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Peak Oil Review – 2 May 2016
By Tom Whipple
Quote of the Week
“ “Oil prices simply aren’t going to rise fast enough to keep oil and energy companies from defaulting. Then there is a real contagion risk to financial companies and from there to the rest of the economy.”
Jason Schenker, president and chief economist at Prestige Economics
Professor Michael Jefferson of the ESCP Europe Business School, a former chief economist at oil major Royal Dutch/Shell Group, former Deputy Secretary-General of the World Energy Council
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
Analysts are starting to wonder as whether 2016 could turn out to be similar to 2015 when oil prices rose sharply in the first five months of the year on hopes that the oil surplus would soon be over, and then collapsed in May when it became apparent that there was going to be more oil around than necessary. Last week the price surge which began in February continued through Thursday and then slowed on Friday leaving London futures at $48.13 at the close and New York at $45.92. The impetus for the surge is that that hedge funds and other speculators are convinced that the two-year price slump is over and that higher prices are ahead. This forecast is supported by the steady decline in the US rig count, which continued last week; a continuing drop in US crude production which the EIA projects will continue into next year; a weaker dollar due to the Federal Reserve’s failure to increase interest rates; increased consumption of gasoline in the US due to low prices; market technical analysis showing prices breaking various “ceilings;” and news of a string of production outages across the globe due to insurgencies and unsettled economic conditions.
Most analysts and financial institutions are saying that the recent price increase of more than 70 percent since January has been too much too soon and that the fundamentals do not support such a rapid increase. They cite the increasing global crude stockpiles, both on shore and at sea, and the recent increases in oil production by Iran and the Saudis which is offsetting the drop in US shale oil production. While there are several geopolitical situations around the world which have reduced oil exports in recent months, most of these are of a temporary nature and are likely to be reversed shortly.
The US economy and that of the EU are growing rather slowly which is keeping the demand for distillates low. The price of gasoline in the US has been rising in the last few weeks which will make it less attractive for discretionary travel. Chinese refiners are producing more diesel and gasoline than their country can consume, so the surplus is being dumped on the world market. Some see a gasoline glut currently developing. While the massive cutbacks of capital expenditures on exploring for and drilling new oil wells will eventually have a major impact on the supply and price of oil, it is likely to be another year or two before the full impact is felt.
There are, however, at least three geopolitical developments that could drive prices sharply higher in the near term. These are the political/economic upheavals going on in Venezuela, Nigeria, and Iraq. Evidence is mounting that one or more of these countries could be engulfed by so much political turmoil in next few weeks or months that their combined oil production of nearly 7 million b/d would be affected. Oil stoppages on the order of millions of barrels a day would almost certainly drive oil prices much higher. As with most efforts to forecast oil prices, there are simply too many forces at work to come to a conclusion as to which just which forces will prevail, even in the short run. Over the next two years or so, oil prices will almost certainly be higher due the drop in investment and contraction of the industry. It is the timing of this increase where the uncertainty lies.
Last week saw much bad news from across the oil industry with profits plunging, credit ratings being reduced and workers let go. Particularly hard hit has been the oil services industry that makes its money supporting exploring and drilling operations which have been sharply curtailed. The economies of those states that have been benefiting from the shale oil bonanza are reporting souring economic conditions with loan delinquencies and bank losses on the rise. Offshore drillers are being hit particularly hard as the cost of producing deepwater oil in now well over $100 a barrel making the economics of starting new projects prohibitive. Last week, however, a new well was started off Uruguay in 11,000 feet of water setting a new record, but it is unlikely that many new deepwater wells will be started until prices recover back into the $100s. The IMF reports that Middle Eastern oil exporters are on track to receive some $500 billion less for their oil this year as compared to 2014.
Read More
Analysts are starting to wonder as whether 2016 could turn out to be similar to 2015 when oil prices rose sharply in the first five months of the year on hopes that the oil surplus would soon be over, and then collapsed in May when it became apparent that there was going to be more oil around than necessary. Last week the price surge which began in February continued through Thursday and then slowed on Friday leaving London futures at $48.13 at the close and New York at $45.92. The impetus for the surge is that that hedge funds and other speculators are convinced that the two-year price slump is over and that higher prices are ahead. This forecast is supported by the steady decline in the US rig count, which continued last week; a continuing drop in US crude production which the EIA projects will continue into next year; a weaker dollar due to the Federal Reserve’s failure to increase interest rates; increased consumption of gasoline in the US due to low prices; market technical analysis showing prices breaking various “ceilings;” and news of a string of production outages across the globe due to insurgencies and unsettled economic conditions.Most analysts and financial institutions are saying that the recent price increase of more than 70 percent since January has been too much too soon and that the fundamentals do not support such a rapid increase. They cite the increasing global crude stockpiles, both on shore and at sea, and the recent increases in oil production by Iran and the Saudis which is offsetting the drop in US shale oil production. While there are several geopolitical situations around the world which have reduced oil exports in recent months, most of these are of a temporary nature and are likely to be reversed shortly.
The US economy and that of the EU are growing rather slowly which is keeping the demand for distillates low. The price of gasoline in the US has been rising in the last few weeks which will make it less attractive for discretionary travel. Chinese refiners are producing more diesel and gasoline than their country can consume, so the surplus is being dumped on the world market. Some see a gasoline glut currently developing. While the massive cutbacks of capital expenditures on exploring for and drilling new oil wells will eventually have a major impact on the supply and price of oil, it is likely to be another year or two before the full impact is felt.
There are, however, at least three geopolitical developments that could drive prices sharply higher in the near term. These are the political/economic upheavals going on in Venezuela, Nigeria, and Iraq. Evidence is mounting that one or more of these countries could be engulfed by so much political turmoil in next few weeks or months that their combined oil production of nearly 7 million b/d would be affected. Oil stoppages on the order of millions of barrels a day would almost certainly drive oil prices much higher. As with most efforts to forecast oil prices, there are simply too many forces at work to come to a conclusion as to which just which forces will prevail, even in the short run. Over the next two years or so, oil prices will almost certainly be higher due the drop in investment and contraction of the industry. It is the timing of this increase where the uncertainty lies.
Last week saw much bad news from across the oil industry with profits plunging, credit ratings being reduced and workers let go. Particularly hard hit has been the oil services industry that makes its money supporting exploring and drilling operations which have been sharply curtailed. The economies of those states that have been benefiting from the shale oil bonanza are reporting souring economic conditions with loan delinquencies and bank losses on the rise. Offshore drillers are being hit particularly hard as the cost of producing deepwater oil in now well over $100 a barrel making the economics of starting new projects prohibitive. Last week, however, a new well was started off Uruguay in 11,000 feet of water setting a new record, but it is unlikely that many new deepwater wells will be started until prices recover back into the $100s. The IMF reports that Middle Eastern oil exporters are on track to receive some $500 billion less for their oil this year as compared to 2014.
Read More
