Tag Archives: Oil

Russia and Iran Moving to Corner the Mideast Oil Supply, by Steve Chambers

Posted on October 16, 2015 | Leave a comment

The title is a little overwrought, but the author raises some possibilities and dangers in the Middle East that cannot be dismissed out of hand. From Steve Chambers at americanthinker.com:

It looks like Vladimir Putin and the ayatollahs are preparing to corner the world’s oil supply – literally.

Last May I wrote on this site that Iran was in the process of surrounding the Saudi/Wahhabi oil reserves, along with those of the other Sunni Gulf petro-states. I added that, “Iran’s strategy to strangle Saudi/Wahhabi oil production also dovetails with Putin’s interests. As the ruler of the second largest exporter of oil, he would be delighted to see the Kingdom’s production eliminated or severely curtailed and global prices soar to unseen levels. No wonder he is so overtly supporting Iran.”

We’ve now seen Putin take a major, menacing step in support of the Iranians by introducing combat forces into Syria. Many analysts argue that he’s doing this both to protect his own naval base at Tartus and as some sort of favor to the Iranians. Are those really sufficient inducement for him to spend scarce resources and risk Russian lives, or does he have bigger ambitions in mind? Given the parlous state of Russia’s economy, thanks in very large part to the recent halving of oil prices, he must relish the opportunity now presented to him, in an axis with Iran, to drive those prices back to prior levels.

The Iranians, for their part, must welcome this opportunity as well, for two huge reasons: first, when sanctions are finally lifted, thanks to their friend in the White House, Iran’s oil production will only aggravate the current global excess oil supply, reducing their cash flow (although they will still repatriate the $150 billion released by the nuclear deal). They and the Russians must both be desperate to find a way to prevent further oil price declines. And second, Iran’s mortal sectarian enemies and rivals for leadership of all of Islam are the Saudi/Wahhabi clan, so the prospect of simultaneously hurting them while strengthening themselves must seem tremendously tantalizing.

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The Clock Is Ticking On The U.S. Dollar As World’s Reserve Currency, by Henry Hewitt

Posted on September 23, 2015 | Leave a comment

From Henry Hewitt at oilprice.com:

The View From Hubbert’s Peak

In 1971, the American President put an end to a 2,500 year trend; the Wall Street Journal called it “Nixon’s Worst Weekend.” Considering the old boy had some really bad ones, this must have been something special. In August of that year (on Friday the 13th) it was decided that the U.S. would no longer pay out gold for its paper dollars. OPEC Ministers took note, and in September they met, deciding it would be necessary to collect more paper dollars, if possible, since gold was no longer on offer and oil was the only asset they had to sell.

It would take another two years for those decisions to matter (during the October 1973 embargo in the wake of another Arab-Israeli war). The Oil Embargo marked the end of ‘free’ energy, and kicked off a massive rise in the price of oil because the U.S., the world’s swing producer since Colonel Drake’s Pennsylvania strike in 1859, had finally reached peak production at around 10 million barrels per day in 1970. This moment is the original Hubbert’s Peak, the beginning of decline for the U.S. oil industry, at least until recently. The surge in U.S. production since 2010 has stalled out around 9.5 mb/d and, due to the Saudi decision to give the American tight oil producers ‘a good sweating,’ that rate has begun to fall in the last few months.

It is certainly possible that U.S. production will surpass the 1970 peak, but with low prices it is hard to say when that will be; it is also hard to say how long that will last as tight oil wells have a devilishly high rate of decline. It is worth noting, as Arthur Berman has recently done in his fine article, that even the best producers are losing money now, and lots more are being lost by those who are not the best. Making it up on volume is a dog that does not hunt for $45.

The Wizard of Oz

The ultimate irony for this generation of investors is that, despite the occasional obligatory chant about ‘free markets’ and the wonders of capitalism, most of the day is spent obsessing about what the world’s most important central planner will do next. By Supreme Central Planner, I mean, the Fed.

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Why Saudi Arabia Won’t Cut Oil Production, by Nick Cunningham

Posted on August 27, 2015 | Leave a comment

Oil bulls hoping Saudi Arabia will soon cut production are probably whistling by the graveyard. From Nick Cunningham at oilprice.com:

Nine months after OPEC decided to leave its production target unchanged and pursue market share instead of trying to prop up prices, the group is facing a set of complex problems and decisions going forward.

At first blush, the collapse of oil prices and the resiliency of U.S. shale appears to hand OPEC, and its most powerful member in Saudi Arabia, a stinging defeat. U.S. oil production has leveled off but has not dramatically declined. Meanwhile, oil prices are at their lowest levels since the financial crisis and the revenues of OPEC members have fallen precipitously along with the price of crude.

All of that is true, and in fact, Saudi Arabia is under tremendous pressure. The Saudi government is considering slashing spending by a staggering 10 percent as it seeks to stop the budget deficit from growing any bigger. The IMF predicts that Saudi Arabia could run a budget deficit that amounts to about 20 percent of GDP.

The pain is manifesting itself in different ways. Not only will the Kingdom have to cut spending, but it has also turned to the bond markets in a big way. Low oil prices have forced Saudi Arabia to issue bonds with maturities over 12 months for the first time in eight years, raising 35 billion riyals (around $10 billion) so far in 2015.

At the same time, the currency is coming under increasing pressure. Saudi Arabia pegs the riyal to the dollar at a rate of about 3.75:1, but speculation is rising that the currency may need to be devalued, given that the oil producer won’t be able to defend that ratio indefinitely. On one-year forward markets, the riyal has already weakened to 3.79, according to the FT. That forced the government to issue a statement, saying that the Saudi Arabian Monetary Agency “is committed to the policy of pegging the Saudi riyal with the American dollar.” But if oil prices do not rebound, the government will have to continue to draw down on its foreign exchange in order to keep the currency steady.

All the damage inflicted upon Saudi Arabia has the world looking back towards Riyadh, especially after oil prices crashed on “Meltdown Monday.” The markets are trying to figure out if Saudi Arabia may switch tactics in order to stop the crash from worsening.

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He Said That? 8/9/15

Posted on August 9, 2015 | 2 comments

From Stephen Schork, of The Schork Report, an energy industry newsletter, in an interview with Bloomberg’s Pimm Fox:

And this is the big concern because we keep on thinking that lower energy prices are somehow good for the economy. That can’t be, because energy prices or commodity prices in general don’t drive economic growth. Economic growth drives commodity prices.

So we have the rout in oil prices. We have the rout in copper prices, in aluminum prices. If we look at the industrial metals complex, that’s now trading at lows not seen since the recession. We’re looking at bellwethers such as Caterpillar, a bellwether of industrial production. That stock is trading again at a post-great recession low.

So there are a lot of telltales out there that this drop in oil prices, this drop industrial metal prices, this is not good. It’s a canary in the coal mine that something is not right in the global economy, Pimm. And that is a concern for us all.

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Cash-Strapped Saudi Arabia Hopes To Continue War Against Shale With Fed’s Blessing, by Tyler Durden

Posted on August 6, 2015 | Leave a comment

From Tyler Durden at zerohedge.com:

Two weeks ago, Morgan Stanley made a decisively bearish call on oil, noting that if the forward curve was any indication, the recovery in prices will be “far worse than 1986” meaning “there would be little in analysable history that could be a guide to [the] cycle.”

As we said at the time, “those who contend that the downturn simply cannot last much longer are perhaps ignoring the underlying narrative that helps to explain why the situation looks like it does.”

“At heart,” we continued, “this is a struggle between the Fed’s ZIRP and the Saudis, who appear set to outlast the easy money that’s kept US producers alive.” This is an allusion to the fact that the weakest players in the US shale industry – which the Saudis figure they can effectively wipe out – have been able to hold on thus far thanks largely to accommodative capital markets.

But persistently low crude prices – which, if you believe Morgan Stanley, are at this point driven pretty much entirely by OPEC supply – are taking their toll on producers the world over. That is, the damage isn’t confined to US producers.

In fact, the protracted downturn in prices is slowly killing the petrodollar and exporters sucked liquidity from global markets for the first time in 18 years in 2014. To let Goldman tell it, a “new (lower) oil price equilibrium will reduce the supply of petrodollars by up to US$24 bn per month in the coming years, corresponding to around US$860 bn” by 2018.

As Bloomberg noted a few months back, the turmoil in commodities has produced a “concomitant drop in FX reserves … in nations from oil producer Oman to copper-rich Chile and cotton-growing Burkina Faso.”

And don’t forget Saudi Arabia which, as you can see from the chart below, isn’t immune to the ill-effects of its own policies.

The financial strain comes at an inopportune time for the Saudis and indeed, as we noted when the country moved to open its stock market to foreign investment in June, “the move to allow direct foreign ownership of domestic equities [may reflect the fact that] falling crude prices and military action in Yemen have weighed on Saudi Arabia’s fiscal position.”

“Our forecast is for Brent to average US$54 per barrel in 2015 [and] at this price, we expect total Saudi government revenues to fall by some 41% in 2015.[resulting] in [sharp] cuts to expenditures,” Citi said at the time.

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Pain Worsens for Oil Giants Exxon and Chevron, by Dan Gilbert

Posted on August 2, 2015 | Leave a comment

It’s not just the little guys getting killed in the oil patch. From Daniel Gilbert at nasdaq.com:

America’s two biggest oil companies, Exxon Mobil Corp. and Chevron Corp., reported their worst profits from pumping oil and natural gas in more than a decade as low crude prices lopped off billions of dollars from their quarterly haul.

Exxon’s second-quarter profit plunged 52% to $4.2 billion. The energy giant’s division that pumps oil and gas accounted for just $2 billion of that, the lowest level since 2002. Chevron eked out a quarterly profit of $571 million thanks to its fuel-making refineries, which made up for the company’s $2.2 billion loss from pumping oil and gas–the first such loss in nearly 20 years. Chevron lowered its outlook for crude prices and wrote down the value of its energy holdings by $2 billion.
The hard landing fell short of analysts’ expectations, and Exxon and Chevron shares dropped nearly 5% Friday, making them the two worst performers in the Dow Jones Industrial Average.

Global oil prices have fallen more than 50% since last June, and settled Friday at $52 a barrel, the lowest since January. Exxon and Chevron have posted bigger profits during the 2009 downturn and earlier oil busts. But the world’s biggest oil companies are ailing from more than low prices–problems that were masked when oil traded around $100 a barrel.

“The tide’s going out and now we can see what was at the bottom,” said Amy Myers Jaffe, executive director of energy and sustainability at the University of California-Davis.

The cost of unleashing new supplies of oil and gas has soared for the world’s biggest oil companies, as they have spent enormous sums to harvest natural gas from Australia’s remote waters and wring crude from Canada’s oil sands, Ms. Jaffe noted.

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Why US Shale Producers Are About To Get Crushed, by Kurt Cobb

Posted on July 28, 2015 | Leave a comment

From Kurt Cobb at oilprice.com:

The plunge in oil prices last year led many to say that a decline in U.S. oil production wouldn’t be far behind. This was because almost all the growth in U.S. production in recent years had come from high-cost tight oil deposits which could not be profitable at these new lower oil prices. These wells were also known to have production declines that averaged 40 percent per year. Overall U.S. production, however, confounded the conventional logic and continued to rise–until early June when it stalled and then dropped slightly.

Anyone who understood that U.S. drillers in shale plays had large inventories of drilled, but not yet completed wells, knew that production would probably rise for some time into 2015–even as the number of rigs operating plummeted.

Shale drillers who are in debt–and most of the independents are heavily in debt–simply must get some revenue out of wells already drilled to maintain interest payments. Some oil production even at these low prices is better than none. Only large international oil companies–who don’t have huge debt loads related to their tight oil wells–have the luxury of waiting for higher prices before completing those wells.

The drop in overall U.S. oil production (defined as crude including lease condensate) is based on estimates made by the U.S. Energy Information Administration (EIA). Still months away are revised numbers based on more complete data. But, the EIA had already said that it expects U.S. production to decline in the second half of this year.

What this first sighting of a decline suggests is that glowing analyses of how much costs have come down for tight oil drillers and how much more efficient the drillers have become with their rigs are off the mark. It was inevitable that oil service companies would be forced to discount their services to tight oil drillers in the wake of the price and drilling bust or simply go without work. And, it makes sense that the most inefficient uses of drilling rigs would be halted.

To continue reading: Why US Shale Producers Are About To Get Crushed

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Rig Count Increases by 19 As Oil Prices Plunge–What Are They Thinking? by Art Berman

Posted on July 26, 2015 | Leave a comment

From Art Berman at The Petroleum Truth Report via theburningplatform.com:

The U.S. rig count increased by 19 this week as oil prices dropped below $48 per barrel–the latest sign that the E&P industry is out of touch with reality.

The last time the rig count increased this much was the week ending August 8, 2014 when WTI was $98 and Brent was $103 per barrel.

What are they thinking?

In fairness, the contracts to add more rigs were probably signed in May and June when WTI prices were around $60 per barrel (Figure 1) and some felt that a bottom had been found, left behind in January through March, and that prices would continue to increase.

Figure 1. Daily WTI crude oil prices, January 2-July 24, 2015. Source: EIA and NYMEX futures prices (July 21-24).

In mid-May, I wrote in a post called “Oil Prices Will Fall: A Lesson in Gravity”,

“The data so far says that the problem that moved prices to almost $40 per barrel in January has only gotten worse. That means that recent gains may vanish and old lows might be replaced by lower lows.”

In mid-June, I wrote in a post called “For Oil Price, Bad Is The New Good”,

“Right now, oil prices are profoundly out of balance with fundamentals. Look for a correction.”

Oil prices began falling in early July and fell another 6% last week. Some of that was because of the Iran nuclear deal, the Greek debt crisis and the drop in Chinese stock markets. But everyone knew that the first two were coming, and there were plenty of warnings about the the Chinese stock exchanges long before July.

The likelihood of lower oil prices should not have been a surprise to anyone.

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What the Heck Just Happened in the Global Markets? by Wolf Richter

Posted on July 26, 2015 | Leave a comment

From Wolf Richter, at wolfstreet.com:

It was the kind of day that shouldn’t have happened. Somebody dropped the ball at CNBC, or something.

Thursday evening, after three morose days in US stock markets, Amazon came out and said it made a profit! OK, a teeny-weeny profit of $92 million, a barely perceptible 0.4% of sales, a rounding error for other thriving companies’ with $23 billion at the top line. But for Amazon, the mere fact that there wasn’t a minus-sign in front of it, for once, was huge.

Its shares soared 22% after hours. The company’s valuation jumped by $40 billion. CNBC exploded with excitement. And Friday should have been a huge day for stocks.

But oh my!

From the first minute on, Amazon’s shares lost steam, drifted lower throughout the day and gave up half of their afterhours gain. The S&P 500 and the NASDAQ lost over 1%, the Dow almost 1%.

It topped off a bad week:

• The Dow dropped 2.8%, its worst week since December 2014, broke its 200-day moving average, and is in the red for the year.

• The Dow Transportation index fell 2.8%, its worst week since March, and hit a 9-month low, down 12% for the year.

•The S&P 500 dropped 2.1%, its third worst week in 20 15, and is up a mere 1% for the year.

• The Nasdaq dropped 2.2%, its worst week since March.
• The Russell 2000 swooned 3.1%, its worst week since October 2014

It didn’t help that Biotechs collapsed.

Biogen set the tone. It slashed its sales growth forecast for 2015 in half. Its multiple sclerosis drugs, its mainstay, are in trouble. Sales of Tecfidera, its main growth driver since its launch in 2013, ran smack-dab into reports linking it to brain infections. Sales of its injectable MS drug Tysabri and interferon-based MS drug Avonex both fell more than expected. And sales of Plegridy also disappointed. Shares of Biogen plunged 22%, wiping out $25 billion in stockholder wealth.

The Biotech ETF (XBI) dropped 3.6%. XOMA, which had already been eviscerated on Wednesday, dropped another 9.6% on Friday, to 94 cents, down about 80% for the week. A total of 25 biotechs in the index plunged over 5% on Friday.

Crude oil got hammered all week.

Particularly on Friday when WTI dropped to $47.97 a barrel, just weeks after $60 a barrel had been considered the new low going forward. Energy companies got slammed. Many of them are junk-rated, and their bonds sold off this week, dragging down the world’s largest junk-bond ETF (HYG) by 1.4%.

To continue reading: What the Heck Just Happened in the Global Markets?

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Biggest Glut in Recorded Crude-Oil History Taking Shape, by Wolf Richter

Posted on June 17, 2015 | 2 comments

From Wolf Richter, at wolfstreet.com:

“The market is flooded with oil and everyone is desperate to sell quickly, so you have a price war,” a marine-fuel trader in Singapore, the largest ship refueling hub in the world, told Reuters as prices for bunker fuel oil are plunging.

OPEC, which produces about 40% of global oil supply, announced on June 5 to “maintain” output at 30 million barrels per day for the next six months. Six days later, the IEA’s Oil Market Report for June clarified that “Saudi Arabia, Iraq, and the United Arab Emirates pumped at record monthly rates” in May and boosted OPEC output to 31.3 million barrels per day, the highest since October 2012, and over 1 MMbpd above target for the third month in a row. OPEC will likely continue pumping at this rate “in coming months,” the IEA said.

“We have plenty of crude,” explained Ahmed Al-Subaey, Saudi Aramco’s executive director for marketing while in India to discuss with Indian oil officials supplying additional oil. “You are not going to see any cuts from Saudi Arabia,” he said. Saudi Arabia produced 10.3 MMbpd in May, its highest rate on record.

So forget the long-rumored decline of Saudi oil fields. For Saudi Arabia, it’s a matter of survival. It has cheap oil, and it won’t be pushed into the abyss by high-cost, junk-bond-funded, eternally cash-flow-negative producers in the US. It will defend its market share, and it can do so profitably.

Russian produced 10.71 MMbpd of oil and condensate in May, a hair lower than its post-Soviet record set in January, and within reach of the Soviet record of 11.48 MMbpd set in 1987. Russia is not cutting back either. It needs every foreign-exchange dime it can get. Its oil & gas sector is its economic lifeline.

And US oil producers aren’t backing off either. They idled 60% of their drilling rigs, slashed capital expenditures, laid off tens of thousands of workers, and shut some facilities. A number of companies in the oil patch have filed for bankruptcy. But US producers are pumping more oil than ever before.

http://wolfstreet.com/2015/06/16/biggest-glut-in-crude-oil-history-takes-shape-us-russia-opec-saudi-arabia-production/

To continue reading: Biggest Glut in Recorded Crude-Oil History Taking Shape

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