1. Oil and the Global Economy
Volatility continued last week with oil prices falling early in the week, rebounding on Wednesday and Thursday, and then falling again on Friday. At week’s end, New York futures were down 1.4 percent for the week closing at $59.72 and London was down 2.2 percent to $65.37. Traders’ hopes for higher oil prices, which sparked the recent 35-40 percent price rally, have come mainly from falling rig counts and expectations that lower prices would fuel increased demand. These ideas have been supported by small declines in US oil stocks. The deteriorating situation in the Middle East, which shows every sign of getting worse, is another factor supporting prices despite indications that there is still a global oil surplus.
While US production is already dropping, it seems unlikely to fall by the 1-2 million b/d necessary to offset global over-production. Barring serious troubles in the Middle East, some further drop in prices is widely predicted. OPEC, read the Saudis, could agree to a substantial production cut in June, but this too seems unlikely given Riyadh’s need for revenue to deal with its growing security problems. If a nuclear agreement lifts the sanctions on Iran next month, most observers believe it is unlikely that Tehran could export much additional oil before 2016. Only the ISIL surge in Iraq and Syria or the Yemeni civil war seem to offer the possibility that there could be lower oil exports from the region which in turn would drive oil prices significantly higher.
Some analysts say the stronger US dollar, up 3.2 percent against the euro last week, was largely responsible for the week’s gains. During the week the Federal Reserve Chair said she expects that the US will raise interest rates later this year, which should strengthen the dollar and send prices lower. The ongoing Greek debt crisis and the possibility that the euro would be harmed in a Greek default remains a major issue affecting oil prices.
Natural gas prices, which had been up by as much as 60 cents per thousand BTUs in the past month to trade at $3.10, gave up some of this gain to close at $2.89. Inventories did not grow as much as expected last week, suggesting that more natural gas in going into electric power production than is generally appreciated. Recent reports concerning the coal industry, including coal shipments and layoffs, suggest that domestic coal production has been falling rapidly. Concerns about environmental regulations and cheap natural gas prices have contributed to larger amounts of natural gas going for electricity production.
The EIA released its International Energy Statistics last week, which includes world export data through 2012. As has been known for some time, global crude oil exports have been slowly trending down for the last decade, while consumption in producing countries has been increasing steadily for the last 30 years. Middle Eastern oil exports in 2012 were about where they were in 1997, while domestic consumption is up by about 2 million b/d. Saudi exports remained at about 6.5 million b/d from 1990 through 2012, but have increased in the last year as the Saudis have pushed production to all-time highs in an effort to maintain market share.
The IMF released a report last week which estimates that global consumers should be paying an additional $5 trillion a year to pay for hidden costs of producing and using fossil fuels such as environmental and health damage. The $5 trillion figure amounts to about 6 percent of global GDP. The IMF believes that policy makers should be levying more taxes or similar policies that force fossil fuel users to pay for the true costs of such fuels. This in turn would lead to reduced or more efficient consumption. The IMF also points out that government fuel subsidies are creating air pollution and climate change by handing out vast amounts of oil products at below cost in order to keep constituents quiescent.
2. The Middle East North Africa
Iraq/Syria: Baghdad’s oil exports so far in May have held above 3 million b/d adding to the global oil surplus. Outside of oil exports, however, little has gone right for Iraq in the past week. The fall of Ramadi, the capital of Iraq’s Anbar province, may mark a major turning point in Iraq’s civil war. The US Secretary of Defense said over the weekend that the withdrawal of a far larger government force from Ramadi in reaction to a series of truck bombings raises the question as to whether Baghdad’s regular forces have the will to fight. A counteroffensive is underway, led by the more motivated Shiite militias that are feared by the local Sunnis in Anbar. It now seems clear that even with US air support, the government in Baghdad can do little to stop ISIL forces from overrunning much larger un-motivated government forces. Local Sunni tribes, which could turn the tide against ISIL, are still refusing to get involved on the side of the Shiite-controlled government, which in turn is refusing to supply arms to the Sunni tribes.
A major struggle seems to be seems to be shaping up at the Habbaniya air base, which is the last major military installation in Anbar province still held by the government. ISIL forces are moving to take the base while Baghdad is moving Shiite militia to the base in preparation for an offensive to retake Ramadi. The results of the fighting in the next few weeks could have a major impact on the course of the war. Needless to say, major debates are underway in Washington and likely in other foreign capitals, including Tehran, over what to do about the deteriorating situation.
From a peak oil perspective, the key issue is whether ISIL has the ability to reduce or even stop Iraq’s oil exports. The loss of some 3 million b/d of Iraqi crude would more than offset the global oil surplus and would push prices much higher. As few countries would be willing to buy oil from an ISIL controlled Iraq – which probably would be blockaded — the likelihood of foreign military invention either by the US, Iran, or both seems high if Baghdad or the southern oil fields appear to be threatened.
Last week ISIL forces destroyed a key flow tank at the Aljil oil field near Tikrit rendering the field inoperable for the foreseeable future. Baghdad has also approved a $500 million deal with a Chinese firm to drill 66 new wells in the large West Qurna Two oil field operated by Russia’s Lukoil. The oilfield is rated at a production capacity of 400,000 b/d but is currently producing 350,000.
In the meantime, Iraq’s prime minister has been in Moscow where he received promises of more military aid for the struggle with ISIL. Washington has promised to speed up the delivery of anti-tank weapons to the Iraqi army this week.
In Syria, insurgent forces from ISIL and other insurgent groups continue to make progress against Iranian and Russian-backed government forces. In the months since the Saudis with the aid of the Turkish government began supplying the non-ISIL insurgents with increased flows of military equipment (with the exception of surface-to-air missiles), government forces have been losing battle after battle. The last border crossing between Syria and Iraq fell into the hands of ISIL last week. Some believe the days of the Assad government are numbered unless there is heavier intervention by Iranian forces on its side. If Syria’s armed forces collapse, there is likely to be a mass rush of the 2.5 million Alawites for the Lebanese border in hopes of finding sanctuary among their fellow Shiites.
Iran: Tehran is facing its most serious challenges since the war with Iraq 30 years ago. Deeply involved in the Iraqi, Yemeni, and Syrian civil wars as well as supporting Hezbollah in its confrontation with Israel, Iran is also suffering from low oil prices and western sanctions. Given these pressures and the growing possibility that it might have to intervene with more than the current token forces and advisors in Iraq or Syria, Iran is betting its future on a nuclear treaty as the means of removing the sanctions and gaining some of its foreign policy objectives by negotiation. During the week it was reported that Iran now has a limited number of combat troops supplying artillery and other heavy weapon support to the Shiite militia efforts to drive ISIS out of the Beiji oil refinery in Iraq.
One example of this was Tehran’s mounting problems was its rather humiliating agreement last week to have its humanitarian relief ship, destined for a Houthi controlled port in Yemen, submit to UN inspection rather than risk a confrontation with the Saudi or US navies.
Although there has been little news of the negotiations in the past week, as pressures build Tehran seems more willing to reach compromises rather than face an indefinite continuation of the sanctions. President Obama said last week that he has a “personal interest” in ensuring that an agreement is reached despite the numerous objections to a treaty being raised in the US and elsewhere. All this increases the likelihood that a treaty will emerge by the end of June.
Libya: Libyan National Oil Company and Central Bank officials met with officials of international oil companies doing business in Libya recently to reassure the companies that the Libya’s oil company and central bank are disbursing the oil revenues in a fair manner despite the existence in two governments in the country. The oil companies are concerned that some of the revenues may be going to support ISIL terrorists in Libya whose strength appears to be growing.
Last week ISIL in Libya effectively took over Gaddafi’s home town of Sirte amidst the anarchy of two governments. On Sunday an oil tanker was bombed by the Tobruk government in the harbor at Sirte. The Tobruk government says the ship was carrying men and arms to ISIL, but the National Oil Company says it was carrying oil to the Sirte power station as it does routinely.
The EU is getting closer to a military intervention in Libya to halt the flow of migrants crossing the Mediterranean to Italy. Smugglers are making millions by stuffing would-be immigrants into old fishing boats and sending them north. In the last 18 months some 5,000 migrants have drowned when overcrowded boats sank. Plans for the intervention, which focus on destroying old fishing boats and possibly establishing a permanent military presence on shore to prevent boats from departing, are under consideration.
Saudi Arabia/Yemen: The world is starting to take note of the large, new oil refineries that the Saudis have opened in the last few years. The kingdom now owns or has stakes in 5 million b/d of refining capacity and is aiming for 8-10 million. This capacity is allowing the Saudis to turn much of their lower valued crude into higher valued oil products thus offsetting some of the loss of oil revenues that have been besetting other oil producers. Given the low production costs of Saudi crude, the margins on refining are some of the largest in the world. Another 400,000 b/d refinery is due to come online in three years.
Saudi crude exports which hit a nine-year high of 7.9 million b/d in March likely are at a near-term peak as the summer cooling season during which the Saudis burn millions of barrels of crude to power air conditioning is now underway. The need for summer cooling fuel may be why Saudis turned down a Chinese request to buy more oil last week.
The Saudis and Yemen’s Houthi militia traded heavy artillery fire that destroyed part of the main crossing point between the two countries as Arab airstrikes continue on targets across Yemen. A UN conference planned for Geneva next week seems to be going nowhere as both sides are refusing to come unless the other side ceases fighting and goes home.
ISIL has claimed responsibility for the bombing of a Shiite mosque in eastern Saudi Arabia, which killed at least 21 and wounded 81. Whether the ISIL leadership in Syria planned the attack or an opportunistic local supporter is responsible remains unclear as is whether it has the assets in the country to continue attacks. ISIL’s radio and web sites warned “black days for Saudi Arabia lie ahead”. The attack seems aimed at stirring up resentment among the Saudis Shiite minority, which has been quiescent in recent years largely due to harsh government security measures. There is still no clear idea of where the Yemen civil war is going, but heavy artillery attacks on Saudi territory are worrisome.
Moscow continues to withdraw into itself by attempting to shut out western influences. Over the weekend it passed a law essentially banning from the country any foreign NGOs — mostly involved with human rights –that it does not like. The new law sets out harsh prison terms for any Russian citizen working for or involved with any organization that irks the Kremlin. Moscow continues to work on non-dollar financing with China to counteract the effects of the sanctions. There are few signs that the EU and US would be willing to lift the sanctions anytime soon as there has been little progress in settling the Ukrainian situation. Moscow is keeping up the pressure on Ukraine by threaten more sanctions for failure to repay its natural gas debts.
The Russian oil company, Rosneft, revealed last week that the sanctions have seriously hampered its efforts to expand trading operations which is one of the main revenue sources used by western oil companies to weather the oil price collapse.
The IMF is predicting that the Russian economy will rebound in 2016 after falling 3.4 percent this year. Much of this will depend on the course of oil prices over the next year.
Greece’s interior minister announced over the weekend that Athens does not have the money to make a $1.7 billion loan repayment to the IMF in early June. After months of negotiations, the new anti-austerity leftist government has made little progress in its negotiations with its creditors. Greece is about €320 billion in debt and has received all but the last €7.2 billion installment on an IMF loan. The IMF and EU are insisting that Greece make more progress on improving its fiscal situation, however Greece with a 26 percent unemployment rate and a GDP which has fallen by 25 percent in the last five years says it can do no more.
Athens has about € 1 billion wage and welfare payments coming due in early June and says it simply does not have the money to make debt payments. Polling in Greece shows that the public does not want any more austerity yet wants to stay in the Eurozone. The Greeks have tried all kinds of ploys to maintain the status quo including asking Moscow for a loan, but to no avail.
A Greek default is likely to have repercussions for the euro, which fell 3.4 percent against the dollar last week, exerting downward pressure on oil prices. The euro/dollar ratio still remains about 5 percent, the 12 year high seen in March.
To make matters worse for Greece, the flood of immigrants from the war-torn Middle East making their way into the Greek islands is on the increase and is now about the same as the numbers reaching Italy from Libya.
5. The Briefs
Carbon targets: Germany and France said Tuesday they would push for an “ambitious, comprehensive and binding” global agreement on cutting carbon emissions this year, seeking to create impetus for a broad deal despite resistance from some developing countries. (5/20)
Norway’s Statoil reports having drilled an expensive dry hole in a frontier prospect about three miles north of the Helm field in the Norwegian Sea. (5/23)
In Russia, state-controlled natural gas monopoly Gazprom will cut its production plan for 2015 to 450 billion cubic meters because of decreasing demand due to warm weather. The company had estimated it would produce 485.4 billion cm this year. Officials say the amount of natural gas produced this year will still be more than the 444.4 billion cm produced last year. (5/20)
In Ukraine, shale explorer JXK Oil Gas said Monday it was granted more areas for work in the country, though the cost of business was still prohibitive to drilling. They say that been forced to suspend drilling operations in Ukraine “because of the current punitive levels of production tax and restrictive currency controls.” (5/19)
Saudi Arabia’s recent push to maintain international oil market share saw its oil exports surging in March, but the kingdom may soon find itself unable to maintain much upward momentum. The latest official data from the Riyadh-headquartered Joint Organizations Data Initiative or JODI showed that Saudi crude exports rose by 548,000 b/d in March to 7.898 million — their highest level in over a decade. However, March is the last month of the Arabian Peninsula’s cooler season; domestic oil demand increases substantially as the air-conditioning season arrives. (5/21)
Saudi Arabian Oil Minister al-Naimi said on Thursday that he sees a great future for solar power but that the world can’t abandon fossil fuels in the short term. (5/22)
Refinery blues: Faced with competition from mammoth new refineries in the Middle East and soft fuel demand in key markets, Asian refiners are trying a variety of tactics to cope from investing in refineries in emerging markets to using cheaper energy sources. Less complex and older refineries in Asia, however, might be forced to cut run rates or shut. (5/20)
In Libya, Germany’s Wintershall Holding has expressed an interest in buying stakes in oil-and-gas assets from Occidental Petroleum Corp. It would be a rare move by a western company to increase its foothold in the war-torn country. Occidental has been trying to sell up to a 40% stake in its Middle Eastern and North African interests since October 2013, as it tries to focus on its prolific North American assets. (5/23)
Nigeria is Africa’s largest oil producer, but fuel shortages have paralyzed the country that just a year ago was declared Africa’s largest economy. At one gas station in Lagos, crowds pushed at the gates waving empty jerry cans. Cars queued for a kilometer down the road creating gridlock. Similar scenes are being repeated at almost every petrol station across Nigeria. (5/23)
In Nigeria, the Trans Nigeria Pipeline that carries Bonny Light crude oil to an export terminal has been shut down since May 12. (5/16)
Off the coast of Guyana in the Caribbean, ExxonMobil said it made what it described as a significant oil discovery in the deep waters about 120 miles offshore. Over the coming months the company will work to determine the commercial viability of the discovered resource, as well as evaluate other resource potential on the block. (5/22)
The US oilrig count slowdown may soon be over, as oil drilling rigs fell by one to 659 in the latest week, according to Baker Hughes Inc. Technically this marked the 24th straight week of declines, down 59 percent from a peak of 1609 oilrigs last October. Some shale oil companies are expecting to add rigs in the coming months if prices stabilize near the current levels. (5/23)
Bakken production will keep growing, albeit at a slower pace, and the Eagle Ford still has running room within high-return portions of the play, according to a recent analysis by Wood Mackenzie. The Bakken and Eagle Ford together produce just over 2.5 million barrels per day of oil, or nearly two-thirds of US tight oil production. (5/21)(Editor’s note: the current data indicates the Bakken has been on plateau in the range of 1.12 million b/day since 9/14.)
Downward reserves revisions coming: Millions of barrels of untapped oil that US shale drillers discovered during the boom years are about to disappear from their inventories. That’s all thanks to a provision approved by the Securities and Exchange Commission six years ago to make it easier for companies to claim proved reserves for wells that wouldn’t be drilled for years. (5/23)
Oil spill: What was originally thought to be around 21,000 gallons is now over 105,000 gallons of oil spilled on to the pristine beaches of Santa Barbara County. On Wednesday, Gov. Jerry Brown declared a state of emergency for Santa Barbara County to free up resources to respond to the spill. (5/22)
Wastewater well injunction: Environmentalists filed a motion requesting a preliminary injunction today in a California court to stop the illegal injection of millions of gallons of oil field wastewater into protected groundwater aquifers in the state. Officials with the state’s Division of Oil, Gas, and Geothermal Resources have admitted that their agency improperly permitted more than 2,500 wells to pump oil industry wastewater and fluids from enhanced oil recovery techniques like acidization and steam flooding into groundwater aquifers that should be protected under the federal Safe Drinking Water Act. (5/19)
New York’s state government found there would be “at least one” environmental issue with a proposal to build a tar sands storage facility at a rail terminal. It thereby rescinded a 2013 notice that indicated the bitumen would not present an environmental threat. (5/23)
Georgia pipeline snag: The state of Georgia’s top transportation official has denied Kinder Morgan’s request for a permit to build a $1.12 billion gasoline and distillate pipeline through the southeast part of the state. In a letter dated Monday, the official said he had determined that Kinder’s proposed 360-mile Palmetto Pipeline is not critical enough to allow the company to condemn property and obtain easements along its route to allow its construction. (5/20)
Arctic Shell game: Hundreds of environmental activists have fanned out across the Seattle Bay in recent days to disrupt the Anglo-Dutch company’s rigs from entering the port en route to the Chukchi Sea off Alaska, saying drilling in the remote Arctic waters could lead to an ecological catastrophe. (5/20)
Arctic drilling dilemma: Faced with intense opposition from environmentalists, the director of the US Interior Department’s Bureau of Ocean Energy Management defended the administration’s conditional approval of Shell’s plans to drill in the Arctic this summer, a decision she indicated was based on both federal statute and, partly, national security. (5/22)
Fracking battle: Two oil and gas groups have asked a federal court to block the implementation of new U.S. rules for hydraulic fracturing on public lands until their lawsuit challenging the regulations is resolved. (5/19)
Banning bans: Last year, a city in North Texas (Denton) banned fracking. State lawmakers want to make sure that never happens again. On Monday, Republican Gov. Greg Abbott signed a law that prohibits bans on hydraulic fracturing altogether and makes it much harder for municipal and county governments to control where oil and gas wells can be drilled. Similar efforts are cropping up in states including New Mexico, Ohio, Colorado and Oklahoma. (5/19)
Rail car problem: Citing ‘customer complaints’, the BNSF railway has abandoned plans to buy 5,000 crude oil tankers. Typically, leasing companies or oil companies own the tank cars that move crude along the tracks and not the railroads themselves. But last year, BNSF requested proposals from railcar manufacturers to produce cars for them that were stronger and safer cars than the current DOT standards. The company had hoped that producing cars with thicker shells, reinforced ends and thermal blankets would reduce the risks of using trains to haul oil. (5/20)
US crude-oil exports to Canada provided a crucial relief valve for US producers this year, according to a new report from data provider Genscape Inc. Almost 19 million barrels were shipped from the US Gulf Coast to Canada’s eastern coast from the beginning of the year through early May. Without those shipments, storage terminals in Corpus Christi, Texas, would have run out of capacity by now. (5/19)
US net imports of natural gas decreased 9 percent in 2014, continuing an eight-year decline. As US dry natural gas production has reached record highs, lower domestic prices have helped to displace natural gas imports. Net natural gas imports (imports minus exports) totaled 1,171 billion cubic feet in 2014. (5/22)
Gasoline prices: US drivers hitting the roads this Memorial Day weekend can expect to find the lowest prices at the pump since 2009, federal data showed Friday. On May 18, the US average retail price for gasoline was $2.74/gal, or 92 cents per gallon lower than at the same time last year, (5/23)
Gasoline tax gap: Oregon is about to embark on a first-in-the-nation program that aims to charge car owners not for the fuel they use, but for the miles they drive. The program is meant to help the state raise more revenue to pay for road and bridge projects at a time when money generated from gasoline taxes are declining across the country, in part, because of greater fuel efficiency and the increasing popularity of hybrid and electric cars. (5/21)
For data sleuths: On May 18, EIA launched a beta version of a redesigned International Energy Portal designed to help users access international energy data and to provide new and expanded tools and capabilities to examine trends in global energy markets. (5/21)
Alternative transport fuels: In the United States, petroleum is by far the most-consumed transportation fuel. But recently the share of fuels other than petroleum for US transportation has increased from a multi-decades baseline of 4 percent to 8.5 percent in 2014. The recent increase can be attributed primarily to increased blending of biomass-based fuels with traditional vehicle fuels, and secondarily to growing use of biodiesel, electricity and natural gas in the transportation sector. (5/19)
King coal continues aging: US railroads originated a new year-low volume of 93,664 coal carloads for the week ending May 16, marking the lowest total in 120 weeks. It was the sixth time in only 19 weeks this year that volumes fell below 100,000. The last year weekly coal carloads last fell below 100,000 more than six times was 1989 when it happened seven times. (5/21)
Coal miner Alpha Natural Resources said it plans to lay off 439 miners at a mine in south-central West Virginia. Murray Energy Corp., another big Appalachian miner, is planning to lay off around 1,800 workers, mostly in Ohio and West Virginia. Both companies are reeling from competition from the natural gas industry and its less expensive energy for power plants, plus from a global coal glut and tougher environmental regulations in the US. (5/23)
Coal shoulder: A new government analysis of President Obama’s signature effort to fight climate change affirms what critics suspected: the proposal could further weaken an already battered coal industry. Electricity generation from the carbon-intensive fossil fuel would fall by 90 gigawatts, more than twice the decline government analysts had predicted as recently as April. (5/23)
Offshore wind: A Rhode Island company will be the first of its kind to build a vessel to support the development of the inaugural U.S. offshore wind farm, planners said. (5/20)
Renewables lags target: A report from the IEA finds the pace at which renewable energy is advancing is lagging far behind global goals for 2030. A joint IEA-World Bank report on a U.N. initiative finds the share of renewable energy on the global grid grew from 17.8 percent in 2010 to 18.1 percent two years later. The initiative calls for at least twice that by 2030. Substantial investments beyond the $400 billion rate in renewables, to at least $1 trillion, are needed to achieve the goals. The lack of investments, the report found, was one of the main drivers behind the slow pace of progress. (5/20)
German energy company E.ON said Monday it is continuing its legacy as the largest European investor in wind by building a wind farm in the English Channel. The project will cost the company about $2.1 billion to build about 10 miles off the British coast. It will feature 116 wind turbines positioned in shallow waters. The German company is the third-largest offshore wind energy operator. (5/19)
China’s State Council has unveiled a ten-year national plan, Made in China 2025, designed to transform China’s manufacturing prowess. The 10 key sectors targeted are new information technology, numerical control tools and robotics, aerospace equipment, ocean engineering equipment and high-tech ships, railway equipment, energy saving and new energy vehicles, power equipment, new materials, medicine and medical devices, and agricultural machinery. (5/19)
In China, an environmental dispute involving a stone quarry in a southeastern province marks the first test of a new government effort to use the courts to help clean up the country’s massive pollution problems. (5/19)
In Venezuela, U.S. prosecutors are investigating several high-ranking officials, including the president of the country’s congress, on suspicion that they have turned the country into a global hub for cocaine trafficking and money laundering, according to more than a dozen people familiar with the probes. (5/19)
Federal Reserve Chair Janet Yellen said again on Friday that the central bank was poised to raise interest rates later this year, as the U.S. economy was set to bounce back from an early-year slump and as headwinds at home and abroad waned. (5/23)