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Quote of the Week

“Around $200 billion of investments in energy have been canceled this year, with energy companies planning to cut another 3 to 8 percent from their investments next year. This is the first time since the mid-1980s that the oil and gas industry will have cut investment in two consecutive years.”

Prince Abdulaziz bin Salman al Saud, Saudi Arabia’s vice minister of petroleum and mineral resources

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

1.  Oil and the Global Economy

Despite oil’s fundamentals pointing to lower prices, the oil markets rebounded in thin trading last week. New York futures which were trading below $36 on Tuesday closed Thursday at $38.10, nearly a 9 percent jump.  In a similar fashion Brent, which on Monday touched its lowest point since 2004, climbed to close out the week at $37.89. We now have US oil selling above Brent, which makes it rather hard to sell on the international markets unless a refiner is looking for very light oil and is willing to pay a premium.

The proximate cause of last week’s price jump was an unexpected increase in US crude stocks of 5.9 million barrels, despite the market’s awareness of the unprecedented 30 million barrels of crude waiting to be unloaded from tankers anchored off Galveston. Even after the rebound, NY oil was still down 8.5 percent for the month.

Most analysts attributed the price jump to short-covering, in which traders who had profited from the rapid price fall since October decided to take profits prior to the uncertainties of the holiday trading period. Expectations are that the markets will refocus on fundamentals and that prices will fall again after January 1st.  Gloom and doom prevails across the oil industry with most expecting a much tougher year in 2016 than they have just endured. Major oil companies around the world are cutting capital expenditures. OPEC, Russia, and the US continue to produce at higher than expected levels. Demand seems to be tepid despite the low prices and improvements in China’s economy, the chief driver of oil demand in recent years, are not yet in sight. A case can be made that 2015 will mark some kind of a peak, either temporary or all-time, in world oil production.

Natural gas prices rallied on Thursday marking the biggest gain in nearly two years with prices closing for the week at $2.02 per million BTUs, up 14.8 percent for the week. The move was triggered by a report of larger-than-expected withdrawal from inventories on Thursday and forecasts of colder weather settling in across much of the northern US after weeks of record-breaking highs. It should be noted that the withdrawals from stocks the week before last was 32 billion cubic feet. While above the 25 billion analysts were predicting, it was well below the 121 billion average withdrawal for the week. The natural gas glut is far from over.

The flip side of Congress’s lifting of the oil export ban was the extension of the federal subsidies for renewable energy programs. Congressional Democrats from oil-producing states, who were politically-bound to vote for lifting the export ban, were able to negotiate the extension of the subsidies after convincing their Democratic colleagues that lifting the export ban now is a meaningless gesture and unlikely to affect consumer prices for the benefit of the oil industry. To trade a meaningless lifting of the export ban in return for more renewable credits seemed a good deal to many Democrats and perhaps a few Republicans. It should be remembered that 60 percent of Republican voters now favor doing something about climate change. With many Republican-leaning states being torn up by unusual weather phenomena of late, there could be some changes in store.

2.  The Middle East & North Africa

Iran: There seems to be a general consensus that the sanctions will be lifted in January, despite the complaints from Tehran that the new US visa law forbids visa-free travel to the US by people who hold Iranian nationality or have visited Iran. Washington in return is saying that Iran’s latest missile test violates UN mandates. The US is preparing to end restrictions on foreign subsidiaries of US corporations that keep these entities from doing business with Tehran. Food, aircraft-parts, and medicines have been exempt from the sanctions for humanitarian reasons. Several major US corporations are considering making overtures to Iran to sell various types of equipment that the Iranians need.

It is unlikely that US oil companies will be making direct investments in Tehran’s oil industry due to the rocky relationship and suspicions that still exist between Washington and Tehran. Sales of equipment and services however are possible. The IMF said last week that although Tehran’s economy will be helped by the lifting of the sanctions, the low oil prices which are expected to continue through 2016 will leave Iran with less economic growth than it saw in 2015 due to considerably lower average oil prices and the likelihood that Tehran will have to sell its oil at substantial discounts in order to regain its former market share. Iran is already said to be offering Indian refiners the opportunity to “name their price” in order to sell its oil.

Syria/Iraq: Russian bombing in Syria was back in the news last week with claims by Amnesty International that the bombing has already killed 200 civilians. Moscow says it has only struck terrorists which it defines rather loosely as any person or any town not wholeheartedly backing the Assad government. For now, the West sees Moscow as the only country in a position to broker a peace that will slow the flow of refugees into Europe.  There is much discussion of UN brokered peace talks, but so far little movement as the fighting and bombing continues to complicate the situation.

The Russian and Western bombing campaigns seem to be making some progress against ISIL.  Moscow is bombing with little regard for civilian casualties and is likely to be causing more damage in the few bombing runs that are expended on ISIL rather than moderate opponents of the Assad government. Moscow is busy targeting any oil tankers it can find in ISIL-controlled Syria. In the long run this will seriously reduce the amount of oil being produced for local consumption or shipped out of the region. While Assad’s forces and those of his allies are making limited progress against rebel groups pressuring Damascus and other government strongholds, in general these groups seem to be holding their own despite Moscow’s intervention. Reports of heavy Iranian and Hezbollah casualties while launching attacks on rebel positions suggests that this will be a long war.

US backed Kurds and moderate Syrians seem to be making some progress in taking back towns, roads and facilities held by ISIL. With out any air significant air defense, ISIL forces are highly vulnerable when isolated from the civilians who deter air attacks.

In Iraq, government forces seem to be on the verge of pushing ISIL out of Ramadi, with considerable help from Western airstrikes.  Although Baghdad says it is preparing to liberate Mosul without outside help, this seems a long time away. In general, there is little real progress towards any kind of settlement or victory in either Syria or Iraq with the civil wars seemingly destined to drag on for years.

Libya: The growth of the Islamic State’s power in central Libya is forcing the two Libyan governments to unite. Should this happen in the next few weeks, European intervention against the Islamic State seems likely. Such an intervention is likely to stabilize the situation in Libya to the extent that it can start producing and exporting significant quantities on oil again. While skeptical that the situation in Libya can be brought under control in the near term, Morgan Stanley says that the country could increase its oil exports by 400-600 thousand b/d. This amount of oil coming on the market at the same time Iran resumes unfettered exporting is not going to do much for oil prices in the coming year.

Saudi Arabia/Yemen: The stalemate in Yemen and continuing Saudi bombing is starting to hurt relations between Riyadh and Washington. Although the US has been supporting the Saudi bombing campaign, questions are arising about indiscriminate Saudi bombing which might constitute a war crime. Since the airstrikes began in March, more that 2,700 Yemenis have been killed and the UN is warning of breaches of international law. In recent weeks the Saudi/government offensive against Houthi rebels has made little progress while Saudi bombing continues. Over the weekend, the Houthis launched a Scud missile at a Saudi airbase which was intercepted and destroyed by a Saudi air defense unit. This resulted in another round of bombing by the Saudi Air Force.

In Riyadh, low oil prices continue to wreak havoc with the Saudi budget. In the last decade, the government has spent freely on subsidies that have provided cheap food, fuel, medical services, and education to its 30 million residents. The decline in oil revenues is forcing a rethink of these policies. At present rates of disbursement, the Saudis sovereign wealth funds that have been built up over the years of high oil prices will be depleted in the next few years and the government will be forced into deficit financing which has already started with the issuance of new bonds.

In a speech last week, King Salman signaled that there will be major cuts in government spending next year.  As defense and national security spending are unlikely to be touched, the extensive subsidies which keep the kingdom’s 30 million residents quiescent while other countries in the region are in turmoil may be coming to an end. It is far too early to predict significant civil unrest in the country, but there are glimmerings on the horizon.  The price of Saudi Arabia’s 5-year credit default swap, an insurance against sovereign default, has more than doubled since August to almost $150, its highest since the 2008 crisis. This number gives some insight into how the international financial markets evaluate the kingdom’s economic situation.

3.  China

Over the weekend, Beijing passed an “anti-terrorism” law which is raising criticism from governments and human rights groups around the world.  Drafts of the new law that have been released so far include a “recklessly” broad definition of terrorism which essentially allow the government to censor or even criminalize any sentiments that it does not like. The draft of the law would forbid encryption of the internet and require foreign technology companies such as Apple and Samsung to hand over to the government proprietary technical information.   This in turn would allow the Chinese government to monitor users of these devices world-wide. China’s legislature also approved changes in the the law restricting urban families to one child. The two-child rule will come into effect next Friday. Expect a large jump in China’s maternity wards next fall as millions of women have a long sought after second child. This could easily be the mother of all baby-booms.

There is a silver lining to northern China’s incessant deadly smogs. Cities in southern China, where the air is still relatively clean by Chinese standards, have launched a major recruiting effort to entice workers to the blue sky cities of the south. “You will never need to wear a mask here” is the recruiters’ slogan.

Many business journals are highlighting China’s economic slowdown as one of the top business stories of 2015. Now that China has officially changed its economic growth policy from one of ever-increasing exports to one of increased domestic consumption, growth has clearly slackened. Although Beijing continues to talk about growing its GDP by 7 percent a year, and will likely announce a number around this size, most outside observers believe that in reality growth is closer to 5 percent. China’s industrial profits fell in November for the sixth straight month. Profits of state-owned enterprises were down 23 percent from last year during the first 11 months of the year.  The producer price index has been falling for the last four years, suggesting weak domestic demand and overcapacity.

China’s debt is still growing about twice as fast as its GDP. No nation has ever expanded its debt as much as China in the past seven years. In the past year, the government has tried to steer investment into first housing, and then the stock market with disastrous results.

The question here is what the impact of China’s slowing economy, and the economies of the 40-odd states that have become dependent on China for their exports, will be on the global demand for oil. Platt’s analysis of Chinese data shows that apparent demand for oil averaged 11.11 million b/d in the first 10 months of 2015, an increase of 7.5 percent from the same period in 2014. However, Platts also says that it expects China’s oil demand to rise only 585,000 b/d or 5.6 percent year over year in 2015. Given the country’s slowing economic momentum, Platts expects the demand for oil to increase by less than 2 percent next year. If this forecast turns out to be true, then we can expect a tough year ahead for the oil industry.

4. Russia/Ukraine

The ruble fell as low as 71.2 to the dollar last week and is still trading below 70 despite the oil price rebound. The ruble is down about 6 percent in December and may have further to fall as it has not kept pace with the decline in oil prices. A leading Russian economist says that the ruble should be down around 75 to the dollar if the average 12-month price of oil is $44 a barrel which is well above where it is trading today. Despite large capital outflows as investors pull out of Russia, the current account still shows a surplus due to the large sales of oil, gas, wheat, and other commodities.

One of the major surprises in the last couple of years is that Russian oil production from aging oil fields continues to expand, without the help of arctic oil, shale oil, or the outside technical assistance that led to the Russian oil industry’s rapid rebound from the collapse of the Soviet Union. It looks as if Russia will set a post-Soviet oil production record this year despite the economic sanctions, low oil prices, and a global gut. This has been accomplished by hundreds of small productivity improvements across the giant Russian oil industry. The falling ruble which kept the revenue, when converted to rubles, fairly stable for Russia’s oil companies, was a major factor in keeping the industry growing. A Reuters poll suggests that Russian production will continue to grow in 2016 as new wells come online. This of course will simply contribute to the supply glut which is expected to continue into next year.

A new Russian government report concludes that the country is warming 2.5 times more quickly than the rest of the world. While the average world temperature has risen by 0.17o C since 1976, Russia has risen by 0.42oC. Environmental scientists have long noted that the Arctic is warming faster than the rest of the globe so as a partly arctic country, Russian should be susceptible to the phenomenon. The report notes that there were 569 dangerous meteorological phenomena in Russia during 2014, ranging from forest fires, to floods, to droughts. Water levels in Lake Baikal are falling rapidly despite minimal use of water by down stream hydroelectric stations.

President Putin has rarely said much about global warming having expressed the opinion that a warmer Russian Arctic would bring an economic boom to the region. In Moscow last week temperatures were setting records and forced the closure of the city’s outdoor ice rinks while snowdrops bloomed in the parks.

ConocoPhillips, one of the first western oil companies to invest in the Russian oil and gas industry, has pulled out completely by selling its stake in the Polar Lights joint venture with Rosneft. The move highlight the troubles US and other foreign companies have in doing business in Russia these days with low oil prices, sanctions, and political tensions dominating the relationship. It is simply a lot easier to do business in North Dakota these days than in the Russian Arctic.

5. Climate

The current El Niño, which has caused so much weather havoc in the US of late, is due to come to an end this coming August and may be replaced by the La Niña weather phenomenon. Sea temperatures brought about by the current El Niño have plateaued in recent weeks and if past patterns are a guide, the current El Niño is on its way to dissolving.

Government forecasters are warning that La Niña, which has followed 11 of the last 15 El Niño events, can cause much damage to crops, send agricultural prices much higher and increase the power of hurricanes hitting Asian coastlines. El Niña can bring about crop problems in North and South America and brutally cold winters in the US.

5.  The Briefs

OPEC forecast: Oil prices will take decades to recover and will still not reach the peak seen in recent years, according to the latest World Oil Outlook from OPEC. In the group’s latest outlook on supply, demand and prices to 2020 and 2040, OPEC predicted that a barrel of oil would cost (in real terms) around $70 by 2020 and $95 by 2040, a far cry from a high point of $114 a barrel last seen in June 2014 before prices began to plunge. (12/24)

The $20/barrel low-cost price for early next year has been predicted since the autumn by Goldman Sachs. Now the International Monetary Fund has hinted that global prices could fall this low when Iran increases its oil exports in the wake of the lifting of international sanctions. Iran reckons it could increase its output by around one million barrels a day into a global market that is already oversupplied by up to two million b/d. (12/23)

In Finland, price negotiations between Russia’s Gazprom and Finland’s Gasum, ongoing since early 2014, have been concluded. The Finnish government has agreed to buy Gazprom’s 25% stake in Gasum.  Competitiveness against coal in power generation remains Gasum’s primary challenge in the Finnish market, where gas demand has been on a downward trend in recent years due to plunging coal prices.  In 2014, Finland consumed 2.8 billion cm of gas, down from 5 billion in 2005.  Finland is currently dependent on Russia for its entire gas supply. (12/21)

In southeastern Nigeria, as many as 100 people were killed by an explosion at a gas plant. The blast happened on Thursday when a truck was discharging butane gas at the facility in Nnewi town in Anambra state while customers were refilling their gas bottles. (12/25)

Nigeria will reduce gasoline costs and scrap a fuel subsidy under a pricing mechanism to come into effect during January. Africa’s biggest oil producer relies on fuel imports to meet domestic needs since its refineries produce a fraction of the 445,000 barrels per day they’re capable of processing. (12/26)

Nigerian President Buhari asked lawmakers to approve the country’s biggest ever budget on Tuesday as he looks to revive an economy hit by collapsing oil prices. Buhari outlined plans for the government to spend $30.8 billion in 2016, an increase of about 20 percent from this year. Africa’s largest oil producer usually derives two-thirds of government revenue from the commodity. (12/22) Buhari also hinted for the first time that he would accept a devaluation of the national currency, the naira. (12/23)

PDVSA downer: A leading contractor for Venezuela’s state oil company and another businessman were arrested by US authorities on charges of bribing foreign government officials, wire fraud and money laundering, the first arrests made in the US as part of a wide-ranging investigation of the company. (12/22)

Mexico’s Pemex hopes to start 2016 with a plan to become leaner and more efficient. The state-owned oil producer is set to announce job cuts for next year as part of the plan to restructure the company and to synchronize itself to industry standards. Oil output at Pemex in 2015 will drop to the lowest in 25 years as a series of accidents and budget cuts curbed supply. The company is nearing $100 billion in debt and recently posted a record loss of about $10.2 billion in the third quarter. (12/24)

The total US rig count declined by nine this week to 700 with 538 rigs drilling for oil (down 3) and 162 rigs drilling for natural gas (down 6) amid depressed energy prices. A year ago, a total of 1,840 rigs were active. (12/24)

US exports: It took years to lift a ban on most US oil exports. It took a week for the first shipment to be announced. Enterprise Products Partners LP will load 600,000 barrels of domestic crude onto a tanker in the Houston Ship Channel during the first week of January. It sold the cargo to merchant trading giant Vitol Group, which will probably send it to Europe. (12/24)

US exports: OPEC’s biggest producers probably don’t need to worry about their sales being challenged by US crude exports to Asia, yet. US West Texas Intermediate oil must drop to $4 – $6 below Dubai crude, the benchmark for Middle East supply, for it to become competitive according to South Korea’s Ministry of Trade, Industry and Energy. (12/23)

Budget cutting: In a sign that U.S. energy producers think oil and gas prices will languish through next year, several are slashing their already slimmed-down budgets even more. ConocoPhillips plans to cut spending next year by 55 percent, when compared with its 2014 budget, to $7.7 billion. Marathon’s 60 percent cut to a $2.2 billion budget for 2016 is even steeper. The low-price trend has already triggered a massive wave of asset write-downs. (12/26)

Shell has lowered its 2016 capital spending plan by $2 billion to $33 billion, pending a shareholder vote on the matter in January 2016. (12/23)

ConocoPhillips, one of the pioneers of foreign investment in the Russian oil and gas industry, has completed a full retreat from the country by selling out of its Polar Lights joint venture with Rosneft.  Conoco’s decision to exit from Russia after more than 25 years highlights the challenges facing foreign investors in the country’s energy sector, which has been hit by recent political tensions and the tumble in oil prices.  (12/22)

Bankruptcies among oil and gas companies have reached quarterly levels last seen in the Great Recession, according to the Federal Reserve Bank of Dallas. At least nine U.S. oil and gas companies that accounted for more than $2 billion in debt have filed for bankruptcy in the fourth quarter. (12/25)

Lower tax revenues because of job losses in energy and related sectors due to the collapse in oil prices will hit the budgets of oil-producing states through the remainder of this fiscal year and next, Moody’s Investors Service said Monday. Oklahoma revised down its revenue projections last Tuesday for the remainder of the current fiscal year by 8 percent, and by 13 percent for the next fiscal year. Moody’s analysts expect to see a similar dynamic in Alaska, Louisiana, New Mexico, North Dakota and Texas, with those states having to dip into budget reserves to meet shortfalls. (12/22)

US natural gas prices are so low that drillers are shutting in production, a once unfathomable development. This choking back of production suggests that prices could be at an absolute bottom. Still, that is not to say that prices will rebound substantially anytime soon. The supply overhang will likely linger with late-fall storage levels at all-time highs. (12/24)

In metro Los Angeles, officials in the San Fernando Valley have declared a state of emergency in the Porter Ranch neighborhood there, where more than 1,600 residents have been displaced by a massive natural-gas leak now entering its ninth week. It may take until March to stop the methane flowing from an old oil field used to store natural gas. The utility, a unit of Sempra Energy, says it has made six unsuccessful efforts to stop the leak, which appears to be coming from a well rupture about 500 feet below the surface. (12/22)

The Colorado Supreme Court heard arguments in early December on whether state or local governments have the authority to restrict hydraulic fracturing. A lower court threw out restrictions imposed by five Colorado cities and challenged by the Colorado Oil and Gas Association. (12/24)

Traffic on the US rail network continues to weaken in a sign of the slowdown spreading across the industrial economy and efforts by firms to reverse the unplanned build-up of inventories throughout the supply chain. For the first 49 weeks of 2015, traffic has fallen 2.1 percent compared with the same period in 2014, though the rate of decline during the second half of the year is more than double the first-half decline. (12/24)

Automated driving: Ford is in talks with Google on an autonomous-driving venture.  The talks are intended to help Ford accelerate its efforts to bring autonomous cars to market. Any agreement wouldn’t be exclusive to Ford, and Google continues to talk with other auto makers. (12/22)

Automated driving: Toyota is developing a high-precision map generation system that will use data from on-board cameras and GPS devices installed in production vehicles in order to aid the safe implementation of automated driving. The new system will go on display at CES (Consumer Electronics Show) 2016 in Las Vegas next month. (12/22)

Wind energy credits: Congressional moves to keep the U.S. government funded through the middle of 2016 included an extension of subsidies for renewable energy programs. Wind power in the U.S. expanded more than 6 percent in 2015 alone. (12/22)

Low oil prices vs. emissions: The IEA analyzed the impact on greenhouse-gas emissions if global oil prices remain below $50 a barrel for the rest of the decade, pulling down coal and natural gas prices as well.  The answer is complicated: on one hand, low prices will accelerate the shift from coal to cleaner gas for producing electricity, cutting carbon emissions. On the other, inexpensive fossil fuels will also undercut sales of electric vehicles, boost the cost of renewable-power subsidies, encourage the use of oil for chemical feedstocks and, most critically, make the payoff less attractive for efficiency upgrades. (12/22)

Climate Change: A majority of US Republicans who had heard of the international climate deal in Paris said they support working with other countries to curb global warming and were willing to take steps to do so, according to a Reuters/Ipsos poll on Tuesday. The desire for action is notable for an issue that has barely made a ripple on the campaign trail among 2016 Republican presidential candidates. (12/23)