cut two steps, according to statements by the New York-based rating company on Friday. Chevron will generate negative cash flow amid rising debt for at least the next two years. (4/9)

In Houston, the boom helped create 100,000 oil and gas jobs annually for several years, while the bust resulted in 50,000 layoffs last year alone. And the layoffs aren’t over. Another 21,000 job losses in the oil and gas sectors are projected for this year.  Other problems loom, including a projected city budget shortfall of at least $140 million and a slumping commercial real estate market. (4/5)

20,000 cuts: According to the Federal Reserve Bank of Dallas’ calculations, oil and gas companies working in the U.S. have cut more than 20,000 from their payrolls during the first quarter of the year. Their latest analysis said many oil and gas companies are entering “survival mode” as they look to navigate the declining market trajectory. (4/9)

Merger full-stop? Rumors surfaced earlier this week the US Justice Department would follow its European counterparts in challenging the proposed merger of the two companies because of concerns about market competition. The two companies are the No. 2 and No. 3 in terms of market share, behind Schlumberger. (4/8)

Anti-fracking Grist: A new study from Stanford has confirmed that fracking operations are contaminating drinking water sources in Wyoming. This news comes soon after a Pennsylvania jury awarded $4.24 million to two families in Dimock, PA who sued Cabot Oil for contaminating their drinking water via fracking operations. And a new study that has found fracking — and not just frack waste injection — is causing earthquakes in Canada. (4/7)

BP Macondo settlement: Judge Carl Barbier granted final approval on Monday to BP’s civil settlement over its 2010 Gulf of Mexico oil spill after it reached a deal in July 2015 to pay up to $18.7 billion in penalties to the U.S. government and five states. The company at the time said its total pre-tax charges from the spill set aside for criminal and civil penalties and cleanup costs were around $53.8 billion. (4/5)

Oil refineries are shifting into high gear to produce as much gasoline as possible for the world’s fuel-hungry drivers – kicking the problem of a worsening diesel glut further down the road. The “margin” or profit derived from refining crude into diesel has plunged in Europe, hitting multi-year lows this week as demand for the fuel – used heavily for heating in the Northern Hemisphere – wilts towards the end of winter. (4/9)

Big airlines are making waves in the oil market for the first time since prices went into a tailspin nearly two years ago, betting this may be their best chance to lock in cheap jet fuel for years to come. A number of airlines moved last week to place significant oil price hedges for 2017, 2018 and even 2019. (4/7)

Gasoline prices: US consumers may be in for seasonal volatility in retail gasoline prices as crude oil market dynamics contrast with refinery-side pressures. Motor club AAA reported a national average retail price for a gallon of regular unleaded at $2.05 per gallon, relatively unchanged from one week ago but 24 cents, or 13 percent, higher than one month ago. (4/6)

Gas backfires: Experts don’t know how exactly much money utilities have lost nationwide on natural-gas hedges. Natural-gas prices have plunged 74% in the past 10 years, but some US utilities haven’t reaped the full benefit because of bad bets they made to hedge the cost of the fuel. (4/4)

Weekly US coal production totaled an estimated 11 million tons in the week ended April 2, down 5.4% from the prior week’s estimate and down 37.9% from the year-ago week.  Year-to-date coal production is down 32.2% compared with the same period last year as producers continue to deal with weak demand due to high utility stockpiles and competition from cheap natural gas. (4/9)

Railroad Blues: The number of railcars loaded with coal in the first 12 weeks was down by 32 percent compared with 2015. Coal loadings are down because power plants have switched to burning inexpensive natural gas. Overall, U.S. rail freight declined more than 6 percent in the first 12 weeks of 2016 compared with a year earlier. (4/5)

Investment climate shift: One by one, the descendants of John D Rockefeller, the Gilded Age oil baron, are repudiating the fossil fuels that made the family rich.  On the heels of the Rockefeller Brothers Fund in 2014, the Rockefeller Family Fund, the charitable vehicle of another arm of the family, announced last month that it would be divesting its shares in coal producers and oil and gas explorers, including ExxonMobil. (4/4)