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Contents
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
1. Oil and the Global Economy
Oil prices in London climbed steadily last week closing at $62.58, capping the biggest monthly price increase in six years. New York futures were more volatile, closing Friday at $49.76 a barrel as traders weighed the reports of cutbacks in drilling in the US and around the world against the ever-increasing US crude stocks — which are threatening to overrun storage capacity. The issue remains as to how quickly declines in capital expenditures on drilling new wells will translate into significantly lower supplies. Many observers say that the oil markets have rebounded too rapidly and that we will see a new price bottom in the next few weeks before prices rise later this year. The EIA says US crude production remained steady the week before last despite the very cold weather, which inhibits oil production in northern states.
The issue of US crude storage capacity is receiving more treatment in the press, as it is key to just how much crude can be stored given the restrictions on US crude exports. Some analysts say that the US is already at 80 percent of capacity and much of the remainder is scattered at remote locations that are not well suited to temporary storage. The cost of storage aboard seagoing tankers is rising rapidly as global supply is thought to be running at some 1.5 million b/d and much of it has already been stored in tankers. The so called “contango” in which current futures contract are going for less than those expiring in a year or more widened to $12 a barrel last week. The profitability of this spread vs. the cost of storing oil for a year could be a key as to where the markets move in the next few months.
There were a number of short-term influences affecting the markets last week such as the unusually cold weather in the US, which increased the demand for heating oil; bad weather which slowed OPEC shipments resulting in lower exports; and the Chinese economy showing a small bounce.
The US oil workers strike spread to three more oil-processing facilities last week. Some 6,500 workers are now on strike; however management personnel seem to be keeping most of the facilities working. Last week the strike negotiations broke down, but are expected to resume soon. The last US oil worker strike 25 years ago lasted for three months. A major issue seems to be whether union workers or outside contractors will perform routine maintenance at the plants, which the union labels as a safety issue.
The presidential veto of the Keystone pipeline bill last week raised a lot of fuss in the Congress, but is unlikely to have much impact on the oil markets in the foreseeable future other than as a political issue.
US natural gas prices dropped sharply last week, despite the unusually cold weather, closing at $2.70 per million. Natural gas futures, which were trading around $3.80 in late November, fell to $2.60 in early February, and then rebounded to over $3 the week before last. Robust production is clearly offsetting the recent bout of cold weather.
2. The Middle East & North Africa
Iraq: Baghdad’s oil exports in February fell to 2 million b/d from 2.4 in January largely due to bad weather at the southern export terminal. Observers say that the decline is likely to be temporary as more oil is being produced from the southern oil fields that are being redeveloped by foreign oil companies, and progress is being made on improving Iraqi terminal facilities.
The western oil companies working in Iraqi Kurdistan are still not being paid for their efforts as Baghdad is having trouble making the agreed-upon payments to the Kurds. Oil deposits in Kurdistan contain roughly one third of the oilin Iraq and can be extracted for roughly $12 a barrel which in today’s oil market makes them a highly sought after prize.
The military situation in Iraq is generally unchanged with ISIL bombs killing Shiites at a steady pace; coalition air strikes preventing ISIL from massing to take more territory and slowly eroding its sources of oil. ISIL, however, now controls large numbers of people that can be coerced into their military forces and support networks. The UN estimates that some 1100 Iraqis were killed in the fighting during February. The Kurds armed forces are in a stalemate with ISIL. They will go on the offensive to recover territory which is inhabited by ethnic Kurds, but are reluctant move against ISIL forces located in traditionally Sunni territory. The world is waiting to see whether government forces, which are largely Shiite militia backed by coalition air power can make progress against the ISIL forces recapturing Mosel later this year.
In general, the Iraqi political situation continues to deteriorate, with fighting between ISIL and the Shiite dominated and Iran-backed government in Baghdad becoming ever bitterer.
Libya: Crude exports continue to oscillate between 250,000 b/d and close to zero depending on the latest turn of events. On Sunday a National Oil Company official said that crude production is now back up to 400,000 b/d after having cycled down to 200,000 b/d or so last week as the reopening of a major sabotaged pipeline was quickly followed by storms which cut off electric power. The only stable source of Libyan oil is coming from offshore fields and some smaller fields near the Egyptian border.
In the wake of the ISIL beheadings of the Egyptian Copts, some 25,000 of the estimated hundreds of thousands of Egyptian workers living in Libya are leaving the country. Italy is becoming increasing concerned about the thousands of migrants arriving at its shores from the un-policed Libyan coast and is pushing for foreign intervention to stop the illegal immigration and prevent ISIL from spreading from bases in Libya.
Iran: Both sides reported progress in the latest round of nuclear talks that ended last week. The thrust of the current negotiations seems to leave Iran free to enrich uranium, but encumbered with restrictions that would cause a year’s delay following a decision to build a nuclear weapon. Needless to say, the Israelis and many of their friends around the world consider this sort of restriction on Iran as inadequate, although they seem to have few other proposals other than stiffening sanctions until Tehran is forced to completely halt its nuclear programs or starting a war by bombing Iranian nuclear facilities.
With the deadline for completing the framework of a nuclear treaty less than a month away, the negotiations are the top of policy concern relating to the Middle East. Should an agreement be reached and then overcome the likely objections to be raised in the US Congress, the treaty is likely to lift sanctions enough that more Iranian oil would be reaching the market before the end of the year. Such an increase, which could be as much as 1 million b/d, would likely offset much of the anticipated decline in US shale oil production later this year.
Should opponents of the agreement succeed in preventing a treaty from being signed, the situation could easily decay into a far more serious situation and even lead to hostilities. Many observers believe that the European powers and China would be unlikely to maintain their sanctions following failure of the talks and the US would be left to go it alone. Some see even foresee Tehran making a push to step up uranium enrichment and beginning another push to develop nuclear weapons which would almost certainly result in an Israeli reaction which would threaten the regions’ oil exports.
3. China
The state of Beijing’s economy in the next year or so will likely become a key determinant in the size of its ever-increasing demand for oil. As is well known, China’s economic growth has dropped significantly in recent years and the official Purchasing Managers index reported another contraction in factory activity during February. A recent, and unexpected, cut in interest rates however, is raising fears that the economic situation may be worse than official figures are suggesting.
Beijing’s rush to buy low-priced crude for its strategic reserve is making it difficult to assess China’s actual domesticoil consumption these days. Last year imports grew by nearly 10 percent as millions of additional barrels were imported to fill its national stockpile, which has been low for a country with its level of consumption. The government recently announced that the strategic reserve tanks it built in the first phase of establishing a national reserve will hold about nine days of consumption vs. a national goal of 90 days, so purchases may go on for a while. Beijing is opening a new oil import terminal in Myanmar and is building a new pipeline to southwest China, which will reduce the costs and speed the delivery of Middle Eastern oil.
China’s oil imports increased by some 500,000 b/d every year from 2003 to 2012 and its Increasing economic activity also spurred increased demand for oil from many of its trading partners across East Asia. Refinery input which has been growing at some 6 percent each year is now down to 2 or 3 percent despite the opening of several new refineries which seem to be contributing to China’s oil product exports.
The government announced last week that coal consumption fell by 2.9 percent in 2014 to 3.9 billion metric tons. This was the first decline in coal consumption in 14 years. The move came as oil and natural gas replace coal in a slowing economy and more pollution-aware country.
4. Russia/Ukraine
Even though the ruble rallied 12 percent in February as the Ukrainian ceasefire took hold and oil prices rebounded, Russia’s economy is still in deep trouble. Last week Moscow allocated half of its reserve funds, accumulated during the good years, to supporting government expenditures in 2015. The general perception of the Western financial community is that Russia is now a rogue state allowing politics to trump the needs of its economy. This was reinforced last week by the assassination of one of the major opposition leaders and Moody’s downgrading of seven Russian banks.
Western sanctions on Moscow will be discussed again at EU meetings on March 19-20 and June 25-26. Last week there was talk of expanding the sanctions as Moscow continued to support the separatists’ drive to take a key road junction in violation of the ceasefire agreement. Most observers believe that with a ceasefire in place, the sanctions will be maintained but not strengthened in the immediate future. A lot will depend on the course of oil prices in the next couple of years.
As the ceasefire in the Ukraine gradually took hold, last week was dominated by a revival of the natural gas dispute with Gazprom which once again was threatening to turn off the gas unless Kyiv pays its disputed gas bills promptly. Kyiv says Moscow is only providing a fraction of the gas it has contracted for and will not pay until regular flows are restored.
Melting of the permafrost in northern Siberia is resulting in the formation of an increasing number of large craters as underlying deposits of natural gas explode through the weakened surface soil. While these “explosions” of pressurized natural gas rarely catch fire, the release of large quantities of methane is not doing the greenhouse gas problem any good. Even the Russians are becoming concerned about the phenomenon as Siberia is a very big place with lots of natural gas lying below heretofore frozen earth.
5. Quote of the Week
- “The fiscal position of Venezuela will suffer the most from the decline in world oil prices, as its public sector derives a large share of its fiscal revenues from oil exports. In addition, the domestic price of gasoline is expected to remain close to zero, which virtually eliminates any potential revenues from domestic sales.”
— The International Monetary Fund
6. The Briefs
OPEC has no plans to hold an emergency meeting before its next scheduled gathering in June. (2/25)
IEA’s take: The oil market will rebalance in the next several months as a price collapse boosts consumption and curbs supplies, the IEA said a day after Saudi Arabia’s oil minister told reporters demand is rising. An oil price as low as $45 a barrel is unsustainable, Fatih Birol, the IEA’s chief economist said at a conference in London Thursday. (2/27)
Oil production in the British North Sea declined by 1.1 percent in 2014 amid rising costs, high taxes and low oilprices, underscoring the need for more investment and exploration there. The report by Oil & Gas UK comes as theoil industry has stepped up pressure on the government to cut taxes and streamline the complex regime for the oiland gas sector. (2/24)
In the North Sea, after 50 years that have seen 42 billion barrels of oil and gas produced, the province could now see a significant proportion of activity brought to a premature end. Fields which are uneconomic at current prices could be closed down and then decommissioned unless a way is found to maintain operations and to ensure that the resources in place can be developed when prices rise again. (2/23)
The European Commission released its Energy Union Package of proposals designed to continue developing the bloc’s energy market and energy security. The proposals, meant to establish a European Energy Union, are more a continuation of EU energy policies than a radical departure from them. The proposals will not substantially decrease the energy supplies flowing from Russia to Europe, but they will continue to erode Moscow’s ability to dictate prices in European markets. (2/28)
Saudi Arabia plans to become the world’s second-largest exporter of refined oil products in 2017 as part of its drive to diversify its economy and increase its share of the global crude and petroleum products markets. The kingdom’s two new refineries will add 800,000 b/d in refining capacity this year. A planned 400,000 b/d oil refinery in Jazan will bring Saudi Arabia’s refining capacity to more than 3 million b/d. (2/26)
Iraq overtook Angola and Russia to become China’s second-largest oil supplier in January as imports from the Middle Eastern country rose to a record. Inbound shipments from Iraq jumped 44 percent to 803,000 barrels a day. (2/28)
Kurdistan: The oil tanker at the center of a lawsuit over the nation’s autonomous exports appears to have unloaded at the Israeli port of Ashkelon, having abandoned its quest to deliver crude to the U.S. (2/27)
Kazakhstan said Wednesday it expects oil production to increase by as much as 30 percent in part because of operations at its 16 billion barrel Kashagan field as well as an expansion project at its onshore Tengiz oil field. (2/26)
In Pakistan, the Asian Development Bank said Friday it was supporting efforts to help build the nation’s first liquefied natural gas terminal with a $30 million loan. The plant will be able to convert as much as 3 million tons of LNG per year to gas for use in state power plants.
In Algeria, the CEO of the nation’s oil company Sonatrach said that the company had discovered three oil fields during the first two months of 2015. (2/27)
In Algeria, daily protests against a pilot hydraulic fracturing project are now well into their second month. The demonstrations have spread to several towns and have provided opposition parties with a new platform at an especially precarious moment for the government as oil prices have slumped. Hundreds of police officers sealed off streets to block an anti-fracking march in the capital. (2/26)
In Morocco, Gulfsands Petroleum confirmed a gas discovery in an onshore shale basin, the company’s third such success. Morocco is one of the West African countries that have drawn interest from international energy companies eager to tap into unexploited reserves. Onshore, the country holds an estimated 20 trillion cubic feet of recoverable shale oil and natural gas reserves. Gulfsands said last year it planned to spend $3.5 million to develop its acreage in northern Morocco. (2/24)
Nigeria’s government revenue fell 15 percent in January as falling oil prices eroded the income of Africa’s biggest crude producer. The volume of oil exports declined 33 percent in November and December. Nigeria relies on export of the commodity for more than 90 percent of foreign exchange income and 70 percent of government revenue. (2/25)
Nigeria on Wednesday cut its forecast for oil prices and the value of its currency this year, an acknowledgment of the pain tumbling energy costs are inflicting on Africa’s top crude producer. The senate voted to cut its benchmark expectation for oil prices this year to $52 a barrel, from $65 in December. Senators also pegged the average value of the local currency, the naira, this year at 190 to the U.S. dollar, well below the previous target of 165 to the greenback. (2/26)
Cash-strapped Venezuela is persuading traders and analysts alike to back away from calls the country will default this year. But not everyone is buying it. Deutsche Bank AG and Jefferies LLC still see Venezuela running out of money to pay debt in 2015. (2/26)
Venezuela, plagued with shortages of basic goods, was offered a reprieve by the Prime Minister of neighboring Trinidad & Tobago: exchange oil for toilet paper. In a country with large oil reserves, citizens line up outside supermarkets for hours seeking a bag of clothing detergent, toilet paper or cooking oil. (2/26)
Venezuela has requested the annulment of a World Bank tribunal award that orders it to pay Exxon Mobil Corp $1.6 billion in compensation for nationalizations. (2/26)
In Brazil, a decision by Moody’s Investors Service to downgrade to junk status the debt of Petrobras is stoking fears that the nation’s sovereign rating could be next. Moody’s slashed the debt of the oil company two notches to Ba2, two steps below investment grade, on continued concern about the fallout from a corruption scandal and the state-run oil giant’s ability to pay down about $135 billion in debt. (2/26)
Sete Brasil Participacoes SA, the company founded to lease oil rigs to Petroleo Brasileiro SA, said it’s considering legal measures against a shipyard that pulled out of a $6 billion deal to build drillships. (2/24)
In Mexico, Pemex is in talks with oil service and jack-up rig providers to reduce daily rates after the board approved cutting more than $4 billion from its 2015 budget last week. The state-owned oil producer posted a ninth straight quarterly loss on slumping crude prices. (2/28)
Oil-sands costs: the head of one of Canada’s largest oil-sands operators is warning the industry faces a “death spiral” if it doesn’t figure out how to cut costs. Steve Laut, president of Canadian Natural Resources Ltd., said oilsands companies can still return to health, but only if they aggressively begin to cut costs. Costs have risen so far, so fast that oil producers were making three times as much profit in 2004, when oil was at $40 a barrel, than they were a few years ago when oil was at $100 a barrel. (2/23)
Royal Dutch Shell said it was indefinitely postponing plans to develop a proposed 200,000 b/d oil sands surface mine (Pierre River North) in Western Canada, the company’s latest sign of retrenchment amid the drop in crude oilprices. That move followed Shell’s decision last month to cut up to 10% of its 3,000 oil-sands-related jobs. Shell was the first major energy company to shed workers in Canada’s oil patch. (2/24)
U.S. rigs targeting oil fell for the 12th straight week, this time by 33 to 986, dropping below 1,000 for the first time since June 2011, Baker Hughes Inc. said. Those seeking gas dropped by nine to 280. The total U.S. count declined by 43 to 1,267. Since October the rig count is down 39 percent, an unprecedented retreat that threatens to bring the nation’s shale boom to a halt as early as this year. (2/28)
US residual fuel oil demand in 2014 was a record low 257,000 b/d, down by half from 2009 and further evidence the product’s utility is waning, according to the US EIA. Fuel oil use has declined for nine consecutive years. (2/28)
California Governor Jerry Brown’s plan to cut the state’s use of petroleum for transportation in half by 2030 will be “tough” to reach, the chair of the state’s energy policy and planning agency said on Friday. The governor’s goals include cutting petroleum use in cars and trucks by 50 percent, doubling the efficiency of existing buildings and increasing from one-third to 50 percent the electricity delivered from renewable sources. (2/28)
Maintenance at U.S. refineries should leave some markets short on gasoline supplies, with West Coast markets suffering most, the Energy Department said. A Feb. 18 fire at an Exxon Mobil refinery in Torrance (CA) will contribute to any market tightness. (2/28)
Exxon Mobil Corp. has reached an agreement with New Jersey environmental regulators to settle litigation about pollution released over decades by an oil refinery and petrochemical plant. The New York Times first reported the settlement, saying Exxon will pay $250 million; the state initially sought $8.9 billion. (2/28)
Exxon Mobil said spending would decline about 11 percent this year to around $34 billion due to plunging oil prices. Smaller oil and gas companies have been making cuts to capital expenditures that generally range from 20 percent to 50 percent in response to the oil price crash. Spending cuts at the largest global oil companies such as Exxon have not been as drastic; Chevron Corp, said its capital spending would fall 13 percent this year. Major oilcompanies are generally less reactionary because they have a longer-term view on price. (2/27)
Exxon Mobil added more oil and gas to its reserves than it produced in 2014, with most of the new reserves coming from Canada. The world’s biggest oil company said it added proven reserves totaling 1.5 billion oil-equivalent barrels, of which 1.2 billion barrels consisted of petroleum and other liquids and 300 million barrels of natural gas. Exxon’s proved reserves were made up of 54% liquids, up one percentage point from a year earlier, and 46% natural gas. (2/24)
Chesapeake Energy Corp. is budgeting total capital expenditures of $4-4.5 billion for 2015. Using the midpoint of the range, it represents a 26% reduction compared with the company’s 2014 capital expenditures before acquisitions of $5.8 billion, and a 37% reduction from the company’s 2014 total capital expenditures of $6.7 billion. (2/26)
The world’s biggest offshore drillers reported plunging earnings and orders on Thursday but managed to get a grip on costs to improve their chances of riding out a sectoral crisis that could last several more years. Transocean made a net loss in the fourth quarter while rival Seadrill’s bottom line nearly halved as both wrote down the value of their business and earned lower revenue after charter rates plunged. Still, their underlying operations were better than the market had forecast and both managed to reduce their near-term spending commitments for new vessels, giving them cash for the lean years. (2/27)
Alaska Republican Senator Lisa Murkowski said the Obama administration’s restrictions on oil production in her state threaten to dry up supplies that could flow through the trans-Alaska pipeline. Alaska oil production has declined from a peak of 2.1 million barrels a day in 1988 to an average of 514,399 barrels a day so far this month. Interior Secretary Sally Jewell said much of that change reflects the natural decline in long-producing oil fields. (2/25)
Arctic rules: The Interior Department last week unveiled seven proposals meant to enhance regulations governingoil and gas operations on the arctic shelf of the United States. The new rules would require companies to adopt oilspill response plans suitable for the arctic environment and have the ability to drill a relief well in the event of a catastrophe like the BP oil spill in the Gulf of Mexico. (2/24)
U.S. train derailments involving crude oil and ethanol will cost more than $18 billion over the next 20 years, according to the U.S. Department of Transportation. USDOT forecasts there will be just over 200 derailments involving trains carrying 20 or more tank cars of crude or ethanol between 2015 and 2034, an average of more than 10 per year, based on analysis of previous accidents and predicted growth in traffic volumes. Most will be “lower-consequence events” involving limited damage and clean-up and only a few injuries or fatalities, with the bill totaling less than $5 billion. But up to 10 could have more serious consequences because they occur in more densely populated areas, with an estimated cost of $1.2 billion per incident. (2/24)
Federal Reserve Chair Janet Yellen told lawmakers the impact of lower oil prices means the U.S. inflation rate will decline before it eventually rises toward the central bank’s 2 percent target. (2/26)
In Japan, for the first time since the catastrophic 2011 earthquake the nation has been rocked with a series of ever stronger tremors, with two 6.0+ quakes recorded in just the past 2 days: The quakes come just a few short months before Japan’s government aims to restart its first nuclear reactor following the Fukushima devastation. Overnight another radioactive water leak in the sea was detected at the crippled Fukushima nuclear plant. Contamination levels reportedly spiked up 70 times over regular readings. (2/23)
In the aftermath of the Fukushima disaster, TEPCO officials have admitted that it’s investigating the cause of a spike in radiation levels (23,000 Becquerel’s/liter vs. the legal limit of 90) in drainage water that it believes subsequently leaked into the Pacific from the wrecked nuclear power plant. The bigger problem: TEPCO failed to report the leak for 10 months. (2/27)
In Pakistan, angry protesters filled the streets of Karachi last week, clogging traffic lanes and public squares until police and paratroopers were forced to intervene. That’s not rare in Pakistan, which is often a site of political and religious violence. But last week’s protests were about access to water. The meager allotment of water available to each Pakistani is a third of what it was in 1950. As the country’s population rises, that amount is falling fast. Dozens of other countries face similar situations—not someday, or soon, but now. (2/25)
A prominent climate change denier–Wei-Hock “Willie” Soon a researcher at the Harvard-Smithsonian Center for Astrophysics–quietly took more than $1.2 million in payouts from the energy industry, including the Koch brothers and other oil lobbyists, for the past 14 years, according to newly released documents. (2/23)
Climate change shift: the market is waking up to the economic threat posed by climate change and the economic opportunity in the inevitable decline of fossil fuels. Those shifts will in turn unlock government policy and public opinion because the previous resistance to action argued on economic grounds, will reverse to favor action on economic grounds. (2/25)
Close to 30 UK green energy schemes have been awarded a subsidy pot worth nearly £4bn in a government auction that has set the stage for a big fall in solar electricity prices and much cheaper wind power. Two small winning solar panel projects have said they can produce electricity for nearly 60 percent less than the maximum price the government had agreed to pay for that type of electricity and almost the same as current wholesale power prices. (2/27)
Batteries: Researchers at Pacific Northwest National Laboratory have developed a new electrolyte that allows lithium-sulfur, lithium-metal and lithium-air batteries to operate at 99% efficiency, while having a high current density and without growing dendrites that short-circuit rechargeable batteries. This new discovery could kick-start the development of powerful and practical next-generation rechargeable batteries such as lithium-sulfur, lithium-air and lithium-metal batteries, (2/25)