Tag Archives: Oil

Iran Just Officially Ditched the Dollar in Major Blow to US: Here’s Why It Matters, by Alice Salles

The petrodollar has been the bulwark of the US dollars status as the world’s reserve currency. Iran has just taken a step towards undermining the petrodollar. Having the reserve currency has allowed the US to pay its dollar-denominated debts with more dollars. That could come to an end. From Alice Salles at theantimedia.org:

(ANTIMEDIA) Following President Donald Trump’s ban on travelers from seven predominantly Muslim countries, the Iranian government announced it would stop using the U.S. dollar “as its currency of choice in its financial and foreign exchange reports,” the local Financial Tribune reported.

Iran governor Valiollah Seif’s central bank announced the decision in a television interview on January 29. The change will take effect on March 21, and it will impact all official financial and foreign exchange reports.

“Iran’s difficulties [in dealing] with the dollar,” Seif said, “were in place from the time of the primary sanctions and this trend is continuing,” but when it comes to other currencies, he added, “we face no limitations.”

In a piece published by Forbes, Dominic Dudley contends that this move is significant “in the light of the recent ‘Muslim ban‘” announced by Trump. Iran nationals were added to the order issued by the current U.S. administration, which prompted the Iranian government to vow to stop issuing visas to U.S. citizens.

Dudley notes that since 1975, “no Americans have been killed in terrorist attacks in the US by the citizens of the countries included in the ban,” while countries such as Saudi Arabia — “home of 15 of the 19 terrorists involved in the 9/11 attacks” — were left out of the list of prohibited countries.

Despite the country’s decision to halt the use of the U.S. dollar as its base currency for exchange with other nations, Iran’s top export is oil. In the global markets, oil is mainly purchased and sold in U.S. dollars. This fiscal year, Iran is expected to earn $41 billion from oil sales, with countries like the United Arab Emirates (UAE) and China as their top clients. It’s still uncertain how the country will manage to switch currencies without relying on the American currency. The shift, Dudley notes, “will add a degree of currency risk and volatility and is likely to complicate matters for the authorities.”

To  continue reading: Iran Just Officially Ditched the Dollar in Major Blow to US: Here’s Why It Matters



What is this ‘Crisis’ of Modernity? by Alastair Crooke

There may be plenty of oil left, but if it takes as much energy to discover, extract, refine, transport, and sell that oil as the oil itself has, we have a problem. From Alastair Crooke at Conflicts Forum via theautomaticearth.com:

Alastair Crooke: We have an economic crisis – centred on the persistent elusiveness of real growth, rather than just monetised debt masquerading as ‘growth’ – and a political crisis, in which even ‘Davos man’, it seems, according to their own World Economic Forum polls,is anxious; losing his faith in ‘the system’ itself, and casting around for an explanation for what is occurring, or what exactly to do about it. Klaus Schwab, the founder of the WEF at Davos remarked before this year’s session, “People have become very emotionalized, this silent fear of what the new world will bring, we have populists here and we want to listen …”.

Dmitry Orlov, a Russian who was taken by his parents to the US at an early age, but who has returned regularly to his birthplace, draws on the Russian experience for his book, The Five Stages of Collapse. Orlov suggests that we not just entering a transient moment of multiple political discontents, but rather that we are already in the early stages of something rather more profound. From his perspective that fuses his American experience with that of post Cold War Russia, he argues, that the five stages would tend to play out in sequence based on the breaching of particular boundaries of consensual faith and trust that groups of human beings vest in the institutions and systems they depend on for daily life. These boundaries run from the least personal (e.g. trust in banks and governments) to the most personal (faith in your local community, neighbours, and kin). It would be hard to avoid the thought – so evident at Davos – that even the elites now accept that Orlov’s first boundary has been breached.

To continue reading: What is this ‘Crisis’ of Modernity?


Worrying Signs in the Oil Markets, by the Oil and Energy Insider

The oil market may be in for a rough ride, especially for those who are long oil. from The Oil and Energy Insider at wolfstreet.com:

The Numbers Report, part of the weekly premium publication, Oil & Energy Insider, compiled a series of data points that make for a worrying outlook for the oil markets. Here are some of them:

Short positions on the rise

• For the week ending on October 11, the number of short positions on WTI rose to more than 540,000 contracts, the highest since 2007.

• Producers take short positions to sell future production, locking in prices at some point in the future in order to mitigate risk. As the EIA notes, banks can require producers take such positions as a prerequisite for securing a loan.

• Aside from mere speculation, a rising number of short positions can be an indicator that producers are confident that they can make money at the current futures prices.

•But they also are a bearish signal for oil prices, lending weight to the notion that prices will not rally very much in the near-term.

Renewables overtake fossil fuels

• For the first time ever, renewable energy added more electricity capacity across the globe than fossil fuels did. The IEA estimates that in 2015, 153 gigawatts of renewable capacity was installed, about 55 percent of the global total.

• About 500,000 solar panels were installed every single day in 2015, on average.

• The IEA expects renewables to make up 42 percent of the market by 2021.

• Much of the growth will take place in four countries: the U.S., China, India and Mexico. The EU has a lot of renewable energy, but its growth rate is a bit lower than the others.
• “We are witnessing a transformation of global power markets led by renewables and, as is the case with other fields, the center of gravity for renewable growth is moving to emerging markets,” IEA Executive Director Fatih Birol said.

• The massive stockpile of refined products sitting in storage around the world continues to weigh on refining margins.

• Margins were down 42 percent in the third quarter compared to a year earlier, averaging just $11.60 per barrel. Aside from the first quarter of this year, refining margins in the third quarter were near their lowest levels in years.

• That is a stark difference from 2015, which was an excellent year for refiners. The falling price for crude combined with strong demand saw margins spike to $20 per barrel. But as refiners ramped up output to take advantage of that opportunity, they churned out record product. And as demand softened, inventories built up.

• Low refining margins will take away one of the few sources of strong earnings for the oil majors, which are set to report third quarter numbers in the next few days and weeks.

To continue reading: Worrying Signs in the Oil Markets

The “Nuclear Options:” Oil Pinned Below $30/barrel, US Dollar Rising, by Charles Hugh Smith

There are chain-reactions of negative consequences should oil stay under $30 per barrel or the dollar stage a substantial rally against other currencies. From Charles Hugh Smith at oftwominds.com: 

These two nuclear options could strike the global economy even without any planning.

The “nuclear option” is the extreme-measures button you push when conventional approaches have failed and you’re facing certain defeat. In terms of upsetting the global economy’s precarious balance, there are two nuclear options short of actual nuclear war: pinning oil to $30/barrel or even lower for an extended period, and triggering a sustained rise in the US dollar. (USD)

Let’s glance at weekly charts of oil (WTIC) and the USD:

Oil producers and their lenders/creditors had a near-death experience when oil plunged to $27/barrel early in 2016. At $30 or less per barrel, revenues from oil sales are no longer sufficient to support enormous domestic welfare state spending and debt service.

It’s pretty simple: pin oil at $30/barrel for a year and you destabilize every nation that’s dependent on oil sales for its revenues. Oil producers in more economically diversified nations such as Canada and the US go bankrupt or drastically curtail exploration and development to survive.

A bunch of stuff is no longer affordable to oil-revenue-dependent nations once oil is pinned to $30/barrel for months on end: massive social welfare programs, servicing sovereign debt, waging war, either directly or via proxies, and propping up cratering currencies.

Cratering currencies open up another Pandora’s Box of financial and economic horrors. Which brings us to US dollar, which gained 20% in a mere six months in late 2014.

Foreign exchanges rates are zero-sum: all currencies can’t go up together or drop together; something goes up when something else drops, and vice versa.

Should the USD finish its basing and soar another 20% in a few months, other currencies will lose purchasing power–some more than others, some less, but some currencies will take major hits to their global purchasing power if the USD repeats its “build a base for two years and then gain 20%” pattern.

When currencies rapidly lose value, bad things tend to happen. Rather than lose purchasing power by holding the currency, investors flee, selling the currency and moving their capital into other currencies or assets, i.e. capital flight.

Nations hit with depreciating currencies are often tempted to defend their currencies, and this defense often drains their foreign reserves while doing little to stem the capital flight.

While a devalued currency makes a nation’s exports cheaper to buyers with stronger currencies, it also increases the costs of imports such as food and energy.

What happens to demand for oil in a deep global recession? It tends to plummet, and unless production falls by the same amount, then price tends to plummet as well, as supply stays stubbornly higher than cratering demand.

These two nuclear options could strike the global economy even without any planning. Once the global economy tips into recession, oil may fall under its own weight and the dollar may gain ground as other currencies fall.


This is What’s Wrong with US Oil, by Wolf Richter

The oil glut keeps growing, notwithstanding a widespread expectation that it will start to shrink. From Wolf Richter at wolfstreet.com:

It usually comes in small-sounding and unlarming increments. But add up enough of these increments, and pretty soon you have some real numbers.

Today was another one of those, and it hit a huge milestone. The Energy Information Administration released its new set of weekly petroleum data, including inventories. During the week ending August 19, US crude oil inventories rose by 2.5 million barrels to 523.6 million barrels.

Oil bulls weren’t tickled: West Texas Intermediate fell 2.8%, settling at $45.77.

This rise was, once again, “unexpected,” as the media put it. Analysts had expected a drop of 0.5 million barrels. This is after all the time of the year – driving season – when oil stocks are supposed to drop. The data “revived worries about the supply glut,” according to the media.

Alas, the supply glut has been getting relentlessly worse and worse and worse for two years. It has just shifted around some, with refiners trying to wind their way through it the best they can.

Soothsayers out there have been prophesying time and again, for over a year, that very soon, in fact next week, the supply glut will start to unwind; that production in the US is already coming down sharply, that demand is up, or whatever….

In the end, a glut comes down to whether inventories are rising, particularly during a time of the year when they’re supposed to be falling (glut gets worse), or whether they’re falling (glut stabilizes or abates).

It’s not just crude oil, but also the products that crude oil gets refined into for eventual use. And these stocks of petroleum products have been a doozie, particularly gasoline.

Gasoline stocks were essentially unchanged for the week, at 232.7 million barrels, a record for this time of the year, and up 8.5% from the already elevated inventory levels last year. This chart from the EIA shows the magnitude of the gasoline glut:

Distillate fuels rose by 200,000 barrels to 153.3 million barrels. And “all other oils” jumped by a total of 3.9 million barrels to 490.6 million barrels.

So total petroleum products stocks rose by 6.6 million barrels during the week, or 0.5%. Once again, this small-ish number, but over the period of the oil bust, total petroleum products stocks have soared by 30% and now exceed for the first time ever another huge milestone: 1.4 billion barrels.

This chart shows what a truly relentless glut looks like:

Note how, right after the Financial Crisis, petroleum products stocks began to rise and remained elevated over the years even as demand in the US was still languishing, hampered in part by the $100 price tag per barrel of oil. It was the perfect setup for the oil bust, when prices began to collapse in the summer of 2014.

It’s not often that a glut forms a line in a chart where inventories shoot skyward for two years straight. Normally, something happens along the way: prices crash, companies get in trouble, the money dries up, and production plunges. At the same time, demand, stimulated by the crashed prices, picks up. And gradually the glut unwinds.

To continue reading: This is What’s Wrong with US Oil

Oil Bulls Beware Because China’s Almost Done Amassing Crude, by Bloomberg News

China has been buying oil, opportunistically taking advantage of lower prices, but that may be coming to end. From bloomberg.com:

One of the pillars of oil’s recovery from the lowest price in 12 years may be on the verge of crumbling.

China is likely close to filling its strategic petroleum reserves after doubling purchases for it this year as prices plunged, JPMorgan Chase & Co. analysts including Ying Wang wrote in a June 29 research note. Stopping shipments for the reserve would wipe out about 15 percent of the country’s imports, according to the bank.

Chinese crude imports have risen 16 percent this year, and the country is rivaling the U.S. as the world’s biggest oil purchaser. That demand, along with supply disruptions from Canada to Nigeria, has helped boost oil prices about 80 percent since January.

“China has taken the opportunity of lower oil prices since early-2015 to accelerate the strategic petroleum reserve builds,” Wang said in the report. “This volume might be close to the capacity limit, in our view, and together with potential teapot utilization pullback and slower-than-expected demand from China could increase near-term risks to global oil prices.”

Chinese imports surged to a record 8.04 million barrels a day in February. The nation may surpass the U.S. as the world’s largest crude importer this year with average inbound shipments of 7.5 million barrels a day, according to Zhong Fuliang, vice president with China International United Petroleum & Chemicals Co., the trading arm of the nation’s biggest refiner.


China finished building the first phase of its strategic petroleum reserve program with four sites in 2009, totaling 91 million barrels, according to the National Bureau of Statistics. The second-phase will be completed by 2020, according to the 2016-2020 Five Year Plan released in March.

The Chinese government doesn’t regularly report the capacity or storage level of its strategic reserves. JPMorgan calculated the surplus crude available to go into the SPR by subtracting how much oil is refined into fuels or sent to commercial inventories from the combined volume of the domestic crude output and net imports. The surplus is about 1.2 million barrels a day this year, up from 491,000 last year, and adds up to about 400 million barrels in total, the bank estimates.

The bank assumes the capacity for the reserves is about 511 million barrels, based on government plans cited by state media. At the current rate of stockpiling, the storage would fill up by August, leading to a potential import drop in September.

“We do not believe the 16 percent growth in oil imports year-to-date is sustainable despite a domestic oil production decline, as demand is weak, if inventory capacity reaches the limit,” the bank said.


Oil Is Still Heading to $10 a Barrel, by A. Gary Shilling

In all the hullabaloo over Brexit, it was almost possible to forget that the world is heading into a resumption of deflationary depression. This article, by A.Gary Shilling, and the next one, by David Stockman, bring us back up to speed on that front. From Shilling at bloomberg.com:

Back in February 2015, the price of West Texas Intermediate stood at about $52 per barrel, half of its 2014 peak. I argued then that a renewed decline was coming that could drive it below $20, a scenario regarded by oil bulls as unthinkable. But prices did fall further, dropping all the way to a low of $26 in February. Since then, crude rallied to spend several weeks flirting with $50 per barrel, a level not seen since last year. But it won’t last; I’m sticking to my call for prices to decline anew to $10 to $20 per barrel.

Recent gains have little to do with the fundamentals that led to the collapse in the first place. Wildfires in the oil-sands region in Canada, output cuts in Nigeria and Venezuela due to political unrest, and hopes that American hydraulic fracturing would run out of steam are the primary causes of the recent spurt.

But the world continues to be awash in crude, and American frackers have replaced the Organization of Petroleum Exporting Countries as the world’s swing producers. The once-feared oil cartel is, to my mind, pretty much finished as an effective price enforcer. Even OPEC’s leader, Saudi Arabia, is acknowledging the new reality by quashing recent attempts to freeze output, borrowing from banks and preparing to sell a stake in its Aramco oil company as it tries to find new sources of non-oil revenue.

The Saudis and their Persian Gulf allies continue to play a desperate game of chicken with other major oil producers. Cartels exist to keep prices above equilibrium, which encourages cheating as cartel members exceed their allotted output and other producers take advantage of inflated prices. So the role of the cartel leader, in this case Saudi Arabia, is to cut its own output, neutralizing the cheaters to keep prices up. But the Saudis suffered market-share losses from their previous production cuts. OPEC has effectively abandoned restraints, with total output soaring to as high as 33 million barrels per day at the end of last year:

Iran, freed of Western sanctions, plans to double output to 6 million barrels a day by 2020, which would make it the second-largest OPEC producer behind Saudi Arabia. Russia continues pumping to support its economy after the collapse in oil prices devastated government revenue and export earnings. War-torn Libya is also ramping up production as best it can.

The International Energy Agency predicts that even with a successful OPEC production freeze, if U.S. frackers cut production by 600,000 barrels a day this year and a further 200,000 barrels per day in 2017, excess supply would run at 1.5 million barrels a day until 2017. That’s a continuation of the recent oversupply of 1 to 2 million barrels a day.

To continue reading: Oil Is Still Heading to $10 a Barrel