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A new report from the Energy Information Administration adds more weight to the notion that crude oil exports from the U.S. would not damage the economy.

The EIA studied the prospect of oil exports in response to questions from Congress, and it builds on several prior reports completed by the agency over the past year and a half. The report is full of caveats and other drawbacks, but the headline takeaway could fuel political momentum to remove the export ban.

According to the results, the EIA believes that if U.S. oil production remains below 10.6 million barrels per day through the next decade, there would be few differences between leaving the export ban in place versus removing it. If production is set to rise beyond that level, however, removing export restrictions would have several effects: higher domestic oil production, higher crude exports, slightly lower gasoline prices, but also lower refined product exports.

Digging into the findings, the EIA says that if the export ban stays in place it would have the effect of maintaining the current discount at which WTI trades relative to the Brent crude marker. Moreover, if U.S. oil production increases, the spread between WTI and Brent would only widen, perhaps as high as $10 per barrel under one scenario. And that spread would increase in corresponding fashion the more U.S. oil production increases.

Of course, removing the export ban would shrink that spread, allowing for higher oil prices at the wellhead for American oil and gas drillers. That would incentivize more drilling, leading to higher oil output than would otherwise occur under the export ban.

…click on the above link to read the rest of the article…

Financial Sector To Cut Credit Supply Lines For Oil And Gas Industry

September 3, 2015

Financial Sector To Cut Credit Supply Lines For Oil And Gas Industry

More U.S. oil and gas companies could come under financial distress in the coming months as crucial hedging protection begins to expire.

Many companies had locked in high prices for their oil sales last year, allowing them a degree of protection as oil prices collapsed precipitously over the second half of 2014. Few, if any, hedged all of their production though, so revenues declined along with the oil price. Still, with some protection, the vast majority of companies (aside from a tragic handful) have not missed debt payments and have stayed out of bankruptcy.

That could become an increasingly tricky feat to pull off. As time passes, more and more hedges are expiring, leaving oil companies fully exposed to the painfully low oil price environment. “A lot of these smaller guys who had bad balance sheets have pretty good hedge books through full-year 2015,” Andrew Byrne, an analyst with IHS, told the Houston Chronicle. “You can’t say that about 2016.”

In fact, about one-fifth of North American production is hedged at a median price of $87.51 per barrel. Smaller companies rely much more heavily upon hedging as they are more vulnerable to price swings and are not diversified with downstream assets. Across the industry, IHS estimates that smaller companies had about half of their production hedged at a median oil price of $89.86 per barrel in 2015.

But as those positions expire, any new hedges will be linked to current oil prices, which are now trading around $45 per barrel (although prices are fluctuating with great intensity and ferocity these days).

More worrying for the oil and gas companies that are struggling to keep their lights on is the forthcoming credit redeterminations, which typically take place in April and September. Banks recalculate credit lines for drillers, using oil prices as a key determinant of an individual company’s viability.

…click on the above link to read the rest of the article…

Why Saudi Arabia Won’t Cut Oil Production

August 27, 2015

Why Saudi Arabia Won’t Cut Oil Production

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

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

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

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

At the same time, the currency is coming under increasing pressure. Saudi Arabia pegs the riyal to the dollar at a rate of about 3.75:1, but speculation is rising that the currency may need to be devalued, given that the oil producer won’t be able to defend that ratio indefinitely.

…click on the above link to read the rest of the article…

Oil Price Collapse Triggers Currency Crisis In Emerging Markets

August 24, 2015

Oil Price Collapse Triggers Currency Crisis In Emerging Markets

Emerging market currencies are getting slammed by the collapse in commodity prices, a downturn that has accelerated in recent weeks.

The health of many middle-income and emerging market economies has been predicated on relatively strong commodity prices. A whole category of countries achieved strong growth by exporting their natural resources. For example, Brazil’s impressive economic expansion since the early 2000s, and the huge number of people that were able to jump into the middle class, was made possible by exporting oil, soy, iron ore, beef, and a variety of other resources. High prices for these goods led to more growth, a strengthening of the currency, and a real estate boom in cities like Rio de Janeiro.

The same story unfolded in many other commodity-driven economies, from Latin America, to Africa, to Central and Southeast Asia.

However, with commodity prices down dramatically from a year ago, growth in these countries has slowed, and their currencies are sharply weaker than they have been in the past.

In fact, the fall of Brent crude below $50 per barrel has sparked a sudden downturn in emerging market currencies across the globe.

But it isn’t just oil prices slamming currencies. The worries over the Chinese economy, including the plunge in its main stock market this summer, have raised concerns about the vigor of emerging market economies. Worse yet, China’s surprise devaluation has sent shock waves through currency markets around the world.

Other countries now feel pressure to let their currencies depreciate, and if they have adhered to a currency peg up until now, some are being pushed to float. Kazakhstan decided to scrap its currency peg last week, and the tenge promptly lost 23 percent of its value against the dollar. Vietnam also devalued the dong.

The devaluations tend to have a cascading effect, with other emerging markets coming under increasing pressure from their competitors.

…click on the above link to read the rest of the article…

Low Oil Prices Could Break The “Fragile Five” Producing Nations

August 20, 2015

Low Oil Prices Could Break The “Fragile Five” Producing Nations

Persistently low oil prices have already inflicted economic pain on oil-producing countries. But with crude sticking near six-year lows, the risk of political turmoil is starting to rise.

There are several countries in which the risks are the greatest – Algeria, Iraq, Libya, Nigeria, and Venezuela – and RBC Capital Markets has labeled them the “Fragile Five.”

Iraq, facing instability from the ongoing fight with ISIS, has seen its problems compounded by the fall in oil prices, causing its budget to shrink significantly. The government is moving to tap the bond markets for the first time in years, looking to issue $6 billion in new debt.

Revenues have been bolstered somewhat by continued gains in production. Iraq’s oil output hit a record high in July at 4.18 million barrels per day, up sharply from an average of 3.42 million barrels per day in the first quarter of this year. But with Brent crude now dropping well below $50 per barrel, Iraq’s finances are worsening. According to Fitch Ratings, Iraq may post a fiscal deficit in excess of 10 percent this year, and all the savings accrued during the years of high oil prices have been depleted.

Other political problems loom for Iraq. The central government and the semiautonomous region of Kurdistan have been unable to resolve a dispute over oil sales. With revenues running low for the central government, it has failed to transfer adequate funds to the Kurdish Regional Government (KRG). That led to the breakdown of a tenuous deal between the two sides that saw Kurdish oil sold under the purview of the Iraqi government. The KRG is selling oil on its own now in an effort to obtain much needed revenue in order to pay private oil companies operating in its territory.

…click on the above link to read the rest of the article…

Low Oil Prices And China Pull The Rug From Under Latin America

August 19, 2015

Low Oil Prices And China Pull The Rug From Under Latin America

When China sneezes, the world gets a cold.

The world’s second largest economy is suddenly looking unstable, with economic growth slowing, the stock markets gyrating, and a surprise currency devaluation having taken worldwide markets by surprise. That could be bad news not just for China, but for a lot of countries that depend on exporting to China.

China’s phenomenal growth over the past two decades led to boom times for other countries as well. China is a voracious consumer of all sorts of commodities – oil, gas, coal, copper, iron ore, agricultural products, and more. For countries exporting these goods, the run up in commodity prices since the middle of the last decade has been extraordinary.

Nowhere is that more true than in Latin America. Countries like Brazil, Argentina, Chile, Peru, and Colombia have enjoyed strong economic growth rates because of China’s rapid expansion.

But the boom times are over. Latin America is getting hit with a double whammy: the collapse in commodity prices and the sudden economic turmoil in China.

Low oil prices are hurting Latin America’s exporters. Mexico’s state-owned oil company Pemex has already slashed its budget for the year, cutting spending from $27.3 billion to $23.5 billion. Pemex has also borne the brunt of government spending cutbacks. And the much-anticipated first auction of Mexico’s offshore oil resources following a historic liberalization of its energy sector produceddisappointing results, as low oil prices scared away bidders.

Brazil has fared worse. Compounded by a colossal corruption scandal, Brazil’s Petrobras is drowning in debt as oil prices have plummeted. In late June, Petrobras announced it would slash spending by one-third, divest itself of billions of dollars in assets, and it lowered its long-term oil production target to just 2.8 million barrels per day (mb/d) by 2020, down from a previous target of 4 mb/d.

…click on the above link to read the rest of the article…

Global Oil Supply More Fragile Than You Think

August 6, 2015

Global Oil Supply More Fragile Than You Think

Many oil companies had trimmed their budgets heading into 2015 to deal with lower oil prices. But the rebound in April and May to $60 per barrel from the mid-$40s suggested that the severe drop was merely temporary.

But the collapse of prices in July – owing to the Iran nuclear deal, an ongoing production surplus, and economic and financial concerns in Greece and China – have darkened the mood. Now a prevailing sense that oil prices may stay lower for longer has hit the markets.

Oil futures for delivery in December 2020 are currently trading $8 lower than they were at the beginning of this year even while immediate spot prices are $4 higher today. In other words, oil traders are now feeling much gloomier about oil prices several years out than they were at the beginning of 2015.

The growing acceptance that oil prices could stay lower for longer will kick off a fresh round of cuts in spending and workforces for the oil industry.

“It’s a monumental challenge to offset the impact of a 50% drop in oil price,” Fadel Gheit, an analyst with Oppenheimer & Co., told the WSJ. “The priorities have shifted completely. The priority now is to discontinue budget spending. The priority is to live within your means. Forget about growth. They are now in survival mode.”

And many companies are also recalculating the oil price needed for new drilling projects to make financial sense. For example, according to the Wall Street Journal, BP is assuming an oil price of $60 per barrel moving forward. Royal Dutch Shell is a little more pessimistic, using $50 per barrel as their projection. For now, projects that need $100+ per barrel will be put on ice indefinitely. The oil majors have cancelled or delayed a combined $200 billion in new projects as they seek to rein in costs, according to Wood Mackenzie.

…click on the above link to read the rest of the article…

EPA’s Clean Power Plan Tougher Than Expected

August 4, 2015

EPA’s Clean Power Plan Tougher Than Expected

The Obama administration unveiled a much-anticipated, controversial rule on the regulation of greenhouse gases from power plants on August 3.

The first-of-their-kind limits on carbon pollution from existing power plants will actually require slightly tougher cuts than the original proposal. The EPA is calling for a 32 percent reduction in greenhouse gas emissions from power plants below 2005 levels by 2030. That is up from the 30 percent target as part of last year’s proposal.

However, the EPA did throw the industry, and its opponents in Congress, a bone.

In the final rule, the Obama administration will allow for two extra years for utilities to hit their interim targets of achieving a 25 percent reduction in greenhouse gases, with a deadline of 2022 instead of 2020. The EPA also offered up a “reliability safety valve,” which would allow states more leniency with deadlines in the event that the reliability of the electric grid came into question.

Under the final rule, the administration also decided to give new nuclear power plants credit towards the federal emissions target, as nuclear generates electricity without carbon emissions. That probably won’t be an avenue that many states pursue outside of a handful of nuclear power plants under construction in Georgia, Tennessee, and South Carolina.

The EPA estimates that the so-called “Clean Power Plan” will cost $8.4 billion annually by 2030 when implemented, but yield public-health and other benefits of $34 to $54 billion, including avoiding thousands of premature deaths each year.

The plan will accelerate a trend towards cleaner sources of electricity. The plan expects renewable energy to more than double its share of the electricity market, jumping from 13 percent in 2014 to 28 percent by 2030.

…click on the above link to read the rest of the article…

Recession Risk Mounting For Canada

August 3, 2015

Recession Risk Mounting For Canada

The latest economic data from Canada shows that it is inching towards recession, after its economy posted its fifth straight month of contraction.

Statistics Canada revealed on July 31 that the Canadian economy shrank by 0.2 percent on an annualized basis in May, perhaps pushing the country over the edge into recessionary territory for the first half of 2015. “There is no sugar-coating this one,” Douglas Porter, BMO chief economist, wrote in a client note. “It’s a sour result.”

The poor showing surprised economists, who predicted GDP to remain flat, but it the result followed a contraction in the first quarter at an annual rate of 0.6 percent. Canada’s economy may or may not have technically dipped into recession this year – defined as two consecutive quarters of negative GDP growth – but it is surely facing some serious headwinds.

Canada’s central bank slashed interest rates in July to 0.50 percent, the second cut this year, but that may not be enough to goose the economy. With rates already so low, there comes a point when interest rate cuts have diminishing returns. Consumer confidence in Canada is at a two-year low.

There are other fault lines in the Canadian economy. Fears over a housing bubble in key metro areas such as Toronto and Vancouver are rising. “In light of its hotter price performance over the past three to five years and greater supply risk, this vulnerability appears to be comparatively high in the Toronto market,” the deputy chief economist of TD Bank wrote in a new report. A run up in housing prices, along with overbuilding units that haven’t been sold, and a high home price-to-income ratio has TD Bank predicting a “medium-to-moderate” chance of a “painful price adjustment.” In other words, the bubble could deflate.

…click on the above link to read the rest of the article…

Oil Price Rebound Looking Unlikely

July 14, 2015

Oil Price Rebound Looking Unlikely

Oil prices may have firmed up a bit this spring, but we could be heading into another protracted period of weak prices.

First there are the demand risks. The Chinese stock market turmoil raises serious concerns over a potential financial crisis, which, needless to say, would be negative for oil prices.

The Greek crisis, again, presents risks to oil markets, not because Greece is a major oil produce or consumer (it is neither), but because of the threat of instability to the euro and to financial markets.

Both of these factors were behind the dramatic fall in oil prices earlier this month, but both are largely baked into the price already. And with an apparent band aid to the Greek crisis (but not a real solution) in hand, and the steadying of the Chinese stock markets over the last few days on the back of heavy intervention by the Chinese government, these two forces could be temporary.

However, there are other dangers ahead for oil prices. The International Energy Agency (IEA) estimated in its monthly oil market report that global demand growth will slow to just 1.2 million barrels per day (mb/d) in 2016, down from 1.4 mb/d this year. Weak demand means consumers won’t be able to soak up the extra supply.

But then there are the supply risks. OPEC revealed in its own monthly report that Saudi Arabia is now producing at its highest level on record. From May to June, Saudi Arabia ramped up output by an additional 230,000 barrels per day to reach a record high of 10.5 mb/d. Iraq also added 303,000 barrels per day in June and Nigeria added 75,000 barrels per day. OPEC continues to flood the market and collectively the cartel is producing well in excess of its 30 million-barrel-per-day target.

…click on the above link to read the rest of the article…

EIA Confirms: Oil Production Peaked

July 13, 2015

EIA Confirms: Oil Production Peaked

U.S. oil production has peaked…at least for now.

That is the conclusion from a new government report that concludes that U.S. oil production is on the decline. After questions surrounding the resilience of U.S. shale and when low oil prices would finally cut into production, the EIA says the month of April was the turning point.

In its Short-Term Energy Outlook released on July 7, the EIA acknowledged that U.S. oil production peaked in April, hitting 9.7 million barrels per day (mb/d), thehighest level since 1971. In May, production fell by 50,000 barrels per day, and EIA says that it will continue to decline through the early part of next year. Still, the declines won’t be huge, according to the agency’s forecast – production will average 9.5 mb/d in 2015 and 9.3 mb/d in 2016.

The EIA figures move a little closer to what some critics have been saying for some time. Data from states like North Dakota and Texas had pointed to slowing production for months while EIA posted weekly gains in production figures for the nation as a whole. Along with several consecutive weeks of inventory drawdowns, EIA figures started to look a little suspect. The latest report is sort of an acknowledgement that those figures were a little optimistic.

Nevertheless, as the EIA affirms peak production in the second quarter of 2015, the fall in output over the next few quarters should bring supply and demand back into balance, or at least close to it. Supply exceeded demand by more than 2.5 mb/d in the second quarter of this year, but that gap will narrow to 1.6 mb/d in the third quarter and just 500,000 barrels per day in 2016.

…click on the above link to read the rest of the article…

Why A U.S Shale Slowdown Will Hardly Effect Oil Prices

June 22, 2015

Why A U.S Shale Slowdown Will Hardly Effect Oil Prices

Just last week I wrote on the possibility of a renewed downturn in oil prices, owing to the fact that huge volumes of supplies could potentially come online in places like Iraq, Libya, and Iran. That is still the case.

But let’s look at the other side of the coin. Despite the surprising resilience of U.S. shale, production could be now entering an extended period of decline. The EIApredicts that output in the major shale regions could decline by 91,000 barrels per day in July.

An ongoing and deeper contraction is likely. The EIA also reports a dramatic decline in well completions since October of last year. When prices starting falling, especially after the November 2014 OPEC meeting, rig counts started vanishing from the field and drilling companies began completing fewer wells.

(Click to enlarge)

That is important because shale wells suffer from rapid decline rates in their production profiles. After about the first year, the initial burst of oil largely peters out, and the decline rate is precipitous. As a result, a large number of fresh wells need to constantly be completed just to keep output flat.

With the number of well completions down, falling production from wells that were drilled in the past start to become more obvious. This “legacy decline” is now overtaking new production, most likely forcing overall net production to have dipped into negative territory in May.

(Click to enlarge)

The volume of legacy declines will only increase as it will increasingly reflect the huge volume of production that came online in 2013 and 2014. All of that recent production won’t be replaced as drillers sit on the sidelines. That means the decline in total production will only accelerate in the months ahead.

…click on the above link to read the rest of the article…

How Big Oil Was Saved From The Oil Price Crash

June 18, 2015

How Big Oil Was Saved From The Oil Price Crash

Low oil prices have been less of a drag on the big integrated oil companies than it has for smaller producers. Diversified portfolios have allowed the largest oil companies to weather the storm better than their smaller competitors.

To be sure, Big Oil has not gotten off lightly. In fact, some of the largest megaprojects that are only undertaken by the oil majors appear to be huge financial burdens. Having spent billions of dollars on extraordinarily large and complex projects – ultra-deep water, LNG, large oil sands projects – the costs are a colossal weight around the necks of the oil majors. The oil industry has scrapped an estimated $200 billion in future offshore and LNG projects as the industry backs away from the massive costs.

Smaller onshore shale projects that have shorter lead times look attractive by comparison, despite shorter lifespans and relatively high breakeven costs. Wells can be drilled for a few million dollars over the course of a few months, rather than the billions needed for the megaprojects that can take a decade to develop.

At a time in which OPEC is fighting for market share, which could lead to oil prices remaining low for an extended period of time, smaller has its advantages. “The major oil companies are being squeezed,” CEO of Italian oil giant Eni, Claudio Descalzi, said in Vienna in early June. “We need to slow down and look for easier projects away from the complexity of the last 10 years.”

Nevertheless, it pays to be big and diversified. Complex megaprojects may be weighing on the balance sheets of the oil majors, but their extensive downstream assets are paying off.

…click on the above link to read the rest of the article…

Cold Shoulder For Russia Could Hint At OPEC Decision June 5th

June 3, 2015

Cold Shoulder For Russia Could Hint At OPEC Decision June 5th

Before the November 2014 OPEC meeting in Vienna, the head of Russia’s state-owned oil company Rosneft flew to Vienna to meet with OPEC members. The meeting demonstrated Russia’s interest in stopping oil prices from falling further, as it pushed OPEC to cut back on oil production. But little came of the meeting, since Russia was not prepared to participate in any decrease in output.

With OPEC set to meet again on June 5, the Wall Street Journal reported that Russian officials again held secret discussions with OPEC. Once again, the meeting, apparently held on May 13, concluded without any agreement.

Russia is overwhelmingly dependent on oil. Around half of its budget revenues come from oil and gas, and for this reason Russia is particularly desperate to see a return to higher oil prices. A disproportionate dependence on oil revenues is something shared by most, if not all, of the members of OPEC.

But the two sides are operating in different circumstances. For example, the de facto head of OPEC, Saudi Arabia has a vast war chest, somewhere on the order of $700 billion in reserves.

Ultimately, however, the big difference is that Saudi Arabia plays the long game. There are multiple concerns in Riyadh that factor into its strategic decision making over oil output. The near to medium term concern is maintaining market share, which it is pursuing by keeping oil production levels high. Saudi Oil Minister Ali al-Naimi said on June 1 that the strategy was working, and with an eye on stagnating US shale production, he said the markets are moving “in the right direction.”

…click on the above link to read the rest of the article…

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