Quote of the Week

“We went through that four-month window where [natural gas prices] just went sideways and they didn’t stop pumping that whole time. This could be one of those ugly seasons for futures.”
Dean Hazelcorn, trader at the Coquest Inc. brokerage in Dallas.

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

Last week oil prices remained in the month-old trading range of around $45 a barrel in New York and $48 in London despite several major geopolitical developments and much news affecting oil’s fundamentals. However, the general situation of too much oil production and slowing economic growth remained intact.  During the week, Russia announced that its production hit a new post-Soviet high of 10.74 million b/d, and along with the Saudis, Moscow shows no indication of being willing to cut oil production. US production is now down about 500,000 b/d from the high set in June, but this still seems inadequate to ease the oil glut. US oil stocks have climbed in eight of the last ten Octobers due to refinery maintenance, and there is no reason to believe that this will not happen again this year.

On Friday oil prices first slid lower on indications that the US economy is being affected by the global slowdown, then when the weekly rig count came out showing that oil-directed rigs were down by 26 units to 614 last week – a five-year low – prices rebounded.

In contrast to the oil markets, last week natural gas futures in New York fell by nearly 30 cents per million BTUs, closing Friday at $2.45. The gas industry continues to be plagued by overproduction and increasing stocks. The weather in the US has been temperate of late, with little demand for heating or air conditioning. Global natural gas and LNG prices, many of which are tied to the price of oil, have been falling along with crude prices, making US LNG exports less attractive than they were a year ago.

Analysts are all over the map as to where oil prices are headed. Some say that the recent stability around $45 a barrel shows we are at the end of the slump and that prices will be higher next year. Some expect that the ongoing contraction of the US oil industry will soon eliminate the glut. Cheaper gasoline is driving up demand in many countries. One or two are talking about $4 gasoline by next year if oil production collapses.  The contrasting view holds that the economies in China and the EU continue to decline. Although Chinese oil consumption has been holding up so far, a lot of this comes from one time events such as building strategic stocks and the opening of new export-oriented oil refineries. If China’s economy is only growing around 6 percent annually — and many believe it is growing considerably less – then the steady increases in Beijing’s demand for oil which have been going on for 30 years should be slowing.  The IMF continues to warn that the global economy is contracting and that growth this year and next will be worse than in previous years.

2.  The Middle East & North Africa

Iran: With implementation of the nuclear agreement and the lifting of sanctions drawing near, foreign countries are scrambling to get into Iran. Last week Shell said it would be allowed to build 100 gasoline stations there and BP sent a team of managers to Tehran to assess the possibilities of doing business. France’s Total also is to build 100 gasoline stations in Iran. Although the Iranians have many tasks specified in the treaty to complete before the sanctions are lifted, diplomats are hopeful that these can be completed “early in 2016.”

Iran has some of the largest oil and gas reserves left in the world which are cheap to exploit in comparison to Arctic, shale, tar sand, and deepwater oils. There are still numerous caveats in doing business with the people ruling Tehran, not to the mention the “snap-back” provisions in the treaty under which the West could quickly re-impose sanctions should Iran be caught cheating.   Last week Israel’s prime minister reiterated that his country was prepared to use military force to keep Iran from acquiring nuclear weapons. The Jerusalem Post opined last week that the best part of the nuclear agreement is that it will let the West learn in detail where are the best places to bomb Iran in the coming war.

On the downside, Iran appears to be expanding its role in the Syrian civil war by sending more advisors and bankrolling more forces to save the Assad government from being over run by the rebel groups. Tehran is believed to already have some 7,000 military personnel inside Syria, training, advising, and organizing new militias loyal to the the government. With little left of its economy, most of money supporting the Assad government, the Lebanese Hezbollah militias, and the increasing numbers of Iraqi Shiite militias entering Syria is coming from Tehran and Moscow. It is this deepening involvement in the various Middle Eastern conflicts that raises flags as to just how deeply Western firms want to get involved with the Iranians. So far there is no indication that Tehran is planning to send its regular armed forces to fight the rebels in Syria, but is content to act through proxy-Shiite militias recruited in Syria, Lebanon, and Iraq.

Syria/Iraq:  Russian bombing of “ISIL” targets in Syria began with little advanced notice on Wednesday adding a new and dangerous dimension to the civil war and indeed to the whole Middle Eastern situation.  Although Moscow says it is bombing ISIL and other “terrorist” groups, in reality most of the bombs seem to be falling on easy to find non-ISIL groups that up to now have had no reason to fear serious aerial attacks. After a year of carefully-considered-to-avoid-civilians-strikes on ISIL forces and installations, very few lucrative targets remain for the US and allied air forces. Hence the Russians seem to be bombing mainly the non-ISIL forces, some backed by the US, Turkey, and the Gulf Arabs, that are presenting more of a threat to the Assad government than ISIL and are much easier to find. Britain says that only one of the first 20 airstrikes was aimed at Islamic State facilities. Moscow says it will increase the intensity of the attacks in coming days.

The returns are just starting to come in, but it is likely that the Russians are causing considerably more “collateral damage” than comparable attacks by coalition air forces. It seems as if the Russian’s military strategy is simply to blow towns that contain opposition fighters to pieces allowing the Syrians or their allies to move in with little opposition. Moscow is well behind the West in the development and use of expensive precision guided bombs so it is likely that the numbers of civilians being killed in Syria will climb considerably.

Iraqi oil exports in September were 3.05 million b/d, down slightly from previous months’ numbers as more of the oil being exported through Kurdistan to Ceyhan, Turkey is being credited to the Kurd’s not Baghdad’s account. Barclays Bank notes that loading problems usually reduce exports through Basra by 300,000-500,000 b/d during the winter months. In the north, Kurdish Peshmerga forces, with the aid of coalition airstrikes, are attempting to push ISIL forces away from the oilfields near Kirkuk.

As the regular Iraqi Army becomes weaker and weaker, there is concern that the growing power of Shiite militia groups could eventually take over the country from the US-installed government. The Shiite militias have been playing a major role in the fighting with ISIL, but there is controversy over efforts to bring them under government command. Should there be a militia-coup against the government, we would have a whole new game in Iraq which would likely lead to dissolution of the state and a decline in oil exports.

Saudi Arabia/Yemen: The Saudis are coming under increasing pressure over their indiscriminate use of airpower in Yemen. The US says that most of the 2,300 civilians killed so far have been hit by Saudi airstrikes. Last Saturday over 130 attendees at a wedding were killed by an airstrike. Riyadh is doing is best to divert an effort in the UN to investigate the killings and Washington is trying to distance itself from its involvement in providing targeting information to the Saudis. Government forces continue to make progress in driving the remaining Houthi forces in southern Iraq out of the region and are preparing for an assault on the capital, Sanaa.

As the Saudis take a more active role in Middle Eastern affairs, aided by some $90 billion worth of modern arms they have purchased from the US in the last decade, Riyadh becomes more of a target for radical Sunni and Shiite groups, including the state of Iran, that do not think very much of the hereditary monarchies and the Saudi role as the protector of Mecca. Although security incidents are on the upswing in Saudi Arabia, dissident groups so far are no match for the massive and well-funded Saudi security apparatus. The ruling family is become more sensitive to dissent and in recent months has taken to handing down harsh sentences, even execution, for participating in demonstrating or publically saying anything critical of the royal family.

There is no telling how long the Saudi monarchy will endure in its present form. Hereditary monarchies with true power are becoming scarcer all the time and the Saudi royal family will always be a top target of Shiite and dissident Sunni groups.

The drop in oil prices is bringing pressure on the government to curtail some of the social benefits, such as the $10 billion gasoline subsidy, free healthcare, free education and numerous other social benefits that keep the Saudi populace largely quiescent. For now, the government is not making its budget through oil sales and has started to sell off foreign assets to keep functioning at its current pace. While these assets are large by most standards, they will only last for another four years at the current rate of expenditure. If oil prices do not rebound by 2020 the Saudis are going to face some hard choices.

3.  China

Beijing’s manufacturing sector continued to slip in September despite several rounds of government intervention during the past year.  One private survey released last week even showed contraction in China’s services sector which has been counted on to offset declining industrial production.  As the Chinese economy contracts, the pain is being felt across much of the underdeveloped world which has become dependent on Chinese imports for their economic growth.  Even though global oil demand is forecast by the IEA to rise by a 5-year record of 1.7 million b/d this year due to the lower prices, some are starting to worry that the increases sparked by lower prices may be short-lived.

Chinese consumption of petroleum products is notoriously difficult to calculate. To come up with a number one has to put together myriads of data concerning refinery throughput, net product imports, and change in inventories for many different products. A few news organizations try to cobble some of this data together, but most simply look at net crude imports as an indication of what is happening.  An industrial slowdown obviously will cut the demand for diesel, but maybe not for consumer gasoline.   We do know that Chinese demand for oil is up by 9.2 percent year-over-year as of August.  Some of this “cheap” oil is going into strategic reserves and some is being processed in new refineries for export in competition with other Asian refineries.

Obviously the course of China’s economy is being closely watched all over the world. Opinions on where it is going are varied. Some see a major economic collapse in the offing as the housing bubble bursts. Others have great faith in Beijing’s ability to manage a transition from an export to a domestic consumption related economy. For now, its GDP seems to be contracting, but so far there has been little impact on oil imports.

4. Russia/Ukraine

Russia, its economy, and its foreign policies intersect with the world oil situation in many ways. As the world’s largest oil producer, its level of crude production, destination of its exports, and taxing policies influence the fundamentals of the the global oil markets in many ways. As oil prices have fallen, the state of its economy, which is highly dependent on oil and gas exports has become problematic for the near future. In the last two years, Moscow’s foreign policies especially towards Ukraine and Syria have not only been the cause of much consternation, but they have and will force shifts in the oil markets and potentially make major changes in the Middle Eastern situation.

Last week Russia’s bombing of Syria led to a drop in the ruble down to 65 to the dollar which is considered an important threshold. Russia’s stock market also fell as investors worried about the possibility of confrontations with the US emerging from the bombing. Moscow announced that its oil output hit a new post-Soviet monthly high of 10.74 b/d in September, adding to the oil glut. Outside observers are surprised that Russia can continue to increase its oil production as many of its oil fields have been in production for decades and are depleting rapidly. New technologies, some provided by foreign oil companies, and an active drilling program are seen as responsible for production continuing to increase. The steep decline of the ruble has allowed Russian oil companies to make substantial profits as exported oil is sold for dollars which are then converted into the rubles which are used for oil company expenses.

Russia’s oil companies continue to be hurt by the Ukrainian sanctions. Last week Schlumberger cancelled a $1.7 billion deal that would given Schlumberger a 45 percent stake in Eurasia Drilling Co., a Russian firm. The deteriorating relations between Moscow and the West and fears of Russian regulators as to what could happen if the deal went through finished the negotiations. Russia’s state-owned energy companies, Rosneft and Gazprom, are delaying offshore drilling by two to three years because of the sanctions and low oil prices.

The Russian government has proposed raising taxes on the oil industry as one remaining sector of its economy that is still doing well.  This proposal has set off a storm in the industry with the head of Rosneft calling on the government to find another source of revenue rather taking money from his firm. Rosneft has already said that implementation of the tax would cut drilling for more oil and lead to lower production.

5.  The Briefs

Rig Count: The overall US drilling rig count plunged 29 units during the week ended Oct. 2 to a total of 809, the lowest since May 3, 2002. The count has now fallen for 6 consecutive weeks, giving up 76 units during that time. The recent decline follows a small summer rebound in which the total climbed 28 units over a 9-week period from a nadir of 857 to a plateau of 885. The count is now down 1,113 units year-over-year and 1,122 units since a peak of 1,931 most recently touched on Sept. 26, 2014. (9/3)

South Sudan: Fifty-two soldiers and rebels have been killed in recent fighting in South Sudan’s contested state of Unity, said a military official, blaming rebels for the latest violation of a peace deal signed last month. Rebel forces have attacked positions held by government troops, killing 14 of them and wounding 42 others as part of an offensive to attack government troops in parts of Upper Nile state. (10/3)

Chinese Imports:  Ships hauling 2 million barrel cargoes of Saudi Arabian crude to Japan, a benchmark route, earned $104,256 a day, a level last seen in July 2008, according to data from the Baltic Exchange in London. The rate was a 13 percent gain from Thursday. Bookings by Chinese oil companies surged this week to collect oil from regions including the Middle East and West Africa. The Asian country imported 26.6 million metric tons of crude in August, 5.6 percent more than a year earlier, according to customs data. (9.3)

Choking Wells: Encana Corp is among a growing number of companies that are restricting initial output — a process known as choking back — in basins from North Dakota to Texas. They’re conceding up-front gushers of crude in exchange for smaller production declines over time so that the wells ultimately generate more oil. The strategy sacrifices one of the biggest benefits from shale – the early oil paid back investments fast, allowing companies to pour capital into new projects. Instead, Encana and others envision a future with a more stable flow from wells. (10/3)

Export Ban: Lifting the ban on exporting U.S. crude oil prices could lead to an increase of $2.50 per barrel for domestic producers, a federal report finds. Members of the House of Representatives are debating legislation that would end the ban on exports of domestically-produced crude oil. (10/2)

Israel’s Gas Field: When the Leviathan gas field was discovered off the coast of Israel in 2010, it was said that such a vast energy reserve would transform the economy and bolster public finances for years to come. Five years on, poor policymaking, political infighting and a battle between Prime Minister Benjamin Netanyahu and the antitrust commissioner over a lack of competition mean Leviathan remains undeveloped. (10/2)

Mexico: Italian energy company Eni said it secured a production sharing contract to help develop oil fields off the eastern coast of Mexico. The company won all of the shares in three oil fields included under what the Mexican government categorized as Area 1 during the latest government auction. The combined reserves for the three fields are approximately 800 million barrels of oil and 480 billion cubic feet of associated gas. (10/2)

Stripper Wells: Crude prices tumbling to $30 a barrel would threaten the profitability of about 206,000 b/d of production from older wells that produce minimal amounts of oil, according to a report from Bloomberg. Output from older US wells is less profitable as oil prices fall. The wells, which are most prevalent in Texas’ Permian Basin, are about 25 years old on average and produce no more than 15 barrels a day. (10/2)

Mexican Imports: The US became a net oil/oil product exporter to Mexico for the first time in more than 20 years. Net exports — comprising only oil products since the US bans most shipments of crude — totaled 48,000 b/d in July, the U.S. Energy Information Administration said in data released Wednesday. A decade ago, the country bought a net 1.3 million b/d of oil from its southern neighbor. (10/2)

Chesapeake Energy negotiated a reprieve from its banks that comes at the expense of its bondholders. Under a new financing agreement, the embattled oil and gas producer’s unsecured $4 billion revolver will be converted into a secured credit line, according to a company statement. The announcement sparked a selloff in the company’s bonds, erasing as much as $285 million in market value. (10/2)

The Environmental Protection Agency on Thursday announced a sweeping federal air-pollution limit on ground-level ozone, one of several environmental regulations fueling a clash between the Obama administration and the business community. The EPA is setting a final standard of 70 parts per billion of ozone in the air, down from the current level of 75 parts per billion.  The ozone limit is prompting criticism both from environmental groups that say it isn’t strong enough and business executives who didn’t want the EPA to change the standard at all. (10/2)

Export Ban:  Sponsors of US Senate and House bills to repeal the 40-year-old ban on exports of US-produced crude oil expect their measures to move ahead soon.  Congress could complete work on a final bill and send it to the White House by year’s end. The White House says the President will veto the bill. (10/2)

Christine Lagarde, the International Monetary Fund chief, has warned of “disappointing and uneven” global growth, with emerging economies set to be buffeted by a fifth consecutive year of slowing expansion.  She warned that worldwide expansion will fall short of last year’s figures and there will be only modest growth in 2016. (10/2)

Nigeria’s crude oil exports may fall by about 10 per cent in November. The provisional loading programs showed that Nigeria plans to export a total of 56.66 million barrels of oil in November, which is a decline from the 63.1 million barrels, or 2.04 million b/d, planned initially for October loading. (10/1)

Ecuador’s economy slipped into recession in the second quarter for the first time since 2009 as the government struggles to borrow enough money to offset the global oil slump. Gross domestic product shrank 0.3 percent from the previous three months, after contracting a revised 0.1 percent in the first quarter. (10/1)

Natural gas is so abundant and cheap in much of the US that producers want to export it overseas.  However in New England gas is so hard to get that companies are importing it from as far away as Yemen as the U.S. shale largely bypassed the energy-starved Northeast. Few pipelines are available to ferry gas from Pennsylvania and Ohio to Connecticut and Maine, and new lines proposed in the region won’t go into service until 2018 or later. (10/1)

Fracking: A US judge in Wyoming has blocked new rules that tighten controls over fracking on federal lands, granting a measure of relief to producers who would have faced higher costs. The order puts a temporary hold on the most closely-watched effort by the Obama administration to ensure that hydraulic fracturing doesn’t contaminate water supplies. (10/1)

Keystone Pipeline: TransCanada said it was filing an application with state regulators in Nebraska to build Keystone XL, ending a bid to challenge eminent domain. The company says it is ready to file an application with the Nebraska Public Service Commission for pipeline construction. “We believe that going through the Public Service Commission process is the clearest path to achieving route certainty for the Keystone XL project in Nebraska.” (10/1)

North Dakota revenues have taken a deep dive this year but the state still ranks as a fiscal model. Low oil prices and fewer drilling rigs are being blamed for a drop in North Dakota’s general revenues that fell to $41.7 million during July and August. But with prudent spending by lawmakers and a continued surplus, this is not devastating news. (10/1)

Kazakhstan: There are no changes in the operational plans for the giant Kashagan oil field off the coast of Kazakhstan, the country’s deputy energy minister said. Commercial production from the field is expected about six weeks after operations begin in late 2016. (9/30)

Arctic: Despite disappointing results for Shell in arctic Alaskan waters, industry leaders say the $7 billion campaign was a success in terms of safe operations. Royal Dutch Shell said it was dismantling its exploratory operations in the arctic Chukchi Sea after drilling uncovered no commercial prospects of oil and natural gas. Environmental activists praised the end to a campaign they viewed as risky. (9/30)

Gasoline Prices:  Though U.S. refineries are making a blend of gasoline that’s cheaper to produce, maintenance issues are keeping consumer prices elevated, AAA said. The motor club lists a national average of $2.29 per gallon on Tuesday, relatively unchanged from one week ago. The retail price for a gallon of regular unleaded gasoline is down 20 cents, or 8 percent, from one month ago. (9/30)

Offshore Wind:  Starting with a development off the Rhode Island coast, the federal government will be studying the real-time impacts of offshore wind farm construction. The program will provide real-time data on potential environmental impacts and seafloor disturbances related to wind farm installation offshore. (9/30)

Chesapeake Energy, the U.S. shale driller, said it expects to post third-quarter charges of roughly $55.5 million because of the drop in oil prices, Chesapeake has reduced rig operations and cut capital expenditures after failing to offset the plunge with higher production. Chesapeake, based in Oklahoma City, had about 5,000 employees. On Tuesday, 740 of them were laid off, with about 560 of those positions coming from the home office in Oklahoma. (9/30)

Norway’s bond market is feeling the squeeze and the country’s regional banks are the main victims. Companies and banks seeking to raise debt are finding few willing investors out there, after life insurance companies filled up on bonds and real estate before the summer this year and as the plunging krone is keeping away foreign investors. (9/30)

Norway’s Statoil said the last stretch of a 300-mile natural gas pipeline crossing the Arctic Circle has been completed. The 36-inch diameter Polarled gas pipeline was placed more than 4,000 feet below the surface of the Norwegian Sea in the Aasta Hansteen field.  The field is estimated to hold between 175 billion and 300 billion cubic feet of recoverable natural gas, making it one of the largest fields in the region. (9/30)

Nuclear Fusion has been long on promise and short on reality. Now private companies think they can succeed where the government has failed. In theory it could provide a cheap, clean, and almost boundless source of energy. Consider this: One tablespoon of liquid hydrogen fuel—a mix of deuterium and tritium—would produce the same energy as 28 tons of coal. But smashing two hydrogen atoms together at 100 million degrees centigrade to create a fusion reaction has proved to be a costly and elusive endeavor. (9/30)

Nigeria:  There has been a steady surge in fuel importation to Nigeria with more inflows expected from Europe in the months to come. The country has four refineries which could reduce petroleum products importation by up to 50 per cent but the refineries have struggled to remain afloat and have been unable to make products in appreciable quantities since the Nigeria National Petroleum Corporation (NNPC) announced they were back. (9/29)

Jet fuel consumption by US airlines is growing at some of the fastest rates for a decade. US carriers consumed 1.6 billion gallons of fuel in July, up 3.4 percent from the same month a year earlier. Fuel consumption for the first seven months of the year rose nearly 2.9 percent, the biggest increase since 2011 and before that 2005, according to the U.S. Department of Transportation. (9/29)

EU Commodity Trading: After months of delays, the European Union on Monday published details of tough new financial regulation for commodities markets, ending more than a year of uncertainty. The changes are part of broad legislation conceived in the wake of the financial crisis that is intended to extend regulatory oversight of fixed-income and commodity markets and move more financial instruments onto exchanges. The plans have drawn criticism from national governments and market participants, concerned that the new rules could push up costs and drive out key players. (9/29)

UK petroleum consumption is growing at some of the fastest rates for a decade, as strong economic growth and cheaper fuel prices spur increased use. Consumption of petroleum products rose by 1.6 percent in the first six months of 2015 compared with the same period a year earlier. Consumption has been growing consistently since the third quarter of 2014, coinciding with a maturing economic recovery and a sharp drop in oil prices. (9/29)

Venezuela is suffering the deepest economic crisis in its history with output expected to contract 9.1 percent this year according to Barclays. The economic contraction will likely reach 16.5 percent between 2014 and 2016, while inflation over that period will exceed 1,000 percent. President Maduro will not likely announce any changes in economic policy before congressional elections Dec. 6. (9/28)

Brazil has pledged to slash greenhouse gas emissions by 43 percent by 2030 as its contribution to a United Nations climate agreement, but said it will include reductions from past efforts against deforestation to help it reach the target. President Rousseff presented the country’s pledges during a speech at the U.N. General Assembly in New York, noting the targets are more ambitious than those of most developed countries and that Brazil will not need external support to achieve them. (9/28)

Volkswagen: So far the diesel-emissions scandal hasn’t involved any of the products Volkswagen makes with its joint-venture partners in its biggest single market. In fact, diesel passenger cars are extremely rare in China. According to IHS Automotive, China produced just 9,046 diesel cars in 2014, a paltry tally in the country where total passenger vehicle sales reached 19.7 million last year. (9/28)