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Quote of the Week
“We are witnessing the total collapse of Venezuela’s economy. A contraction of these proportions might be a unique case in the last 50 years in the world. This never happens. Even Iraq’s GDP didn’t fall proportionately during the war.”
Alexander Guerrero, economist and head of the firm Techno-Economic.
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 continued to slide last week due to increasing inventories and a weakening Chinese economy. Prices have now fallen about $6 a barrel from the recent highs seen in late August and again in mid-October. New York futures closed Friday at $44.60 and London at $47.99 which is about at the bottom of the trading range we have seen since early September. Prices, however, are still some $4 – $5 a barrel higher than the lows of circa $40 and $44 a barrel set in mid-August.
On Friday the selloff was prompted by a surge in the dollar which has gained nearly 3 percent in the last two weeks. The dollar’s climb was prompted by yet another cut in Chinese interest rates which was seen as an indication that Beijing’s economy is in worse shape than official statistics indicate. The news from China was complimented by other bad economic news from Japan and Canada; an unusually large 8 million barrel increase in US crude stocks ; and the report that US oil production remained above 9 million b/d last week.
The US rig count was only down by one last week suggesting that it may be stabilizing after two months of declines. There are now 787 rigs in operation, 68 percent fewer than there were a year ago when the US rig count hit a peak of 1,609 units. There has been much talk of the increases that US shale oil drillers have been making in “efficiency” by continuing to produce more oil than the number of operation rigs would suggest is possible. Some of these gains came from drilling multiple wells at a drilling single pad thereby saving the time and expense involved in moving the rig. Other gains came from simply drilling longer horizontal wells. However, the belief is growing that much of the oil called “efficiency gain” came from continuing to drill only in the limited number of highly productive sweet spots and the squeezing of desperate subcontractors to lower costs. When oil prices started dropping last year, there was a large backlog of thousands of wells that had already been drilled and were only awaiting fracking before they could start producing oil. If this school of thought is true, then the era of “efficiency gains” in the shale oil industry may be nearing a close and drops in production from the steep decline in drilling may be coming faster than we have seen during the past year.
The consensus of most market watchers is that the bear market is not yet over and will last well into 2016 and possibly longer. At best most expect prices stay in their current trading ranges. A few even see further price declines mostly linked to a lack of storage space for the amount of oil that is being produced, although some believe that oil prices are not yet low enough to spark the multimillion barrel drop in production that would be necessary to curb overproduction and reduce the massive amounts of crude that have been added to storage in recent months. Another factor is the growing economic slowdown in Asia which has been the source of much of the world’s increasing demand for oil in recent years.
US natural gas prices sank to new three-year lows last week on expectations of weak demand. Prices closed Friday at 2.28 per million BTUs. Normally natural gas is added to storage caverns until the end of October, after which the demand for heating gas tends to empty them out. However, this year weather forecasts are calling for abnormally warm conditions in much of the US suggesting that the change over from injecting to extracting gas will be later than usual. Prices have now fallen by 70 cents per million since August and will likely bring still more pressure on the shale gas industry which is clearly losing money on its operations.
2. The Middle East & North Africa
The IMF is worried about mounting fiscal deficits from low oil prices and the cost of wars in which most exporters in the Middle East are now involved. Syria’s GDP is now down about 50 percent and that of Yemen 30 percent. The region as a whole has lost about $360 billion this year in revenue losses due to low oil prices. Region-wide, countries are running budget deficits averaging about 13 percent. Most oil exporters have large sovereign wealth funds that were created during the years of high oil prices, but these are being drained rapidly to support current government operations. Smaller countries such as Kuwait, Qatar and the UAE have enough in reserves to last for as much as 20 years of low oil prices, but the Saudis who have adopted a more aggressive and expensive foreign policy risk draining off their reserves in as little as five years.
Iran: Although the nuclear agreement remains on course to lift international sanctions against Iran sometime in the next six months, recent developments suggest there may be trouble ahead and that the situation may not be as rosy as Tehran has been painting. Although Iran’s Ayatollah has grudgingly approved the nuclear deal, he has ruled out any improvement in relations with the US and continues to warn that Washington is out to harm Iran. The increased Iranian involvement against Western interests in Syria remains a major issue as does the continued incarceration of American citizens on trumped-up charges. Tehran’s recent test of a long range ballistic missile, a weapon which is widely considered only useful for delivering nuclear weapons, has also raised concern. There certainly is room for considerable trouble ahead that could cause the nuclear deal to break down.
Tehran is pushing ahead with plans for a post-sanctions world in which hopefully its economy would bloom and its oil exports increase. Iran plans to start producing more gas and condensate from the South Pars field which is said to be the largest gas field in the world. Iran is preparing to announce a new oilfield-bid process which would allow foreign investors to exploit oil in Iran under 20-year contracts. Spokesmen for foreign oil companies are saying the new proposals are attractive as compared to the conditions under which foreign oil companies worked in Iran prior to the sanctions.
It is generally held that Iran could increases its exports by about 500,000 b/d soon after the sanctions are lifted using its own resources. Tehran, however, is talking about doubling exports in the next few years with the help of foreign investors and has been holding a series of conferences across Europe in an effort to attract such investment. While the the terms may be attractive, doing business in Iran still has drawbacks. Tehran is ruled by a coalition of religious, military, and elected officials with competing goals and outlooks. While sanctions on oil exports, investments, and money transfers may be lifted, those against the Revolutionary Guards which control much of the country’s more lucrative economic activity continue to leave a dangerous path for would-be foreign investors. On top of this, the situation is highly unstable and there are numerous plausible situations in which the sanctions could snap back, leaving foreign investments stranded.
Syria/Iraq: As Moscow’s bombing campaign enters its second month, Russia maintains that it is only bombing ISIL military targets, while the West maintain that most of the air strikes have hit the Free Syrian Army and other factions backed by the Western governments and gulf states. It is the Free Syrian Army which has been posing the greatest threat to the survival of the Assad government in recent months. In the meantime, the battle for Aleppo, Syria’s largest city goes on with little news of progress by the combined government, Hezbollah, Iranian task force which is attempting to drive rebel forces from the city.
There seems to be some movement on the political track to solving the situation in Syria.
The rebel forces opposing the government advance say they are receiving an increased flow of weapons from the Saudis to stem the advance. In the past two years the large numbers of anti-tank US-made TOW missiles that have been supplied to the rebels have been highly effective in countering the tanks and other armored vehicles that give government forces the means of advancing against the rebels. Over the weekend the US and Saudis agreed to increase support to the moderate opposition. Whether Russian bombers and attack helicopters will make a difference remains to be seen.
In Iraq, coalition airstrikes of ISIL continue, but lucrative targets whose destruction does much to harm ISIL are becoming hard to find. ISIL is clearly hunkered down in the cities and towns as moving in force becomes more difficult. Never in modern history have so few become mortal enemies of so many, including Russia, Europe, the US and many Muslim governments so quickly. The Kurdish/US raid on an ISIL prison last week shows how vulnerable ISIL facilities are to the forces that are arrayed against them. Moreover, Moscow seems to have few qualms about blowing up numerous civilians as collateral damage in its war against ISIL and other enemies of the Assad government. This policy opens more ISIL held territory to air attack than has been the case with only coalition air attacks.
Involvement of Iraqi Shiite militia under Iranian control in the offensive against Aleppo is beginning to become an issue. Whether the government in Baghdad or or the one in Tehran really controls the most effective of the Iraqi governments military assets has the potential of growing into a major issue disrupting the nuclear agreement.
The cholera outbreak in Iraq is growing as the Euphrates slowly dries up and wells become contaminated. As the climate becomes worse, there is little remedy for this situation which has the potential of growing into a situation that devastates the country and harms oil exports.
There was little news of the oil situation in Iraq last week.
Libya: The chairman of the National Oil Corporation told a conference in London last week the the country is producing about 440,000 b/d. Two major export terminals remain closed by strikers or local militia closing pipelines to the ports. The UN is making little progress in brokering an agreement between the two rival governments.
Saudi Arabia/Yemen: Pro-government forces have liberated most of southern Yemen and are closing in on the cultural capital of Taiz. Houthi forces, however, remain in control of much of the country. Sudanese forces arrived at Aden last week and have joined the coalition troops from the Gulf States in protecting the cities airports. Some 5,600 have been killed in the fighting and the humanitarian crisis continues to grow. Democrats in Congress recently blocked arms transfers to the Saudis out of concerns about the rising civilian deaths in Yemen due to the bombing.
Concerns are growing about the Saudi economy. Government spending has increased so much in recent years that the breakeven oil price for the Saudis has risen from $69 a barrel in 2010 to $106 in 2014. The kingdom is already delaying payments to contractors as oil revenue continues to slump. Net assets were down by $82 billion by the end of August and the country has raised $15 billion by issuing bonds this year. As the IMF has pointed out, the Saudis will be in trouble by the end of the decade unless oil prices move back above $100 a barrel.
Saudi crude exports fell by 278,000 b/d in August to 7 million b/d as the volume of refined oil product exports rose to a record high. The Saudis burned more crude in power plants during July and August to meet the demand for air conditioning and Saudi refining capacity has grown in recent years as the kingdom attempts to capitalize on the profits that can be made in refining.
3. China
The accuracy of China’s official growth rates came to the fore last week as Beijing announced that 3rd quarter growth was 6.9 percent year-over-year. There is growing concern that the official number is based on political considerations rather than economic reality. Beijing would have liked to announce that its economy was on track to meet the 7 percent goal that it has set for economic growth this year. Unfortunately, this growth rate is not supported by a host of other numbers that have been released in the last three months so the government settled on a barely believable 6.9 percent growth as its best option.
China’s central bank has now cut interest rates six times this year; the government has approved some 200 infrastructure projects worth more than $283 billion since January and increased fiscal spending by 27 percent; and devalued its currency in an effort to spur economic growth which is the main justification for one-party rule in China.
The rapid growth of China’s economy in the last seven years accounts for some one-third of global growth. Beijing is making an effort to transfer more of its economic activity from industrial production that is now growing at less than six percent to consumer services which are more difficult to measure. Many outside observers, however, believe that China’s real growth is now circa 4-7 percent, an assertion which the Chinese government denies citing improvements in consumer services.
The issue of China’s economic growth and whether it can maintain momentum in the coming years is critical to the course of the demand for oil. Chinese imports are now the largest or close to the largest of any country in the world. As most industrial countries’ oil imports are now stagnant, China is seen as the major factor which could increase the demand for oil and support higher prices in the next few years. This issue will not go away so that any number relating to Chinese economic growth will continue to be closely watched.
As China does not release official data on its oil stocks considering such numbers to be a state secret, Platts and other observers calculate changes each month by subtracting refinery throughput numbers for China’s crude imports and domestic production. In August Platts calculates that Chinese crude imports rose by 784,000 b/d which is consistent with what has been going on in the US in the past year. Over the past year Platts data shows crude stockpile builds, be they commercial or strategic, in 11 of the last 12 months.
4. Russia/Ukraine
Although the Ukrainian situation has been relatively quiet since Moscow’s intervention in Syria, over the weekend direct flights between the two countries were cancelled, forcing travelers to fly through third countries, drive, or take the train. Other than this, which was initiated by Kyiv and seconded by Moscow in retaliation, the front lines between Ukrainian forces and the separatists/Russian volunteers has been quiet. Most believe it will remain so as long as Moscow is seized with saving the Assad government.
Capital investment in Russia dropped 6.8 percent in August and only 5.6 percent in September. Industrial production during the month declined by 3.7 percent in the month, the smallest decline since March. Inflation, however, is running at 16 percent largely due to the ban on food imports from the EU; retail sales fell 10.4 percent year over year in September as compared with 8.5 percent during the first nine months of the year. Much of this comes from the 9.7 percent drop in real wages after adjustments for inflation. Moscow still expects that its economy will contract by 3.9 percent this year, but says the the pace of the decline is shrinking.
Russia’ economic minister warned last week that he believes oil prices will be stuck at around $50 a barrel for the foreseeable future. The minister noted that the country must slowly shift from being an exporter of commodities to to a more diversified set of exports. The government continues to maintain that it is making progress in replacing food imports from the countries that are sanctioning Moscow with locally produced food products. While this is the official government line, figures from the state statistical office, which still seem to be reasonably free from government censorship, tell another story.
5. The Briefs
In the North Sea, two of the biggest independent oil explorers have predicted a further 10,000 jobs will be lost from the sector, indicating a growing acceptance that oil prices are stuck in a prolonged slump. Since late last year, 5,500 people directly employed in the industry have lost their jobs — 15 per cent of the total workforce. (10/19)
Poland will take delivery of its first crude from Saudi Arabia next month, a shipment that could mark the start of new trade relationship undermining the traditional dominance of Russian supplies. (10/23)
The United Arab Emirates could expand oil production by 30 percent by 2020 using a costly recovery technique—enhanced oil recovery (EOR)—a U.S. federal review finds. The UAE was the third-largest contributor to oil production from OPEC last month, at 2.9 million barrels per day. (10/24)
OPEC member states should cut crude output to boost prices to a range of $70 to $80 a barrel, Iran’s Oil Minister Zanganeh said. Even so, Zanganeh said he doesn’t expect OPEC to decide to reduce output when its ministers meet next in December. OPEC has produced more than its official target of 30 million b/d for 16 consecutive months as the group seeks to defend sales amid a global supply glut. (10/19)
For China, BP agreed to supply liquefied natural gas to China Huadian Corp. in a deal worth as much as $10 billion over two decades. BP will supply as much as 1 million metric tons of LNG annually to the Beijing-based company that operates power stations. BP and China National Petroleum Corp., the country’s biggest oil producer, also agreed to jointly explore and produce shale gas in China’s Sichuan basin. (10/22)
The IMF is pressing Nigeria to further devalue its naira currency amid uncertainty over the political and economic outlook for Africa’s biggest oil producer. The naira has lost 25 percent of its value in the past year and the stock market plummeted by 20 percent last year and 14 percent this year because of political uncertainty and halved prices for oil that provides most government revenue. (10/22)
West African crude imports to the US Gulf Coast are picking up this month, drawn by the narrow WTI/Brent spread and African supply glut. Thirteen crude tankers have landed or are due to land in the US Gulf from West Africa in October, up from four vessels in September. (10/23)
China has returned to be the main buyer for Angola’s November crude program, data from Platts shows, contrasting with the previous trading cycle, when more barrels headed to European refineries and the US. (10/20)
African pipeline stalemate? Kenya and Uganda announced they have picked a route for the world’s longest heated pipeline to get the estimated 1 billion barrels in Kenya’s remote northwest out of the country. It would have allowed Kenya to share the cost of piping oil with Uganda, which has 6.5 billion barrels of its own oil that it wants to get to market. But this week Uganda turned around and announced it had instead signed an agreement with Tanzania and Total (which is exploring in Uganda) to consider a pipeline for Ugandan oil through Tanzania, bypassing Kenya altogether. (10/19)
Venezuela has set a target price of $40/barrel for its export basket of crude and products for 2016. The target price compares to the $60/b target the Venezuelan government put in place for the country’s 2015 budget. (10/21)
Venezuela not only has the funds needed to make payments to bond investors due this month and next, but intends to keep making timely payments on its obligations, Finance Minister Rodolfo Marco Torres said Tuesday. (10/21)
Venezuela’s international reserves fell to a 12-year low of $15.3 billion as the South American oil producer faces payments on its dollar debt totaling $4.5 billion in October and November. The government will likely be able to pay its debt due this year, although there’s a 60 percent chance of default next year, Eurasia Group said Monday. (10/21)
In Venezuela, a political turnover could be in the cards and the country’s leaders are doing their best to prepare for it. The Dec. 6 parliamentary elections are less than two months away, and the ruling United Socialist Party of Venezuela stands a good chance of losing its legislative majority. (10/19)
Cuba plans to drill exploratory deepwater wells in the Gulf of Mexico by the end of 2016 or beginning of 2017 despite current low oil prices. Cuba-Petróleo will drill exploratory wells as deep as 7,000 meters in waters of up to 3,000 meters in production sharing contracts with Venezuelan state oil company PDVSA and Angola’s Sonangol. (10/22)
In Canada, the incoming Liberal government is being called on to move away from an oil-based economy, the Natural Resources Defense Council said. From the oil industry side, Tim McMillan, president and CEO of the Canadian Association of Petroleum Producers, said the industry would work with the Trudeau administration on finding a balanced approach to the economy. (10/22)
In Nova Scotia, an offshore petroleum regulator said Dutch super major Shell has consent to start an exploratory drilling program in the region’s deep waters about 150 miles off the provincial coast. Nova Scotia’s government estimates there may be up to 120 trillion cubic feet of natural gas and 8 billion barrels of oil offshore. (10/22)
Canadian Oil Sands says it hasn’t been approached with any other takeover offers after rejecting Suncor Energy Inc.’s $3.3 billion hostile bid, though it’s exploring alternatives. (10/20)
The US oil rig count declined for an eighth week in a row but slowed the rate of those cuts to just one rig, Baker Hughes Inc. reported. The oil rig count for the week ended Oct. 23 slipped to 594 while the gas rig count gained one to 193. Over the past eight weeks, drillers cut a total of 81 oil rigs. (10/24)
The big challenge of shale oil work is that well output drops off quickly – often more than 70 percent in the first year alone…. The fall in U.S. output could be sharper than a 10 percent drop the EIA sees between a peak of 9.6 million b/d in April and next August, when it expects production to bottom at 8.66 million b/d before starting to recover. (10/22)
The end of the U.S. shale boom is about to claim another victim: oil refiners. Refiners are showing signs of slowing down after an unprecedented rise in U.S. crude production sent them on a five-year bull run. (10/22)
Halliburton cut another 2,000 jobs in the past month as the worst oil market slump in decades saps demand for work at the world’s largest provider of fracking services. The Houston-based company said the first quarter of next year may represent the lowest point for its North American profit margin as customers start fresh with new spending budgets for 2016 and tap Halliburton’s pressure-pumping expertise to start new wells. (10/20)
Oilfield services giant Baker Hughes saw revenues drop to $3.8 billion for 3Q 2015, down 39 percent compared to 3Q 2014, and a 5 percent decrease from last quarter. (10/22)
Cushing and quakes: In the months after Sept. 11, 2001, as U.S. security officials assessed the top targets for potential terrorist attacks, the small town of Cushing, Okla.– the largest commercial oil storage hub in North America—received special attention because of being an obvious target for disrupting America’s economy and energy supply. Now the massive oil stockpile faces an emerging threat: earthquakes. In the past month, a flurry of quakes have hit within a few miles of Cushing, rattling the town and its massive tanks. (10/24)
In Oklahoma, a sharp rise in earthquakes in the past 100 years is likely the result of industrial activities such as oil and natural gas production. A new paper by the U.S. Geological Survey, which singled out the state of Oklahoma, was released online this week and concludes that the injection of massive amounts of the byproduct of oil and gas production—chemical-laced wastewater—deep into the earth likely induced the quakes. (10/22)
US gasoline prices: More refineries working at full capacity and plenty of supply on the domestic market means US drivers are paying far less for gas, market analysts said. AAA reports a national average retail price for a gallon of regular unleaded gasoline at $2.25 per gallon, the lowest it’s been since early February. (10/21)
US railroads have been developing their intermodal businesses of moving containers and trailers, allowing them to compete directly with truckers on their home turf. As fuel prices skyrocketed and trucking companies faced driver and capacity crunches, railroads became a logical, cheaper choice. But diesel prices have fallen by about 30% over the past year to $2.53 per gallon, making trucking prices more competitive again. (10/24)
A review of 31 oil and ethanol train crashes that have occurred since 2013 puts track failure at the heart of the growing safety problem. Track problems were blamed in 59 percent of the crashes, more than double the overall rate for freight train accidents. Investigators and rail safety experts are looking at how the weight and movements of oil trains may be causing higher than expected track failures. (10/19)
Coal sale: Alpha Natural Resources is selling a number of closed coal mines as it revamps its business in bankruptcy. At least 16 idled mines in West Virginia, Kentucky, Tennessee and Illinois are being put up for sale in Alpha’s chapter 11 bankruptcy proceeding. (10/24)
Coal shipments to top importer China could fall a further 25 million tons in 2016, analysts said on Monday, with foreign suppliers struggling to compete in a massively oversupplied market. Shipments of coal to China over the first nine months to September fell 30 percent to 156 million tons. Volumes are on track to fall about 60 million tons in 2015. The recent government push to support its domestic market and focus on cleaner energy sources has raised doubts over whether its status as an importer is sustainable. (10/20)
“New” nuke: For the first time in almost 20 years, federal regulators have given a new nuclear power plant a license to begin generating electricity. The TVA began building the Watts Bar Unit 2 reactor in the early 1970s but broke off work in 1985 in part because of a construction scandal at the agency. It revived the project in 2007. That tangled history helps explain why experts aren’t predicting a big wave of new nuclear power projects, which today produce about 19% of the electricity in the U.S. Two other utilities in the Southeast are building four reactors in Georgia and South Carolina that are expected to enter service by the end of the decade. But few utilities are likely to follow suit because of the steep investments nuclear plants require and the difficulty they are having competing with low-cost natural-gas plants. (10/24)
California’s Senate Bill 350, signed on Oct. 7, envisions cutting greenhouse gas emissions to 40 percent below 1990 levels by 2030 and 80 percent by 2050. Language in the bill directs regulators to help reach those ambitious goals by making it easier for the state’s 23 million drivers to opt for vehicles that run on electricity instead of gasoline. The law requires the California Public Utilities Commission to solicit proposals from electric companies for “multiyear programs and investments to accelerate widespread transportation electrification to reduce dependence on petroleum. (10/23)
Tim Cook, chief executive of Apple, has warned that the global automobile industry is on the brink of a technology-led upheaval, in his most direct public comments yet addressing reports that the iPhone maker is planning to start making its own cars. “I do think that industry is at an inflection point for massive change, not just evolutionary change.” (10/20)
Many utility companies are seeking to increase their monthly fixed fees by double-digit percentages, raising them to $25 or more a month regardless of the amount of power consumers use. The utilities argue that the fees should cover a bigger proportion of the fixed costs of the electric grid, including maintenance and repairs. (10/20)
Energy storage developers have been saying for a decade that the industry is on the verge of a big breakthrough that will finally turn the battery into a major player in the power market. This time around, they’ve got customers backing them up. Utilities Southern California Edison and San Diego Gas & Electric said at a storage conference last week that supply from batteries now competes against natural-gas fired plants that start up when demand peaks. (10/20)
Offshore Scotland, in Pentland Firth, this past summer the Atlantis group began construction of a submerged tidal turbine array consisting of four, three-bladed, seabed-mounted turbines, enough to deliver 6 megawatts to the grid by 2016 and power approximately 3,000 Scottish homes. By the early 2020s, Atlantis is planning to build 269 turbines in the firth, capable of generating 398 megawatts of electricity, enough to power 200,000 homes. (10/21)
In Mexico, China’s Envision Energy’s deal brings it a majority stake in a portfolio of projects not yet started but designed to have a capacity of 600 MW, as well as a strategic partnership with ViveEnergia to develop 1.5 GW of wind energy capacity by 2020. (10/20)
American Business Act on Climate Pledge: The White House on Monday announced that 68 companies—among them Johnson & Johnson, Proctor & Gamble, Nike and Ikea—had joined the 13 original signatories to the pledge committing them to take more aggressive action on climate change. Although the 81 companies included a handful of energy companies, large oil and gas companies such as ExxonMobil and Chevron were notably absent. (10/20)
BP has just admitted that some fossil fuel reserves are unburnable, and that some oil will have to remain in the ground if we are to have any hope of keeping global climate change within “safe” — which, at this point, really just means “less dangerous.” (10/19)
In Oakland (CA), a proposal that could make this city a gateway for Utah coal to be shipped overseas has become a political flash point and put pressure on Gov. Jerry Brown, a former mayor known for his warnings on climate change, to come out against the project. (10/19)