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Quote of the Week

“It could be a lot of years before you see any meaningful rebound in the dividend [of oil companies]. It’s tough to have a really conservative, stable investment in a business that can’t control the price of its own product.”

Josh Peters, editor of Morningstar Inc.’s DividendInvestor newsletter


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 price rally that has been on-going since mid-February continued last week with US futures closing Friday at $39.44 a barrel, up 2.4 percent for the week, and London futures closing at $41.20 up 2 percent. Last week the move came from a combination of what one analyst termed a “brilliant communications strategy” and other developments that normally lead to higher prices. The “brilliant communications strategy,” of course, is the meeting in April during which those countries that either cannot or do not want to increase oil production are supposed to agree not to increase their production. During the week, Moscow even hinted that Iran might join the group after it increases its oil output to 4 million b/d, a goal that might take many months or even years to reach. The producers now are scheduled to meet on 17 April in Qatar; the meeting is being heralded as the first agreement to limit global oil production in 15 years even though it is unlikely to have any real impact on oil production.

There was, however, some news last week of the kind that moves oil prices. The US Federal Reserve announced that its plan to increase US interest rates is likely to be more limited than previously announced. This news pushed down the dollar and moved oil prices higher. US crude stocks grew by only 1.3 million barrels the week before last which was the smallest gain in the last five weeks. The markets ignored the storms in the Gulf of Mexico that week which restricted imports. Traders continue to watch the US rig count, which last week fell to an all-time low of 476, down from 1,069 a year ago and 4,530 back in 1981. Rigs drilling for oil last week increased by one rig which is meaningless, but brought hopes of higher prices to the markets. Although oil production in the US continues to slip, the resilience of the industry has been remarkable considering the low prices and the number of rigs continuing to drill for oil.

The mystery of 800,000 b/d of missing oil has some analysts wondering if the IEA’s story of a 1-2 million b/d surplus in world oil production has been overblown. They are saying that supply and demand could be much closer to being in balance than most believe. It seems that last year 800,000 b/d of what was thought to be surplus oil production did not end up in OECD storage tanks when the year was over. There are several possible reasons for this. Oil could be going to storage in tanks outside of the OECD inventory count; oil production was lower than estimated, or oil consumption was actually higher.  If the 800,000 b/d never existed and were only the result of bad accounting and misestimates, then we should be much closer to a global rebalance and price rebound than currently forecast.

Bad news for the oil industry, such as bankruptcies, restrictions on financing, or large cutbacks in capital spending, continues to be announced daily. At some point in the coming years, there clearly will be some major drops in production unless capital spending and drilling for new oil increases rapidly, depletion will take its toll.

Natural gas prices which have been below $2 per million BTUs since mid-February and at one point were trading around $1.65, rebounded to close at $1.90 last week. These prices, of course, still are well below the actual costs of production, which is why we are starting to see a reduction in the-drilling-for-gas rig count and gas production.

2.  The Middle East & North Africa

Iran:  Tehran made some progress in February on its goal of producing 4 million barrels of crude per day. Production for the month was up by 187,000 b/d to 3.1 million, the biggest monthly increase in nearly 20 years. Iran’s Oil Minister said his country would consider joining other countries in freezing oil production after production hits 4 million b/d, and he would like to see oil prices back around $70 per barrel, but would settle for less. If all goes well, Iran might increase production by another 900,000 b/d by the end of the year, but many are skeptical that given the under-capitalized state of Iran’s oil fields, the competition for markets, and the lingering sanctions, this goal can be reached.

Iran’s oil minister said that US companies were welcome to return to doing business in Iran, but noted that Washington still has many sanctions in place on Iran that restrict US companies from doing business there. General Electric is one US company that has been in talks with the Iranians concerning business opportunities.

Syria/Iraq: In a surprise move, Moscow pulled some of its warplanes out of Syria and reduced the intensity of its bombing as the ceasefire between Assad’s forces and his allies, and the moderate rebels continues to hold.  The reason for the partial Russian pull-out is not clear, but many believe that it was to pressure the Assad government into entering negotiations with the various rebel factions. Moscow, however, is still free to attack ISIL and al Qaeda-affiliated groups and over the weekend bombed the ISIL “capital” and Raqqa. As usual, the Russians were not particularly careful in their bombing, and some 40 civilians were reported killed in the strikes. Moscow announced that was ready to cooperate with the US-led coalition in attacking Raqqa, now that the moderate rebel forces that were threatening the Assad government have been beaten back and forced into a ceasefire. In the past six months, Russia has carried out some 9,000 air strikes in Syria and has killed some 2,000 civilians according to the best available estimates.

The major news of the week was the agreement between Turkey and the EU to stop and reverse the flow of Syrian refugees into Europe in return for substantial EU payments to the Turks. In the meantime, suicide bombings in Turkey continue as the Syrian civil war metastasizes across the region. The declaration of an autonomous Kurdish region in northern Syria received a resounding NO from Damascus and Ankara.

The export pipeline from Iraqi Kurdistan seems to be working again; oil revenues are once again flowing into Erbil, and OPEC’s oil production should be higher in March. For now, however, the oil that is being produced by Iraq’s Northern Oil Company from around Kirkuk is not being exported through the Kurd’s export pipeline to Turkey. The Northern Oil Company says this is for technical reasons, but some believe it is an effort by Baghdad to reopen revenue sharing negotiations with the Kurds.

Libya: It is difficult to see where any progress has been made in the country which is now run by four separate “governments.” We now have the elected parliament in Tobruk; the militia government that took over Tripoli; the Islamic State which holds part of the coast; and now the UN’s Unity Government which is sitting in Tunisia. In the meantime, refugees continue to be smuggled out of the country by the hundreds causing much consternation in the EU. The latest plan is to intercept people-smuggling boats as they leave the Libyan shore, return the people to Libya rather than taking them on to the EU and destroying the boats. It is hoped that this eventually will stop the people smuggling.

Platts reports that Libyan oil production in February fell by 10,000 b/d to 360,000 b/d — approximately 1 million b/d below pre-uprising exports. Recent Islamic State attacks on export facilities are not helping the oil export situation.  However, US and EU special forces groups are reported to be in the country to deal with the Islamic State.  After years of squabbles, no political settlement is yet in sight. It seems doubtful if there will be any significant increase in Libyan oil output in the foreseeable future.

Saudi Arabia/Yemen:  The UN is accusing the Saudis and their coalition partners of causing most of the civilian casualties in Yemen through indiscriminate air strikes. More the 6,000 people have been killed in the past year, half of them civilians. No letup to the Saudis’ airstrikes have yet been noted, and there seems to be little progress on the ground.

Low oil prices continue to take a toll on Riyadh. Moody’s Investor Service lowered its outlook for Saudi banks to negative from stable on expectations that bad loans will start rising over the next year due to oil prices and reductions in government spending. Last week the government ordered an across the board cut of at least 5 percent in contract spending. As much of the economic activity in the country comes from government contracts, the cutback is expected to have a widespread impact.

Saudi oil production remained steady at 10.22 million b/d in February. Saudi output has moved very little in recent months which is why all stories about a production freeze are mostly hype. Many think that Saudi production is already at peak sustainable production and that very little increase above current production levels will ever be seen.

3.  China

Beijing is doing its best to reassure the world that its economy is not going have a hard landing with more serious troubles ahead. Although manufacturing in January and February was down, Beijing now says that capital outflows are easing. The government recently put in new regulations making it harder for Chinese citizens to move capital out of the country. Since the beginning of the year, some $100 billion has moved out of China as companies either merged or purchased assets abroad.

Corporate debt levels continue rising and over the weekend, even the governor of the Bank of China joined the chorus warning of what could happen if debt becomes excessive. Moody’s has warned that it may downgrade China’s sovereign debt out of concern for increasing debt at all levels of government and falling foreign exchange reserves.

The new Five-year Plan envisions significant cuts for those industries that are larger than necessary. The steel industry alone is scheduled to reduce some 150 million tons of steel-making capacity. These cuts will be accompanied by layoffs and retraining for what is likely to be millions of workers. Labor protests in China are already growing. Government officials are clearly worried about the protests, declaring them illegal and threatening fines and prison terms for demonstrators. A labor rights group in Hong Kong counted more than 2,700 strikes and protests in China last year and 500 in January 2016.

As part of the new Five Year Plan, China pledged to control pollution and gradually shift away from coal. Part of the plan involves burning more coal in central power plants with better pollution control equipment and reducing its use in the small furnaces used for heating individual buildings.

4. Russia/Ukraine

The top story last week was Russia’s partial pullback from Syria after having conducted some 9,000 sorties against the moderate rebels and to a lesser extent ISIL-held towns and military positions. The military intervention clearly has saved the Assad government for the time being and gained influence for Moscow in any settlement that may be negotiated. Outside of that, the intervention likely has prolonged the war indefinitely inflaming hatreds in the region. The civil war in Syria is spreading into Turkey with as yet unknown results.

A senior oil ministry official aide last week that Russia has proved reserves of about 14 billion tons which should be enough to last for another 28 years. Many foreign observers believe that Russian oil production which has been on a plateau for several years is about to go into a decline as older oil fields dry up.  Moscow does not have the capital, technology, or foreign partnerships to replace the declining production from older fields with whatever oil may be under the Arctic. Moscow, however, is trying some first tentative efforts to drill in the Arctic. Last week Gazprom Neft, the oil arm of the natural gas giant, announced that its first well in the Priraziomnoye field was coming along well and that annual production rates could reach 35 million barrels or 10,000 b/d. This rate of production from a single Arctic drilling platform is insignificant given the size of Russia’s 10 million b/d oil industry.

As Moscow’s ruble has been moving with the price of oil lately the last two months have been better for its economy. However, $40 oil is still a long way from the $100+ oil Russia was enjoying not so many years ago.

5.  The Briefs

Oil and gas production start-ups have occurred all over the globe within the first few months of this year, with considerable increases in Europe, the Middle East, and Africa. (3/19)

European diversification: Europe finds itself at a crossroads regarding ensuring reliable and sufficient natural gas supplies, given geopolitical problems with current or future pipelines to Ukraine, Turkey, and Iran. A recent Genscape white paper argues that the region’s gas customers should take steps to increase imports of liquefied natural gas from North America. (3/18)

Arctic oil: After long delays and cost overruns, Italian oil company Eni SpA has started to pump oil from the world’s most northern offshore platform, Goliat, which is located in the Arctic about 50 miles from Norway’s northern coast. (3/14)

Norway’s Statoil said it was dispatching an emergency response team to Algeria following an explosion at one of its gas facilities in the country. The company said its In Salah gas plant was “hit by explosive munitions fired from a distance” early Friday morning local time. (3/19)

Russian oil company Gazprom Neft said it revised a production schedule to dramatically boost output from a field in the country’s Arctic north. (3/18)

Eni SpA announced plans for $14.71 billion in cost cuts and asset sales, the latest major oil and gas company to further adjust its strategy for enduring low crude oil prices. Eni, Italy’s largest company by market value, said it would sell over $8 billion in assets by 2019, with most of that coming from stakes in recently discovered oil and gas fields. (3/19)

Israeli gas: The EU is interested in receiving natural gas from Israel, according to Israel’s energy ministry, with ministry sources saying Thursday that preliminary talks on future sales of gas are underway. (3/19)

The breakup of Shell’s and Saudi Aramco’s giant U.S. refining joint venture draws a line under an often rocky relationship and allows Aramco to accelerate an ambitious public offering and Shell to push ahead with a large asset sale. The two energy giants’ plan to dissolve Motiva Enterprises after a nearly 20-year partnership leaves both with fully-owned refineries and gas stations in the United States. (3/18)

Saudi Arabia’s national oil company wants to buy more US refining and chemical plants to expand its footprint in the world’s largest energy market once the break-up of its joint venture with Royal Dutch Shell Plc is complete. (3/19)

India’s oil demand grew by 300,000 barrels a day last year, double the average rate in the previous decade, according to a recent report by The Oxford Institute for Energy Studies. China’s growth has slowed to 300,000 barrels from an average 500,000 barrels in the decade to 2013. (3/14)

Japan will receive a US crude cargo in May, the country’s second purchase from the United States since Washington lifted a four-decade ban on crude exports. This shows a growing willingness among Asian refiners to experiment with new grades as they seek to diversify their feedstock sources away from the Middle East (Japan’s is 80%). (3/16)

Construction of the Tanzania-Uganda crude oil pipeline begins in August. The $4 billion project will be completed in two years, even as Kenya continues to negotiate to have the 876-mile pipeline go north through Lamu. (3/17)

Argentina offers one of the few places on earth where oil companies are not suffering from the full force of the collapse in prices. Argentina regulates oil prices, a policy originally intended to insulate the public from the whims of the market, protecting people from triple-digit crude prices. But with the crash in prices since mid-2014, the effect of the regulation has reversed: motorists are now effectively subsidizing the oil industry. Prices for light oil are set at $67 per barrel. That may help Argentina’s shale industry keep its momentum going.  (3/14)

Offshore Brazil, Royal Dutch Shell said Monday it started production from the third and final phase of operations in the deep water Parque das Canchas development in the Campos Basin. Shell holds a 50 percent stake and serves as project operator. At peak production, the final phase of the development should add another 20,000 b/d of oil equivalent. (3/15)

Mexico will hold a private bidding round for the nation’s shale oil fields this year in part to cater to continued interest from US drillers eyeing expansion south of the border. (3/18)

Canadian crude exports to the US Gulf Coast more than doubled in 2015 while non-US exports tumbled, according to the latest data from Canada’s National Energy Board. Bolstered by new pipeline connectivity, Canadian exports to the US Gulf Coast increased to about 389,600 b/d from about 186,000 b/d in 2014. Nearly 99% of that increase, or around 201,000 b/d, was heavy crude. (3/14)

TransCanada, the company behind the controversial Keystone XL oil pipeline project, agreed to buy Columbia Pipeline Group for $10.2 billion. (3/18)

The total U.S. rig count exploring for oil and natural gas in the US dropped by four this week to 476, a record low in the 67-year history of records kept by Baker Hughes. While gas rigs dropped by 5 to 87, oil rigs increased by one to 387 in the week to March 18, during a time when oil prices have risen nearly 50% since mid-February. One year ago the oil rig count was 825.  During 2015, drillers cut an average 18 oil rigs per week for a total reduction of 963 rigs—the biggest annual decline in decades; so far this year, the decline has averaged 15 oil rigs per week. (3/19)

50 percent from fracking: Nearly half of the oil produced in the US came as a result of hydraulic fracturing last year, the Department of Energy said.  Back in 2000, 23,000 fracked wells in the country yielded about 102,000 b/d; in 2015, fracking of around 300,000 wells resulted in 4.3 million b/d. (3/16)

Technology: Fifty-stage frack jobs. Fifteen-foot cluster spacing. More than 2,000 pounds of proppant concentrate per foot. Top U.S. shale producers are pushing fracking technology to new extremes to get more oil out of their wells, as they weather lower-for-longer oil prices. While the impact of the techniques may be scarcely noticeable on current US output with so few wells in operation, it could mean drillers can accelerate production more rapidly than ever once prices recover. (3/14)

US oil exports are on the rise [note: despite the fact that the U.S. remains the world’s second largest oil importer, on a net basis]. One reason behind the rise in exports is cheap pipeline and railway fees to move crude from the fields in Texas, Oklahoma, and North Dakota into the ports of the US Gulf of Mexico. Another is that US oil prices have been trading at a discount to Brent crude, allowing traders to move oil from one shore of the Atlantic to another at a profit. Oil traders are starting to export American crude to store overseas and profit from a market condition called contango. That’s where prices of oil for delivery today are lower than those in future months. (3/18)

US refiners are once again calling for a domestic crude benchmark that covers more than the standard gravity and sulfur pairing offered by the existing NYMEX contract. The push is being spurred this time by increasing concentration of shale crudes in the West Texas Intermediate common stream, which have pushed the average API gravity in Cushing – where that contract is delivered – beyond the maximum 42 degrees. (3/16)

Oil and gas producer Venoco filed for Chapter 11 bankruptcy protection on Friday, joining more than 40 energy-related firms that have sought court protection from creditors since oil prices started plummeting in mid-2014. Denver, Colorado-based Venoco listed assets of between $100 million and $500 million and liabilities of between $500 million and $1 billion. (3/19)

Linn Energy, the largest energy producer operating as a partnership, drastically widened its loss in the final quarter of the year on sharply lower revenue amid a steep decline in fuel prices and warned it may not be able to pay down its debts. (3/16)

Energy companies that are struggling to avert bankruptcy have recently been relying on a tool to buy time called a distressed-debt exchange. That may no longer be as useful, particularly for smaller firms, according to Fitch Ratings. (3/19)

Dividend cuts: Bludgeoned by falling energy prices, at least, a dozen oil and natural gas companies have opted to cut dividends this year to preserve cash, cannibalizing payouts considered sacrosanct by many investors. The cost to shareholders: more than $7.4 billion in lost income, compared to what they would have received this year if the payouts remained the same. (3/17)

Oil price hedging: Last October, as US oil prices seemed to be stabilizing around $45 a barrel, only a handful of shale firms—including Anadarko and Chesapeake Energy—hedged production before oil fell another $15+.  Now, analysts estimate that between 15 and 20 percent of 2016 US oil production is hedged, and as little as 2 percent for 2017 adding to the industry’s woes. (3/16)

In Oklahoma, five seismic events were reported by the US Geological Survey last week as the state works to stem incidents tied to oil and gas work. Three minor tremors were reported early Monday, including a magnitude-3.4 quake near Fairview in the northern part of the state. An increase in seismic activity in Oklahoma was linked by the USGS in a 2015 report to the disposal of wastewater from the oil and gas industry. (3/15)

Atlantic off limits: The Obama administration is reversing course on opening Atlantic waters to a new generation of oil and gas drilling, after a revolt by environmentalists and coastal communities that said the activity threatened marine life, fishing and tourism along the U.S. East Coast. (3/15)

No bids in Nevada: A lack of interest in a recent federal auction for 50,000 acres offered for oil and gas development in Nevada is the result of an ongoing, concentrated regulatory effort by the Obama administration to gradually push oil and gas development off federal lands, industry and Republican congressional sources said this week. Likely reasons for the lack of bids also include unattractive economics, unfavorable geography, and operational risk. (3/15)

US pipeline regulators are proposing new rules aimed at strengthening safety requirements for pipelines that carry natural gas. The Administration wants to bulk up safety and inspection protocols for older lines and pipes buried under moderately populated areas where accidents could put lives at risk. (3/18)

President Obama and Prime Minister Trudeau announced a broad array of initiatives to combat climate change, to transition to a cleaner economy, and to protect our shared Arctic environment while supporting the indigenous communities who call it home. (3/16)

GOM drilling protest: As the Obama administration pulls the Atlantic Ocean off the drilling list, activist backers on the southern US coast said they’re wary of Gulf of Mexico plans. A consortium of environmental groups announced plans to hold a demonstration March 23 at the Superdome in downtown New Orleans to protest plans for the leasing of 43 million acres of maritime acreage in the Gulf of Mexico. (3/18)

Gasoline Prices: Motor club AAA reports a national average retail price for regular unleaded gasoline at $1.95 per gallon, 13 cents, or 7.4 percent, higher than last week. A spike in oil prices, coupled with seasonal events at U.S. refineries, means gas prices should increase for consumers. (3/16)

US electricity sales in 2015 totaled about 3.72 billion kWh, down 1.1 percent from 2014, driven by a decline in sales in the Midwest, the US EIA said. The year-on-year dip is the fifth time sales have fallen in eight years. EIA attributed much of the fall to industrial-sector declines “and little or no growth in sales to the residential and commercial-building sectors,” despite a rise in the number of residential households and overall commercial building space. (3/15)

Opposition in the US to nuclear energy has climbed sharply, with a majority opposed to its use for the first time since Gallup began annual polling on the subject 22 years ago. Gallup said 54% of respondents in the national poll said they were somewhat opposed or strongly opposed to nuclear energy. With gasoline prices dropping, perceived worry about the country’s overall “energy situation” has declined to 15-year low levels. (3/19)

Saudi Arabia is getting ready for a time when the world will no longer need its biggest export. The world’s largest crude exporter is focusing on renewable-energy sources such as solar power in preparation for a post-oil global economy, Oil Minister Ali al-Naimi said at a conference in Berlin. (3/18)

Solar shift: With more than a million US houses set to have solar panels by the end of next month, grid managers serving the eastern US plan to cut the amount of electricity they buy from conventional plants by about 1,400 megawatts, starting in 2019, according to industry consultant ICF International Inc. That’s enough juice to power about 780,000 households. The result could be as much as $2 billion in lost revenue for generators that are already reeling from lower demand, tight environmental regulation, and depressed prices. (3/18)

Lithium, the so-called “white petroleum”, drives much of the modern world. It forms a small but irreplaceable component of rechargeable batteries, used in consumer devices like mobile phones and electric cars. Over half of the earth’s identified resources of the mineral are found in South America’s “lithium triangle”, an otherworldly landscape of high-altitude lakes and bright white salt flats that straddles Chile, Argentina, and Bolivia. (3/16)