Sunday, January 31, 2016

stored crude and gasoline at record high; why consumption is falling, & a Russian-OPEC oil cartel?

a number of on again, off again, stories that Russia was planning to meet with the members of the OPEC cartel to negotiate production cuts drove oil prices higher this week, but even now it's still not clear if there was any actual communication between any leaders of the countries to bring about such a meeting, or if the entire hullabaloo was just an old idea that gained a life of its own once news bureau foreign energy correspondents started asking questions of officials whose ambiguous responses fed the story as it built on itself...the proposal for an OPEC meeting with Russia had been called for by Venezuelan and Algerian officials and ignored on several occasions over the past year, but what seems to have started this week's spate of stories was a vague comment by Iraq's oil minister that "We have seen some flexibility from the brothers in Saudi and a change in tone from Russia,"..that quickly turned into a plethora of articles to the effect that Russia would cooperate with OPEC in reducing oil supply in order to boost prices...even though both Russian and OPEC officials initially denied the rumors, the articles about a planned meeting persisted, as the price of oil continued to rise in response each day...then on Thursday, Tass reported that Russian Energy Minister Alexander Novak indicated he was ready to take part in an upcoming meeting of the OPEC and non-OPEC producers in February, and the price of Brent crude spiked to over $35 a barrel in Europe...but at the same time OPEC delegates denied there was any talk of a meeting with Russia, and Iran went a step further by insisting that they wouldn't consider a deal until their exports rose 1.5 million barrels per day above current levels  (recall last week that Iran's new output is not expect to reach 600 thousand bpd until June)...furthermore, everyone knew the Saudis wouldn't cut their production to benefit Iran, since they broke off diplomatic relations with Iran after their embassy was burnt earlier this month, so by the end of the week serious talk of such a deal had pretty much vaporized.. 

at any rate, that entire sequence of Russia/OPEC news stories never seemed quite kosher to me as it was crossing my feeds this week...here's why: it was already known by most players in the energy markets that oil shorts were at a all time high at the beginning of the week; "oil shorts" are those who've entered into a futures contract to sell oil that they don't own; their hope is that the price would fall further, and they'd be able to buy oil at a lower price at some time in the future to meet their original contract, and hence make a profit...since they're putting a very small percentage down when they enter into such contracts, small price moves against them mean the exchange will demand an additional payment to cover their paper, or should we say electronic, losses, and keep them in the black...if prices rise enough, many of those short sellers typically wouldn't have the funds available to cover their theoretical losses, and they are thus forced to closed out their contract by buying oil back at a now higher price, at a loss to them, which adds to the oil buying and thus drives the price for oil up even more, forcing even more shorts to sell...that's what's called a short squeeze, and what i saw happening this week with the price of oil had all the earmarks of it....with a story like that of a Russian OPEC cartel that drives a large price change was put out on the wires, and continued to be repeated and distributed even though it's been officially denied, it certainly seemed like someone was trying to manipulate the price...the Russian energy minister only chimed in later, when he saw the rumor was moving the price higher...with oil trading of WTI at NYMEX running above 1.2 million 1000 barrel oil contracts each day this week and trading of Brent contracts in London probably even higher, there was a lot of money to be made every day for every $1 per barrel price change...we would not be surprised to hear that Russian oil traders in Europe were among those who profited the most...

New Record High Supplies of Crude Oil and Gasoline

in news that is far less dubious and has more immediate relevance, this week's stats from the US Energy Information Administration showed that our supplies of crude oil and gasoline in storage have both risen to the highest levels on record, even as our oil imports remain well above last year's level...this week's report showed that our imports of crude oil fell by 170,000 barrels per day to average 7,609,000 barrels per day during the week ending January 22nd, down from the 7,779,000 barrels per day import pace of the prior week...while that was 2.5% more than our 7,422,000 barrel per day of imports during the week ending January 23rd a year ago, oil imports are notoriously volatile week to week as 2 million barrel VLCC tankers arrive and are offloaded irregularly, so the EIA's weekly Petroleum Status Report (62 pp pdf) reports imports as a 4 week moving average...that EIA report showed the 4 week average of our imports remained at the 7.8 million barrel per day level, which was 7.2% above the same four-week period last year... 

production of crude oil from US wells, meanwhile, slipped for the first time in 7 weeks, but still remained above the levels of this past fall....our field production of crude oil fell from 9,235,000 barrels per day during the week ending January 15th to 9,221,000 barrels per day during the week ending January 22nd, which except for the past two weeks, was still at a level higher than any week since August...our field production for January has averaged about 9,228,000 barrels per day to date, which is roughly 100,000 barrels per day more than our average production during September and October, and remains 3.8% above the 9,197,000 barrels per day that was being produced in the same 3 week period a year ago, despite a 70% drop in active oil drilling rigs from the peak of October 2014 since then..

however, our refineries used 551,000 barrels per day less crude than they did last week, which meant there were 8,383,000 barrels more of surplus oil left unused at the end of the week; as a result, our stocks of crude oil in storage, not counting what's in the government's Strategic Petroleum Reserve, rose by that 8,383,000 barrels to end the week at 494,920,000 barrels, which was up 21.7% from the record inventory of 406,727,000 barrels in storage the same week a year ago, and the most oil we've ever had stored in the 80 years of EIA record keeping....we'll include a graphic here so you can all see what that looks like:

January 29 2016 crude oil inventories

in the graph above, copied from “This Week in Petroleum” from the EIA, the blue line shows the recent track of US oil inventories over the period from June 2014 to January 22, 2016, while the grey shaded area represents the range of US oil inventories as reported weekly by the EIA over the prior 5 years for any given time of year, essentially showing us the normal range of US oil inventories as they fluctuate from season to season....we can see that crude oil inventories typically fall through the summer, when refineries are running flat out, just as they did this year, but we're now heading into the winter period when oil refineries cut back operations and oil inventories rise...note that the large grey wedge on the right now includes the record oil inventories that we were setting last year at this time (ie, it includes the image of the early 2015 inventories) which we are now exceeding by more 20% each week...hence our oil inventories are now exceeding last year's records by an unheard of margin, just as the 2015 global temperature record exceeded the 2014 global temperature record by an unheard of margin...

as noted, the amount crude used by our refineries fell by 551,000 barrels per day to an average of 15,639,000 barrels per day during the week ending January 22nd, as the US refinery utilization rate fell to 87.4%, down from 90.6% last week and down from a utilization rate as high as 94.5% at the end of November, as they're in a normal seasonal slowdown; respective figures for a year ago were 15,256,000 barrels of oil refined and an 88.0% utilization rate...hence, refinery production of gasoline fell a bit, from 9,453,000 barrels per day during week ending January 15th to 9,377,000 barrels per day during week ending January 22nd, which was still 200,000 barrels per day more gasoline than was produced the same week last year...at the same time, refinery production of distillate fuels (diesel fuel and heat oil) decreased by 100,000 barrels per day from the week ending the 15th to 4,452,000 barrels per day during the week ending January 22nd...for gasoline, that production was again more than we could use or export, and hence our end of the week gasoline in storage rose by 3,464,000 barrels to 248,461,000 barrels, which was the most gasoline we've had stored at the end of any week at any time of year in the 25 years of EIA weekly records, which once again merits posting a chart of our gasoline supplies:

January 27 2016 gasoline inventories

the above graph was originally from this week’s weekly Petroleum Status Report (62 pp pdf), but the screen grab of it we're using here was taken from Reuters oil analyst Jack Kemp because the red arrows he included are instructional…like the crude oil stocks graph above, the blue line on this graph shows the recent track of our gasoline inventories over the period from June 2014 to January 22, 2016, while the grey shaded area represents the range of our gasoline supplies as reported weekly by the EIA over the prior 5 years, showing us the normal range of gasoline inventories as they fluctuate from season to season....the red arrows point to the current week's inventories and the previous record gasoline supply for this week, which was set on January 23, 2015, again giving us a clear picture of how much we beat the old record by; last January 23rd’s gasoline inventory record was 238,335,000 barrels, so we’ve just beat that record by more than 10 million barrels...you can also see that we can expect gasoline inventories to increase seasonally at least until March, when refineries will begin winding down for maintenance and to switch over to produce summer blends of gasoline..

inventories of other refined products are also above normal for this time of year....with the cold weather, our distillate fuel inventories fell for the 2nd week in a row, dropping by 4,057,000 barrels to 160,472,000 barrels, down 3.1% from the 5 year record high 165,554,000 barrels we had stored on January 8th, which came after a warm December when heat oil consumption was minimal…hence we still have 20.9% more distillate fuels stored than the 132,687,000 barrels of distillates we had stored on January 23rd of last year, leaving current distillate fuel supplies still near the upper limit of the average range for this time of year...quickly running through other major refinery products, supplies of kerosene-type jet fuel were at 41,828,000 barrels as of January 22nd, also near the upper limit of the average range for this time of year...supplies of residual fuel oils, which are used to power ships and large boilers, were at 160,472,000 barrels, not a record but the highest since January 2011...and supplies of propane/propylene were at 83,695,000 barrels, down almost 15% since Christmas, but still well above the average range for this time of year...the point is that not only do we have record supplies of crude oil and gasoline, but also have a glut of all the other products refined from crude, suggesting that US refineries will ultimately be force to slow down before they're buried in their own output...

Why Gasoline Demand is Down

over the past several weeks i've been puzzling over stats and charts that showed that our gasoline consumption has been down considerably since the fall, and that it has now even fallen to below the level of last year for the last 4 weeks...those reports from the EIA did not seem to jive with reports from US automakers that 3 out of 4 new passenger vehicles they've been selling are gas guzzlers built on a truck frame, and reports from the Department of Transportation which showed that vehicle miles driven in the US surged 4.3% to a new record in November...this week i realized that what i have been failing to take into account was the fact that the new SUVs and pickup trucks being bought today are essentially replacing vehicles that are 15 or 20 years old that were getting much poorer gas mileage, so i went looking for the stats on that...it seems that even the government refers to data compiled by the Transportation Research Institute at the University of Michigan, and i found a really neat graphic at their website which gives us an excellent picture of what is happening with fuel-economy in  the US light vehicle fleet, which i'm including below...

sales-weighted fuel-economy monthly:

January 28 2016 sales weighted miles per gallon

the above graph shows the average gas mileage for all the cars sold each month since October 2007, divided into mileage years that begin on each October 1st...we can see that the average gas mileage of cars sold in the US hit a peak at nearly 26 miles per gallon in July of 2014, a month after oil peaked at $107 a barrel and 3 months before the infamous OPEC meeting which crashed the price of oil, and it's been falling in an irregular fashion since, as Americans have been buying a greater percentage of SUVs and pickup trucks as passenger vehicles...we can see on the graph that as of December, new vehicles being purchased were still averaging 24.9 miles per gallon of gasoline, despite the fact that more than half of them were built on a truck frame...but the majority of cars that were being junked at the same time were likely sold well before the 2008 model year, and hence were getting less than 20 miles per gallon...so for the present, every new gas guzzler being bought is an improvement in gasoline consumption on the old cars heading for the junkyard, to the extent that we could eventually see a 20% reduction in gasoline consumption per mile driven as the entire fleet turns over...however, the current deterioration in average gas mileage for new vehicles is set to continue for some time, because current CAFE standards favor even heavier, larger pickups and are not due to be changed until the 2022 model year...

This Week's Rig Counts

lower prices continued to drive more drillers to the sidelines during the week ending January 29th as the total number of active drilling rigs deployed in the US fell for the 6th week in a row...Baker Hughes reported that the total active rig count fell by 18 to 619, as the count of active oil rigs fell by 12 to 498 while the count of active gas rigs fell by 6 to 121...those totals were down from 1223 oil rigs, 319 gas rigs and 1 miscellaneous rig that were actively drilling as of the last weekend of January a year ago, and by that time the rig count had already fallen from the peaks in the prior October and November...oil rigs had hit their fracking era high at 1609 working rigs on October 10, 2014, while the recent high for gas drilling rigs was the 356 rigs that were deployed on November 11th of that same year

one platform in the Gulf of Mexico was idled this week, after three were set up & startred drilling there last week, which left the active Gulf rig count at 28, down from 47 in the Gulf and 49 offshore a year ago...13 rigs that had been doing horizontal drilling were also shut down, cutting the horizontal rig count down to 487, which was down from 1168 in the same week a year ago....in addition, the count of active vertical drilling rigs was down by 3 from last week to 74, which was down from the 235 rigs that were drilling vertically on January 30th of 2015, and 2 directional rigs were also removed, leaving 58 active, down from the 140 directional rigs that were in use a year ago..

of the major shale basins, the Permian of west Texas alone accounted for most of the drop, as a net of 17 rigs that had drilling there last week were stacked, leaving 182, which was down from 454 that were drilling in the Permian last January 31st....the Barnett shale of the Dallas area, the Granite Wash of the Oklahoma-Texas panhandle region, the Marcellus of the northern Appalachians and the Williston of North Dakota all saw a net of one rig removed...those cuts left the Barnett with 3 rigs, down from 19 a year earlier, the Granite Wash with 13 rigs, down from last year's 40, the Marcellus with 34, down from 75 a year earlier, and the Williston with 44, down from 148 last year at this time...meanwhile, 2 rigs were added in the DJ-Niobrara chalk of the Rockies front range, which brought the count of rigs drilling in that area up to 21, which was still down from 51 a year earlier, and a single rig was added in the Mississippian of southwest Kansas, where the 11 rigs active this week was down from 54 in the same week of 2015...

the Baker Hughes state count tables show that Texas still had 281 rigs still working, down 13 from last week and down from 695 in the same week last year; New Mexico, which also claims some of the Permian basin, was down 4 rigs to 26, which was down from 87 rigs on January 31st of 2015...Louisiana saw 3 rigs stacked this week, leaving 51, which was down from 108 a year earlier, while Kansas, North Dakota and Pennsylvania were each down 1 rig, leaving Kansas with 9 rigs, down from 22 a year earlier, North Dakota with 44 rigs, down from 143 a year earlier, and Pennsylvania with 22 rigs, down from the 54 rigs that were drilling in the Keystone state at the end of January last year...states adding rigs this week included Alaska, where they were up 2 to 13, which was also up from 10 rigs a year earlier, Colorado, where they also added 2 rigs, bringing their count back up to 22, which was still down from last year's 63, and Oklahoma, where the addition of 1 rig brought their count to 88, still down from 183 a year ago at this time...

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Ohio has yet to write rules for fracking industry - In June 2014, the state published a list of 20 rules it was working on to govern Ohio’s growing oil and gas industry. The rules were intended to cover serious environmental, financial and health issues, including recycling fracking waste, tracking wastewater pulled from wells developed with the hydraulic fracturing process and establishing a timetable for companies to report well leaks. But a year and a half later, the Ohio Department of Natural Resources has just one of those rules in place. It covers well pad construction and was finalized in July. Several laws enacted during the past five or so years require ODNR to write these rules to provide additional oversight of fracked wells in Ohio, require additional reporting of spills and gas leaks, create better tracking systems for fracking wastewater and cover storage and reuse of fracking waste. No rules means a lack of oversight and transparency, critics say. "Without rules, there's no way to keep ... ODNR accountable or to ensure that the facilities that ODNR allows to operate without regulatory safeguards are not going to be future time bombs," said Richard Sahli, a former Natural Resources lawyer who now represents environmental advocacy groups.  The state agency could not say last week where any of the 20 rules stood. A Dispatch review of records from the Ohio Joint Committee on Agency Rule Review, the body through which all state agency rules pass, shows the one written rule. Eric Heis, an agency spokesman, said the public should trust the state agency.

Time for fracking rules - The Star Beacon - As State Reps. John Patterson and Sean O’Brien make their trek around the state and district, they would do well to heed the concerns of officials at the ground floor of the fracking debate. Their proposed bill would add much needed regulations to the fracking industry, and the language in it is by no means set in stone — Patterson called it “fluid.” Which is why they are wisely seeking feedback. There are already big positives in it, so let’s start there. It would help close loopholes so interested parties are informed when oil and gas wells change ownership, or if an owner dies. It would enforce firm setbacks for where wells could be placed — 150 to 200 feet in urban areas and 2,000 feet in rural areas. The bill would also protect from wells being set up in flood plains or near bodies of water. But, of particular concern to local trustees, is the continued lack of oversight. Instead, the proposal would actually grant more authority — and funding — to the Ohio Department of Natural Resources, which is not well thought of as an oversight body when it comes to fracking. We have been among those arguing for more local control when it comes to injection wells, so it’s hard to get on board with ODNR having more power when it has not proved itself a solid watchdog in the past. Patterson and O’Brien said this concern is a “non-starter” for the oil and gas lobby, and while they stopped short of calling out their fellow lawmakers for kowtowing to oil and gas, that lobby clearly has long arms and powerful strings. That’s not to say there is no need for compromise. Fracking But the idea that the oil and gas lobby is deciding what safety and regulatory issues are “non-starters” is concerning.  Certainly compromise and negotiation are a big part of any legislation, but Patterson and O’Brien, for as noble as their efforts are, clearly have a lot more work to do to convince their peers of the need for stronger regulations.

Ohio Elected Officials and Statewide Groups Voice Support for Drilling in Wayne National Forest - Elected officials from both parties recently joined groups from across Ohio to advocate for responsible oil and gas development in the Wayne National Forest (WNF). The support has been overwhelming and bipartisan ahead of the public comment period coming to a close.  U.S. Senator Rob Portman, Congressman Bill Johnson, Ohio Treasurer Josh Mandel, state representatives, state senators, county commissioners, economic development agencies, chambers, and  labor unions submitted a flurry of letters to the Bureau of Land management (BLM) explain that drilling in the WNF will brings jobs and economic prosperity to the state.This news comes just days after the BLM made an announcement that it plans to move forward with oil and gas leasing on public lands. That must have been a blow to anti-fracking activists led by the “Keep it in the Ground” campaign and MoveOn.org’s  national petition, “Just say NO to fracking” on public lands. Despite the efforts of these groups, authentic local Ohio voices are prevailing and making it abundantly clear that there is strong support for drilling in the Wayne. Labor groups, including the International Union of Operating Engineers’ Local 18 attended all three public meetings held on WNF leasing and made the following comments:“The oil and natural gas industry has played an important role in the economic well-being of Ohio, and the state’s production is a strong contributor toward American energy security. … We are asking that the Bureau of Land Management approve leasing and expedite the process, as the U.S. Forest Service has already conducted a thorough NEPA review in 2012.”

Beaver County activists enlighten commissioners about the dangers of shale drilling - -- Two residents who are part of a group that aims to educate people about the potential risks associated with shale drilling came to the first night meeting of the new Beaver County Commissioners board Thursday to state their case against further oil and gas exploration and development in the county. The Rev. Jim Hamilton of Ambridge and Bob Schmetzer of South Heights are both part of the Beaver County Marcellus Shale Awareness Committee, a group that's been in place since 2010 that opposes further drilling in the county. Hamilton presented commissioners with packets of information about the danger of releasing uranium and radon that some say can be associated with shale exploration, including hydraulic fracturing (fracking) natural gas wells in the Marcellus and Utica shale that's been actively pursued in Pennsylvania since the group formed."What I'd like to have them (commissioners) do is move for a moratorium," Hamilton said after the meeting. It's something the Pennsylvania Council of Churches supports, he said."The churches can see it, the pope can see it (the dangers of drilling)," he said. Hamilton worries about the dangers drilling poses to people, he said.

As rig counts decrease, wastewater floods - In July, when the Shale Alliance For Energy Research released its outlook on the future of oil and gas wastewater, the so-called crossover point for this region was supposed to come in nine years.  That’s the point at which the volume of wastewater produced from shale gas extraction outpaces the industry’s ability to reuse it to drill and frack more wells. It was an academic estimate. “It’s a whole lot shorter in the real world,”  Mr. Hughes said the more realistic crossover point for this region might be closer to five years. But that was three months ago, before oil slid below $30 per barrel and natural gas companies — fairly or not — went along for the downhill ride. Shale wells produce water first in a gush, when the fracking fluids pumped underground to stimulate gas flow come back up the well bore, and then in more of a trickle over a longer period, as the salty brine that lives underground comes to the surface along with oil and gas. Oil and gas operators, particularly in Pennsylvania, have been able to recycle the majority of their so-called flowback and produced water by using it to drill and frack new wells. But with drilling and fracking activity down drastically — Consol Energy Inc. said it won’t drill any new wells in 2016, for example — more attention is turning to how to dispose of this water. “Now that the drilling has dropped off anywhere between 75 percent to 100 percent, there is this completely unexpected and unplanned-for tsunami of produced water that the operators are having to deal with,” “The slowdown is not good for the industry, but it puts a spotlight on what we’re doing,” According to Mr. Kalt, the limiting factor isn’t just that there are fewer opportunities to reuse this water but also that companies are moving away from deep well injection, a practice frequently linked to small earthquakes in states such as Oklahoma and Ohio.

U.S. Shale Gas Production Could Sharply Decline in 2016, World Bank Says - In the wake of tumbling oil prices, an onslaught on coal and a year of geopolitical tumult, the World Bank has released its 2016 report on the outlook for the world’s commodity markets.  Carbon Brief looks at the five key takeaways for climate change and energy.

  • 1. There’s All-Round Bad News for Coal The report makes grim reading for coal industry executives. Coal prices are expected to continue their tumble downwards in 2016. Having fallen by more than 60 percent since 2011, prices are expected to drop a further 13 percent in the year ahead. This is attributed to a number of factors, which have, in turn, led to weak demand and oversupply.
  • 2. Geopolitics Will Continue to Affect Energy Markets The energy market is not immune to the slings and arrows of wider geopolitical events. Oil and gas prices are highly susceptible to external conflicts and debates.
  • 3. Warm Weather Depressed Oil Demand Growth, Which Will Continue to Shrink - 2015 was the hottest year on record and consumption of oil and gas reflected this..
  • 4. U.S. Shale Gas Production Could Sharply Decline Growth in global oil production slowed sharply in 2015. Most of this occurred in non-OPEC countries, bucking the trend of the last two-and-a-half years, during which U.S. production of shale oil boomed.  U.S. crude oil production is also expected to accelerate its downward trend in 2016, as non-OPEC producers attempt to sustain oil prices of below $40 per barrel. Production from OPEC countries, on the other hand, is expected to rise.
  • 5. Oil Prices Are Expected to Gradually Recover. The world watched on as oil prices continued their inexorable slide downwards in 2015, thanks to the lifting of sanctions on Iran, deteriorating growth in major energy-importing countries and OPEC’s refusal to cut oil production.

EIA: Consumption will drive natural gas prices up -- Natural gas prices are expected to rise, according to the EIA’s latest Short-Term Energy Outlook report. The average natural gas spot price at the benchmark Henry Hub for December 2015 was $1.93 per million British thermal units. That’s the lowest monthly average since March 1999. In the January report, the Nymex futures strip averaged $2.50/MMBtu for 2016 and $2.80/MMBtu for 2017. The Nymex futures strip represents the price of natural gas for delivery at each contract month. The expected price increases reflect consumption growth, mainly from the industrial sector, that outpaces near-term production growth. In September 2015, total marketed production of natural gas hit a record high of 80.2 billion cubic feet per day, according to data from the EIA’s survey of natural gas production. The EIA estimates growth will slow 0.7 percent in 2016, then increase 1.8 percent in 2017 as natural gas prices rise and more demand comes from the industrial sector and liquefied natural gas exporters. Total natural gas consumption is also expected to increase. U.S. consumers used an estimated 75.7 Bcf/d of natural gas in 2015. Forecasted natural gas consumption averages 76.6 Bcf/d in 2016 and 77.2 Bcf/d in 2017. The forecasts are increases of 1.5 and 0.8 percent, respectively. The report also predicts natural gas consumption in the residential and commercial sectors to increase over the next two years, reflecting higher heating demand.

Spread between Henry Hub, Marcellus natural gas prices narrows as pipeline capacity grows - Today in Energy - U.S. EIA - Natural gas spot prices around the United States are often compared to prices at the Henry Hub in Louisiana. At trading points in and around the Marcellus and Utica shale plays in Pennsylvania, West Virginia, and Ohio, natural gas prices consistently trade below the Henry Hub national benchmark price. However, the difference between these pricing points and the Henry Hub has narrowed in recent months as new pipeline projects have come online. Most of the natural gas produced in the region is consumed in other areas of the country. With limited infrastructure to deliver natural gas to consumers, the Marcellus region can quickly become oversupplied, causing prices within the Marcellus region (especially Pennsylvania) to be discounted. In times of high demand for heating in the winter, natural gas spot prices can rise substantially in market areas such as New York and Boston. New infrastructure projects have come online to alleviate the disconnect between prices in producing and consuming areas around the country. Although prices in the Marcellus region are still relatively low, trading under $1.50 per million British thermal units (MMBtu), the gap between Marcellus region price points and Henry Hub has narrowed. The price at Transcontinental Pipeline's (Transco) Leidy Hub in central Pennsylvania, for example, averaged 93 cents per MMBtu below the Henry Hub price from December 1 through January 15. In July 2015, this differential was much larger, averaging $1.65/MMBtu for the month.

Natural Gas Infrastructure In New England; New Solar Energy Fees In California -- From EIA, the natural gas pipeline network in New England. The projects that came on-line in late 2015 or early 2016:

  • The Rockies Express Pipeline (REX) reversal project had added westbound capacity to flow natural gas to the Midwest in 2014. In late 2015, Texas Eastern Transmission Company’s (Tetco) OPEN project added 550 million cubic feet per day (MMcf/d) of pipeline takeaway capacity out of Ohio.
  • Columbia Gas Pipeline's East Side Expansion, a 310 MMcf/d project that flows natural gas produced in Pennsylvania to Mid-Atlantic markets.
  • Tennessee Gas Pipeline's Broad Run Flexibility Project, a 590 MMcf/d project originating in West Virginia that moves natural gas to the Gulf Coast states.
  • Tetco’s Uniontown-to-Gas City project flows up to 425 MMcf/d of natural gas produced in the Marcellus region to Indiana.
  • Williams Transcontinental Pipeline's Leidy Southeast project provides additional capacity to take Marcellus natural gas to Transco's mainline, which extends from Texas to New York. From there, the natural gas serves Mid-Atlantic market areas as well as the Gulf Coast.

Opposition Grows to Fracking and Fracking Infrastructure Projects - Over a seven day period last week there was a flurry of step-it-up activity on the East Coast in opposition to the planned expansion of fracking and fracking infrastructure. It began with a three-day walk over the Martin Luther King, Jr. weekend in sub-freezing, wintry weather in rural western Massachusetts against Kinder Morgan’s proposed Northeast Energy Direct pipeline. Upwards of 200 people took part in the walk, with an average of about 80 people walking 11-12 miles each day. The spirit and energy of the group was powerful.The movement against FERC and the expansion of fracked gas pipelines, compressor stations, and storage and export terminals has made great strides over the past year and this past week’s actions are an indication of what will be happening this year.  It continued on Wednesday in Harrisburg, Pennsylvania with a successful disruption of the last meeting of Gov. Tom Wolf’s gas-industry-stacked pipeline infrastructure commission. The commission was set up to sell the plan to build even more gas pipelines and expand fracking in the state.  And it ended on Thursday in Washington, DC with the 15th consecutive Beyond Extreme Energy disruption of the monthly Federal Energy Regulatory Commission (FERC) Commissioners’ meeting. This action was followed by one right near the White House at a Bank of America branch. Bank of America is a major funder of the being-built Cove Point, Maryland Liquified Natural Gas export terminal.Also this past week, on Monday, seven people were arrested at the latest blockade organized by We Are Seneca Lake in Ithaca, New York at the Crestwood gas storage facility; many hundreds have been arrested over the last year and a half in a campaign that shows no signs of letting up.

Experts Cast Doubt On EPA Fracking Investigation: Government analysts say the U.S. EPA’s investigation into the effects of fracking on drinking water may lack scientific credibility. The environmental agency released a landmark report last year that appeared to promote the controversial notion that fracking does not endanger drinking water. Fracking supporters celebrated the EPA’s announcement in June that it “did not find evidence that these mechanisms have led to widespread, systemic impacts on drinking water resources in the United States.” Now, a new government critique — from the agency’s own experts — is questioning that assessment. “The Hydraulic Fracturing Research Advisory Panel, a unit of the EPA’s Science Advisory Board (SAB), published its evaluation of the EPA’s report on Jan. 7,” NPR reported. The new report questioned the “clarity and adequacy of support” of several findings in the EPA’s fracking analysis. It said these findings “seek to draw national-level conclusions regarding the impacts of hydraulic fracturing on drinking water resources” but that the findings are inconsistent with “the observations, data, and levels of uncertainty” in the agency’s research. One of the biggest concerns is that the original EPA report said researchers “did not find evidence that hydraulic fracturing mechanisms have led to widespread, systemic impacts on drinking water resources in the United States.” That’s not a perfect statement, according to the new report.

US Forest Service rejects proposed forest route for pipeline — The U.S. Forest Service has rejected the proposed route of a 550-mile natural gas pipeline through national forests in Virginia and West Virginia because of concerns over the project’s impact on an endangered salamander and other resources. In a letter this week to federal regulators, the Forest Service said the builders of the proposed Atlantic Coast Pipeline will have to consider alternate routes through the George Washington and Monongahela national forests. Besides cow knob salamanders in Virginia, foresters also cited concerns about northern flying squirrels in West Virginia and red spruce restoration areas along the proposed pipeline route. The Forest Service described the two species and forestland as “irreplaceable.” Foresters said those species and forestland “must be considered in the development of alternatives.” Dominion Virginia Power, Duke Energy and other energy partners have proposed building the $5 billion pipeline, one of at least two interstate pipelines that would carve a path through West Virginia and Virginia. The pipelines are intended to deliver natural gas from the shale fields of northern West Virginia to Virginia and North Carolina. Its application to build the pipeline is before the Federal Energy Regulatory Commission.

Big Oil Takes Aim at the Atlantic Coast -- Sharks are circling in the Atlantic ocean and we’re not referring to the majestic wildlife found there. International oil supermajors Exxon, Shell and Chevron have all submitted public comments urging the government to open up as much of the U.S. coastline to oil exploration as possible, in particular the Atlantic offshore area stretching from Virginia to Georgia. In the next month or two, the Obama administration will be accepting public comments on a proposed five-year leasing program that may allow offshore oil drilling in the Arctic, Atlantic and Gulf of Mexico. Opening up new areas to risky oil extraction has prompted a wave of activism from the Pacific Northwest and Alaska to more than 100 coastal communities in the Southeast, but giant oil companies are using every ounce of their political clout to make sure they continue to have easy access to resources owned by the American people.In public comments submitted last year regarding the draft five year program, Exxon, Shell and Chevron all called for opening up the Atlantic Outer Continental Shelf (OCS) to leasing and attacked even the minor protections that the plan included. Exxon lamented that the program authorized oil and gas leasing in “only” eight of the 26 offshore planning areas and warned that any further restrictions would have “deleterious consequences” for the domestic economy.  All of the oil companies criticized a planned buffer zone that prohibits oil drilling within 50 miles of the shore—a protection that would likely cut profit margins for the drillers as they are forced to explore in deeper water. They also requested that the lease sale (currently planned for 2021) be moved up.

Florida Legislature 2016: House passes fracking bill -- After an intense debate spread over two days, the Florida House on Wednesday approved a bill that would revamp regulation of the controversial oil and gas drilling process known as “fracking.” The bill (HB 191) would bar local governments from imposing moratoriums on fracking, while requiring the state Department of Environmental Protection to undertake a wide-ranging study that would include looking at potential risks and economic benefits of the process. The bill spurred heavy debate Tuesday and Wednesday and passed in a 73-45 vote that was nearly along party lines. Republicans Halsey Beshears of Monticello, Chris Latvala of Clearwater, Mike Miller of Winter Park, Holly Raschein of Key Largo, Greg Steube of Sarasota, Jay Trumbull of Panama City and Charles Van Zant of Keystone Heights crossed party lines to vote against the measure. Supporters of the bill point, in part, to efforts to gain energy independence. Also, they say oil and natural-gas drilling has taken place in parts of Northwest Florida and Southwest Florida for decades.. “Wishing for a zero-risk process or some absolute safety is not possible,” Rep. Cary Pigman, a physician, said. “I acknowledge that oil and natural-gas production is an untidy process. So is all of mining, so is farming, so is industry, yet our society needs energy, we need food and we need the finished products made from natural resources.”

Florida Passes A Bill To Regulate Fracking, Bans Local Fracking Bans - This week, the Florida House approved a bill that would allow fracking to take place throughout the state as early as 2017, following an inquiry into the environmental and health impacts of the practice. The bill does not require fracking companies to disclose the chemicals or potential carcinogens used in the process, however, and includes a ban on local communities banning the practice entirely. Florida legislators also struck down attempts by Democratic lawmakers to alter the bill, opposing amendments that would have allowed local governments to regulate fracturing activity, required testing of water used in the process, and analyzed the impact of fracking chemicals on public health. Democratic lawmakers also introduced an amendment that would have required local voters to approve any fracking project before it began. That amendment was also struck down.  According to the Tampa Bay Times, the oil and gas industry has been incredibly active in supporting the bill, spending at least $443,000 in contributions to top Republican lawmakers since the last election. The bill calls for the Florida Department of Environmental Protection to conduct a $1 million study looking at the potential impact of fracking on the state’s geology and water supply. The study will also look at the impact of fracking on human health, something that lawmakers argued made an amendment requiring such studies redundant.

Texas crude oil export shipment reaches destination in France - The third of three crude oil export shipments that left Texas around the beginning of the New Year has reached its destination in France. A Liberian tanker named the "Angelica Schulte" reached the Port of Fos-Sur-Mer just outside Marseilles at 11:43 CST Monday.  The Angelica Schulte left the Enterprise Products Partners terminal at the Port of Houston on Jan. 9 and spent more than two weeks at sea before reaching Europe. Switzerland-based trading company Vitol bought the shipment and two others just like it shortly after American federal officials made a Dec. 18 decision to lift a decades old crude oil export ban. Oil industry history was made on New Year's Eve when a tanker named the "Theo T" left from the NuStar Energy terminal at the Port of Corpus Christi carrying the first unlicensed crude oil export shipment in more than 40 years time. A tanker named the "Seaqueen" carried the second unlicensed crude oil export shipment and left the Enterprise Products Partners terminal at the Port of Houston on New Year's Day. The Theo T arrived in Marseilles on Jan. 20 while the Seaqueen arrived in the Dutch port of Rotterdam on Jan. 21. Although the ultimate destination of the crude oil aboard the Angelica Schulte has not been publicized, the South European Pipeline in Marseilles connects to Vitol's Cressier Refinery in Switzerland. Historic low crude oil prices are putting the brakes on more exports, but the three shipments have been noted as important symbols.

Oklahoma approves $1.4m funding for earthquake research related to fracking - Energy Business Review: Oklahoma Governor Mary Fallin has approved $1.4m emergency funds to undertake research and understand increasing frequency of earthquakes in the region. The earthquakes are believed to be linked to wastewater disposal from the oil and gas wells. The funds will used by the Oklahoma Corporation Commission (OCC) and the Oklahoma Geological Survey (OGS). Fallin said: "I'm committed to funding seismic research, bringing on line advanced technology and more staff to fully support our regulators at they take meaningful action on earthquakes." In particular, OGS will use its share of $1m to install additional permanent seismic monitoring stations, update seismic monitoring network and software as well as analyze the response of seismicity to regulatory and market forces driving changes in produced water injection. It will also use to funding to characterize the properties of the Arbuckle formation and basement rock in a complex fluid reservoir and conduct workshops to share research results and define needs for additional studies. OGS director Jeremy Boak said: "The funds will enable us to provide better recommendations for remedial action to further reduce the rate and magnitude of induced earthquakes." Additionally, OCC will use a share of $387,000 for information technology upgrades, two contract geologists, contract clerical worker and geophysicist consultant as well as senior-level oil and gas attorney.

Appeals court says farmer may sue pipeline for crop damage  — An appeals court said Wednesday that a northeastern Iowa farmer may pursue a breach of contract lawsuit against a natural gas pipeline company and seek damages for decreased crop productivity on the ground above the pipeline. Roger Tiemessen rents land from his parents to grow corn and soybeans near New Hampton and says the land above Alliance Pipeline’s high pressure natural gas line is warmer, causing earlier thawing and quicker draining and drying than on nearby land. He says crop yields above the pipes installed in 2000 are poorer than other areas and he wants Alliance to compensate him for the loss. Damage amounts were not specified in court documents. Judge Richard D. Stochl dismissed the lawsuit in 2014, determining that Tiemessen had no cause of action against the company. “If he has any dispute with his ability to grow crops in the easement area, his dispute is with the landlord and not Alliance,” Stochl wrote. “He is free to negotiate a lower rental rate with the landlord if he finds the easement area defective. He has no direct cause of action against Alliance.” But the Iowa Court of Appeals said Tiemessen has presented enough of a question about crop damage in the area of the pipes to present to a jury. The court noted the easement agreement with Alliance says the company will pay for crop damages that may arise from operating the pipeline.

Oil stranded by pipeline break in Calif. could be trucked out — Eight months ago a ruptured pipeline created the largest coastal oil spill in California in 25 years, fouling beaches near Santa Barbara with crude and spreading goo as far as 100 miles away. The beaches reopened last summer, but the fallout is continuing. Santa Barbara County planners are expected to decide in about a week whether to grant Exxon Mobil Corp.’s latest request to use trucks to move more than 17 million gallons of oil stranded in storage after the pipeline shut down in May after the break. With the pipeline shut down indefinitely, the county last year rejected the company’s emergency application to truck the oil to refineries. In a second proposal filed this month, the company says it’s been determined the pipeline will be shut down for months, if not years, creating an “unusual risk” for the remaining oil. “The lack of a pipeline to quickly empty the … crude storage tanks during a natural disaster or unforeseen circumstance could potentially result in the loss or damage to property, the environment or essential public services,” the company warns. If approved, the company would run up to 30 truck trips a day for as long as six months to move the remaining crude. The plan has run into opposition from environmentalists who warn that transporting the marooned oil would be more dangerous than leaving it where it is.

Leaking Los Angeles gas well ordered shut down — The Southern California Gas Co. has been ordered to permanently close and seal a storage well that’s poured natural gas into the air over a Los Angeles neighborhood for months and driven thousands from their homes. A hearing board of the South Coast Air Quality Management District on Saturday also ordered the utility to fund an independent health study for residents of the Porter Ranch neighborhood and inspect all 115 wells at the Aliso Canyon storage facility to help prevent future leaks. “As a result of this order, SoCalGas must take immediate steps to minimize air pollution and odors from its leaking well and stop the leak as quickly as possible,” said Barry Wallerstein, SCAQMD’s executive officer. However, critics who say people have been sickened by the fumes were furious that the air regulators stopped short of ordering a complete and permanent shutdown of all wells at the huge storage field. “This is an ongoing disappointment and no one is managing this crisis situation,” said a statement from Matt Pakucko, president of the group Save Porter Ranch. “SQAMD’s failure to put Californians’ livelihoods first is shameful, and Governor Brown should intervene swiftly,” Michael Brune, executive director of the Sierra Club, said in the same press release. “There should be no other choice but to shut down the dangerous Aliso Canyon facility and look to close every urban oil and gas facility throughout California and our country, to ensure the health of our communities and our climate is never again sacrificed for corporate polluter profits.” Southern California Gas Co. did not immediately release any comment on the SQMAMD orders.

The Latest: California bill would cap abandoned oil wells - A California state senator is pushing legislation to monitor and cap abandoned and leaking oil wells. Democratic Sen. Hannah-Beth Jackson of Santa Barbara said Monday that her bill was inspired by the influx of oil onto Summerland Beach south of Santa Barbara. The popular beach was briefly closed last year while officials looked for the source of smelly oil and tar balls, and health officials have warned visitors to avoid the oil. Jackson says the Summerland Beach oil is believed to come from a well that dates to the 1890s. Jackson’s SB 900 would require the California State Lands Commission to plug abandoned offshore wells when the original oil company cannot be held responsible. Jackson says it costs an estimated $1 million to cap a well.

Reactions to BLM flaring rule – Government overreach or common sense? -- In the latest effort to extend the reach of its climate agenda, the Obama Administration proposed new rules to cut gas flaring and venting on public land. The United States Bureau of Land Management (BLM) last week proposed new rules to reduce natural gas waste from flaring, venting and leaks occurring on oil and gas production operations of public and Indian lands. The new rules, which will be implemented over the course of several years, would require producers to take measures to reduce this waste while modernizing existing and outdated production rules, as well as modifying the existing royalty rate provisions. In a release, the BLM listed the following facts about its proposed rules:

  • The BLM’s onshore oil and gas management program is a major contributor to the nation’s O&G production. Over 100,000 federal onshore oil and gas wells account for five percent of the nation’s oil supply and eleven percent of its natural gas.
  • Large quantities of natural gas are wasted during oil and gas production, enough to supply about 5.1 million households.
  • States, Tribes and federal taxpayers are missing out on royalty revenues lost to wasted natural gas.
  • The proposed rule would minimize waste of natural gas by making productive use of it, enough to supply up to about 760,000 homes each year.
  • Inaction will be damaging to the environment because methane is a powerful greenhouse gas 25 more times potent than carbon dioxide, further exacerbating the effects of climate change.
  • The BLM’s conservative estimates of the rules’ benefits indicate that the costs associated with its implementation will be recouped with net economic benefits ranging up to $188 million per year.
  • Operators will be impacted minimally because many have already taken steps to reduce wasted gas.

Shale Oil Production in Bakken, Eagle Ford Little Changed - Platts: Oil production from key shale formations in North Dakota and Texas dropped slightly in December versus November, according to Platts Bentek, an analytics and forecasting unit of Platts, a leading global provider of energy, petrochemicals, metals and agriculture information. Oil production from the Eagle Ford shale basin in Texas was relatively unchanged in December, increasing about 11,000 barrels per day (b/d), or less than 1%, versus the previous month, the latest analysis showed. This marks the first time since March 2015 that the Eagle Ford shale did not decline. Conversely, crude oil production in the North Dakota section of the Bakken* shale formation of the Williston Basin dipped by less than 1% month over month in December, or about 9,000 b/d, continuing the trend of marginal decline that began in the summer. The average oil production from the South Texas, Eagle Ford basin in December was 1.5 million barrels per day. On a year-over-year basis, that is down about 7%, or about 110,000 barrels per day, from December 2014, according to Sami Yahya, Platts Bentek energy analyst. The average crude oil production from the North Dakota section of the Bakken in November was 1.2 million b/d, about 6% lower than year ago levels.

MDU Refinery Update -- January 27, 2016  -- Jack Kemp posted this graphic today:  Bloomberg posted this story: How the Oil Bust Wiped Out One North Dakota Oil Refiner's Profit -- For the first new refinery in the U.S. in seven years, the idea was simple: Buy cheap oil from shale producers, then score a quick profit by selling it right back to them as more expensive diesel needed to power their trucks and drilling rigs.  Now the shale bust is threatening to ruin a renaissance in small refineries, known as teapots, before it even begins. When Dakota Prairie Refining LLC was building its plant in 2014, it could buy some of the cheapest oil in America and sell among the most expensive diesel in America. But the oil bust obliterated its local diesel market, along with the fat premium the fuel used to fetch, as its potential customers shut down operations.  In the fall of 2014, when tiny Dakota Prairie was getting ready to open its processing plant in Dickinson, North Dakota, diesel fuel near the state’s Bakken oil fields sold for $100 a barrel more than the oil produced there. Now it’s selling for just $16 a barrel more.   "The last thing you want to be doing right now is running a refinery that makes a lot of diesel and very little gasoline," said Robert Campbell, head of oil-products research at Energy Aspects Ltd.  It’s a "double whammy," he said, as the diesel market weakens worldwide and demand in their specific local market plunges. Dakota Prairie lacks the pipelines and storage units a larger refiner uses to sell to customers farther away, and it’s not equipped to make vehicle-ready gasoline instead of diesel.

Spate of layoffs sweeps energy industry -- A sustained downturn led to thousands of layoffs this week as companies struggle to weather the prolonged energy market slump. Falling oil prices forced many producers to cut costs and streamline business. The International Energy Agency said oil prices may fall further this year due to low demand and an oversupply of crude. Schlumberger Schlumberger cut 10,000 jobs and reported a net loss of $1 billion during the fourth quarter of 2015 The largest oilfield services company eliminated about 20,000 jobs earlier in 2015. Schlumberger said it plans to buy back $10 billion in stock.  Southwestern Energy announced another round of layoffs Thursday. According to filings with the SEC, the company laid off 1,100 workers. Affected employees were offered a severance package and select employees were offered reduced roles within the company.  Layoffs at Royal Dutch Shell and BG Group will reach up to 10,000 employees as the companies prepare for a $70 billion merger. In a preliminary earning report, Shell announced it reduced operating costs by $4 billion last year and expects to trim another $3 billion in costs this year. The Daily Advertiser reported Halliburton and Baker Hughes hinted at thousands of layoffs in 2016. As a result of plunging oil prices, Baker Hughes said this week it plans to lay off about 7,000 employees. That number amounts to 11 percent of its workforce.Oklahoma’s Devon Energy stated this week it intends to layoff members of its workforce. However, the company wasn’t able to say when layoffs will occur or how many workers will be affected.  As oil hit 12-year lows earlier this month, BP announced plans to cut 4,000 jobs from upstream operations over the next two years.

Oil price plunge threatens fracking revolution  — Producers of oil and gas from once hard-to-tap shale deposits are now facing the payback of the energy revolution they wrought: ultra-low prices forcing them out of business. This year is expected to be a make-or-break year for US shale producers, after the 70% plunge in crude prices, with many at risk of failure. Dozens of shale drillers sought bankruptcy protection in the past year as low oil prices made their operations uncompetitive and they could not pay debts. But many are holding on toughly, hoping desperately for a turnaround in the market. It has been a rapid reversal for an industry barely a decade old. While shale and other deep-rock strata have long been known to hold substantial oil and gas deposits, it was only recently that techniques were developed to economically tap this "tight" oil by hydraulic fracturing, or "fracking" the strata to release it. Encouraged by US policy to cut the country’s dependence on imported energy, the fracking revolution led to a stunning increase in US domestic crude oil production. Total US output rose from about 5.6-million barrels a day in 2010 to 9.4-million barrels a day last year. But most of that surge, which made the US rival Saudi Arabia as a crude producer, came while crude prices held above $80 a barrel. That made the relatively costly process of tapping shale reserves lucrative. It is different now that crude is close to $30 a barrel, with estimates that US oil and gas producers as a group are losing about $2bn a week. With the estimated price for survival at $50 a barrel, "we expect a sharp jump in bankruptcies at some stage in 2016," VTB Capital analysts said in a note.

Volatility, oil and stock markets - "Down" is such a downer word. That's why when prices fall for practically anything Wall Street wants to sell you, Wall Streeters talk about volatility instead. Volatility allows for the possibility that prices will recover soon and go to new highs. Any setback is just temporary. The market turbulence, it seems, is merely designed by invisible market gods to test your character as a long-term investor. Don't give in to panic, the investment people say, and you'll be rewarded. Until you aren't! A year ago I said the crash in commodity prices signaled a weak economy and that financial markets would eventually have to reflect this fact. The widely watched S&P 500 Index closed at 1,994.99 on January 30, 2015 just prior to the publication of the linked piece. Last Friday's close was 1906.90. The U.S. stock market hasn't exactly reflected the weakness in commodities, but it hasn't gained any ground either. The continuing rout in oil prices began to underline not only the weakness in the global economy, but also the unclear situation at major banks holding large energy-related loan portfolios. The Dallas Federal Reserve Bank was reported to have encouraged banks in its jurisdiction to forebear on energy loans. Essentially, the Dallas Fed was telling banks to ignore losses in their energy portfolios until further notice so as not to cause a panic. The reserve bank quickly denied any such guidance to member banks. The truth in this particular instance may not matter since what we do know--that energy-related junk bond losses are at 2008 crisis levels--could suggest that energy-related losses at the world's banks may end up being the size associated with the subprime mortgage crisis that brought the global economy to its knees in 2008. It is worth remembering that in 2007 then-Federal Reserve Chairman Ben Bernanke assured the U.S. Congress that "the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained."

US junk-rated energy debt hits two-decade low The value of debt issued by junk-rated US energy companies has plummeted to the lowest level for more than two decades, sending a warning signal about the outlook for the North American oil industry. The average high-yield energy bond has slid to just 56 cents on the dollar, below levels touched during the financial crisis in 2008-09, as investors brace for a wave of bankruptcies. The slump in bond prices took a further step down last week, as crude dropped to 12-year lows below $28 per barrel. Although oil rebounded sharply, at about $32 per barrel on Friday, it was still 14 per cent lower than at the start of the year. The US shale revolution which sent the country’s oil production soaring from 2009 to 2015 was led by small and midsized companies that typically borrowed to finance their growth. They sold $241bn worth of bonds during 2007-15 and many are now struggling under the debts they took on. Very few US shale oil developments can be profitable with crude at about $30 a barrel, industry executives and advisers say. Production costs in shale have fallen as much as 40 per cent, but that has not been enough to keep pace with the decline in oil prices. “This year in shale will be very hard,” said Bielenis Villanueva Triana, an analyst at Rystad Energy. The three leading credit rating agencies have warned that high-yield defaults will rise in 2016 and 2017, driven by failures in the energy sector. On Friday, Moody’s placed 120 oil and gas companies on review for downgrade, including 69 in the US. Standard & Poor’s this month cut the oil price assumptions that it uses to assess credit quality and is working on ratings downgrades expected next month. Some investment grade companies are also likely to be downgraded. “Energy without a doubt is where the defaults will be concentrated,”

Moody’s Ponders Credit Downgrades for 120 Energy Companies --Oil prices received a jolt on January 21 and 22, as a cavalcade of bullish news conspired to push oil prices back into the $30s per barrel. The markets got excited at the possibility of more aggressive action from the European Central Bank on Thursday after comments from Mario Draghi, the bank’s president. Also, several voices weighed on oil prices, raising the questions about the unreasonable decline below $30 per barrel. The head of state-owned Saudi Aramco said that oil prices below $30 per barrel was “irrational,” and that he expected prices to rebound this year. Separately, Citigroup said that oil could be “the trade of the year,” because a price increase is nearly assured. After all, prices cannot go much lower, can they?  Meanwhile, even if prices rebound, the financial damage of $30 oil continues to impact energy companies around the world. Moody’s Investors Service, in several separate moves, put 175 oil, gas, and mining companies up for review for possible credit downgrades. 120 of them are in energy and 55 are mining companies. On January 21, Moody’s issued notices on 69 E&P companies. Included in the long list of companies were important names like Transocean, Schlumberger and Chesapeake Energy. “Even under a scenario with a modest recovery from current prices, producing companies and the drillers and service companies that support them will experience rising financial stress with much lower cash flows,” Moody’s wrote in a press release. Some companies are a lot worse off than others. In fact, Moody’s said that it will be looking at “multi-notch” downgrades in some credit ratings. “Multi-notch downgrades are particularly likely among issuers whose activities are centered in North America, where natural gas prices have declined dramatically along with oil prices,” Moody’s wrote.

Energy Creditors Lucky To Recover 15 Cents On The Dollar In Bankruptcy -- This past Wednesday, we reported that in the latest twist of the energy sector collapse, liquidating oil and gas producers, and specifically their creditors, got a nasty lesson in trough cycle asset values when in one after another bankruptcy "stalking horse" aka 363 auction, they were not only unable to cover the outstanding debt (both secured and unsecured) through asset sales, but barely able to cover a tiny fraction of it. "A lot of people got into this business and didn’t really understand the ups and downs of price cycles,” said Becky Roof, a managing director for turnaround and restructuring with the consulting firm AlixPartners. “They’re getting a very bad dose of reality right now.” Becky is right as the following bankruptcy liquidation sales tabulated by Bloomberg demonstrate:

  • Dune went belly up owing $144.2 million. Its assets sold for $20 million.
  • In May, American Eagle Energy Corp. filed for bankruptcy with debts of $215 million. Its properties sold for $45 million in October.
  • BPZ Resources Inc. owed $275.2 million. Its assets fetched about $9 million.
  • Endeavour International Corp. went into bankruptcy owing $1.63 billion. The company sold some assets for $9.65 million and handed over the rest to lenders.
  • ERG Resources LLC opened an auction with a minimum bid of $250 million. Response? No takers.

Then earlier today we learned that as part of its 363 Asset Sale, the 3rd largest bankruptcy of 2015 after Samson Energy and Sabine Oil, that of Quicksilver, the estate was only able to collect $245 million in cash proceeds from BlueStone Natural Resources. With $2.35 billion in debt, Quicksilver was one of the first casualties of the energy bust when it filed on March 17, 2015. Today's news means that the recovery for its creditors is a paltry 10 cents on every dollar of total debt, most of which will go to partially satisfy secured claims. The problem as the chart below shows is that these bankruptcy auctions confirm recoveries on existing debt will be paltry, and based on our limited dataset, average to roughly 15 cents on total debt exposure, which includes both secured and unsecured debt.

Oil Bust May Put Onus on Pimco to Give Rio Retirees Debt Relief -- The sinking price of oil is threatening to put two of the world’s largest bond funds in an uncomfortable position. Pacific Investment Management Co. and Dodge & Cox are the biggest owners of $3.1 billion of notes sold by Rioprevidencia, a pension fund for public-sector workers from Rio de Janeiro. The fund relies on crude royalties from the state to pay the debt. With oil prices plumbing new depths almost daily, the bonds have fallen to a record low on speculation Rioprevidencia may have little choice but to ask creditors to restructure the debt or default. The selloff comes after Rioprevidencia persuaded investors to grant the fund a temporary waiver in September, when the fund said a metric fell below the minimum threshold required to prevent an acceleration of payments should more than half of bondholders demand their money back. In return, the fund boosted the coupon on the securities three percentage points to as much as 9.5 percent. But oil’s collapse has only worsened since that deal was struck, with prices falling 34.5 percent to a 12-year low. “At the end of the day, this is going to have to be restructured,” “Most likely, that will involve much lower coupon payments to bondholders and extending maturities. What the pension did with the covenant waiver was give itself time in case oil came back. The next time Rioprevidencia blows the covenant, which will almost certainly be when the waiver expires, will be the trigger for the restructuring.” Bondholders agreed to waive the so-called debt-service coverage ratio until March. Rioprevidencia said in September the measure fell to 1.2, below the 1.5 required in its debt contracts.

So Yes, the Oil Crash Looks a Lot Like Subprime - One year ago, analysts at Bank of America Merrill Lynch drew a parallel between the subprime mortgage crash and the disorderly fall in the price of oil. Led by Chris Flanagan, a veteran of the securitization space, the team drew attention to Markit's ABX Index, better known as the mother of all synthetic subprime credit indexes. Created in January 2006 and consisting of a basket of credit default swaps (CDS) tied to the welfare of subprime mortgages, it allowed a bevy of investors to bet on the future direction of riskier home loans and helped inflate the massive amounts of leverage tied to the U.S. housing bubble. Fast-forward to today and the BofAML analysts provide an update to their previous thesis, which was that the downward spiral in the price of oil was shaping up to look a lot like the negative trend that engulfed the subprime space circa the year 2007. Here's what they say: The pattern of the decline in the price of oil that began in mid-2014 is remarkably similar to the 2007-2009 pattern of the price decline of ABX, the credit derivative index that referenced subprime mortgages and, ultimately, the U.S. housing market (Chart 1). The ABX history suggests that oil will see more declines in the next couple of months and find a floor somewhere in the low 20s in the March-April time frame. Both the duration of the decline (1.5+ years) and the scale of the decline (100 neighborhood starting price down to the sub-30 neighborhood) are similar. Given that both housing and oil prices were fueled to spectacular heights in the two periods by massive credit expansion, it’s probably more than just coincidence that the respective “bubble” bursting patterns are so similar.

Office of Financial Research Warns of Corporate Debt Defaults, Particularly Related to Energy Loans, as Stability Risk - Yves Smith - We’ve warned for some time that the debt loads on fracking companies were substantial, and had accounted for a high percentage of new lending in the US over the last five years. We also warned that the fall in energy prices, which was widely ballyhooed as a boon for the economy, would not only hit energy companies, but would have knock-on effects by lower revenues and employment in oil/shale boom towns, employment cuts at oilfield service providers, and a downturn in real estate prices in affected communities, all of which could result in loan losses at regional banks. And remember the big rule of investing: tail risk is much greater than you assume. From the International Business Times: A financial watchdog set off the alarm bells on corporate debt Wednesday in its annual report to Congress. With companies feeling growing pressure from painful exchange rates and energy prices, the U.S. is at a higher risk of seeing a wave of corporate defaults, the report said.  The report from the Office of Financial Research, a division of the Treasury Department, listed credit risk as one of the top three financial stability dangers facing the economy in 2016…. It’s not just oil companies that are exposed, however. Regional banks that lend to the energy industry could suffer as a result of a default wave, the OFR report noted, adding that “the ultimate magnitude of losses in these industries and regions is uncertain.”  Moody’s had elevated the debt default concern by downgrading 175 energy-related companies last Friday. Standard & Poors followed suit quickly, but not with a raft of downgrades, but a big warning and a whack at the one-time fracking darling Chesapeake Energy.

Did Wall Street Banks Create the Oil Crash? -- Pam Martens - From June 2008 to the depth of the Wall Street financial crash in early 2009, U.S. domestic crude oil lost 70 percent of its value, falling from over $140 to the low $40s. But then a strange thing happened. Despite weak global economic growth, oil went back to over $100 by 2011 and traded between the $80s and a little over $100 until June 2014. Since then, it has plunged by 72 percent – a bigger crash than when Wall Street was collapsing. The chart of crude oil has the distinct feel of a pump and dump scheme, a technique that Wall Street has turned into an art form in the past.  Pretty much everything that’s done on Wall Street is some variation of pump and dump. Here’s why we’re particularly suspicious of the oil price action. Levin’s Subcommittee unearthed the following about Morgan Stanley: Morgan Stanley had purchased massive physical oil holdings, including the purchase of TransMontaigne, which managed almost 50 oil sites within the United States and Canada. It also had a majority ownership stake in Heidmar, which “managed a fleet of 100 vessels delivering oil internationally.” Morgan Stanley also owned Olco Petroleum, “which blended oils, sponsored storage facilities, and ran about 200 retail gasoline stations in Canada.” The report raised further concerns as to just what Morgan Stanley had morphed into with this finding: “One of Morgan Stanley’s primary physical oil activities was to store vast quantities of oil in facilities located within the United States and abroad. According to Morgan Stanley, in the New York-New Jersey-Connecticut area alone, by 2011, it had leases on oil storage facilities with a total capacity of 8.2 million barrels, increasing to 9.1 million barrels in 2012, and then decreasing to 7.7 million barrels in 2013. Morgan Stanley also had storage facilities in Europe and Asia. 

The myth of US self-sufficiency in crude oil --- Google for “US energy independence” and you will get 134k results, “US self sufficiency” yields 10k results. Here are some examples of what the media reports: In Aljazeera’s Inside Story, 10/1/2016, titled “How much support will Saudi Arabia win against Iran?” the delicate relationship between the US, Saudi Arabia and Iran is discussed with 3 panellists. The moderator wanted answers in the context of “the US is almost at a tipping point, is almost energy independent..” In the State of the Union Address 2014 Obama proudly announced: “Today, America is closer to energy independence than we’ve been in decades”. In the latest SOUA on 12th January 2016, we hear: “Meanwhile, we’ve cut our imports of foreign oil by nearly sixty percent” On 16/1/2016, the 7pm news of Australia’s public broadcaster ABC TV had this snippet:  Let’s look at the data: Crude imports Fig 1: The graph shows that crude production reached almost 9.5 mb/d in 2015, just short of the historic peak in 1970. But imports are still 7 mb/d. Exports were only around 500 kb/d (to Canada) due to an export ban (which was recently lifted). Let’s zoom into the period since 2007, the peak year of imports.  We have several phases in this crude oil import history:

  • 3 year decline of imports due to recession as oil prices went up, followed by the financial crisis
  • A rebound when quantitative easing started
  • A 2 mb/d decline 1 year after the shale oil boom started

In 2013 the growing production curve intersects with the declining import curve at around 7.5 mb/d i.e. a production/import ratio 50:50. Since then production grew another 2 mb/d but has peaked in April 2015 because of low oil prices which hit the shale oil industry. Imports did not continue to decline but remained basically flat. Due to slightly declining crude production the ratio did not improve anymore in 2015 and appears to be stuck at 43%. Clearly, this is not “virtually self-sufficient in [crude] oil”.

There’s Only One Presidential Candidate Who Wants to Ban Fracking - There isn't much daylight these days between the Democratic candidates on the environment. Bernie Sanders, Hillary Clinton, and Martin O'Malley all agree that humans are responsible for climate change and that it's one of the world's most pressing problems. To that end, they support clean energy tax breaks, reject drilling offshore and in the Arctic, and oppose the (now-rejected) Keystone XL pipeline.  But there's one environmental issue where Sanders truly stands apart: He wants to ban hydraulic fracturing outright. Clinton and O'Malley have proposed lesser measures, and show no sign of going further. That's an indication of just how radical Sanders's stance really is, but it also raises an important question: Is a fracking ban remotely plausible?  There used to be more daylight between the candidates, especially Sanders and Clinton. The Vermont senator has long called for "a political revolution that takes on the fossil fuel billionaires, accelerates our transition to clean energy, and finally puts people before the profits of polluters"—and he's taken early, decisive stances in support of many of the environmental movement's top demands before he ever launched his presidential campaign.

A Look At Where Oil Production Keeps Rising - Located in my home state of Ohio is the Utica, a region that has become well known for producing oil and natural gas during the fracking revolution. Although less famous than other regions like Marcellus, the Permian, or Eagle Ford, the area does produce enough oil to warrant the attention of the EIA (Energy Information Administration), which includes its data on its monthly Drilling Productivity Report. As one of the smaller oil-producing regions, you would imagine that the Utica would lack the resources needed to continue producing ever-increasing amounts of crude in this current environment but it, unlike its peers, looks set to continue increasing output unless something material changes.  The area known as the Utica covers the Eastern portion of Ohio and sits right next to the Marcellus. In the image below, you can see the area it consists of, as well as the six other regions analyzed by the EIA; Permian, Eagle Ford, Bakken, Marcellus, Haynesville, and Niobrara. In past articles, I've looked at the Permian, Eagle Ford, and Bakken, the three largest regions covered by the organization, and found that, while Permian production could continue to grow a bit near-term, the overall trend for the other regions is (absent a rise in rig count) very much down.

Incremental Production in the Gulf of Mexico -- Deepwater and ultra-deepwater crude oil production projects in the Gulf of Mexico (GOM) are complex and take years to complete, so the several GOM projects on which exploration and production companies made final investment decisions in 2012-14 are only now coming online—just in time, it turns out, for the lowest oil prices in a dozen years.  So there’s this irony: Crude is selling for little more than $30/Bbl, but the new projects coming online in 2016 and beyond are likely to bring GOM production to record highs. Today, we continue our examination of still-rising production in the GOM with a review of more projects increasing the Gulf’s output.  A key aim of this blog series is to point out one of the reasons why—even after a year and a half of falling crude oil prices—U.S. oil production has remained so high and fairly steady. According to U.S. Energy Information Administration (EIA) monthly reports, domestic crude production peaked in April 2015, at 9.7 MMb/d and then fell by 400 Mb/d to 9.3 MMb/d in October (the latest monthly data). The less reliable weekly EIA domestic field production for the week ending January 15, 2016 showed output still averaged 9.2 MMb/d.  While U.S. production as a whole fell by 3.6% from April to October 2015 - production in the GOM is up by 4.8% to 1.6 MMb/d over the same period; and since oil prices started falling in June 2014 GOM production has increased by nearly 14%. The reasons for the still-widening gap between onshore production declines and GOM production gains are 1) that production from the best GOM wells typically remains high and flat for years (unlike most onshore shale wells, with their high initial production rates and quick falloffs), 2) that E&Ps active in the GOM take a decidedly long-term view of oil prices when considering whether to make a Final Investment Decision (FID) on a new production project, and 3) that (due to project scope and complexity) it typically takes at least several years to take a GOM project from FID to “first oil.”

US shale groups slash capital spending -- Three leading US shale oil producers have announced steep cuts in their planned capital spending, as they set their budgets to respond to the collapse in crude prices. Two of them also forecast that their oil and gas production would fall, showing how the financial squeeze on US companies is having a growing impact on the country’s output of crude. Oklahoma-based Continental Resources, controlled by its founder Harold Hamm, said it would cut capital spending by 66 per cent this year to $920m, following a 46 per cent reduction last year. New York-based Hess said it would cut spending by 40 per cent this year, following a 29 per cent cut in 2015. Noble Energy, based in Houston, said it planned a 50 per cent cut in spending for 2016, as it also reduced its quarterly dividend from 18 cents per share to 10 cents. Mr Hamm said Continental’s budget “confirms our intense focus on cash flow neutrality”: ensuring capital spending is covered by cash the business generates so the company does not need to raise additional financing. Greg Hill, chief operating officer of Hess, said it planned to “reduce activity at all of our producing assets” and would “pursue further cost reductions and efficiency gains”. John Hess, chief executive, said the company’s focus would be on “preserving the strength of our balance sheet”. Kenneth Fisher, chief financial officer at Noble, said its capital spending and dividend cuts were "part of a comprehensive effort to spend within cash flow" and reduce the company's debts. External financing from debt and equity markets for small and midsized US oil and gas producers slowed sharply in the second half of last year. Continental, Hess and Noble are the first US oil companies to announce budgets following the slump in crude prices this year to about $31 per barrel on Tuesday.

Halliburton posts 4Q loss, drop in revenue amid oil slump — Hurt by falling oil prices, Halliburton reported a loss for its fourth quarter and said its revenue dropped 42 percent from a year ago. Houston-based Halliburton provides drilling services to oil and gas operators, which have been cutting their spending due to falling oil prices and demand. The company reported a loss of $28 million, or 3 cents per share, in the fourth quarter, compared with a profit of $901 million, or $1.06 per share, in the same period a year ago. Earnings, adjusted for asset impairment costs and costs related to mergers and acquisitions, came to 31 cents per share, topping Wall Street expectations. The average estimate of 17 analysts surveyed by Zacks Investment Research was for earnings of 24 cents per share. Revenue fell to $5.08 billion from $8.77 billion a year ago, narrowly missing Street forecasts. Twelve analysts surveyed by Zacks expected $5.1 billion. For the year, the company reported a loss of $671 million, or 79 cents per share. Revenue was reported as $23.63 billion.

Hess Corp reports bigger 4Q loss amid oil slump — Hess, which announced a 40 percent cut in capital expenditures for 2016 this week, promised even deeper cuts Wednesday after reporting worse-than expected losses in the fourth quarter with crude prices hovering around $30 per barrel. The New York company reported a loss of $1.82 billion, or $6.43 per share, in its fourth quarter, compared with a loss of $8 million, or 3 cents per share, in the same quarter a year ago. Losses, adjusted for non-recurring costs and to account for discontinued operations, were $1.40 per share, 30 cents lower than Wall Street had projected, according to a poll by Zacks Investment Research was for a loss of $1.10 per share. Revenue was almost cut in half to $1.39 billion, which was also worse than expected. Major energy companies across the board are hunkering down by slashing expenses, cancelling projects, and laying off workers.

Valero Energy posts better-than-expected profit - Valero Energy reported higher-than-expected earnings on Thursday. The San Antonio-based company earned $862 million in profit during the fourth quarter 2015. The San Antonio oil refiner reported earnings of $1.79 per share, beating the average estimate of $1.41 per share. High crack spreads, the difference between crude oil and refined petroleum products, have meant strong profits for oil refiners despite low gasoline prices. The price of benchmark U.S. crude has fallen more than 70 percent since June 2014. In the fourth quarter, Valero Energy’s refining margin fell to $10.87, compared to $11.17 a year ago. Net income to Valero Energy’s stockholders fell 62 cents per share, down $298 million. Operating revenue fell 33 percent to $18.78 billion. In the fourth quarter, the company commissioned a new crude unit at its Corpus Christi refinery, completed a hydrocracker expansion at its Port Arthur refinery and completed a crude unit expansion at its McKee refinery.

SandRidge Energy On The Verge Bankruptcy: Would Be 2nd Largest Shale Chapter 11 In Past Year -- As we said two days ago when looking at the paltry recoveries on their total debt that bankrupt energy debtors are generating in liquidation and bankruptcy asset sales, "the energy bankruptcy party is only just starting." And sure enough, overnight we learned that another company is preparing to throw in the towel following a Reuters report that SandRidge Energy - a shale oil and gas producer in the Mid-Continent region of the U.S. - is exploring debt restructuring options, "as the heavily indebted U.S. oil and gas exploration and production company struggles with the fallout from plunging energy prices." In reviewing the company's options, Reuters writes that one choice is a pre-packaged bankruptcy. However, a decision on a way forward is not imminent and that the company has access to enough cash to continue doing business for at least several more months under its current structure. Other avenues SandRidge could pursue would include a debt exchange or filing for bankruptcy protection without any agreement with its creditors. What this really means is that having struggled to come to a prepackaged bankruptcy agreement for the past few weeks with its various stakeholders (Debtwire reported on Jan. 13 that Sandridge hired Houlihan Lokey to craft a restructuring plan), the company will likely have no choice but to file a "freefall" Chapter 11 and let a bankruptcy judge decide the fate of its $4 billion in debt.

Moody’s Ponders Credit Downgrades for 120 Energy Companies --Oil prices received a jolt on January 21 and 22, as a cavalcade of bullish news conspired to push oil prices back into the $30s per barrel. The markets got excited at the possibility of more aggressive action from the European Central Bank on Thursday after comments from Mario Draghi, the bank’s president. Also, several voices weighed on oil prices, raising the questions about the unreasonable decline below $30 per barrel. The head of state-owned Saudi Aramco said that oil prices below $30 per barrel was “irrational,” and that he expected prices to rebound this year. Separately, Citigroup said that oil could be “the trade of the year,” because a price increase is nearly assured. After all, prices cannot go much lower, can they?  Meanwhile, even if prices rebound, the financial damage of $30 oil continues to impact energy companies around the world. Moody’s Investors Service, in several separate moves, put 175 oil, gas, and mining companies up for review for possible credit downgrades. 120 of them are in energy and 55 are mining companies. On January 21, Moody’s issued notices on 69 E&P companies. Included in the long list of companies were important names like Transocean, Schlumberger and Chesapeake Energy. “Even under a scenario with a modest recovery from current prices, producing companies and the drillers and service companies that support them will experience rising financial stress with much lower cash flows,” Moody’s wrote in a press release. Some companies are a lot worse off than others. In fact, Moody’s said that it will be looking at “multi-notch” downgrades in some credit ratings. “Multi-notch downgrades are particularly likely among issuers whose activities are centered in North America, where natural gas prices have declined dramatically along with oil prices,” Moody’s wrote.

Oil Rout Has Banks Reining in Risky Loans, Adding to Energy Woes -- With crude trading near its lowest level since 2003, banks large and small are clamping down further on how much they’re willing to lend to risky oil-and-gas companies. Standard & Poor’s estimates that credit lines to these companies -- the amount banks are willing to lend based on the value of the firms’ reserves -- could be cut by 30 percent the next time banks conduct their twice-yearly reevaluations in April. That’s even after a reduction of about 10 percent in November, according to Thomas Watters, managing director of the credit rater’s oil and gas group. Banks including Wells Fargo & Co., Goldman Sachs Group Inc., Bank of America Corp. and JPMorgan Chase & Co. and regional banks such as Comerica Inc. and SunTrust Banks Inc. have all voiced caution about the sector as increasing numbers of energy companies file for bankruptcy. “The pressure on lenders to reduce the borrowing base during spring or discretionary redeterminations increases,” . “A few more months in this commodity pricing environment will result in a substantial increase in the number of restructurings and Chapter 11 filings.” Already, Wells Fargo lost $118 million on oil and natural gas loans in the fourth quarter and Citigroup Inc. added $250 million to its reserves to cover potential losses in its energy portfolio as oil fell from $90 to about $30 a barrel in the space of 15 months. Oil-and-gas securities accounted for 31 percent of the total amount of debt trading at a distressed level in January, according to a Standard & Poor’s report. Debt is considered distressed when it trades with yields of more than 10 percentage points above Treasuries.

Kinder Morgan Would Like To Build An "XL" Pipeline Through British Columbia -- Good Luck -- January 26, 2016 - It was reported just a few days ago that TransCanada and First Nations had agreed on a natural gas pipeline from Alberta through British Columbia to the west coast. Now we turn to crude oil. PennEnergy is reportingA proposed pipeline-expansion project in Canada will put the fishing rights and cultural heritage of U.S. tribes at risk, a lawyer representing several Washington state tribes told Canadian energy regulators. Kinder Morgan's Trans Mountain project would nearly triple oil pipeline capacity from 300,000 to 890,000 barrels of crude oil a day. It would carry oil from Alberta's oil sands to the Vancouver area to be loaded on to barges and tankers for Asian and U.S. markets. The project would dramatically increase the number of oil tankers that ply Washington state waters.  "This project will harm the cultures of the US tribes," said Kristen Boyles, an Earthjustice attorney who spoke against the project Friday on behalf of the Swinomish, Tulalip, Suquamish and Lummi tribes. She made final arguments to Canada's National Energy Board at a hearing in Burnaby, British Columbia, which was broadcast online. Boyles told the three-member panel that project officials didn't consult with the U.S. tribes and didn't consider the impacts to the tribes. "This project is all risk and no reward," she added.  The U.S. tribes are among the municipalities, environmental groups, First Nations and residents along the pipeline route who are intervenors in the case. Many have raised concerns about the risk of pipeline leaks, increased vessel traffic and potential oil spills.

US tribes oppose massive pipeline expansion in Canada — A proposed pipeline-expansion project in Canada will put the fishing rights and cultural heritage of U.S. tribes at risk, a lawyer representing several Washington state tribes told Canadian energy regulators. Kinder Morgan’s Trans Mountain project would nearly triple pipeline capacity from 300,000 to 890,000 barrels of crude oil a day. It would carry oil from Alberta’s oil sands to the Vancouver area to be loaded on to barges and tankers for Asian and U.S. markets. The project would dramatically increase the number of oil tankers that ply Washington state waters. “This project will harm the cultures of the US tribes,” said Kristen Boyles, an Earthjustice attorney who spoke against the project Friday on behalf of the Swinomish, Tulalip, Suquamish and Lummi tribes. She made final arguments to Canada’s National Energy Board at a hearing in Burnaby, British Columbia, which was broadcast online. Boyles told the three-member panel that project officials didn’t consult with the U.S. tribes and didn’t consider the impacts to the tribes. “This project is all risk and no reward,” she added. The U.S. tribes are among the municipalities, environmental groups, First Nations and residents along the pipeline route who are intervenors in the case. Many have raised concerns about the risk of pipeline leaks, increased vessel traffic and potential oil spills.

Bad Loans Pile Up In Alberta, As Oil Bust Weighs On State Lender -- As regular readers are no doubt acutely aware, Alberta is in trouble.The province is at the heart of Canada’s dying oil patch and crude’s inexorable decline has had a devastating economic impact.30% of provincial revenue is derived from resources and as crude collapsed, so did oil and gas investment. O&G spending plunged by more than a third in 2015  and as provincial authorities wrote in their latest fiscal update, “weakness in the oil and gas sector has spread to other sectors of the economy.” As the layoffs piled up, so too did the social consequences of the bust. Food bank usage rose, property crime soared, and suicide rates spiked. The recent rally notwithstanding, the outlook for oil prices is grim. Overnight, Saudi Aramco Chairman Khalid Al-Falih announced his company hasn’t reduced its investment capacity which suggests they’ll be no abrupt about face on the supply side from Riyadh and Iran is set to ramp production by 1,000,000 barrels per day by the end of the year.In Canada, WCS is sitting just a dollar above the marginal cost of production and Stephen Poloz didn’t do drillers any favors by eschewing a rate cut last week.

Alberta Loses Most Jobs In 34 Years As Oil Crunch Cripples Labor Market - Times are tough in Alberta and to be sure, we’ve piled it on heavy when it comes to cataloguing the long list of pitiable outcomes that have accompanied crude’s steep slide. The province is at the center of Canada’s dying oil patch and as crude extended its seemingly endless decline last year, Alberta saw oil and gas investment plunge by a third. That’s bad news for authorities who count on resources for 30% of provincial revenues. Rig activity fell by half in the first seven months of 2015 and as the job losses mounted, the sorrow deepened - literally. Suicide rates jumped by 30% and in Calgary commercial break-ins almost doubled from a year earlier, while bank robberies were up 65% and home invasions increased 52% (read more here). Meanwhile, food bank usage spiked as those who used to be donors found themselves depending on the free meals for subsistence. And speaking of food, prices for fresh fruit and vegetables are seeing double-digit inflation thanks to the plunging loonie. All in all, a very bad situation indeed and on Tuesday we learned that the picture was actually materially worse than an initial round of statistics led us to believe. “Statscan’s annual revisions of its national Labour Force Survey data ratcheted up Alberta’s net job losses last year to 19,600, from the 14,600 the statistical agency originally reported in its final 2015 survey released in early January,” The Globe And Mail reports, adding that the losses “exceed the 17,000 jobs Alberta shed in the Great Recession in 2009.”

Canada Just Announced A Major Pipeline Reform - Oil and gas pipelines now have a new hurdle to clear before they’re approved in Canada. Pipelines and natural gas export terminals proposed in the country will now be subject to a climate test, which will seek to determine how the project will impact greenhouse gas emissions, Canadian officials announced Wednesday. That test will take into account the “upstream” impacts of a project — meaning the emissions from the extraction of the oil or gas that the pipeline would carry or the gas the terminal would store — as well as the emissions created from building and maintaining the project. “The federal role is to put into place a process by which TransCanada and any other companies could demonstrate that their projects are in the public interest and could have public support,” Trudeau said Tuesday, ahead of the government’s official announcement. “What we are going to roll out very soon, as we promised in our election campaign, is to establish a clear process which will consider all the greenhouse gas emissions tied to a project, which will build on the work already done.” The announcement, which covers projects already proposed in Canada, is good news for environmentalists and others who are concerned about increased fossil fuel production “We were very, very excited to see this announcement,” said Lena Moffitt director of the Sierra Club’s Beyond Dirty Fuels campaign. “It’s exactly the kind of analysis that should be conducted in reviewing any major energy project, and it’s exactly the kind of thing we’d like to see the Obama administration institute.”

Book review: Slick Waters shows us the human face of fracking: (interview transcript) Andrew Nikiforuk is an award-winning journalist and author who has written about energy, economics and the West for more than three decades. In his new book he tells the story of Jessica Ernst — the biologist and longtime oilpatch consultant who alleges that energy giant Encana secretly fracked hundreds of gas wells around her home, piercing her community’s drinking water aquifer. She has an ongoing lawsuit against Encana, Alberta Environment, and the Energy Resources Conservation Board. Q: Tell us how you first discovered Jessica Ernst’s story and why you decided to dedicate a book to it (and the subject of fracking.)

Anti-fracking activist seeking to record evidence of gas leak found guilty of trespass - ABC News - An anti-fracking activist has been found guilty of trespass after entering a Buru Energy drilling compound to film evidence of a methane leak at one of its wells. Broome man Damien Hirsch, 44, admitted to breaking into the compound in 2014, but pleaded not guilty to trespass on the grounds that public health concerns warranted the action. The footage showed a handheld meter apparently recording dangerously high levels of methane being released from the Yulleroo 2 gas well, 70 kilometres east of Broome. Magistrate Stephen Sharratt found Hirsch guilty of trespass, but accepted he was genuinely concerned about inaction over the gas leak."I accept the valve was leaking to the extent it could be heard and smelt," he said.He said Mr Hirsch "wanted to show the department's inaction ... and committed trespass to gather evidence"."His motives were good, but jumping into the compound was not trivial ... it was dangerous, he took a great risk, he could have been blown up," Mr Sharratt said. He said acquitting him would set a precedent that would see "people committing trespass all over the state" when concerned about environmental issues.

Fracking fears raised by methane gas study - BBC News: Research on the amount of gas leaked from onshore oil and gas wells raises "serious questions" over the development of fracking in the UK, Greenpeace has said. Around a third of former onshore oil and gas wells are leaking methane gas, according to the research led by scientists at the University of Durham. But it found the leaks produced less methane than agricultural use. The industry body said the findings should reassure people. "What ReFINE has shown is that the public should have no health or environmental concerns about emissions from properly decommissioned wells adhering to current industry standards." "Indeed the research has found that in the minority of cases where they have recorded some methane emissions from decommissioned wells, these emissions are typically less than one would get from just a handful of livestock grazing in the same fields," said Ken Cronin, Chief Executive of UKOOG, the representative body of the UK Onshore Oil & Gas industry. Around 2000 onshore oil and gas wells have been drilled in the UK. Fracking for shale oil and gas could result in many more.

Why the oil price crash may have killed off fracking in Wales for decades - Fracking in Wales is unlikely to happen for at least a decade and arguably much longer, experts say. With the oil price plunging across the world and significant political opposition in Wales, it is thought the prospect of exploiting the shale gas and oil beneath South Wales is vanishing. It was revealed last week that Eden Energy, which owned 50% of the rights to exploit the shale beds in South Wales, has sold its share for a £1, plus a royalty if petroleum is ever produced. The sale was announced to the stock market in Australia where the Perth-based firm is listed. The economic reasons for fracking's uncertain future in Wales With the price of a barrel of oil hovering at around $30 on global markets, exploiting the reserves believed to be present in South Wales are simply too expensive. Professor Calvin Jones of Cardiff Business School said the oil price would need to “quadruple” before companies had an incentive to start shale gas extraction in the UK.

Exxon says oil and gas will still dominate energy in 2040 -— The way oil giant Exxon Mobil sees it, the global energy landscape won’t be radically different in 2040 than it is today. Oil and gas will remain king, accounting for an even slightly larger share of the energy supply. Coal will fall behind natural gas to become the third-largest source of energy. Exxon forecasts that emerging renewables such as solar and wind power will triple but remain small — just 4 percent of the world’s energy. And carbon emissions will continue rising until around 2030, when cuts in industrialized nations gain traction lead an overall reduction. Those are some of the highlights in the long-range outlook that Exxon Mobil Corp. released Monday. It is not likely to win an enthusiastic response from environmentalists, including some of the company’s dissident shareholders, who want a quicker pivot away from oil, gas and coal and faster progress to bring down carbon emissions. Exxon officials say it is a dispassionate forecast, not a political document. “Exxon Mobil uses the outlook to develop business strategies that underpin our billion-dollar investment decisions,” William Colton, the oil giant’s chief strategist, said in an interview. “We have every incentive to get it right.”

Study: Fracking in Germany would not contaminate drinking water --A study by geologists at the Federal Institute for Geosciences and Natural Resources (BGR) found that developing Germany’s shale oil and gas with hydraulic fracturing would not contaminate drinking water resources. A Reuters report summarized its findings. Geologists used computer simulations to study what would happen to fracking fluids when injected into the bedrock of the North German Basin. “We found that the injected fluids did not move upwards into layers carrying drinking water,”. The results of the study were published in Germany last week.   Ladage also noted that hydraulic fracturing could improve Germany’s development of natural gas. “Gas production from domestic resources has been falling for 10 years,” Ladage said. “Using shale gas resources in Germany primarily bears the potential of mitigating part of the ongoing decline.”The BGR reported that between 0.32 trillion and 2.03 trillion cubic meters of gas could be extracted in depths below 1,000 meters in northern Germany. One of the world’s largest energy consumers, Germany has to import most of its energy fuel. Imports account for 98 percent of crude oil and 88 percent of natural gas, according to the BGR.

One-Third of Ecuador's Rainforests to Be Auctioned Off to Chinese Oil Companies - Almost two years after a controversial bid by the country's politicians to auction off part of the Amazon Rainforest to Chinese oil drilling companies, the it seems like the deal is finally about to get finalized, according to The Business Insider. If the deal does go through, China would be free to exploit about 3 million of the country's 8.1 million hectares of pure, untouched Amazonian rainforest. The region has remained pristine despite the advent of industrialization, until now. Areas of the Amazon are widely believed to carry vast deposits of oil, one of the global market's primary commodities. With China growing at an unprecedented pace, its acquisition of the Amazonian rainforest would, of course, enable the Asian giant to access more resources Like Us on Facebook Of course, such a move carries undeniable consequences, most of all being the obvious negative effects on the Amazon's ecosystem. Ecuador, most especially the millions of hectares of pure rainforest, is extremely biodiverse and is widely thought to hold species of animals that are probably yet to be discovered. However, such biodiversity is also extremely delicate; thus, the oil exploration activities of China might very well compromise its balance.

Oil Drops as Saudis to Maintain Spending, China Diesel Use Falls  -- Oil dropped after Saudi Arabia, the world’s biggest crude exporter, said low prices won’t reduce its spending on energy projects and China’s diesel demand fell for a fourth consecutive month. Futures tumbled 5.8 percent in New York. Saudi Arabian Oil Co., also known as Saudi Aramco, is maintaining its investment plans despite the rout in the crude market, Chairman Khalid Al-Falih said Monday. Diesel use in China dropped 5.6 percent in December compared with a year earlier and gasoline consumption grew at the slowest pace in more than two years. Oil resumed its decline after the biggest two-day rally in more than seven years as concerns persist over ample U.S. stockpiles, steady production from Saudi Arabia and Russia and the outlook for increasing Iranian shipments after the end of sanctions. Prices may take as long as three years to normalize, according to Bank of Montreal Chief Executive Officer William Downe. "A decline is to be expected after a giant move like we just had," . "We’re also down because the Chinese demand numbers were off considerably, especially diesel. The Saudis aren’t helping the market by deciding that they will go full-speed ahead with their investment plans." West Texas Intermediate for March delivery dropped $1.85 to close at $30.34 a barrel on the New York Mercantile Exchange. Total volume traded was 28 percent higher than the 100-day averageat 2:57 p.m. Front-month prices rose 21 percent over two sessions at the close Friday after the February contract expired Wednesday at $26.55 a barrel, the lowest since 2003. Brent for March settlement fell $1.68, or 5.2 percent, to end the session at $30.50 a barrel on the London-based ICE Futures Europe exchange. The contract gained 10 percent to $32.18 Friday. The European benchmark crude closed at a 16-cent premium to WTI. 

Tankers Cutting Speeds Amid Oil Glut-- Ardmore Shipping Founder and CEO Anthony Gurnee discusses the impact of low oil prices on the shipping industry. He speaks on "Bloomberg Markets." 

A Constant Short Squeeze Threat: Oil Shorts Are At All-Time Highs --  While market participants will hardly need the caution, having experienced historic moves in the oil complex over the past few days including the biggest two-day surge in seven years at the end of last week, one reason why oil remains so remarkably jumpy on even the tiniest hint of supply rationalization as demonstrated this morning by the latest comments by the Iraqi oil minister, is that the short interest in both WTI and Brent is at nosebleed record highs and continues to rise with every passing week. As SocGen writes this morning, "we have seen extreme short positioning building up in the oil futures market. The quantity of short positions opened is at an all-time high for Brent, and still high for WTI futures."  SocGen correctly notes that there is now an asymmetric profile on oil: "a positive surprise could happen quite sharply, as short positions are likely to be squeezed by a profit-taking move. On WTI, the in-the-money short positions are really dominating at the front end of the curve while out-of-the-money long positions are dominating at the long end of the curve: the front end of oil curve could thus be more exposed to some profit-taking."  SocGen's conclusion is that "deflation fears could turn around rapidly and give more room to reflation and inflation talks" which considering all central banks are now actively blaming low oil prices for their monetary incompetence, is indeed notable.

Crude Plunges After API Reports Biggest Inventory Build Since 1996 -- After a day of exuberant hope from rumors of production cuts, WTI crude is plunging back to reality as API reports a stunning 11.4 million barrel inventory build. This is the biggest weekly build since May 1996. When moar is not better... And the reaction...  Let's hope that stocks can decouple from oil's harsh reality or all that dead cat bubble bounce will be gone before Janet gets to unleash her statement.

Opec pleads for Russian alliance to smash oil speculators - Telegraph: The Opec oil cartel has issued its strongest plea to date for a pact with Russia and rival producers to cut crude output and halt the collapse in prices, warning that the deepening investment slump is storing up serious trouble for the future. Abdullah al-Badri, Opec’s secretary-general, said the cartel is ready to embrace rivals and thrash out a compromise following the 72pc crash in prices since mid-2014. "Tough times requires tough choices. It is crucial that all major producers sit down and come up with a solution," he told a Chatham House conference in London. Mr al-Badri said the world needs an investment blitz of $10 trillion to replace depleting oil fields and to meet extra demand of 17m barrels per day (b/d) by 2040, yet projects are being shelved at an alarming rate. A study by IHS found that investment for the years from 2015 to 2020 has been slashed by $1.8 trillion, compared to what was planned in 2014. Mr al-Badri warned that the current glut is setting the stage for a future supply shock, with prices lurching from one extreme to another in a deranged market that is in the interests of nobody but speculators. "It is vital that the market addresses the stock overhang,” he said. Leonid Fedun, vice-president of Russia’s oil group Lukoil, said Opec policy had set off a stampede, comparing it to a “herd of animals rushing to escape a fire”. He called on the Kremlin to craft a political deal with the cartel to overcome the glut. “It is better to sell a barrel of oil at $50 than two barrels at $30,” he told Tass. This is a significant shift in thinking. It has long been argued that Russian companies cannot join forces with Opec since the Siberian weather makes it hard to switch output on and off, and because these listed firms are supposedly answerable to shareholders, not the Kremlin.

Why A Russian-Saudi Deal On Cutting Oil Output Remains Elusive  -  With oil trading near $30 a barrel, calls for orchestrated output cuts to quell global oversupply have intensified this week. Trouble is, none of the world’s largest producers, most notably Russia and Saudi Arabia, have shown they’re ready to make a move. OPEC Secretary-General Abdalla El-Badri called on all countries, both inside and outside the group, to join efforts to revive oil prices. "It should be viewed as something OPEC and non-OPEC tackle together," he said on Monday. Iraq’s oil minister said on Tuesday that Saudi Arabia and Russia, the world’s two largest exporters, might be ready to become “more flexible.” Yet there’s little sign the countries themselves are ready to reach an agreement despite the economic damage wrought by the lowest prices since 2003. Long-standing obstacles remain -- Saudi Arabia’s desire to defend market share, Russia’s inability to cut production in winter months -- and analysts say talk of a deal probably reflects the hope of producers in pain rather than the expectation of concrete action. The two countries’ opposing views on Syria, where Russia is President Bashar Al-Assad’s closest ally and Saudi Arabia wants him gone, present another significant diplomatic obstacle. "It will not happen -- everybody is winking, hinting," said Kamel al-Harami, an independent oil analyst and former executive of state-owned Kuwait Petroleum Corp. "The Saudis won’t do it without the Russians. Unless Russia accepts to cut, I don’t see it happening.”

Fast And Furious -- January 27, 2016; US Crude Oil Stocks At Highest Inventory Level For Month Of December Since The Great Depression  -- Several interesting tweets one following the other, fast and furious:

  • Reuters: Russian energy ministry says possible coordination with OPEC was discussed at meeting with Russian oil companies
  • Russia's Transneft says Russia and OPEC will discuss possible output cuts -- Tass
  • From John Kemp, Remains unclear whether Russia is seriously contemplating coordinated OPEC cuts but speculation intensifying
  • From John Kemp: CAVEAT LECTOR: Earlier today Reuters carried this: Russia plans no joint action with OPEC
  • US commercial crude oil inventories +8.4 million bbl for week ended Jan. 22 to 494.9 million bbl,
  • From John Kemp: Canada's oil output projected to rise 56% to 6.1m b/d by 2040 under reference price scenario (most from oil sands)
  • Oil Companies Holding On: Deloitte Says M&A Deals Down 53%.
  • At 484 million bbl (+23% YOY), US crude oil stocks hit highest inventory level for December since 1930
  • US oil output in December averaged 9.3 million b/d, down 1.4% YOY but 2nd highest for month since 1972,
  • US petroleum demand in December was highest for month in 5 years.

That last bullet was a bit interesting in view of this graph that shows gasoline demand continues to fall, though it now "parallels" last year's decline:

Oil Oscillates As Inventories Surge Most In 9 Months And Demand Plunges - Following last night's huge 11.4mm barrel inventory build forecast from API (the largest since 1996), DOE reports an 8.4mm build (against analysts estimates of +4mm). It seems the blowback from the huge gasoline and inventory builds is flowing back upstream to crude but there is some good news as Cushing saw a 771k draw after 11 weeks of builds (and production dropped very modestly). On the demand side, it's just as ugly with Gasoline demand -2.5% YoY and Distillate demand down a stunning 14.8% YoY. Having tested the API ledge in prices twice this morning, WTI is hovering between $30.50 and $31.

  • *CRUDE OIL INVENTORIES ROSE 8.38 MLN BARRELS, EIA SAYS
  • *GASOLINE INVENTORIES ROSE 3.46 MLN BARRELS, EIA SAYS
  • *DISTILLATE INVENTORIES FELL 4.06 MLN BARRELS, EIA SAYS

Oil Inventory Hits "Levels Not Seen in 80 Years"; Crude Jumps on News Russia May Cooperate with OPEC -- The supply glut in oil storage continues as crude. Inventories hit new all-time highs this past week. The above charts from EIA Weekly Supply Data shows the crude inventory of 494,920,000 (not counting strategic reserves) passed the previous high of 490,912,000 set on April 24, 2015.Reserves, including the Strategic Petroleum Reserve (SPR), reached 1,190,038 barrels, also a record high. Here are some interesting comments from the Weekly EIA Report. "At 494.9 million barrels, U.S. crude oil inventories remain near levels not seen for this time of year in at least the last 80 years. Total motor gasoline inventories increased by 3.5 million barrels last week, and are well above the upper limit of the average range. Both finished gasoline inventories and blending components inventories increased last week. Distillate fuel inventories decreased by 4.1 million barrels last week but are near the upper limit of the average range for this time of year. Propane/propylene inventories fell 6.2 million barrels last week but are well above the upper limit of the average range. Total commercial petroleum inventories decreased by 1.0 million barrels last week."  Despite the record inventory surge, crude jumped a bit from extremely oversold levels on news Russia Dangles Prospect of OPEC Cooperation. Oil futures surged on Wednesday, after Russia said it was discussing the possibility of co-operation with OPEC, fanning hopes that a deal was in the works to reduce oversupply that sent prices the lowest levels in a dozen years last week. Russia's energy ministry said possible coordination with the Organization of the Petroleum Exporting Countries (OPEC) was discussed at a meeting with Russian oil companies on Wednesday.  "I remain skeptical, at the end of the day, about that happening as the oil producers are looking at the other guy to cut production while maintaining their own levels,"

The “Great Divide” Between Crude and Natural Gas Is Shuttered By Low Prices -- West Texas Intermediate (WTI) CME NYMEX crude futures settled up 92 cents/Bbl yesterday (January 28, 2016) at $33.22/Bbl and NYMEX Henry Hub natural gas futures settled up slightly at $2.182/MMBtu. The crude-to-gas ratio - meaning the crude price in $/Bbl divided by the gas price in $/MMBtu - was 15.22 X. For most of this year so far the ratio has been less than 15X On January 20, 2016 it dipped to 12.5 X – its lowest point since March 2009. Over the 5 years between 2010 and 2014 the ratio averaged 27X - reaching a high of 54X in April 2012. That lofty five year run for the crude-to-gas ratio was arguably responsible for much of the crude and natural gas liquids production boom since 2011 and a “Golden Age” of natural gas processing. Today we begin a two-part series discussing the ratio and the market implications if it stays low.

$7 Crude? Deutsche Bank Downgrades Oil 'Lower For A Lot Longer' -- Oil prices around USD 30/bbl mean that an increasingly significant volume of future oil projects no longer make sense. Although Deutsche Bank does not expect US crude inventories to reach capacity, rising US inventories and high US crude imports may heighten downside pressures to push prices closer to marginal cash costs of USD 7-17/bbl for US tight oil.  With few plausible scenarios for a strong price recovery in the short term, Deutsche lowers their Q1-2016 price forecasts to USD 33/bbl for WTI and Brent. We see downside risks stemming from a lower demand growth outlook this year in the event that US product demand remains extremely weak, and from the possibility that equity market declines feed through into lower consumer confidence and spending. Upside risks may arise from either a weak or unsustained rise in Iranian exports, which may then lead to OPEC production in 2017 below our assumption of 32.4 mmb/d (excluding Indonesia). One might be tempted to claim that prices have detached from fundamentals given the rapidity of the decline since December. Although we could choose to attribute some part of price movement to outside factors such as market psychology, an undeniable rise in risk aversion since the start of the year, and associated equity market weakness, this would do little to advance the state of knowledge regarding oil fundamentals. Therefore we prefer to (i) identify a possible fundamental basis for the further decline in oil prices, which could sustain prices at a low level, and (ii) assess the likely impact of prices remaining around USD 30/bbl on the forward balance. With regard to the first point, the disappointment in Chinese economic growth for Q4-15 should not be a key driver as the most recent data on apparent consumption remains strong as of November 2015, with average year-on-year demand growth of +400 kb/d for the three months ending in November, Figure 2.

Russia says Saudis proposing global oil production cut | Reuters: Russia said on Thursday that OPEC's largest producer Saudi Arabia, had proposed oil production cuts of up to 5 percent in what would be the first global deal in over a decade to help clear a glut of crude and prop up sinking prices. Benchmark Brent futures jumped as much as 8 percent on Thursday to nearly $36 a barrel on news of the potential deal, which if implemented would immediately reduce surplus global output exceeding demand by 1 million barrels per day (bpd). Brent was trading at $34 a barrel at 1540 GMT. A turnaround in oil's fortunes would be welcomed by oil-rich countries where the price collapse has caused budget squeezes and political turmoil with some even forced to devalue their currencies. Russian Energy Minister Alexander Novak said Saudi Arabia had proposed that oil-producing countries cut production by up to 5 percent, which for non-OPEC member Russia - the world's top producer - would represent around 500,000 bpd. "Indeed, these parameters were proposed, to cut production by each country by up to 5 percent," Novak said. "This is a subject for discussions, it's too early to talk about." Saudi Arabian officials did not immediately comment on the proposal but a senior Gulf OPEC delegate said: "Gulf OPEC countries and Saudi Arabia are willing to cooperate for any action to stabilize the international oil market." The proposal did not come directly from Saudi Arabia but rather from OPEC members Venezuela and Algeria, one Gulf OPEC source said.

Oil Soars To 3 Week High On Saudi Production Cut Confusion; Futures Surge - Headline hockey continues in the energy complex as earlier confirmation of a pending OPEC meeting possible in February has seen more color added, via Reuters, that Saudi Arabia made a proposal that OPEC members cut production by a maximum of 5%. There remains confusion however as Bloomberg reports simply that Russian energy minister has said they "may discuss it," as opposed to being a specific proposal.  Reuters seems confident that The House of Saud has backed down and prosposed the cut... But Bloomberg is less confident that this is an actual proposal... And further, Interfax reports that this is nothing new... Crude is surging on the confusion... In summary: a story about a Saudi proposal for a 5% cut becomes one where a 5% cut may be discussed. For now however, the short squeeze has been started and the panicked  covering of shorts is in progress if only for the next few minutes.

U.S. rig count down 18; Louisiana drops 3  — Oilfield services company Baker Hughes Inc. says the number of rigs exploring for oil and natural gas in the U.S. declined by 18 this week to 619. The Houston firm said Friday 498 rigs sought oil and 121 explored for natural gas amid depressed energy prices. A year ago, 1,543 rigs were active. Among major oil- and gas-producing states, Texas declined by 13 rigs, New Mexico, four; Louisiana, three; and Kansas, North Dakota and Pennsylvania, one apiece. Alaska and Colorado each increased by two rigs and Oklahoma was up one. Arkansas, California, Ohio, Utah, West Virginia and Wyoming were all unchanged.

U.S. Oil-Rig Count Declines by 12 - WSJ: The U.S. oil-rig count fell by 12 to 498 in the latest week, according to Baker Hughes Inc., BHI 0.90 % accelerating a recent streak of declines. The number of U.S. oil-drilling rigs, viewed as a proxy for activity in the oil industry, has fallen sharply since oil prices began to fall. But it hasn’t fallen enough to relieve the global glut of crude. There are now about 68% fewer rigs from a peak of 1,609 in October 2014. According to Baker Hughes, the number of U.S. gas rigs declined in the latest week by 6 to 121. The U.S. offshore-rig count was 28 in the latest week, down one from the previous week and down 21 from a year earlier. On Friday, oil prices retreated from their push toward a three-week high as traders continued to debate the effect of attempts at economic stimulus and the possibility of output cuts from the world’s big exporters.

Saudi Production Cut Story Rejected: OPEC Delegates Say "No Plan For Meeting With Russia" - Headlines about "oil production cuts" are the new "Greece is saved" trial balloon. Following today's dizzying surge in crude oil on speculation by the Russian energy minister that the Saudis have proposed a 5% supply cut, which was subsequently trimmed to merely a statement that a "meeting may be called where a production cut could be discussed" we asked how long until the denial: The answer: 15 minutes when the following rejection hit:  OPEC DELEGATES SAY NO PLAN YET FOR MEETING WITH RUSSIA. And now that the squeeze is over, oil can resume tumbling.

TASS: Brent oil prices over $35 on Russia's confirmation of talks with OPEC: The price of Brent crude oil futures contract for March delivery on London’s ICE rose by 5.7% to $35.01 per barrel for the first time since January 6, 2016. Oil price increased following the statements of Russian Energy Minister Alexander Novak about being ready to take part in the upcoming meeting of the OPEC and non-OPEC members in February.  Russia on Thursday confirmed its participation in the meeting of OPEC member-states and other oil producers for discussing low oil prices and coordination of a potential crude production cut due in February. "Currently the OPEC member-states are trying to convene a meeting with participation of other OPEC (member-states) and non-(member-states) in February. Certain countries have come forward with this initiative, currently the issue is being worked out with the countries. On our part we’ve confirmed our potential participation in such a meeting," Novak said. Alexander Novak said he is ready to take part in the upcoming meeting though the question of its level hasn’t been solved yet.

Russia: No firm plans to coordinate oil output with OPEC — The Kremlin says there are no concrete plans to cut oil output in coordination with major producers Saudi Arabia and OPEC. Spokesman Dmitry Peskov told reporters on Thursday that Russia is “actively discussing the instability of oil markets,” with Saudi Arabia and OPEC, but, as of yet, there are no conclusions from the talks. On Wednesday, the head of the Transneft pipeline network Nikolai Tokarev, said talks on output cuts are planned, with the Saudis as the main negotiators. Russian Energy Minister Alexander Novak said Thursday that efforts are underway to convene talks involving OPEC countries and nonmember oil-exporting countries. The price of oil dipped below $30 a barrel last week, causing the ruble to plunge to record lows. The price ticked up slightly at the beginning of this week— due in part to discussions about coordinating oil output— and is now trading at $32.41 a barrel.

OPEC delegates deny talk of Russia meeting: report - Delegates from the Organization of the Petroleum Exporting Countries on Thursday said there were no plans to hold talks with Russia over potential production cuts, Bloomberg reported. Oil futures gave back a large chunk of the sharp rally scored earlier in the session on talk Russia and OPEC would meet next month to coordinate policy. West Texas Intermediate futures for March delivery on the New York Mercantile Exchange were up 92 cents, or 2.8%, at $33.21 after trading as high as $34.82 in earlier activity. April Brent crude on the ICE exchange was up $1.15, or 3.4% at $35.09 a barrel after trading as high as $36.77.

Oil rallied this week on false hopes for deal: There's little chance the OPEC cartel and nonmember Russia could reach a deal that would result in lower oil production, despite market intrigue and a jump in crude prices on talk of a possible agreement. Analysts said Iran would have to be on board in order for OPEC to be willing to strike any deal, but an unnamed Iranian official quoted by the Dow Jones news agency on Friday signaled the country would not participate. "It's very hard to see how this works with Iran ramping up production. What the key is now is how much Iran comes out in terms of putting stored oil back onto the market. The next shoe to drop is clarity about how much oil Iran could put in the market," said Daniel Yergin, vice chairman of IHS. Read MoreWhy oil glut not going away soon The official was quoted as saying Iran could not consider a cut until its exports increase by 1.5 million barrels a day, over its approximately 1.1 million barrels a day. For the past several days, news services have been reporting that OPEC and producers from outside the cartel may meet to discuss production cuts. Brent crude futures were up more 6 percent this week on speculation there would be a meeting. Adding fuel to the reports were comments from Russian Energy Minister Alexander Novak saying his country would cooperate with a deal to cut production. Novak also said Thursday that Saudi Arabia had proposed each country reduce oil output by 5 percent to support prices. Dow Jones, however, quoted a senior Gulf OPEC official as saying that the Saudis did not ask Russia to cut output by 5 percent. The official also said the proposal was an old suggestion from Algeria and Venezuela.

Venezuela’s del Pino to Talk With Russia About Oil Production - WSJ: Venezuelan oil minister Eulogio del Pino said late Friday he will travel to Russia and then to fellow OPEC members Iran and Saudi Arabia to discuss a meeting aimed at stabilizing oil prices. On Thursday, Alexander Novak, the energy minister of Russia, which isn’t a member of the Organization of the Petroleum Exporting Countries, said such a gathering was being planned, fueling speculation that his country may join a collective production cut. In a statement posted on the website of state-run PetrĂ³leos de Venezuela SA, Mr. Del Pino said the remarks had led to an increase in oil prices of about $4 a barrel. He said he would travel on Monday to Moscow to meet Mr. Novak before going to Qatar, Iran and Saudi Arabia.

What Oil Production Cuts: Iran Says It Won't Support Any Supply Cut Or Emergency OPEC Meeting - The main reason for oil's torrid surge over the past 2 days is that following yesterday's Russia-Opec "oil production cut" headline fiasco, crude traders - who as we previously reported already had a record net short position - scrambled to cover their exposure on the assumption that where there is oily smoke, there will be fire. We can now put to rest any speculation that OPEC will proceed with any supply cuts, whether Russia requests it or not, because as the WSJ reported moments ago, not only will OPEC not support a supply cut but it will also not support an emergency OPEC meeting.  BREAKING: Iran won't support a supply cut and won't support an emergency OPEC meeting. — Michael Amon Iran Would Not Join Immediate OPEC Production Cut -- Iranian Official — Summer Said (@summer_said)

Russian-OPEC Production Cut Remains A Long Shot - The rumors of a coordinated production cut between OPEC and Russia continue to grow more serious. The latest comes from the Russian energy minister Alexander Novak, who insisted that Russia will hold talks with OPEC in February on a possible agreement to reduce output. “There are very many questions, on checking cuts, from what base to count from. In order to start working through these issues, we need general agreement, it’s too early to talk about that. That’s the subject of the meeting and discussion (in February),” Novak told reporters, according to TASS. The headline figure: a 5 percent production cut across the board for all participants. That’s what Saudi Arabia floated last year. When asked if that was still on the table, Novak replied, “That is precisely the subject for debate.” The meeting could tentatively take place in February. It was originally proposed by Venezuela, which has pleaded for emergency measures to stabilize oil prices. Oil prices skyrocketed on Wednesday and Thursday after the comments from Novak. During intraday trading on January 28, prices shot up by more than 8 percent. By midday, WTI and Brent fell back a bit, but were still up more than 3 percent. That is the highest level since the first week of January. Coordination on production cuts between OPEC and Russia has always been a long shot, and probably still remains an unlikely development. The big difference this time around, though, is Russia’s change in tone. Saudi Arabia had hinted at its willingness last year to undertake a 5 percent production cut if Russia did the same, but up until now Moscow never really took the idea seriously.

Glencore Said to Store Oil in Ships Off Singapore Amid Contango -- Glencore Plc is said to be storing oil on ships off the coast of Singapore and Malaysia as a market structure known as contango allows traders to benefit from holding on to supplies for sale later. The commodities trader has at least 4 very large crude carriers, each of which can hold about 2 million barrels, floating at sea off the nations’ coast in Southeast Asia, people with knowledge of the matter said, asking not to be identified because the information is confidential. When a market is in contango, prices for supplies today are lower than those in future months, allowing traders with access to stored crude to potentially lock in a profit. Charles Watenphul, a spokesman for Glencore, declined to comment. While the oil market has been in contango since 2014, the premium fetched by future cargoes increased to the highest since February last month. The price difference between a Brent oil contract for immediate delivery and a year forward is at about minus $7 a barrel, twice the level in mid-July. “Traders will be closely watching the contango structure to determine whether to use more vessels for crude floating storage,” said Tushar Tarun Bansal, an analyst in Singapore at industry consultant FGE. “  The Brent contango structure just about covers the cost to time-charter a vessel for floating storage, though we also need to consider added costs such as from financing.  To benefit from the contango, profits from selling a stored cargo must exceed the cost of chartering ships to hold the supply. Euronav NV, Europe’s largest owner of supertankers, would charge about 75 cents per barrel each month for storing, its chief executive officer said on Thursday. Brent crude for April costs about 90 cents more than for March, data from ICE Futures Europe show. Traders incur additional expenses over and above freight.

Saudi central bank net foreign assets drop 3.1 pct m/m in December | Reuters: Net foreign assets at Saudi Arabia's central bank fell 3.1 percent in December from the previous month to 2.283 trillion riyals ($609 billion), the central bank said on Thursday. Assets dropped 15.9 percent from a year earlier to their lowest level since August 2012. They reached a record high of $737 billion in August 2014 before starting to shrink. The central bank, which acts as Saudi Arabia's sovereign wealth fund, has been drawing down its assets to cover a huge state budget deficit caused by low oil prices.

Saudi Arabia’s Sale Of Foreign Assets Accelerates - Saudi Arabia’s holdings of foreign assets slid some $19.4 billion last month, its largest one-month decline.  As Marketfield Asset Management CEO Michael Shaoul writes, this reduces its rolling 12 month holdings by $115.2 billion, outpacing Saudi Arabia’s record pace of accumulation in 2012. Certainly, the decline has only put holdings back to their August 2012 levels, double 2007 levels, but Shaoul writes that the speed of the decline is meaningful, as it “indicates a degree of duress.” Moreover, this December data doesn’t cover the latest oil selloff. More detail from his note: Our concern is not whether Saudi Arabia can “afford” to run down its foreign asset holdings (it clearly can, since even the current pace could be absorbed for two or three years and still leave a large reserve holding), but what the effect of a $230 bln swing in its funding position since 2012 means for global asset markets given that it comes on top of a much larger swing by China.We view Saudi Arabia as the second largest contributor to QT (Quantitative Tightening – a central bank divesting assets) and we suspect that a good deal of the liquidation has taken place in actual credit and equity markets rather than in treasuries (there is no transparency in the data so this is mere supposition on our part).

Saudi Arabia Hemorrhages $19.4 Billion In Reserves During December - Saudi Arabia - which was busy playing headline hockey with Russia this morning over a rumored 5% production cut proposal - is running out of money. Yes, we know, that sounds absurd. But believe it or not, the country whose monarch recently rented the entire Four Seasons hotel for a 48 hour stay in Washington DC, is in fact going broke. And at a fairly rapid clip. The problem: slumping crude. As we first discussed in November of 2014, Riyadh’s move to kill the fabled petrodollar in an effort to bankrupt the US shale complex was a risky proposition. If ZIRP kept US producers in the game longer than the Saudis anticipated, crashing crude could end up blowing a hole in the kingdom’s budget - especially if Iranian supply came back on line and added to the supply glut. Fast forward a 14 months and that’s exactly what’s happened. US production is down but not wholly out (yet) and the Iranians are adding 500,000 barrels per day in output in Q1 and 100,000,000 per day by the end of the year. Compounding the problem is the war in Yemen (which will enter its second year this March) and the cost of providing subsidies for everyday Saudis. All of this has conspired to leave Riyadh with a budget deficit of 16%. That’s expected to narrow in 2016 but at 13%, will still be quite large. Make no mistake, if crude continues to sell for between $30 and $35 per barrel, 13% will probably prove to be a rather conservative estimate.

OilPrice Intelligence Report: Weak Global Economic Growth Linked to Oil Price Collapse - Oil prices fell on Monday on negative news coming from China and on comments from top Saudi officials that there will be no let up in oil production. China revealed on Monday that its full-year consumption of diesel declined in 2015 compared to a year earlier, bolstering fears that China’s economy is faltering. On the same day, Saudi Aramco’s Chairman said that the state-owned oil company would continue to invest in new sources of oil production and that the country could endure low oil prices for “a long, long time.” Together, the news reversed the strong gains in oil prices from last week. Oil was back down to $30 per barrel to close out the day on January 25. But oil then rebounded on Tuesday by 2 percent. As of midday, WTI traded up to $31 per barrel and Brent hit $31.31. Of course, weighing on crude oil prices are concerns about the health of the global economy. Growth is sluggish in most parts of the world. Europe is stagnant, parts of Latin America are in recession, and China is no longer the growth engine that the world has counted on for the past decade. In fact, the markets are increasingly interpreting the collapse in commodity markets as a potential harbinger of a souring economy. In the past, plummeting commodity prices have only been associated with severe recessions (see: Global Financial Crisis 2008-2009). In normal times, short-term swings in commodity prices usually move inversely to global equities. Recently, however, moves in oil prices have been more closely correlated with moves in the stock market, and movements have occurred in in the same direction, a rare development that highlights fears about the global economy. In In fact, the correlation between oil and global stocks hit 0.5 over the past four months, the highest level in more than two years. But 2016 has started off even more worrying. The Wall Street Journal finds that so far in January, the correlation is at 0.97, meaning the two metrics are essentially moving in lock step. Again, to reiterate, such an unusual correlation is usually associated with recessions.

Why The Recent Crude Price Collapse Was Unusually Severe -- In Part 1 of this series we detailed the fundamental factors behind the downward spiral in crude oil prices since the beginning of 2016. The price for U.S. domestic benchmark WTI fell by 28% in the first 20 days of 2016 to $26.55/Bbl - down 75% from its $107/Bbl high in June 2014. The most significant of those fundamental factors is the approximately 1 MMb/d excess of current supply over demand. The U.S. Energy Information Administration (EIA) forecast the supply excess to continue until mid-2017. The world oversupply looks likely to be exacerbated by the return of 0.5 MMb/d of crude to the market from Iran following the lifting of sanctions on that country last week (January 16, 2016).  On Friday (January 22, 2016) West Texas Intermediate (WTI) crude prices on the CME/NYMEX futures exchange closed up $2.66/Bbl – the second day of a recovery from their 28% plunge during the first 20 days of 2016. The jury is still out on whether the recovery will be sustained. There was a similar (though less pronounced) price decline a year ago in January 2015 that did not last very long at the time. But in comparison the price destruction during this month’s collapse was unusually severe - not just because we saw prices under $30/Bbl for the first time since 2003. Today we explain why the extent of the price destruction along the forward curve this time suggests that last week’s recovery may be short lived.

Oil Prices In 2016 Will Be Determined By These 6 Factors -- The one given in this industry is that the analyst community is consistently wrong about where the price of oil is going in the near to mid-term. Just as $100 oil was a sentiment driven price that baked in the risk of every potential negative impact on the supply chain, $28, $30 or $40 dollars is equally sentimental, assuming that any and all incremental barrels are and will be available AND demand will slow or stop. So let’s just step away from the current noise and focus on a non-controversial outcome… that oil will be much more valuable in the future than it is today. What, exactly, will that future look like? Today’s pricing sentiment is driven by a global economic “Pick 6” today…

  • 1. US production rates,
  • 2. Saudi Arabia’s ability to grow production,
  • 3. Iran’s latent ability to produce more oil,
  • 4. Chinese economic slowdown and its impact on consumption,
  • 5. Russia’s ability to add global production, and
  • 6. OPEC’s inscrutable strategy.

Let’s stipulate a couple of assumptions. First, people will produce existing wells at rates that aren’t sustainable to preserve cash flow or compete for market share, because the cost to drill and bring online is already sunk. Second, new wells will not be drilled if there isn’t at least an outlook to breakeven producing them. That means an expectation of a sustained price over 1-3 years or until the well has been paid out.Certainly the unconventional revolution has been a huge factor in global production increases over the last 6 years. The item NOT generally recognized is that production typically lags drilling by some 5 months, thus the drilling in December 2014 is discernible in production records in April 2015. That analysts were alarmed at increasing production and supply during the 1st half of the year suggested that they did not understand this dynamic, nor did the business press. We predicted in April that monthly production would peak in May and then jump around between -100 mbpd and -350 mbpd for the rest of the year. When looking at additional production month over month, it is important to remember that it is building on a sloping foundation of natural decline.

Kuwait projects record deficit sharp decline in oil: The finance Minister reveled Thursday that Kuwait projected a record budget deficit for the fiscal year starting April 1 on the sliding price of oil. According to information from the twitter account of finance Minister The sharp decline in oil for 2016-2017 is estimated at 11.5 5 billion dinars ($38 billion) Spending was estimated at 18.9 billion dinars, just 1.6 percent lower than in the current year, according to the same source. Revenues were projected at 7.4 billion dinars, of which oil income is estimated at $19.1 billion or just 78 percent of the public revenues; whereas, in the past, income from oil contributed more than 94 percent of revenues in the Gulf emirate, before the decline in crude prices. Kuwait has projected a shortfall of $23 billion in the current fiscal year, which is the first deficit after 16 years of surplus.

Falling oil prices: good for producers, bad for importers? -- The intuitive impact of falling oil prices is that it’s a hammer blow for producers and a gift for countries that are net importers. There is obviously some truth in this. Saudi Arabia, for example, is having to take drastic action to cut its fiscal deficit, while Venezuela is in crisis, with chronic shortages of basic everyday goods. But as we have written before, falling oil prices also impose discipline on sovereigns who were previously able to use a torrent of petrodollars to cover up economic, political and social fractures. And conversely for emerging market importers, the benefit of lower oil costs is likely far outweighed by the broader carnage created by a collapsing energy industry, reversing petrodollar flows and the decreasing appetite for risky EM assets. In a note on Monday, Citi’s head of emerging market economics David Lubin carries that beacon further still: Oil importers are obviously enjoying a terms of trade gain which shows up on the current account of the balance of payments, but that gain doesn’t necessarily support growth. Take India and Turkey, for example: two countries where, two years ago, fears about external instability were at the forefront of investors’ minds. The fall in the oil price has helped to evaporate those fears. Turkey’s non-oil current account balance is once again in surplus, and overall deficit in the first 11 months of 2015 stood at US$28bn, compared with US$40bn a year earlier. In India, the current account may well be in surplus during the current quarter, and the overall deficit for fiscal 2015/16 is likely to be just US$18bn, or 0.8% GDP. The argument here, broadly, is that while oil exporters have a primary problem that can be taken care of by pulling relatively straightforward fiscal levers, oil importers face a rather trickier problem: achieving growth when global investors are racing to pull their money out of emerging markets. Although the capital flow problems affect both oil importers and exporters, the latter have more reliable fiscal policies. “While oil falling oil prices are undeniably bad news for oil exporters … the policy discipline that’s evident among some of these countries can help to put some kind of floor under their vulnerability,” says Rubin.

9 Billion Barrels Of Crude At Risk In Massive Nigerian Oil Shakeup -- Supermajors Shell and Italian Eni could be facing the loss of one of the biggest offshore oil exploration blocks in Nigeria, putting an estimated 9 billion barrels of crude oil at risk. As the new Nigerian government launches a rampaging anticorruption campaign, local media are reporting government recommendations to reclaim block OPL 245 from oil giants Shell and Eni. Nigerian Justice Minister and Attorney General Abubakar Malami is behind the recommendation, and is a key figure advising the government on the case. At issue is how Shell and Eni landed the block in the first place—a controversial deal that is now being investigated in the UK, Italy and Nigeria. If newly elected Nigerian President Muhammadu Buhari agrees with Malami’s recommendation, not only could Shell and Eni lose the block, but they could also face billions of dollars in fines for allegedly bribing corrupt public officials and private citizens. According to Global Witness, Shell’s and Eni’s Nigerian subsidiaries had agreed to pay the government $1.1 billion to acquire the offshore block. The watchdog also said that an investigation revealed that at the same time, the same amount was offered to Malabu Oil and Gas, a company widely reported to be controlled by former oil minister Dan Etete. Etete was convicted of money-laundering in France in 2007. Nigeria is Africa’s biggest economy, and it relies on oil exports for 58 percent of the government’s revenue. When Buhari officially took office in May, he said the coffers were empty and massive amounts of oil money had been embezzled—upwards of $150 billion. Now the country is facing a harrowing economic crisis. Buhari appears to be serious about shaking up the industry. He’s already split up the state-owned NNPC oil company into two entities. He also fired the former oil minister, Diezani Alison-Madueke, and had her arrested in London for allegedly facilitating the embezzlement of a whopping $20 billion. New investigations into former officials are being launched at breakneck speed. Things aren’t looking good for Shell and Eni. On top of the reclamation recommendation that would lose them one of the most lucrative plays in the country, both (along with French Total SA) are now being accused of getting a $3.3 billion extraordinary tax break from the previous government in relation to the Nigeria Liquefied Natural Gas (NLNG) consortium set up in 1999.

Security Woes Threaten OPEC's Second Largest Producer - Iraq has been one of the key contributors to the uptick in OPEC oil production over the past year and a half. Despite the fact that the country’s crude oil output has continuously been plagued by security concerns and altering payments to international oil companies from both the Kurdish regional government (KRG) and Baghdad and an ongoing row over oil export rights, it has still managed to ramp up production to record levels.Iraq’s consistent and record oil output last year is, by and large, contributable to the production in the south of the country. According to a January 16. Reuters report, exports from its southern region have been running at 3.297 million barrels per day (bpd) so far in January, representing around 75 percent of the country’s total production.Iraq’s South Oil Co.’s Deputy Director Salah Mahdi told Reuters in an interview that Iraq’s southern oil exports have been running smooth over the last year and in spite of recent tribal violence in the region, he expects the company’s drilling and export activities to continue undisturbed in 2016.The above chart gives a good view of the production increases of Iraqi oil in 2015. The latest OPEC Monthly Oil Report shows a slight decline in Iraq’s production output in December 2015.OPEC has Iraq’s oil production at 4,309 mmbpd in December and estimates its rig count at 51.  No reason to worry about Iraq’s oil future it seems… or is there? As mentioned, the lion share of Iraq’s oil is produced by Iraq’s South Oil Co. around its main export facility, in the province of Basra. The chart below shows the oil deposits in Iraq and all the yellow spots are either giant or supergiant oil fields.

Potential Saudi Aramco IPO Won’t Include Reserves - WSJ -- Saudi Arabia’s potential sale of shares in its state-owned oil giant wouldn’t include the kingdom’s oil reserves and could be on local or international markets, the company’s chairman confirmed in an interview that aired Sunday.  “The reserves would not be sold, but the company’s ability to produce from the reserves is being studied,” Khalid al-Falih told Dubai-based al-Arabiya TV in an interview from Davos, Switzerland, where the annual World Economic Forum was held. “The reserves will remain sovereign,” said the chairman of the Saudi Arabian Oil Co., better known as Saudi Aramco, adding that options were being studied to reach the best formula for the initial public offering. Aramco says it has more than 260 billion barrels of proven oil reserves and the equivalent of 50 billion barrels of natural-gas reserves—more than 12 times the largest publicly traded oil company, Exxon Mobil Corp. Analysts didn’t expect the IPO to include oil reserves, and the potential IPO could still create a publicly listed company valued in the trillions of dollars.

Saudi Aramco chairman defends oil giant's possible IPO — The chairman of Saudi Aramco said on Monday that plans for a possible initial public offering are not being driven by a need for cash amid a global slump in oil prices, but instead signal a desire for greater openness to outside investors. Speaking at an investment conference in the Saudi capital of Riyadh, Khalid al-Falih said the potential listing of the world’s largest oil producer “is not for cash” but a “sign of the times” that the kingdom is open for business. “If we do it, the percentage will not be such that it’s going to move the needle significantly in terms of the government proceeds,” al-Falih said, a reference to the potential listing. He said that despite oil prices recently dipping below $30 a barrel, Saudi Aramco’s investments in oil and gas have not slowed down. Earlier, al-Falih told the Saudi-owned Al-Arabiya news channel that any initial public offering of the company would not include the kingdom’s oil reserves. Talking to reporters at the conference, al-Falih said excessively high oil prices “precipitated” the current slump since “everybody wanted to contribute to supply more than the demand that was coming in.” He said Saudi Arabia has the scale and capability to sustain the current slump in prices for “a long, long time” but that “obviously, we don’t wish for lower prices.”

Saudi Aramco Sees Demand Growth Stabilizing Oil Market - WSJ: The next five years will be critical for the crude oil markets but supply and demand will ultimately balance at a “moderate” price, according to the chairman of the Saudi Arabian Oil Co., better known as Saudi Aramco. The moderate price would be reached before long, said Khalid al-Falih on Monday, speaking on the sidelines of a conference in Riyadh. The head of the Saudi state-owned oil group didn’t say when he thought prices would stabilize.“Demand will grow, as it has already started in 2015, and there will be a period not far into the future [when] demand will catch up with supply,“ he said. But the crude markets may reach a point where there will be tight spare capacity and everybody will be looking to Saudi Arabia to save the world with more supplies. “We don’t want that day to come. We believe excessively high oil prices precipitated the world we are in,” Mr. Falih said High oil prices led to too much capital and investment being sucked into oil markets and created a world where “everybody wanted to contribute to supply more than the demand that was coming in,” he said. A moderate oil price, however, would result in demand and overall sustainability, he said. Top oil exporter Saudi Arabia will continue to be a low-cost producer even if lower oil prices persist. The kingdom could survive in this pricing environment for “a long, long time,” he said.

Royal Pains: Two Princes Vie for Power in Saudi Arabia, Make a Mess - NBC News: A rivalry between two princes may explain Saudi Arabia's sudden eagerness to pick fights at home and abroad, as the two men spark one international disaster after another while vying for the kingdom's throne. "To understand the Saudi royal family, you don't go to the Kennedy School of Government," says Bruce Riedel, the CIA's former national intelligence officer for the Middle East. "You read Shakespeare!" The struggle between Crown Prince Muhammad bin Nayef and Prince Mohammad bin Salman has all the elements of Elizabethan drama, including strange alliances, ambitious courtiers - and an ailing, ancient king who may be mentally incompetent. Diplomatic sources and U.S. officials believe 80-year-old King Salman, with whom Secretary of State John Kerry is scheduled to meet in Riyadh this weekend, shows signs of dementia. One official said that during a recent meeting, the king was only able to follow the conversation by pausing while an aide in another room typed a response that the king then read from an iPad. Some in the U.S. government believe that when King Salman declined to come to Camp David last spring to meet with President Obama, he was not just snubbing the president but trying to avoid embarrassment in front of world media.The princes who would take his place may be first cousins, but they're polar opposites. "MBN," as Crown Prince Muhammad bin Nayef is known, is 55 and a trusted U.S. ally. The interior minister and crown prince rose to power on his slow, steady success as head of the Saudi counterterrorism program, where he became a favorite of the CIA.   "MBS," Mohammad bin Salman, is King Salman's son. Just 29, he's the defense minister and a savvy publicity hound who shot to prominence in 2015 as the architect of Saudi Arabia's war against Yemen's Houthi rebels .

U.S. Relies Heavily on Saudi Money to Support Syrian Rebels -  When President Obama secretly authorized the Central Intelligence Agency to begin arming Syria’s embattled rebels in 2013, the spy agency knew it would have a willing partner to help pay for the covert operation. It was the same partner the C.I.A. has relied on for decades for money and discretion in far-off conflicts: the Kingdom of Saudi Arabia.Since then, the C.I.A. and its Saudi counterpart have maintained an unusual arrangement for the rebel-training mission, which the Americans have code-named Timber Sycamore. Under the deal, current and former administration officials said, the Saudis contribute both weapons and large sums of money, and the C.I.A takes the lead in training the rebels on AK-47 assault rifles and tank-destroying missiles. The support for the Syrian rebels is only the latest chapter in the decadeslong relationship between the spy services of Saudi Arabia and the United States, an alliance that has endured through the Iran-contra scandal, support for the mujahedeen against the Soviets in Afghanistan and proxy fights in Africa. Sometimes, as in Syria, the two countries have worked in concert. In others, Saudi Arabia has simply written checks underwriting American covert activities. The joint arming and training program, which other Middle East nations contribute money to, continues as America’s relations with Saudi Arabia — and the kingdom’s place in the region — are in flux. The old ties of cheap oil and geopolitics that have long bound the countries together have loosened as America’s dependence on foreign oil declines and the Obama administration tiptoes toward a diplomatic rapprochement with Iran. And yet the alliance persists, kept afloat on a sea of Saudi money and a recognition of mutual self-interest. In addition to Saudi Arabia’s vast oil reserves and role as the spiritual anchor of the Sunni Muslim world, the long intelligence relationship helps explain why the United States has been reluctant to openly criticize Saudi Arabia for its human rights abuses, its treatment of women and its support for the extreme strain of Islam, Wahhabism, that has inspired many of the very terrorist groups the United States is fighting.

Petrodollars are eurodollars, and eurodollar base money is shrinking - Izabella Kaminska - The world is waking up to the petrodollar reversal issue… as well as its significant liquidity impact on EM countries (i.e. NOT oil exporters, but importers). This, as we’ve explained before, is down to the contraction of petrodollar base money in the global monetary system, which acted as a sort of unofficial float for a market-controlled an international fractional reserve system. There’s also a significant feedback loop connected to what we’ve previously described as the petrodollar vendor financing circle, wherein those who are long petrodollars extend duration by investing them in countries which redeploy them on growth projects, which create demand for commodities. Global growth-based commodity consumption, in this way, is underpinned by the availability of recycled petrodollars. Kadhim has already referenced Citi’s report on counterintuitive low oil price side-effects for oil consumers, but it is worth adding one more snippet about from the report about the scale of this petrodollar liquidity contraction (our emphasis): The most important consequence of the disappearance of the oil exporters’ surplus is that it would accelerate the withdrawal of Petrodollars and likely put further downward pressure on capital flows to EM. With a sustained fall in oil prices and a return to current account deficits among oil exporters, it seems likely these countries could soon become net debtors to the international banking system. The point is this: the stock of Petrodollars (at least those which show up in Figure 5 and Figure 6) have been remarkably stable even while oil prices have been falling. That stability can’t last, and this should have a negative impact on risk appetite and capital flows. Perhaps a clearer way of getting at this point is to consider the withdrawal of Petrodollars from direct exposure to emerging markets assets. The IIF’s January 2016 analysis suggests that SWFs funded by commodity revenues (almost entirely oil and gas) may have reduced their direct exposure to EM assets from US$600 bn at the end of 2014 to some US$550bn last month. This is based on their estimate that some 15% of commodity-financed SWFs had been invested in EM. We assume that this direct exposure of Petrodollars to EM is also at risk.

Khamenei Issues His Biggest Challenge With Election Ban of Khomeini’s Grandson - Iran’s Supreme Leader has issued his biggest challenge since the mass protests after the disputed 2009 Presidential vote, as the Guardian Council imposed an election ban on the grandson of the founder of the Islamic Republic, Ayatollah Khomeini. Seyed Hassan Khomeini was one of 207 candidates barred by the Council — whose 12 members are named by Ayatollah Khamenei and the judiciary — from standing in February’s ballot for the 88-seat Assembly of Experts, the body which chooses and can nominally remove the Supreme Leader. Only 166 of the 800 applicants were approved, according to Deputy Interior Minister Hossein-Ali Amiri. All 16 female candidates were rejected. Last week the Council — with 12 members appointed by the Supreme Leader and judiciary — banned 60% of the more than 12,000 candidates for Parliament, including 50 current MPs and 99% of the 3,000 reformist applicants. Earlier this month, the Council had threatened to disqualify Khomeini because he did not take a written test to establish his religious credentials, a requirement for many candidates for the Assembly. However, the political reason appears to be fear of Khomeini’s support for a “centrist” bloc linked to President Rouhani and former President Hashemi Rafsanjani. Iran’s hardliners and some conservatives have been warning of a centrist Rouhani-Rafsanjani bloc, allied with reformists, gaining power in February’s elections. MPs, clerics, and military commanders have accused centrists and reformists, including Rafsanjani, of pursuing a foreign-backed “sedition” to undermine the Islamic Republic.

ISIS has destroyed key oil infrastructure in Libya - ISIS militants once again attacked key oil infrastructure in Libya. The Ras Lanuf port on the Mediterranean Coast, one of Libya’s largest oil export terminals, was the target of yet another attack by ISIS this week. Earlier this month, ISIS attacked and set fire to seven oil storage tanks at the port. Early reports say that the latest attacks have also resulted in huge plumes of black smoke emanating from the port.  ISIS also targeted oil pipelines that travel from the Amal oilfield to the port of Es Sider, which is located near Ras Lanuf. ISIS, at this point, does not have the manpower to take over large swathes of territory in Libya in the same way that it has done in Iraq and Syria. But the group is hoping to sow chaos in Libya and prevent the rival government factions from establishing control in the country. Libya’s oil production is down to about 400,000 barrels per day, which is only about one-quarter of the country’s capacity. Before the civil war and the downfall of former dictator Muammar Qaddafi, Libya was producing 1.6 million barrels per day.

US, Britain, France Ready Military Action In Libya As ISIS Closes In On Country's Oil - On January 19, representatives from Libya’s rival factions negotiating in Tunis announced they had formed a unity government comprised of a new 32-member cabinet. Six days later, lawmakers for the country’s internationally-recognized Parliament in Tobruk rejected the proposal. “The Parliament rejected the 32-member cabinet out of concern that it was too large, and that its members had been chosen not for their competency but to satisfy various regional factions,”The New York Times said on Monday.  As a reminder, there are two governments in Libya, an internationally recognized body operating out of Tobruk in the country’s east (where the House of Representatives was exiled in 2014 after elections produced an outcome that wasn't agreeable to Islamist elements in the west) and another group in Tripoli which claims to be the only legitimate authority. The country’s inability to come to some manner of political consensus has opened the door for ISIS which recently mounted a series of assaults on the country’s oil infrastructure. Earlier this month, Libya’s National Oil Corp issued a “cry for help” in the midst of the fighting. Even if officials in Tobruk manage to float a proposal that’s agreeable to their rivals in Tripoli, there’s little chance the fledgling government will be able to consolidate in time to halt the ISIS advance which means it’s time once again for the Western powers to get involved. Here’s The New York Times:The Pentagon is ramping up intelligence-gathering in Libya as the Obama administration draws up plans to open a third front in the war against the Islamic State. This significant escalation is being planned without a meaningful debate in Congress about the merits and risks of a military campaign that is expected to include airstrikes and raids by elite American troops. That is deeply troubling. A new military intervention in Libya would represent a significant progression of a war that could easily spread to other countries on the continent. It is being planned as the American military burrows more deeply into battlegrounds in Syria and Iraq, where American ground troops are being asked to play an increasingly hands-on role in the fight.

Oil producer Azerbaijan in talks for international aid — Representatives from the International Monetary Fund and World Bank arrived in Azerbaijan on Thursday to discuss financial support for the oil producing country’s ailing economy. The ex-Soviet nation in the Caucasus has been hit hard by the sharp drop in prices of its oil and gas exports over the last year. “The World Bank and the IMF are in active dialogue with the government of Azerbaijan, discussing both immediate and longer-term measures in response to the pressure on the local currency and low oil prices,” said Zaur Rzayev, spokesman for the World Bank’s local office. “The World Bank stands ready to provide necessary assistance to Azerbaijan, including budget support.” The World Bank is offering $1 billion in financial support, a government official told The Associated Press, while the European Bank for Reconstruction and Development will seek to help the private sector. The official spoke on condition of anonymity because talks were ongoing. The Azerbaijani government played down the importance of the talks. “Our situation is not so pitiful that we’ve asked someone for a loan in the very short term. Actually, we’re providing other countries with loans,” Finance Minister Samir Sharifov said, adding that “there are no negotiations about the urgent provision of large funds from the IMF and World Bank.”

IMF, World Bank move to avert oil-led defaults - Officials from the International Monetary Fund and the World Bank are heading to Azerbaijan to discuss a possible $4bn emergency loan package in what risks becoming the first of a series of bailouts stemming from the tumbling oil price. The Baku visit, which follows a currency crisis triggered by the collapse in crude, comes amid concern at the two global institutions over emerging market producers from central Asia to Latin America. The fund and the bank have also been monitoring developments in other oil-producing countries such as Brazil, which is now mired in its worst recession in more than a century, and Ecuador. The oil-driven crisis in Venezuela has even raised the possibility of repaired relations between the fund and Caracas, a city IMF staff last visited more than a decade ago. Azerbaijan depends on oil and gas for 95 per cent of its exports and the fallout of its currency weakness has sparked a series of protests across the country rattling the government of President Ilham Aliyev. Last week the former Soviet republic became one of the first countries in the world to resort to capital controls in response to the collapse in oil prices, imposing a 20 per cent tax on exporting foreign currency. The Azerbaijani currency, the manat, has fallen 35 per cent since the central bank in late December abandoned a dollar peg after spending more than half its reserves in a year. The IMF team would be in Baku from January 28 until February 4 for “a fact-finding staff visit at the authorities’ request”, an IMF spokesperson said. It would discuss possible “technical assistance” and “assess possible financing needs”. The financing package under discussion was worth about $4bn, people familiar with the discussions said.

OPEC Economies On Their Last Legs - - In November 2014 the OPEC countries met in Vienna and agreed to keep pumping oil to maintain their market share rather than cut production to support the oil price. In a post written a month later I addressed the question of how these countries were positioned to withstand an extended period of low oil prices and high budget deficits. More than a year has now passed, so it’s time to take a look at how they have done so far and to see what their actions presage for the future.  I made the following estimates from the October 2015 IMF World Economic Outlook Database. They include all the OPEC countries except war-torn Libya, where the data is not particularly meaningful. All the figures given in this post are in (or estimated from) US dollars unless otherwise specified: GDP, 11 OPEC countries combined: Down from $3,392 billion in 2014 to $2,849 billion in 2015, a decrease of $543 billion.  Budget deficit, 11 OPEC countries combined: Up from $17 billion (0.5% of GDP) in 2014 to $278 billion (9.8% of GDP) in 2015, an increase of $261 billion. The economic damage has clearly been serious, but how much of it was a result of lower oil prices? Data from the 2014 OPEC Annual Statistical Bulletin indicate that OPEC exported about 8.5 billion barrels of oil in 2015 at an average “OPEC basket” price of $49.49/bbl. This is $46.80 lower than the $96.29/bbl average basket price in 2014 and represents almost $400 billion in decreased revenue. Allowing for the damping effect on other sectors of the OPEC economies it’s reasonable to assume that most if not all of the damage was done by lower oil prices. The next question is, which countries have suffered the most? According to Figure 1, which plots the percent decrease in GDP between 2014 and 2015 by country, Venezuela, Iraq and Kuwait suffered the largest GDP decreases and Qatar, Iran and Ecuador the least. The rankings are, however, potentially skewed by country-specific factors and by devaluations, as discussed later:

Podcast: Vladimir Putin and the petro states are slowly losing a key weapon: Since the breakup of the Soviet Union, Russia has used natural gas as a weapon against Ukraine and Europe as a whole. Threatening to turn shut off the pipes as the weather turns cold is a pretty effective way to influence foreign policy. But now it looks like one of Vladimir Putin’s key weapons is losing some its punch. This week on War College we’re looking at how shifts in the production of oil and natural gas are effecting global security, and where that leaves the United States.

Slowing emerging markets hamper oil recovery: World Bank - Times of India: The World Bank has warned that slowing emerging-market economies were hampering an oil recovery, and prices could sink further in a blow to a "fragile" global economy. Crude oil in 2016 is projected to come in at USD 37 a barrel, down from its October estimate of $51, the World Bank said in a new quarterly report. "A faster-than-expected slowdown in major emerging markets economies - especially if combined with financial stress - could further reduce commodity prices considerably, setting back growth in commodity exporters and the global economy," it said in the Commodity Markets Outlook report. Oil prices fell below USD 30 a barrel in mid-January to lows last seen more than 12 years ago amid a global oversupply and weakening demand. The World Bank recently downgraded the growth projections for emerging-market and developing economies, after they slowed to a 3.3 per cent pace last year, their weakest showing since 2010. Emerging-market economies have been the main drivers of commodity demand growth since 2000, a reason why their weakening growth prospects are weighing on commodity prices, the World Bank said.

Silk Dragon Takes Persian Road - Pepe ESCOBAR - He came, he saw, and he pocketed all the deals that matter. Chinese President Xi Jinping’s tour of Southwest Asia – Saudi Arabia, Iran and Egypt – could easily be sold anywhere as your typical Chinese-style win-win. On the PR arena, Xi did a sterling job polishing China’s image as a global power. Beijing scored diplomatically on all counts, obtaining several more layers of energy security (over half of China’s oil come from the Persian Gulf) while expanding its export markets and trade relations overall. In Iran, Xi oversaw the signing of 17 politico-economic agreements alongside Iran’s President Hassan Rouhani. Yet another diplomatic coup: Xi was the second leader of a UN Security Council member country to visit Tehran after the nuclear deal struck in Vienna last summer; the first was President Putin, in November. Note the crucial Russia-China-Iran interaction. To make it absolutely clear, Xi issued a statement just before arriving in Tehran, confirming Beijing's support for Iran to join the Shanghai Cooperation Organization (SCO). That will solidify for good the key strategic partnership trio working for future Eurasia integration.Of course, this whole process revolves around One Belt, One Road – the official Chinese denomination of the larger-than-life New Silk Road vision. No other nucleus, apart from Russia-China, offers so much potential in terms of bilateral cooperation; Iran, as much as during the ancient Silk Road uniting imperial China and imperial Persia, is the ultimate hub uniting Asia with Europe. Xi’s high-tech caravan stopped first in Saudi Arabia and Egypt – the Arab world. Xi’s message could not be more crystal-clear: «Instead of looking for a proxy in the Middle East, we promote peace talks; instead of seeking any sphere of influence, we call on all parties to join the circle of friends for the Belt and Road initiative».

China Deal Shows Iran Tilting East, Not West - Iran already has signaled that it plans to do more business with Russia now that the crippling Western sanctions have been lifted from its economy. Iran has also made it clear that it will reach even farther east by moving to a strategic partnership with China, including increasing bilateral trade with Beijing to $600 billion over the next 10 years. Certainly Iran will resume its business ties with some Western concerns, but Iran’s supreme leader, Ayatollah Ali Khamenei, told visiting Chinese President Xi Jinping in Tehran on Saturday that Iranians don’t trust the West and would prefer to pursue closer relations with “independent and trustworthy countries” such as China. “Westerners have never been able to win the Iranian nation’s trust,” Khamenei told Xi, even though the six world powers that negotiated an agreement to lift the sanctions imposed on Iran included the leading Western powers Britain, France, Germany and the United States, as well as Russia and China. nKhamenei has said he feels no sense of gratitude to these countries. “If the bully of the neighborhood breaks into your house to take your properties away by force, and you try hard to finally kick him out of your house, is this a favor by him or an outcome of your power?” he’s quoted as saying on his website.

Ecuador To Sell A Third Of Its Amazon Rainforest To Chinese Oil Companies - Ecuador is planning to auction off three million of the country’s 8.1 million hectares of pristine Amazonian rainforest to Chinese oil companies, Jonathan Kaiman of The Guardian reports. The report comes as oil pollution forced neighbouring Peru to declare an environmental state of emergency in its northern Amazon rainforest. Ecuador owed China more than $7 billion — more than a tenth of its GDP — as of last summer. In 2009 China began loaning Ecuador billions of dollars in exchange for oil shipments. It also helped fund two of the country’s biggest hydroelectric infrastructure projects, and China National Petroleum Corp may soon have a 30 per cent stake in a $10 billion oil refinery in Ecuador. “My understanding is that this is more of a debt issue – it’s because the Ecuadoreans are so dependent on the Chinese to finance their development that they’re willing to compromise in other areas such as social and environmental regulations,” Adam Zuckerman, environmental and human rights campaigner at California-based NGO Amazon Watch, told the Guardian. The seven indigenous groups who live on the land are not happy, especially because last year a court ruled that governments must obtain “free, prior, and informed consent” from native groups before approving oil activities on their indigenous land. “They have not consulted us, and we’re here to tell the big investors that they don’t have our permission to exploit our land,” Narcisa Mashienta, a leader of Ecuador’s Shuar people, said in a report.

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