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Peak Oil Review – 18 April 2016
By Tom Whipple
Quote of the Week
"Wells Fargo’s foray into oil shows how Wall Street misjudged the risks hidden in an esoteric type of energy financing long thought to be bulletproof.”
Asjylyn Loder, Bloomberg News
Contents
1. Oil and the Global Economy
2. The Middle East & North Africa
3. China
4. Russia/Ukraine
5. The Briefs
1. Oil and the Global Economy
As many had predicted, the meeting in Doha on Sunday to freeze oil prices ended without an agreement. Even with the deal watered down to only last six months, the rivalry between Iran and the Saudis was too much for an agreement to reached. Some commentators believed that a minimum some sort of face-saving agreement would have been contrived, but even this did not happen. From now on oil price movements may be based more on fundamentals and less on wishful thinking about a nearly meaningless production freeze.
Other observers are not so sure that overproduction will shrink rapidly as the IEA is forecasting in the next six months. OPEC now sees global demand for oil as being less than previously thought. This is in line with an IMF projection that world economic activity will contract during the remainder of the year. OPEC says that its production will remain about the same for the remainder of the year, but that non-OPEC production will slip by 730,000 b/d during 2016. This is clearly a considerably smaller drop than the IEA is talking about. The EIA, in Washington, projects that US crude production which averaged 9.4 million b/d in 2015, will now come in at 8.6 million in 2016 and 8.0 million in 2017. The Administration’s recent numbers currently put US production just below 9 million b/d.
The US shale oil industry, however, does not seem to be as impressed as speculators by the recent increase in prices and continues to reduce the number of rigs in operation. Much of this is due to serious financial problems. Hardly a day goes by now without a declaration of bankruptcy by a company in the US oil business. Many of these companies are billions in debt and have little hope of drilling themselves out of their problem unless oil prices return to record levels well above $100 a barrel. US bank earnings started to come out last week, and they are mostly down due to writing off billions in loans to oil companies that are now bankrupt. Numerous shale oil drillers have had their lines of credit sharply curtailed or subjected to harsh regulation by their bankers who are tiring of pouring money into losing operations with little prospect of profitability.
There is clearly much confusion as to where oil prices, production, and consumption are going in the next year. Optimists are saying the oil price plunge of the last two years is now over and that the markets will rebalance before the end of the year. Pessimists still foresee the possibility that the overproduction of crude, now put at circa 1.5 million b/d, will continue into next year. They note that the oversupply is reported as increasing in March. Some see recent indications that China’s economy could be bottoming out as a hopeful sign of better economic growth ahead and some are talking of a major economic disaster in the coming year.
Oil prices climbed to recent highs early last week on hopes that the Doha meeting would eventually lead to some sort of production cut, a weaker dollar, and scattered production problems. Later in the week prices fell as the US crude glut continued to grow and expectations that something meaningful would come from the Doha meeting subsided. At week’s end, New York oil was at $40.36 and London at $43.10 up 2.8 percent for the week.
As many had predicted, the meeting in Doha on Sunday to freeze oil prices ended without an agreement. Even with the deal watered down to only last six months, the rivalry between Iran and the Saudis was too much for an agreement to reached. Some commentators believed that a minimum some sort of face-saving agreement would have been contrived, but even this did not happen. From now on oil price movements may be based more on fundamentals and less on wishful thinking about a nearly meaningless production freeze.
Last week, the IEA, EIA, and OPEC issued their prognostications as to what was going to happen to oil production and prices in coming months. There is clearly considerable disagreement about the immediate future. The IEA has become the most optimistic, saying that the oversupply of oil which currently is about 1.5 million b/d will shrink to 200,000 b/d in the third and fourth quarters of 2016 thereby nearly eliminating surplus production. The Agency sees much of this decline in production coming from the US shale oil industry. This assessment is a shift in outlook, as a few weeks back the IEA was expecting overproduction to extend well into 2017. The agency remains confident that world oil consumption will increase by 1.2 million b/d this year.
Other observers are not so sure that overproduction will shrink rapidly as the IEA is forecasting in the next six months. OPEC now sees global demand for oil as being less than previously thought. This is in line with an IMF projection that world economic activity will contract during the remainder of the year. OPEC says that its production will remain about the same for the remainder of the year, but that non-OPEC production will slip by 730,000 b/d during 2016. This is clearly a considerably smaller drop than the IEA is talking about. The EIA, in Washington, projects that US crude production which averaged 9.4 million b/d in 2015, will now come in at 8.6 million in 2016 and 8.0 million in 2017. The Administration’s recent numbers currently put US production just below 9 million b/d.
New numbers from South Dakota released last week show crude production falling by only 4,000 b/d from January to February and that the state still has a backlog of some 900 wells that have been drilled and not yet completed. Oil producers in the state could continue without much of a drop in production just by completing already drilled wells along with a minimal amount of new drilling in sweet spots using the 29 drill rigs still in operation. The issue of just how fast US shale oil production will drop is still open. Deepwater production in the Gulf is expected to continue growing as drillers complete wells started years ago in which they have too much invested to delay production.
The US shale oil industry, however, does not seem to be as impressed as speculators by the recent increase in prices and continues to reduce the number of rigs in operation. Much of this is due to serious financial problems. Hardly a day goes by now without a declaration of bankruptcy by a company in the US oil business. Many of these companies are billions in debt and have little hope of drilling themselves out of their problem unless oil prices return to record levels well above $100 a barrel. US bank earnings started to come out last week, and they are mostly down due to writing off billions in loans to oil companies that are now bankrupt. Numerous shale oil drillers have had their lines of credit sharply curtailed or subjected to harsh regulation by their bankers who are tiring of pouring money into losing operations with little prospect of profitability.
In recent weeks, large numbers of oil tankers have been noted accumulating in unprecedented numbers just off of many major oil ports. Some of these tankers, such as those off Basra, Iraq, are waiting to load, but more oil is now being produced than the port facilities can handle, especially in bad weather. Off several Chinese oil ports, many tankers have been waiting for weeks for a chance to unload due to the boom in oil imports by China’s small independent refiners.
In other places, oil that has already been sold profitability on the futures market is simply being stored aboard tankers until in is time for delivery. The final reason for the long lines of waiting tankers is that the onshore terminals are nearing capacity and that oil must be shifted around to make room for incoming shipments. Whatever the reason, anchored crude carriers are very expensive propositions and a few weeks’ delay in unloading can easily erase any profit the owners had hoped to make from the voyage. In the last two months, similar accumulations of an unusually large numbers of tankers have been reported off Rotterdam, Houston, and Venezuela. This situation may be another sign that some of the overproduction of oil that is taking place in the world is, for the time being, simply ending up sitting on oil tankers longer than usual.
There is clearly much confusion as to where oil prices, production, and consumption are going in the next year. Optimists are saying the oil price plunge of the last two years is now over and that the markets will rebalance before the end of the year. Pessimists still foresee the possibility that the overproduction of crude, now put at circa 1.5 million b/d, will continue into next year. They note that the oversupply is reported as increasing in March. Some see recent indications that China’s economy could be bottoming out as a hopeful sign of better economic growth ahead and some are talking of a major economic disaster in the coming year.
