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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
The oil price rebound which has been going on since mid-March continued for a fifth week with New York futures touching $58 a barrel and London $65 on Thursday before slipping to close a couple of dollars lower on Friday. Several reports last week suggested that US shale oil production may be topping out and that lower output is in store at least for the time being. North Dakota reported that its shale oil production dropped for the second straight month in February and suggested that further production cuts are in store. The US rig count continued to fall, but at a slower pace than in recent months, and the increase in US crude stocks the week before last was only 1.2 million barrels, the smallest weekly increase since January. A worsening situation in the Middle East with fighting in Yemen bringing Iran and Saudi Arabia closer to confrontation, and ISIL on the move in Iraq, is helping to support prices. Technical factors also have been helping the price in recent days as major speculators buy into oil futures in anticipation in a major price increase and several “buy” signals were triggered.
The price weakness on Friday came after the Saudis reported to OPEC that their oil production in March was up by 658,000 b/d to the highest level in 30 years. This increase is more than half of Bakken oil production and is well more than anyone expects US production to fall in the immediate future. To add to the glut, Iraq produced another 556,000 b/d last month and even Libyan National Oil Company was able to get out another 180,000 b/d in the midst of the two-government turmoil. On top of this, the Iranians are chomping at the bit to export another 1 million b/d as soon as they can. These increases in production are suggesting that we may have seen a premature price increase in the last six weeks and that prices could be back in the $40 range on supply and demand factors by the end of the quarter if the Middle East does not fall further apart.
Several major forecasters were heard from last week, including the IEA, EIA, IMF, and OPEC. The IEA is now forecasting that global oil demand will increase by 1.1 million b/d this year, which is a considerable increase from the 700,000 b/d increase in 2014. Ever increasing global demand fell to a 5-year low of 270,000 b/d year-on-year in the second quarter on 2014 which was partly responsible for the great oil price drop, but has been increasing steadily since then and reached a 1.3 million b/d rate of growth in the first quarter of 2015.
The EIA went out on limb in its Annual Energy Outlook 2015, released last week by “projecting” (they say they don’t make forecasts) that the US will have no net energy imports by 2030; US shale oil will peak in 2020 but will only decline slowly over the following 20 years; that the US will be a net exporter of natural gas by 2017; and the price of oil will not return to $100 a barrel until 2029. Needless to say, many analysts are skeptical about all this optimism coming from the US government.
The EIA, however, is now saying that the first actual drop in US shale oilproduction will come between April and May this year. Even though North Dakota has already reported falling production in February and March, the EIA believes that increases in Texas shale oil production will keep the US total growing until May. Some are saying that the EIA’s projection that US oilproduction will increase by some 500,000 b/d in 2015 is way too optimistic. Given the continuing below-cost-of-production prices and the drop in active drilling rigs, the US will be lucky to keep shale oil production level this year.
2. The Middle East & North Africa
Iraq: Heavy fighting took place around Ramadi in Anbar province as ISIL forces continued their offensive against government troops and Shiite militia. The US and coalition air forces continue to provide air support to government forces. At last word ISIL was getting close to Ramadi and tens of thousands of residents were fleeing the city adding to the humanitarian crisis. Heavy fighting also took place around the Beiji oil refinery with ISIL partially occupying the facility. At last word ISIL forces had been driven out the of 175,000 b/d facility, which has been closed since last June.
The foreign oil companies working in southern Iraq and away from the fighting continue to make progress in reviving Iraq’s oil industry. Iraq of course has some of the last cheap and easy to exploit oil fields left on earth, which is why the foreigners have been able to increase production so readily. Last week Iraq’s Interior Minister sought to reassure the foreign oil companies operating around Basra that they would be kept safe from the turmoil taking place north of Baghdad.
Despite months of precision bombing by US and coalition air forces, ISIL, which can maintain its forces by impressing men from the large portions of Iraq and Syria it controls, has shown in recent weeks that it can still conduct significant offensive operations in the face of US airpower and even Iranian-supported Shiite militia. Should the situation deteriorate much further, we are likely to see pressures for greater US or perhaps direct Iranian involvement. This would be particularly true if Iraq’s southern oil exports were directly threatened. Loss of these exports would quickly eliminate the current oil glut, and drive oil prices much higher.
Libya: The recognized government in Tobruk is attempting to attract foreign buyers for the oil it controls from the eastern oil fields by offering steep discounts and routing the proceeds to a Dubai bank account. The eastern government controls about half of the 600,000 b/d that Libya says it is currently producing now that the export terminal problems have subsided and takeovers of oil fields by local militias have waned.
Foreign oil buyers are still leery of doing business with the Tobruk government because of legal risks as to who owns the oil. Last year the UN banned all sales of Libyan oil by other than the state oil company when local militias tried to sell oil during the export terminal strikes. All oil export contracts and paperwork are still at the headquarters of the Libyan oil company in Tripoli, which is under control of the Islamists. Some foreign buyers, however, are offering to take the oil but are willing to pay only $20 a barrel or one third of the going world price because of the risks involved. This is too low for the eastern government.
The situation took a new turn last week as increasing numbers of Africans are using lawless Libya as a jumping off place for attempts to get to Italy. So far this year some 1,600 have died in overloaded boats while crossing the Mediterranean. The situation has forced the Italian Navy to step up patrols along the Libyan coast in effort to intercept refugee boats before they have time to sink or approach Italian territory causing still more problems. If this situation gets worse, there likely will be pressures on the EU to intervene militarily in Libya to stop the flow of immigrants. Foreign intervention, of course, would likely have implications for oil production and exports.
Talks between the two Libyan governments continue amidst sporadic fighting around several cities. Some believe that the two sides are coming to the realization that the country faces greater threats from the rise of the Islamic state in Libya and economic collapse so that chances are increasing that some sort of a political deal is possible.
Iran: With the nuclear negotiations set to begin in Vienna this week, both sides are hopeful that some sort of agreement can be reached by the end of June. Last week President Obama agreed to let the US senate ratify any agreement that is reached, a move that is not expected to make much difference to the final outcome. Ayatollah Khamenei complicated matters by saying there would be no agreement unless all sanctions are lifted immediately rather than phased in as Iran adheres to goals outlined in the agreement. The Iranian army announced that foreign nuclear inspectors would never be allowed access to Iranian military installations under any agreement. President Obama, however, has directed his negotiators to work out a solution to these issues rather than rejecting an agreement out of hand.
The incoming head of the IEA, Fatih Birol, said his agency believes that Iran could not step up oil production significantly within the next three to five years. The IEA is far more concerned about the $100 billion cut in oil industry investment that will take place this year that will almost certainly reduce oilproduction in coming years.
Moscow is taking advantage of the pending agreement to improve relations with Tehran and to get a share of the expected boom in Iranian oil production. Russia’s Lukoil will reopen its offices in Iran in hopes of gaining contracts to exploit Iranian oil. To sweeten the pot, Russia has agreed to sell its advanced S-300 air defense system to Iran, a system that Tehran has been trying to acquire for decade. Moscow claims that the deal will stabilize the situation by making it more difficult if not impossible for Israel to attack Iranian nuclear sites using aircraft and conventional weapons. After the S-300 system is installed, even an attack on Iran by the US would become far more difficult as it would involve widespread suppression of Tehran’s air defense systems prior to any attack on its nuclear facilities.
Tehran continues to send its emissaries around the world seeking out markets for its oil and gas after the sanctions are lifted. The latest move is to suggest that it could replace Russia as the major supplier of natural gas to the EU. Iran’s oil minister said last week that Beijing has so far invested $21 billion in China’s oil industry and will soon announce plans to triple their investment. Tehran seems to looking to Moscow and Beijing as more politically reliable partners to finance further expansion of its oil industry rather than the westernoil companies.
Yemen: Heavy fighting and Saudi air strikes continue across the country as the possibility of a direct confrontation between Saudi and Iranian forces increases. The humanitarian crisis grows worse as the country must import 90 percent of its food and all of its fuel as local supplies have been shut down. Some food and fuel imports are being blocked by a Saudi blockade of the ports. Power is out in much of the country and hospitals are ceasing to functions as they run out of fuel for their emergency generators. The Saudis have agreed to supply $273 million in humanitarian assistance. Needless to say the foreign oil companies working in the country mostly have bailed out along with the diplomats while waiting for better times.
The stoppage of oil exports from the country is not nearly as important as the sectarian hatreds between Shiites and Sunnis that are being aroused by the conflict. Tehran has reflexively sided with its fellow Shiites and is sending a convoy of seven to nine ships to Yemen to resupply the Houthis. The Saudi and Egyptian navies are blockading Yemen, raising the possibility of a military confrontation with Iran.
Even the US, which has warships in the area, but is not officially involved in the sea blockade, has stopped a
“consensually boarded” ship on the grounds that it might have been carrying arms to the Houthis. So far US involvement has been on behalf of the Saudi air campaign by supplying intelligence, logistics, and refueling for Saudi fighters attacking Houthi forces. All this is getting dangerous. Clearly a major humanitarian crisis is in the making and we not far from involving oil exports from the region should the Iranians and Saudis become more directly involved.
3. China
As usual these days, the state of China’s economy remains at the heart of any news about its demand for oil in coming months. The economy is clearly decelerating with first-quarter GDP growth down to 7 percent, the slowest since 2009 when GDP growth fell to 6.1 percent. Exports slumped 15 percent in March year over year and the government is clearly concerned. Over the weekend it made a big cut in bank reserve requirements in an effort to stimulate the economy. China’s economy, which is weighed down by a downturn in property values, industrial overcapacity, and a massive growth in local debt, is expected to be slow to respond to government financial initiatives.
Beijing has made large purchases of spot crude in the Singapore markets this month suggesting that efforts to fill its strategic reserve at low prices are still underway. The slowing economy suggests that Chinese oil imports will be lower as the year progresses.
4. Russia/Ukraine
On Thursday President Putin held an hour-long, phone-in marathon designed to reassure the Russian people that the worst of their economic crisis is over. On Friday, however, new statistics showed that Russia’s economy continued to slide despite the recent stabilization of the currency. Economists now estimate that Russia’s GDP shrank by some 2-4 percent during the first quarter.
There was an increase in fighting in eastern Ukraine last week raising fears that still more EU sanctions would be imposed. Moscow responded to this development with a series of threats, with Prime Minister Medvedev saying that the sanctions are tantamount to economic war. Gazprom warned the EU not to interfere with the plan to bypass Ukraine by building a new natural gas pipeline to the EU through Turkey and Greece. EU efforts to change the pricing model used for purchases of Russian gas. Gazprom is facing an antitrust case accusing it of overcharging customers in eastern Europe. Moscow says that such tactics will backfire and lead to higher natural gas prices across Europe.
5. The Briefs
End to flaring? Twenty-five major oil companies, oil-producing nations and development institutions agreed Friday to end the practice of routine flaring of natural gas by 2030 at thousands of oil production sites around the world. Royal Dutch Shell, Statoil, Kuwait Oil Co., Russia, Norway and the Asian Development Bank are among those making the commitment, which was announced by the World Bank and United Nations. (4/18)
Norwegian energy company Statoil said Monday it made a gas discovery in the Norwegian Sea in an area near a find made less than a month ago. The company estimates the volume of the discovery to be between 12 million and 44 million barrels of oil equivalent. The deep-water platform tied to Aasta Hansteen will be among the largest in the world once full field production begins in 2017. (4/14)
Scotland could be shielded by the rest of the UK from the impact of low North Sea oil revenues even if it gains the “full fiscal autonomy” demanded by the Scottish National Party, former SNP leader Alex Salmond has claimed—a proposal that is likely to outrage SNP critics south of the border. (4/14)
French energy company Total SA said on Thursday it plans to pump more than $600 million into two struggling refineries and cut 180 jobs in a sign of the coming pressures on European refiners. (2/17)
OPEC should consider re-introducing individual output quotas, shuffled quietly to one side in 2008, to prevent oversupply hitting prices should Iran increase its oil exports following a deal over its nuclear work, an OPEC delegate said. Such a proposal would spark a fierce debate within OPEC as national prestige and market share are at stake. After refusing to cut output last year, OPEC is pumping much more than its overall output target of 30 million barrels per day because of record Saudi Arabian output, higher Iraqi exports and a partial return of Libyan crude. (4/18)
China plans to close numerous small-scale enterprises in nearly a dozen industries, including oil refineries, dyeing plants and pesticide producers, in an effort to clean up its water supply. The goal is to significantly improve water quality by 2020. (4/18)
Africa’s growth slowing: Plunging oil prices, sluggish growth in the developed world and a slowdown in China’s pace of industrialization will bring down sub-Saharan Africa’s growth rate this year to its lowest in two decades, the World Bank said Monday. Economic output is expected to grow by 4% across the region in 2015. The decline highlights how vulnerable the world’s second-fastest growing region is, both from trouble at home and abroad. (4/14)
Argentina has started legal proceedings against five companies drilling for oiland gas in the disputed Falkland Islands, raising tensions over the islands’ sovereignty in part because three of the companies are based in Britain. (3/18)
The US drilling rig count fell 34 units—all on land—to 954 rigs working during the week ended April 17, according to Baker Hughes Inc. Rigs targeting oildeclined by 26 to 734. The slide has now lasted 19 consecutive weeks, during which time the count has plunged 966 units. The first declines in major US shale plays were projected by EIA to occur this month, with output dropping from the Eagle Ford, Bakken, and Niobrara. (4/18)
Rig crash rate: Raymond James & Associates noted that during the 2008-09 financial crises, the pace of overall declines averaged 55 rigs/week at its steepest point. However, during this year’s first quarter, declines averaged 65 rigs/week. RJA expects the “count to gradually rebound in the second half of 2015 and continue to grow throughout 2016,” posting a 2015 average of 1,071 units, down 42% from 2014. Next year RJA sees the US rig count climbing 10% year-over-year, peaking at 1,332 and averaging 1,176. (4/18)
The oil services company Schlumberger said it would cut another 11,000 from its workforce, bringing the total to 20,000 since trimming expenses earlier this year to offset lower oil prices. That represents about 15 percent of the company’s staff. (4/18)
100,000 oil sector layoffs, and counting: Like many other oil-field workers, Chris Sabulsky spent years working a schedule known as “14 on, 14 off:” two weeks at an oil or gas well somewhere followed by another 14 days at home in East Texas. But now Mr. Sabulsky, 48 years old, is polishing his resume and pondering his future. (4/15)
Total US petroleum deliveries, a measure of demand, averaged 19.2 million b/d in March, up 3.4% from a year ago and the highest level for the month since 2011, according to the American Petroleum Institute’s monthly statistics for March. Total demand in the first quarter gained 2.2% year-over-year. (4/18)
The EIA came out with its final update of Annual Energy Outlook 2015 (AEO 2015), and it is extremely optimistic concerning future US crude oilproduction. The EIA still expects US crude production to peak in 2019 but at 10,472,000 bpd, or 824,000 barrels per day higher than the expected last year. But the biggest difference is in the EIA’s change in decline expectations. They now expect the US to be producing 9,329,000 bpd in 2040 or 1.8 mbd higher than they had 2040 production last year. (4/18)
US EIA’s AEO2015: Continued growth in oil and natural gas production, growth in the use of renewables, and the application of demand-side efficiencies show the potential to eliminate net US energy imports in the 2020 to 2030 timeframe, according to EIA’s projections. (4/16) (Note: dartboard alert)
US regulators are urging railroads to change the way they deal with wheel defects, saying the problem may have caused a fiery oil-train derailment in Illinois last month. Despite multiple warning signs, a train carrying crude oil from North Dakota to Philadelphia continued to travel on a potentially faulty wheel, according to a preliminary federal investigation. (4/18)
Oil rail cars: The National Transportation Safety Board outlined its findings from their study of recent train derailment accidents and concluded that the current fleet of DOT-111 tank cars rupture too quickly and result in spillage and ignition. (4/16)
New offshore oil and natural-gas drilling regulations were proposed on Monday by the Obama administration. The regs are aimed at preventing the kind of explosion that erupted nearly five years ago on BP ’s Deepwater Horizon, including many provisions the industry has already adopted. The Interior Department draft rule imposes tougher standards on equipment designed to keep control of a well, including blowout preventers, and requires real-time monitoring for certain kinds of drilling that are in deep water or are done at high pressures. (4/14)
Year-to-date coal production in Wyoming and Montana is estimated to total 114.4 million tons, down 3.8 percent compared with the same period last year. In Central Appalachia, year-to-date coal production is estimated to total 34.4 million tons, down 9.3 percent from last year. (4/17)
China’s coal imports, including lignite, thermal and metallurgical coal, fell 32.7% year on year to 17.03 million in March data from the General Administration of Customs (GAC) showed Monday. (4/14)
In Japan’s Fukui Prefecture a local judge blocked the latest attempt to get atomic power back on the grid, issuing an injunction forbidding the restarting of two nuclear reactors at the Takahama power plant. The nuclear industry has been in a state of paralysis since the meltdowns at the Fukushima Daiichi nuclear plant four years ago. (4/15)
Total US greenhouse emissions increased 2 percent during 2013 over the prior year, according to the EPA’s newly published Inventory of US greenhouse gas emissions. Total US emissions have increased by 5.9 percent from 1990 to 2013. (4/16)
The race for renewable energy has passed a turning point. The world is now adding more capacity for renewable power each year than coal, natural gas, and oil combined. And there’s no going back. The shift occurred in 2013, when the world added 143 gigawatts of renewable electricity capacity, compared with 141 gigawatts in new plants that burn fossil fuels, according to an analysis presented at the Bloomberg New Energy Finance annual summit in New York. (4/154)
Solar grid stress in Hawaii? SolarCity joined with Hawaii Electric Co. and the U.S. National Renewable Energy Laboratory to run tests to determine how much solar the grid could handle. They found that high-traffic circuits could absorb twice as much solar energy as the utility thought. After asking solar installers to reprogram equipment that connected them to the grid, late last year HECO lifted its September 2013 ban on new hookups of solar systems. (4/16)
Pacific Ocean meltdown? An emergency closure of fisheries along the West coast was announced last week. According to two University of Washington scientific research papers that were recently released, a 1,000 mile stretch of the Pacific Ocean has warmed up by several degrees, and nobody seems to know why this is happening. This giant “blob” of warm water was first observed in late 2013, and it is playing havoc with our climate. And since this giant “blob” first showed up, fish and other sea creatures have been dying in massive numbers. (4/18)