Tag Archives: Oil

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

Posted on June 29, 2016 | Leave a comment

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

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Turns out, OPEC Isn’t Dead Yet, by Wolf Richter

Posted on June 18, 2016 | Leave a comment

It would hard to read the following and not be bearish on the price of oil. From Wolf Richter at wolfstreet.com:

In War for Market Share with US shale oil.

Mayhem has crisscrossed the global oil markets since 2014: Huge losses for Big Oil, including teetering, over-indebted, state-owned giants like Mexico’s Pemex and Brazil’s Petrobras; bankruptcies among some of the smaller players; cuts in production in the US, Canada, and China where production plunged 7.3% in May from a year ago, the biggest decline since February 2001; hundreds of thousands of people losing their jobs across the globe; deep trouble in Brazil, chaos in Venezuela….

Record levels of crude oil stocks have become a global phenomenon. In the US, crude oil stocks are at 532 million barrels, a record for this time of the year in EIA’s data series going back 80 years. Even driving season has barely made a dent so far; stocks remain 63.6 million barrels above the mega-record levels a year ago. Gasoline and distillate stocks are 19.2 million and 18.6 million barrels above their levels a year ago.

Oil tankers full of crude are lined up outside the port of Singapore and others, some waiting to unload cargo, others being used for crude oil storage at sea. Across OPEC, storage levels of petroleum products rose to 3,046 million barrels in April, or 13% above the five-year average.

The world is awash in oil.

In the process, OPEC has been declared dead or dying because it was unable to agree on anything, refused to cut production, and brushed off calls to do something, for crying out loud, about the collapsed prices — which, despite the mega-rally, remain down over 50% from where they’d been before the oil bust began.

But there was one thing OPEC was able to accomplish by not agreeing to buckle under pressure and cut production: it increased its market share.

This chart shows how OPEC production (blue columns) has edged up year-over-year, while global production (green line) has started to decline. Hence, the increase in OPEC’s market share at the expense of non-OPEC producers, particularly in the US shale patch.

According to ISA Intel, Oil & Energy Insider:

As of May 2016, OPEC captured 34.2% of the global oil market, up 1.8 percentage points from the 32.4% that it held in November 2014 when it first embarked on this strategy. And that rising share comes even as the global market has grown by nearly 2 million barrels per day over that time frame.

OPEC may have inflicted damage on its own members, but it dealt a bigger blow to the shale boom.

But OPEC paid a big price, leaving members with massive sinkholes in their oil-dependent budgets.

The US EIA estimated that OPEC oil export revenues plunged 46% in 2015 to $404 billion, the lowest since 2004, down 58% from the glory days of 2012.

To continue reading: Turns out, OPEC Isn’t Dead Yet

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Why China Is Being Flooded With Oil: Billions In Underwater OPEC Loans Repayable In Crude, by Tyler Durden

Posted on May 25, 2016 | 4 comments

Here’s one of the dumber borrower schemes out there, and a bunch of clueless governments in oil producing countries are at the heart of it: borrow money and agree to pay back the equivalent amount in barrels of oil, not using the market value of oil at the time the deals are struck, but at the time the loans must be repaid. So loans incurred when oil was above $100 a barrel now must be repaid with oil that is only valued at $40-$50 a barrel, meaning debtors must repay 2 to 3 times the amount of oil they would have had oil prices stayed high. The Chinese, the creditor on the other side of these transactions, receive a lot more oil, but they’re running out of storage and refinery capacity. From Tyler Durden at zerohedge.com:

When the price of oil was above $100, many of the less developed oil exporting OPEC members decided to capitalize on the high price and cash out by taking loans using the precious liquid as collateral very much the same way corporate CEOs use their inflated stock (thanks to buybacks they authorize) to issue loans against said stock. And why not: even if the price of oil were to drop, they could just pump more until the principal is repaid. However, few oil exporters anticipated such an acute oil plunge in such as short time span, which resulted in the value of the collateral tumbling by 70%, and now find themselves have to repay the original loan by remitting as much as three times more oil!

According to Reuters, this is precisely what happened in the years preceding the great 2014-2015 oil bust: “poorer oil-producing countries which took out loans to be repaid in oil when the price was higher are having to send three times as much to respect repayment schedules now prices have fallen.”

As a result, the finances of countries such as Angola, Venezuela, Nigeria and Iraq have been crippled, in the process creating further division within the Organization of the Petroleum Exporting Countries.

But while these already poor and corrupt OPEC nations were the biggest losers, one country was a huge winner, the country that provided the billions in virtually risk-free, oil-collateralized loans to any country that requested them. China. The same China which has once again proven smart enough to not demand repayment in fiat but in physical commodities, be they oil, copper or gold.

Take Angola for example: Africa’s largest oil producer has borrowed as much as $25 billion from China since 2010, including about $5 billion last December, which according to Reuters forced its state oil firm to channel almost its entire oil output toward debt repayments this year.

Or Venezuela: ever since 2007, China, which has become Venezuela’s top financier via an oil-for-loans program, has funneled an amazing $50 billion into the Chavez first and then Maduro regimes, in exchange for repayment in crude and fuel, including a $5 billion deal last September. While details of the loans have not been made public, analysts from Barclays estimate Caracas owes $7 billion to Beijing this year and needs nearly 800,000 bpd to meet payments, up from 230,000 bpd when oil traded at $100 per barrel.

To continue reading: Why China Is Being Flooded With Oil: Billions In Underwater OPEC Loans Repayable In Crude

 

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Something Stunning Is Taking Place Off The Coast Of Singapore, by Tyler Durden

Posted on May 22, 2016 | 1 comment

Ernest Hemingway had his moveable feast. World oil markets have a moveable glut. From Tyler Durden at zerohedge.com:

“I’ve been coming to Singapore once a year for the last 15 years, and flying in I have never seen the waters so full of idle tankers,”

– Senior European oil trader a day after arriving in the city-state.

Back in November, when the world-record crude inventory glut was still in its early innings, we showed what we then thought was a disturbing image of dozens of oil tankers on anchor near the US oil hub of Galveston, TX, unwilling to unload their cargo at what the owners of the oil thought was too low prices.

Little did we know that just a few months later this seemingly unprecedented sight of clustered VLCCs would be a daily occurrence as oil producers, concerned by Cushing hitting its operating capacity, would take advantage of oil curve contango to store their oil offshore indefinitely.

However, while the “parking lot” off Galveston has since normalized, something shocking has emerged and continued to grow half way around the world, just off the coat of Singapore. This.

The red dots show ships either at anchor or barely moving, either oil tankers or cargo, which have made the Straits of Malacca, one of the world’s most important shipping lanes which carries about a quarter of all seaborne oil primarily from the Persian Gulf headed to China, into a “bumper to bumper” parking lots of ships with tens of millions of barrels in combustible cargo.

it is also the topic of the latest Reuters expose on the historic physical crude oil glut which continues to build behind the scenes, and which so far has proven totally immune to dissipation as a result of the sharp increase in oil prices over the past three months.

Indeed, as Reuters notes, prices for oil futures have jumped by almost a quarter since April, lifted by severe supply disruptions caused by triggers such as Canadian wildfires, acts of sabotage in Nigeria, and civil war in Libya. And yet flying into Singapore, the oil trading hub for the world’s biggest consumer region, Asia, reveals another picture: that a global glut that pulled down prices by over 70 percent between 2014 and early 2016 is nowhere near over, and that financial traders betting on higher crude oil futures may be in for a surprise from the physical market.

“I’ve been coming to Singapore once a year for the last 15 years, and flying in I have never seen the waters so full of idle tankers,” said a senior European oil trader a day after arriving in the city-state.

As Asia’s main physical oil trading hub, the number of parked tankers sitting off Singapore’s coast or in nearby Malaysian waters is seen by many as a gauge of the industry’s health. Judging by this, oil markets are still sickly: a fleet of 40 supertankers is currently anchored in the region’s coastal waters for use as floating storage facilities.

To continue reading: Something Stunning Is Taking Place Off The Coast Of Singapore

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Taking the petro out of the dollar, by Alasdair MacLeod

Posted on May 1, 2016 | Leave a comment

The petrodollar may be going the way of flip phones. From Alasdair MacLeod at gold money.com:

Saudi Arabia has been in the news recently for several interconnected reasons. Underlying it all is a spendthrift country that is rapidly becoming insolvent.

While the House of Saud remains strongly resistant to change, a mixture of reality and power-play is likely to dominate domestic politics in the coming years, following the ascendency of King Salman to the Saudi throne. This has important implications for the dollar, given its historic role in the region.

Last year’s collapse in the oil price has forced financial reality upon the House of Saud. The young deputy crown prince, Mohammed bin Salman, possibly inspired by a McKinsey report, aims to diversify the state rapidly from oil dependency into a mixture of industries, healthcare and tourism. The McKinsey report looks like a wish-list, rather than reality, particularly when it comes to tourism. The religious police are unlikely to take kindly to bikinis on the Red Sea’s beeches, or to foreign women in mini-shorts wandering around Jeddah.

It is hard to imagine Saudi Arabia, culturally stuck in the middle ages, embracing the changes recommended by McKinsey, without fundamentally reforming the House of Saud, or even without a full-scale revolution. Nearly all properties and businesses are personally owned or controlled by members of the extended royal family, not the state, nor by lesser mortals. The principal exception is Aramco, estimated to be worth $2 trillion.

The state is subservient to the House of Saud. It is therefore hard to see how, as McKinsey recommends, the country can “shift from its current government-led economic model to a more market-based approach”. The country is barely government led: a puppet of the Saudis is more like it. But the state’s lack of funds is making it increasingly desperate.

It was for this reason the Kingdom recently placed a $10bn five-year syndicated loan, the first time it has entered capital markets since Saddam Hussein invaded Kuwait. It proposes to raise a further $100bn by selling a 5% stake in Aramco. The financial plan appears to be a combination of this short-term money-raising, contributions from oil revenue, and sales of US Treasuries (thought to total as much as $750bn). The government has, according to informed sources, been secretly selling gold, mainly to Asian central banks and sovereign wealth funds. Will it see the Kingdom through this sticky patch?

Maybe. Much more likely, buying time is a substitute for ducking fundamental reform. But one can see how stories coming out of Washington, implicating Saudi interests in the 9/11 twin-towers tragedy, could easily have pulled the trigger on all those Treasuries.

Whatever else was discussed, it seems likely that this topic will have been addressed at the two special FOMC meetings “under expedited measures” at the Fed earlier this month, and then at Janet Yellen’s meeting with the President at the White House. Yesterday’s holding pattern on interest rates would lend support to this theory.

 

To continue reading: Taking the petro out of the dollar

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Iraq Is Latest To Announce Record Oil Production: Why This Is Just The Beginning Of The Supply Glut, by Tyler Durden

Posted on April 11, 2016 | Leave a comment

Just what the world needs, more oil! From Tyler Durden at zerohedge.com:

First it was the Saudis; then Russia announced another month of record oil production.

And now it is Iraq’s turn. According to the state-run Oil Marketing Co., Iraq increased crude output to a record level in March, ahead of the long-awaited April 17 meeting in Qatar where OPEC members and other producers may or may not (they won’t) agree to cap production to curb a global glut.

As Bloomberg reports, crude output in OPEC’s second-biggest producer rose to 4.55 million barrels a day last month from 4.46 million barrels in February, while exports increased to 3.81 million barrels a day in March from 3.23 million the previous month, the company, known as Somo, said in an e-mailed statement. The 500,000 barrel increase in monthly barrels has made up almost entirely for the 600,000 barrel decline in US shale output.

Ahead of the Doha meeting, Iraq – which is clearly pumping at full power – supports an agreement reached in February between Saudi Arabia, Russia, Venezuela and Qatar to cap output at January levels. Well maybe: this is what the Iraqi Oil Ministry Spokesman Asim Jihad said on March 23, without confirming if the country agrees to freeze its own production.

Iraq’s unprecedented oil production has been duly documented here. Recall just on Friday we showed a line of oil tankers caught in a traffic jam near the Iraqi port of Basra, causing delays in loading. The culprit is high oil production in Iraq. The port at Basra is struggling to load up all the oil tankers fast enough, forcing some to sit and wait. Iraq exported about 3.26 million barrels per day (mb/d) in March from its southern coast, which is up from just 2.5 mb/d in 2010.

To continue reading: Iraq Is Latest To Announce Record Oil Production: Why This Is Just The Beginning Of The Supply Glut

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19 Facts That Prove Things In America Are Worse Than They Were Six Months Ago, by Michael Snyder

Posted on April 8, 2016 | Leave a comment

The more pessimistic among us might be inclined to see a recession in the offing. SLL rejects such pessimism. It’s going to be a depression. From Michael Snyder at theeconomiccollapseblog.com:

Has the U.S. economy gotten better over the past six months or has it gotten worse? In this article, you will find solid proof that the U.S. economy has continued to get worse over the past six months. Unfortunately, most people seem to think that since the stock market has rebounded significantly in recent weeks that everything must be okay, but of course that is not true at all. If you look at a chart of the Dow, a very ominous head and shoulders pattern is forming, and all of the economic fundamentals are screaming that big trouble is ahead. When Donald Trump told the Washington Post that we are heading for a “very massive recession“, he wasn’t just making stuff up. We are already seeing lots of things happen that never take place outside of a recession, and the U.S. economy has already been sliding downhill fairly rapidly over the past several months. With all that being said, the following are 19 facts that prove things in America are worse than they were six months ago…

#1 U.S. factory orders have now declined on a year over year basis for 16 months in a row. As Zero Hedge has noted, in the post-World War II era this has never happened outside of a recession…

In 60 years, the US economy has not suffered a 16-month continuous YoY drop in Factory orders without being in recession. Moments ago the Department of Commerce confirmed that this is precisely what the US economy did, when factory orders not only dropped for the 16th consecutive month Y/Y, after declining 1.7% from last month

#2 Factory orders have now reached the lowest level that we have seen since the summer of 2011.

#3 It is being projected that corporate earnings will be down 8.5 percent for the first quarter of 2016 compared to one year ago. This will be the fourth quarter in a row that we have seen year over year declines, and the last time that happened was during the last recession.

#4 Total business sales have fallen 5 percent since the peak in mid-2014.

#5 S&P 500 earnings have now fallen a total of 18.5 percent from their peak in late 2014.

#6 Corporate debt defaults have soared to the highest level that we have seen since 2009.

#7 The average rating on U.S. corporate debt has fallen to “BB”, which is lower than it has been at any point since the last financial crisis.

#8 The U.S. oil rig count just hit a 41 year low.

To continue reading: 19 Facts That Prove Things In America Are Worse Than They Were Six Months Ago

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