Quote of the Week
“With oil down again [the day they hit $38], $20 per barrel predictions will be amplified. Remember the oil business doesn’t work at these prices.”
Analysts at Tudor Pickering Holt & Co.
1. Oil and the Global Economy
2. The Middle East & North Africa
5. The Briefs
1. Oil and the Global Economy
It was one of the wildest weeks for the oil markets in recent years. On Monday, another plunge in the Chinese stock markets sent New York oil futures below $38 a barrel and London down to $43, a six and one half year low. The markets bounced around on Tuesday and Wednesday and then surged upwards for two days on the news that the US’s GDP was doing better than previously thought and that the Chinese situation was stabilizing. By Friday afternoon New York futures were up 12 percent for the week, the largest one-week gain since February 2009, closing at $45.22 a barrel. London’s Brent gained 10 percent during the week, closing at $50.05.
Traders attributed the two stage price rebound to profit taking and short covering on Thursday and panic covering of short positions on Friday that had been established earlier in the week and anticipation that data to be released this week will show lower US oil production. A new government report that directly surveys oil output rather than relying on state numbers is due out Monday. Some have heard that the report will show a 200,000 b/d decline in US production during June.
Many market watchers are saying that this price rebound is mostly about short covering and other technical factors operating in the futures markets. Market fundamentals suggest that there is still an oil glut; that crude stocks are expected to rise this fall; and that prices will be heading lower again.
Venezuela, one of the “fragile five” OPEC members is asking for an emergency meeting in coordination with Russia to cut production and raise oil prices. This essentially means that the Gulf Arabs and Iraq should cut production allowing the weaker OPEC members to benefit from the higher prices. OPEC is not scheduled to meet again until December 4th and has rebuffed similar entreaties before.
The government reported that US economic growth in the 3nd quarter was 3.7 percent rather than the 2.3 percent previously reported. Optimists noted that if it were not for the large decline in oil and mining investments, the growth rate would have been 4.5 percent, the highest in a decade.
The EIA is forecasting a drop in natural gas production in the near future. Last week’s rig count report already showed a drop of nine rigs drilling for gas in the US. Even warm summer weather this year has done little to reduce US natural gas stockpiles which could exceed 4 trillion cubic feet, a new record, before winter heating demand starts. The drilling productivity report shows production from seven US shale basins hitting an all-time high of 45.6 billion cubic feet per day in May. The EIA expects that this will drop by 1.5 percent later this year and that the pace of drilling is not high enough to keep up with the decline from existing wells.
2. The Middle East & North Africa
Iran: The debate over the nuclear agreement continues in Washington with opponents launching yet another anti-agreement offensive. It still appears that the President has enough votes to sustain a veto of any bill torpedoing the agreement. The issue has set off some of the most vitriolic exchanges inside the Jewish community in many years as passions between those who oppose and those who support the agreement has reached a fever pitch. All this is strange as in Europe where the agreement seems to have been widely accepted in other counties involved in the negotiations as the best deal that can be reached.
The IAEA reported that Tehran had provided the agency with a sizeable amount of information concerning its previous efforts to acquire nuclear weapons, but declined to comment on its value. With the only obvious roadblock to an agreement coming into force is the US Congress, the British are saying that sanctions on Iran could start being lifted in the spring of 2016. Tehran once again is saying that it is determined to regain its proper share of the world’s oil markets no matter what the price of oil is next year.
The water situation in Iraq and Syria continues to deteriorate. The UN reported last week that water availability in Syria is only half what it was four years ago before the fighting started and that some 5 million are suffering serious water shortages. There have been 18 known attempts to cut the water supply into Aleppo this year. If this situation continues, the refugee flood heading for Europe is bound to increase.
The Turkish Air Force has joined in attacks against ISIL in addition to bombing Kurdish PKK insurgents in Iraq. Ankara’s renewed war against the Kurds in Turkey has resulted in a string of attacks on oil and gas pipelines transiting eastern Turkey. The Shah Deniz pipeline that brings natural gas from Azerbaijan was closed by an explosion on Monday. Oil exports from Iraqi Kurdistan, which also moves the oil from Iraq’s northern oilfields to market, have been stopped periodically by attacks on the pipeline to the port of Ceyhan. Reporting on these outages has been spotty as the Turks are not interested in revealing the success of the Kurdish attacks nor the status of repairs.
Baghdad has been beset with large demonstrations protesting the lack of electricity for air conditioning in a summer when the temperatures have been running above 110o F for weeks. The city’s electric grid has a capacity of only 3,500 megawatts no matter what the level of production. In the country as a whole, demand this summer has been running at 21,000 megawatts while production has been about 13,000. Iraq’s electricity minister recently noted that he had no money for improvements, 40,000 non-essential employees to pay, and insufficient natural gas for his power plants. The protests are likely to continue for a while.
Libya: Most of the news this week concerns the hundreds of would-be immigrants that continue to drown off the coast of Libya in substandard smugglers’ boats. A new round of peace talks is to begin in Geneva this week as the immigrant and the Islamic State situation worsens. There is still talk of an EU military intervention to stabilize the situation, and hopefully oil production, once the two governments come to terms.
Saudi Arabia/Yemen: The Saudi air campaign against the Houthi rebels continued last week as forces loyal to President Hadi continue to move into position for an attack on Sanaa, the capital. With access to Saudi and other Gulf state resources and ultimately backed by Washington, the loyalist forces have been making progress driving the Houthi rebels back into their homeland in northern Yemen.
Some in the financial press are beginning to speculate as to whether direct Saudi intervention against the Houthis might morph into hostilities between the Saudis and Iran with devastating consequences for oil production in the region.
3. China: Concerns about the future of China’s economy came home to roost last week on “black Monday” when stock prices fell by a close-to-limit 8.5 percent setting off declines in stock markets around the world. The collapse of China’s markets continued early Tuesday with a further 6 percent drop before the government stepped in, spending whatever was necessary, to halt the decline by purchasing stocks for its own account. The markets rose on Thursday and Friday, but were still down 8 percent for the week.
This week in China will see a mammoth celebration marking the 70th anniversary of the end of World War II. For the occasion the government has once again cleaned up the air in Beijing by shutting down anything that emits smoke for miles around the city and banning a portion of the city’s vehicle fleet from the roads. The plan seems to be working for the skies are blue and particulates in the air are at record lows. Some suspect the government intervention into the stock markets, which most observers and probably the Chinese themselves, see as bad policy, was intended to boost morale prior to the celebrations.
The stock market problems, however, are just one aspect of the numerous problems facing the country that are likely to impact the world oil markets in the next few years. Numerous economic indices have been dropping and nearly all observers are looking for China’s GDP growth this year to be closer to 5-6 percent rather than the 7 percent the government is hoping for. New car sales are not growing anywhere near what they have been and may not grow at all, cutting the demand for oil in coming years. Some are concerned that “Black Monday” is just the beginning and that subsequent economic events in China will destabilize the world financial markets.
China’s oil industry is concentrated for the most part in three giant state-owned companies that have enjoyed unprecedented growth during the recent boom years. Now that oil prices have fallen, questions are being raised as to how effectively these giant concerns can continue to function in a world of $40-50 oil. We have already learned that these companies have been banned from laying off employees even as their business contracts. There is a lot to the China story still to be played out. For example, the country is currently seized by the giant corruption hunt in which officials taking bribes – likely many if not most – are being purged and sent to prison. This is creating an atmosphere where many officials fear to take decisions to avoid attracting attention to themselves. This alone could slow economic growth markedly.
4. Russia/Ukraine: The ruble was trading at 71 to the dollar early last week, but climbed to 65 by week’s end as oil prices climbed significantly. Moscow’s economy minister now says that the country’s GDP will fall by 3.3 percent which is down from his last projection of a 2.8 percent contraction. There has been no movement in the Ukrainian situation so the sanctions will likely continue indefinitely.
The $27 billion LNG project at Yamal which is supposed to supply natural gas to Asia and relieve Moscow of having to sell much of its gas to the EU is in trouble due to the sanctions. Barred from raising money in the West, the Russians and their French and Chinese partners are going to have to come up with the money themselves. Given the economic troubles in China and Russia, this may be a problem.
5. The Briefs
Euro refining hit: For Europe’s biggest energy companies, the oil-price rout has had one silver lining: Their little-loved refineries returned to churning out big profits. Now, that bright spot could be fading, even as oil prices slump. Analysts and executives are flagging the prospect of lower refining profits as summer gasoline consumption eases, (8/29)
Worldwide gasoline surplus? The global oil product market could experience a surplus of gasoline supply as early as 2017, according to the latest long-term oil product market forecast from Wood Mackenzie Ltd. The research and consultancy firm says the surplus, combined with a deficit of middle distillate and fuel oil, would put significant pressure on refiners by the end of the decade. (8/25)
UK shale oil: Oil and Gas Ltd. said an independent assessment from oil services company Schlumberger found a mean 10.9 billion barrels of oil in place in a 55 square-mile area of the Horse Hill basin. The company expects to be able to extract up to 15 percent of the oil in place. (8/27)
Offshore Norway, the Edvard Grieg field was discovered in 2007. Sweden’s Lundin Petroleum says first production from the field is expected in late 2015. Peak production is anticipated at 90,000 barrels of oil and 53 million cubic feet of natural gas per day. A recent well drilled in the field lead the country’s oil regulator to increase their estimate of ultimately recoverable oil by between 6 and 50 million barrels. (8/26)
French oil company Total said Thursday that it has agreed to sell a gas pipeline and gas terminal in the North Sea to North Sea Midstream Partners for $905 million as it battles against the oil price collapse. (8/27)
Offshore rig company Transocean, based in Switzerland, said it plans to cancel issuance of stock dividends and record $2.1 billion in impairments because of the weak market. The company announced plans to hold an emergency general meeting of shareholders in October to consider the cancellation of the third and fourth installments of its dividend. (8/27)
Russia’s Rosneft said Thursday it was marking its frontier entry into the global liquefied natural gas market through a deal in Egypt. Rosneft signed an LNG supply and purchase agreement with the Egyptian Natural Gas Holding Co. (8/28)
OPEC member Kuwait said the global plunge in oil and financial markets heightens the need for the country to press ahead with investment spending and diversify revenue sources. (8/25)
Israel has imported as much as three-quarters of its oil from Iraq’s semi-autonomous Kurdish north in recent months, providing a vital source of funds to the cash-strapped region as it fights militants of the Islamic State of Iraq and the Levant (Isis). The sales are a sign of Iraqi Kurdistan’s growing assertiveness and the further fraying of ties between Erbil and Baghdad, which has long harbored fears that the Kurds’ ultimate objective is full-scale independence from Iraq. (8/24)
In China, the country’s biggest offshore oil and gas explorer Cnooc Ltd. posted a 56 percent decline in profit for the first half of this year. (8/26)
Australia’s BHP Billiton reported revenues were down 22.2 percent for the period ending June 30 due to an oversupplied crude oil market and a slowing Chinese economy. Capital spending was down 24 percent for the period compared with last year, and the company will cut spending next year by 22% to $8.5 billion and by an additional 17% in 2017. (8/26)
In Nigeria, growth in Africa’s largest economy slowed in the second quarter due to the slump in oil prices. Gross domestic product expanded 2.35 percent on an annual basis, compared with 3.96 percent a quarter earlier. (8/26)
In Nigeria, barely two weeks after the Warri Refining and Petrochemical Company resumed operation, it has been shut down because oil stored on site ran out. (8/26)
South Sudan, an oil producer and one of the world’s most corrupt and least developed countries, prepared an $850 million budget to crush a rebellion shortly after the insurgency began almost two years ago, the UN said. The supply of Israeli automatic rifles, Chinese missiles, Russian attack helicopters and amphibious vehicles “has been instrumental in prolonging and escalating the war,” now in its 21st month, and enabled large-scale violations of humanitarian law. (8/25)
Kenya started talks with neighboring Uganda on the financing and construction of an oil pipeline that will link the two countries and ferry crude produced by companies including Tullow Oil, the Kenyan Energy Ministry said. The negotiations follow an announcement by Kenyan President Kenyatta on Aug. 10 that the route for the conduit had been agreed upon agafter months of debate. (8/28)
Brazil stood, until recently, as the leading example of how a developing nation could rise toward global prominence on the force of a China-driven commodity boom. Now Brazil is looking like a symbol of something else: resource-rich nations’ habit of ending their booms with spectacular busts. Brazil’s stock market is down 22% in the past year. Its currency has lost a third of its value against the dollar. And on Friday, Brazil is expected to report that in the second quarter, its economy shrank at a pace of about 1.7%. (8/28)
In Argentina, consumers subsidize the price of oil. Widely considered among the top shale plays in the world, Vaca Muerta is the size of Belgium and the key to restoring Argentina’s energy self-sufficiency. To prime the pump in Vaca Muerta, the country’s energy secretariat first set its made-in-Argentina oil price at $72 in January 2013. It was adjusted to $77 last month. (8/26)
In Mexico, Moody’s Investors Service on Tuesday placed national oil company Pemex on review for a possible downgrade in its credit rating, citing falling earnings because of lower crude oil prices and a likely increase in financing needs. The review was prompted by the company’s weak cash generation and financial profile so far in 2015. (8/26)
In Canada, Moody’s cut the credit rating of giant Syncrude oil-sands mining consortium amid a swoon in oil prices below $40 a barrel, which has eroded profit margins in the energy industry and made it more difficult for highly-leveraged oil producers to service their debt loads. (8/25)
Canadian crude oil exports in the depressed energy market were down for conventional oil but up for heavier oil sands, national data show. The National Energy Board reported exports of lighter conventional crude oil down 25 percent from January to 772,000 barrels per day in June. Compared with June 2014, total light crude oil exports are down 10 percent. For the heavier oil sands, however, NEB data show a 6 percent increase from January to 2.2 million bpd in June and up 13.5 percent year-on-year. (8/28)
Canada’s Encana Corp., in an effort to cut debt, said Tuesday it was selling its shale natural gas assets in Louisiana’s Haynesville shale formation for $850 million. (8/26)
The overall US drilling rig count, after steadily climbing for several weeks, ended the week of Aug. 28 by dropping 8 units to 877 rigs working, said Baker Hughes Inc. The decline reflected a 9-unit drop in gas-directed rigs. The oil-directed count, however, increased for the sixth straight week, edging up a unit. The overall count is now down 1,037 units year-over-year. (8/29)
The U.S. crude oil swap agreement with Mexico makes sense for regional refiners looking to bridge the gap between oil grades, the U.S. government said. The U.S. Commerce Department this month granted a request from Mexican energy company Pemex to swap as much as 100,000 barrels of U.S. crude oil per day for refining into the nation. The deal requires Mexico to refine the crude oil at home and forbids re-export to other nations. (8/28)
BP has restarted the largest of three crude distillation units at its 413,000-b/d refinery in Whiting, Ind., following the unit’s unplanned shutdown in early August for unscheduled repair work. The processing unit, which shut down on Aug. 8, has returned to service and has resumed production of fuel. However, the 250,000-b/d unit will gradually ramp up to its full processing capacity over time. (8/26)
Outlook for US middle distillate demand, which has grown slightly amid rising exports so far in 2015, will look bearish as the Brent/WTI spread narrows in a globally oversupplied market, speakers at Benposium East 2015 said in New York Thursday. Refined US product stocks have consistently been higher throughout 2015 than in previous years, and while demand is still increasing, it has not kept pace. (8/28)
Ethanol problem: Oil has lost a third of its value in two months, bringing US drivers within pennies’ reach of $2.50 gasoline. But there’s at least one thing standing in the way of a steeper decline at the pumps: ethanol. While the crude rout dragged gasoline futures down about 60 cents a gallon, ethanol has dropped a mere 15 cents — making it costlier than gasoline this week for the first time since January. (8/28)
Oil data upgrade? With oil prices at near-six-year lows, traders and analysts are scrambling to figure out what’s coming next for energy markets. Lucky for them, more detailed US data may be on the way. The U.S. EIA is collecting comments on proposed changes to its energy-data surveys until Sept. 8. (8/27)
Keystone pipeline: A presidential decision on TransCanada Corp.’s cross-border permit application for its proposed Keystone XL crude oil pipeline is not imminent, White House Press Secretary Josh Earnest said. (8/29)
Keep drilling!? Investors sent a surprising message to US shale producers as crude fell almost 20 percent in August: keep calm and drill on. Shareholders continue to favor growth over returns, helping explain why companies that form the engine of US oil — the frackers behind the boom — aren’t slowing down enough to rebalance the market. US production has remained high, frustrating OPEC’s strategy of maintaining market share and enlarging a glut that briefly pushed oil below $40 a barrel. (8/26)
Funding oil: A severe slump in commodity prices has sent energy explorers and producers scrambling to shore up their balance sheets, leading to a flurry of debt sales this year by the industry’s most financially strained firms. The new bonds typically promise creditors ownership of the company’s assets, should it default. (8/29)
Schlumberger + Cameron: The more distressed companies in the oil patch are de-stressing themselves by succumbing to the safety that mergers and acquisitions (M&A) offer. In recent days, oilfield services giant Schlumberger revealed its plan – in a joint press release with joint venture partner Cameron International – to take over the Houston-based operation in a $14.8 billion deal. (8/29)
Shares of the largest oil companies have slumped so low it suggests investors expect the crash in crude prices to force cuts in dividends. History tells a different story. Oil’s collapse has driven the annual dividend yield at Royal Dutch Shell to at least a 20-year high of 7.7 percent this week. The yield — the annual return divided by the share price — is also at a two-decade high at Exxon Mobil Corp. and Chevron Corp. (8/26)
Hurricanes lite: EIA said offshore energy output from the gulf has experienced relatively minor disruptions because of tropical storms and hurricanes in recent years, adding that the National Oceanic and Atmospheric Administration expects a below-normal 2015 hurricane season. (8/29)
Environmental groups are threatening to sue the EPA, alleging it is failing in its duty to tackle a surge in earthquakes that they blame on the American shale revolution. (8/27)
Fitch Ratings finds lower crude oil prices will impact U.S. cities differently, though Houston may be a standout in terms of financial risk. (8/27)
Filling up with gasoline in the US is the cheapest it’s been in a decade. The average retail price dipped to $2.595 a gallon yesterday, down 7.5 cents from the previous week and the lowest for this time of year since 2004. And yet, compared to the drop in the price of a barrel of crude oil, the price of gasoline is somewhat high. There are several reasons for this disconnect. Summer gasoline is more expensive than winter fuel because of clean-air regulations. A string of refinery fires and breakdowns in recent weeks has reduced fuel production in some areas. Americans are driving the most miles on record this year as the economy improves. And filling stations tend to lower retail prices slower than they raise them. (8/25)
Solar from the top: The White House is throwing its weight behind moves by a growing number of US homes and businesses to produce more of their own electricity from solar, wind and other renewable energy sources. President Barack Obama announced a series of actions on Monday to promote homegrown power — known as distributed generation — as part of his efforts to combat climate change. (8/25)
Solar-powered mining: The DeGrussa copper and gold mine in Australia’s sun-scorched outback is getting a solar farm, the latest example of the industry embracing clean energy. The plant will replace about 5 million liters (1.3 million gallons) of diesel a year, a fifth of the mine’s energy needs. Energy generated by the system may eventually cost about half that of diesel-generated power. (8/27)
Washington fires: Rising temperatures and increased winds Thursday could cause the largest wildfire in Washington state history to grow even bigger. More than 1,150 square miles of Washington are on fire, nearly the size of Rhode Island. (8/28)