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Many analysts had anticipated that a dramatic drop in oil prices such as we’ve seen since the summer of 2014 could provide a big stimulus to the economy of a net oil importer like the United States. That doesn’t seem to be what we’ve observed in the data.

There is no question that lower oil prices have been a big windfall for consumers. Americans today are spending $180 B less each year on energy goods and services than we were in July of 2014, which corresponds to about 1 percent of GDP. A year and a half ago, energy expenses constituted 5.4 percent of total consumer spending. Today that share is down to 3.7 percent.

(Click to enlarge)

Consumer purchases of energy goods and services as a percentage of total consumption spending, monthly 1959:M1 to 2016:M2. Blue horizontal line corresponds to an energy expenditure share of 6 percent.

But we’re not seeing much evidence that consumers are spending those gains on other goods or services. I’ve often used a summary of the historical response of overall consumption spending to energy prices that was developed by Paul Edelstein and Lutz Kilian. I re-estimated their equations using data from 1970:M7 through 2014:M7 and used the model to describe consumption spending since then. The black line in the graph below shows the actual level of real consumption spending for the period September 2013 through February of 2016, plotted as a percent of 2014:M7 values. The blue line shows the forecast of their model if we assumed no change in energy prices since then, while the green line indicates the prediction of the model conditional on the big drop in energy prices that we now know began in July of 2014.

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

Debt Spiral Grips Both, Pemex and Mexico

April 6, 2016

Debt Spiral Grips Both, Pemex and Mexico

It was just a matter of time before Pemex, Mexico’s chronically indebted state-owned oil giant, began dragging down the national economy it had almost single handedly sustained for over 75 years.

The company has been bleeding losses for 13 straight quarters. As of December 31, it had $114.3 billion in assets and $180.6 billion in liabilities, a good chunk of it denominated in dollars, leaving a gaping hole of $66.3 billion (negative equity), after having been strip-mined over the decades by its owner, the government. And given these losses and the equity hole, new credit is becoming harder to come by.

Now it seems that Mexico’s worst nightmare is beginning to come true, thanks in no small part to Moody’s Investors Service. The credit rating agency last week downgraded Pemex’s credit rating from Baa1 to Baa3. In November Pemex had a perfectly respectable credit rating of Aa3; now, just six months later, it’s perilously perched just one notch above junk.

“Moody’s believes that Pemex’s credit metrics will worsen as oil prices remain low, production continues to drop, taxes remain high, and the company must adjust down capital spending to meet its budgetary targets,” the report said.

That was for Pemex. Now Moody’s also changed the outlook for Mexico’s sovereign rating from stable to negative.

This, coupled with the mounting risk of a credit downgrade, heaps further pressure on a government already struggling to shore up its balance sheet. Hardly helping matters is the fact that oil prices, a key source of government revenues, continue to languish at low levels, while the prospect of a massive bailout of Pemex looms ever larger. As if that were not enough, Mexico’s manufacturing industry is beginning to feel a very sharp pinch from weakening U.S. consumer demand.

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

Oil Production Vital Statistics March 2016

April 4, 2016

Oil Production Vital Statistics March 2016

Since the possible double bottom at $26 formed on February 11th the oil price has staged a rally to $40 (WTI). Traders lucky enough to buy at $26 and sell at $40 have pocketed a tidy 54% profit. Very few will have been this lucky. The trade was stimulated by news that Saudi Arabia and Russia had agreed to not increase production this year which is hollow news since neither country could significantly increase production no matter how hard they tried. Profit taking has now driven WTI back towards $37 as of 1 April.

What next? There is precious little sign of significant production falls anywhere. US and international rig counts continue to plunge. And there is little sign of global demand recovering as OECD economies buckle under the weight of misguided energy policy and debt. There is a risk of the plunge in oil price resuming.

The following totals compare Feb 2016 with Jan 2016:

World Total Liquids down 180,000 bpd
USA down 60,000 bpd
North America down 100,000 bpd (includes USA)
OPEC up 100,000 bpd
Saudi Arabia up 20,000 bpd
Iran up 220,000 bpd
Russia + FSU down 10,000 bpd
Europe up 220,000 bpd (YOY)
Asia up 60,000 bpd

This article first appeared on Energy Matters.

EIA oil price and Baker Hughes rig count charts are updated to the end of March 2016, the remaining oil production charts are updated to February 2015 using the IEA OMR data.

Figure 1 WTI tested the $26.68 low set on Jan 20 by returning to $26.19 on Feb 11. Since then a rally to $40 has been staged and the price has moved above the near term downwards trend line. Charts have limited value in prediction and must be used in conjunction with fundamentals. For now I don’t believe this chart is providing clear direction. Fundamentals remain chronically weak and the next chart points to an on-going plunge in price. But only time will tell.

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

Jeff Rubin: Oil Sands Are ‘Hemorrhaging Red Ink,’ Doomed to Shutter

March 18, 2016

Jeff Rubin: Oil Sands Are ‘Hemorrhaging Red Ink,’ Doomed to Shutter

Former CIBC chief economist outlines latest predictions at ‘Carbon Talks.’

Former CIBC world markets economist Jeff Rubin at SFU’s ‘Carbon Talks’ panel. On the right is Vancity’s mutual fund manager Dermot Foley. Photo by Mychaylo Prystupa.

The oil sands are downsizing. Alberta’s Big Oil CEOs are talking to environmentalists. And proposed oil pipelines are in serious trouble.

Those were the takeaways from a trio of experts who spoke in Vancouver Wednesday at a “Carbon Talks” event hosted by Simon Fraser University with the David Suzuki Foundation and the Centre for International Governance.

And the reasons for them have a lot less to do with vocal activist opposition or the Trudeau government’s climate commitments than they do with the brute forces of the global marketplace for oil.

It was Jeff Rubin — former CIBC World Markets chief economist and now energy futurist — who declared some of Canada’s largest oil sands operations doomed to be shuttered.

“Hanging over the oil sands industry like the Sword of Damocles,” Rubin said, “is the fact that they are hemorrhaging red ink. At today’s prices, the oil sands are not commercially viable.”

The problem, he said, isn’t that the industry “has been targeted by sanctions or by environmental groups. The problem has been that oil imports in the United States have been halved over the last five years.”

The world is awash in oil. The so-called “shale gas revolution,” using fracking technology in the U.S., has brought cheap shale oil to the surface in abundance in North Dakota and Texas. That, plus the actions of Saudi Arabia and its OPEC partners to flood the market with low-cost oil, has crashed benchmark global oil prices from highs above $100 a barrel two years ago, to prices today in the high $30 range.

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

Fallout in Alberta: The oil crash isn’t just about lost jobs

March 15, 2016

Fallout in Alberta: The oil crash isn’t just about lost jobs

Disillusionment has a way of setting all sorts of bad thoughts in motion

The story assignment from The National was simple. Go to Alberta and talk to regular people about the crash in the price of oil. Humanize the downturn.

Harsh economic numbers coming out of Alberta aren’t hard to find. A projected deficit of $10.4 billion. An unemployment rate of 7.4 per cent, the highest mark since 1996.

Then there was the startling projection from the Conference Board of Canada last week that Alberta will be the only province to see its economy shrink in 2016.

But what do these figures mean for people? How the downturn affects individual lives is much harder to figure out.

It is not always easy to get people to talk about these kinds of things. People who’ve just lost their jobs are busy trying to find another one, or they’re embarrassed by their situations.

But here are three people who agreed to speak to us and share some of their personal experiences during Alberta’s current downturn.

Warren Sonnenberg, Camrose

Warren Sonnenberg

Warren Sonnenberg, in Camrose, says one of the harder things is having friends and neighbours who are too upset to talk about their own situations. (CBC)

Sonnenberg, 35, worked for five years on a drilling rig in the oil patch. He started at the bottom as a leasehand and worked his way up to derrickhand. Before he was laid off in January he was making $40 an hour. He never thought the good times would end.

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

Oil Price Crash Was Not Saudi Arabia’s Fault

March 11, 2016

Oil Price Crash Was Not Saudi Arabia’s Fault

Quite simply, the Saudis want to maintain their market share, but their means to control that are dwindling.

The whole internet is jam-packed with analysis portraying Saudi Arabia and OPEC as villains for the oil price collapse. On a closer look, however, the Saudi’s could have taken no reasonable steps to avert this situation. This is a transformational change that will run its full course, and the major oil producing nations will have to accept and learn to live with lower oil prices for the next few years.

Why the Saudi’s are not to blame

(Click to enlarge)

As seen in the chart above, barring the period during the last supply glut, the Saudi’s have more or less maintained constant oil production, increasing production only modestly at an average of roughly 1 percent per year.

The last time the Saudi’s reduced production, the only objectives they achieved were higher debt and lower market share. It’s no surprise that this time, they were unenthusiastic about following that same path. Had they resorted to any cuts, it would have ended with them losing market share and revenues—nothing more.

U.S. oil production has almost doubled in the last 10 years

When it comes to oil, Saudi Arabia has enjoyed an unopposed leadership position for a long time. When that position was threatened by the U.S. shale oil, it was natural for them to attempt to protect their market share. However, like every other industry, leaders tend to be lax, ignoring competition until it’s too late. The same happened here too—most oil producing nations failed to take corrective measures, and they are facing its consequences now.

Where are we heading

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

The Coming Collapse of Saudi Arabia

March 10, 2016

The Coming Collapse of Saudi Arabia

They met in secret to plan a devastating attack…

Two powerful men, colluding at a palace in the Middle East.

In September 2014, U.S. Secretary of State John Kerry flew to Saudi Arabia. He was there to meet with King Abdullah, the country’s ruler and one of the richest men in the world.

Informed observers say Kerry and Abdullah drew up a plan at this meeting to destroy their common enemies: Russia and Iran.

To carry out the attack, they wouldn’t use fighter jets, tanks and ground troops. They would use a much more powerful weapon…

Oil.

Oil is the world’s most traded commodity. Saudi Arabia is the world’s largest oil exporter. It has arguably more control over the price of oil than any other country does.

Insiders say Saudi Arabia agreed to flood the oil market at this secret meeting. The purpose was to drive down the price of oil. This would hurt Russia’s and Iran’s economies. They both depend heavily on oil sales.

They wanted to hurt Russia for supporting their regional foe, Syrian President Bashar al-Assad. They wanted to hurt Iran for the same reason. Iran is the Saudis’ fierce geopolitical rival in the region.

Their strategy has had some success.

As you can see in the chart below, the price of oil has plummeted over 70% since John Kerry’s secret meeting with King Abdullah in September 2014.

There’s so much conflict in the Middle East—but oil prices are falling.

And despite China’s economic slowdown…it still imported more oil in 2015 than in 2014. China is the world’s number two oil consumer behind the U.S.

Turmoil plus demand says oil should be going up, not down. But the mystery is explained by the Saudis’ oil war and their strategy of flooding the market to bankrupt competitors.

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

Cheap Oil, the U.S. Dollar and the Deep State

March 9, 2016

Cheap Oil, the U.S. Dollar and the Deep State

March 9, 2016

All this is to suggest that those expecting a major weakening in the USD to push oil higher shouldn’t hold their breath awaiting this outcome.

That oil fell off a cliff once the U.S. dollar (USD) began its liftoff in mid-2014 is, well, interesting. Causation, correlation or coincidence? There are a variety of opinions on this, as there should be. What we do know is the soaring USD blew up a bunch of carry trades that borrowed money denominated in USD and invested the cash in emerging markets paying much higher yields. Here’s WTIC oil:

And here’s the USD Index:

We also know the Saudis announced that the kingdom would pump every barrel it could “to maintain market share,” which is generally understood to mean crush competitors such as Russia and U.S. shale producers.

We also know that storage facilities are almost full up (Oil Fundamentals Could Cause Oil Prices To Fall, Fast!).

We also know that global growth is slowing, so demand could weaken sharply going forward.

And lastly, we know that many oil exporters are heavily dependent on oil revenues to fund their oligarchy/monarchy/ruling elites, their military and their vast social welfare programs, which keep the restive masses from overthrowing the oligarchy, etc.

Here is the U.S., heavily indebted producers must pump or die, as they need every dime of revenue to service their vast debts.

If we add all this up– carry trades blowing up, weakening demand and heavy pressures to maintain production–we get a perfect set-up for a continued decline in oil.

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

Oil Fundamentals Could Cause Oil Prices To Fall, Fast.

March 8, 2016

Oil Fundamentals Could Cause Oil Prices To Fall, Fast.

Prices should fall to around $30 once the empty nature of an OPEC-plus-Russia production freeze is understood. A return to the grim reality of over-supply and the weakness of the world economy could push prices well into the $20s.

A Production Freeze Will Not Reduce The Supply Surplus

An OPEC-plus-Russia production cut would be a great step toward re-establishing oil-market balance. I believe that will happen later in 2016 but is not on the table today.

In late February, Saudi oil minister Ali Al-Naimi stated categorically, “There is no sense in wasting our time in seeking production cuts. That will not happen.”

Instead, Russia and Saudi Arabia have apparently agreed to a production freeze. This is meaningless theater but it helped lift oil prices 37 percent from just more than $26 in mid-February to almost $36 per barrel last week. That is a lot of added revenue for Saudi Arabia and Russia but it will do nothing to balance the over-supplied world oil market.

The problem is that neither Saudi Arabia nor Russia has greatly increased production since the oil-price collapse began in 2014 (Figure 1). A freeze by those countries, therefore, will only ensure that the supply surplus will not get worse because of them. It is, moreover, doubtful that Saudi Arabia or Russia have the spare capacity to increase production much beyond present levels making the proposal of a freeze cynical rather than helpful.

(Click to enlarge)

Figure 1. Incremental liquids production since January 2014 by the United States plus Canada, Iraq, Saudi Arabia and Russia. Source: EIA & Labyrinth Consulting Services, Inc. (click image to enlarge)

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

“They Spent It All On Hookers, Blow And Fancy Toys” – Hedge Fund Manager Predicts Lower Oil For Longer, Quantitative Easing For The People, And A Gold Bull Market

March 7, 2016

“They Spent It All On Hookers, Blow And Fancy Toys” – Hedge Fund Manager Predicts Lower Oil For Longer, Quantitative Easing For The People, And A Gold Bull Market

In 2011, as gold prices rocketed to $1900 and oil was trading above $120 a barrel, there were few analysts who saw anything but further gains. But Marin Katusa of Katusa Research had a different opinion. At a major commodity conference Katusa, to boos and jeers from the audience, held strong to his analysis that an imminent deflationary collapse in commodity prices was on the horizon. And collapse they did.

According to Katusa, who is closely involved in the Canadian resource sector, most people simply assumed the good times would go on forever… because it was different this time. But like any uninhibited party fueled by unlimited cash, the hangover was sure to follow.

There’s no doubt you had massive high paying jobs. In Canada, the province that benefited the most is Alberta… In the last twelve months they’ve had 70,000 layoffs of jobs paying over a hundred grand a year.

…when I’d go to these oil towns you’d sit down at the casinos with them and these guys were all about the hookers and blow… they were all about their toys… big fancy trucks… snow mobiles… and they’re in the field for two weeks and they make $20,000 and blow it all at the casinos.

You knew it couldn’t last.

As Katusa notes in his latest interview with Future Money Trends, though the crash has been brutal for the sector, it’s not over yet and it’s going lower for longer.

They [OPEC] can survive at $20 oil…

For two years everyone’s been saying, “OPEC’s going to cut back.”

They reality here is, why would OPEC cut production? That would only prop up the Russians and the shale sector.

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

Top Drillers Shut Down U.S. Fracking Operations as Oil Prices Continue to Tank

March 2, 2016

Top Drillers Shut Down U.S. Fracking Operations as Oil Prices Continue to Tank

Among them: Chesapeake Energy, Continental Resources and Whiting Petroleum. Chesapeake formerly sat as the second most prolific fracker in the U.S. behind ExxonMobil, while Continental has been hailed by many as the “King of the Bakken” shale basin located primarily in North Dakota.

Halliburton too, the drilling services goliath and namesake of the “Halliburton Loophole” exempting the industry from U.S. Environmental Protection Agency (EPA) enforcement of the Safe Drinking Water Act as it applies to fracking operations, has recently announced it will cut 5,000 drilling jobs globally (8 percent of its workforce).

“Continental Resources Inc., the shale oil pioneer controlled by billionaire wildcatter Harold Hamm, halted all fracking in the Bakken shale formation in the U.S. Williston Basin after posting its first annual loss since the company’s public debut in 2007,” wrote Bloomberg. “Continental said it has no fracking crews currently working in the Bakken. The company continues to drill there, focusing on areas with the highest returns, but will leave most wells unfinished this year.”

Chesapeake’s immediate future is just as bleak, if not more so, and it will halt drilling in the Marcellus Shale, Utica Shale, Eagle Ford Shale and elsewhere. The company sits as the top-producing driller in both the Utica and the Marcellus.

Whiting, the most prolific shale oil producer in the Bakken, will halt all of its fracking in the near-future. The company, 83 percent of whose produced oil comes from fracking the Bakken, will simultaneously slash its spending budget by 80 percent.

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

A Secret About Oil You Won’t Find Anywhere Else

March 2, 2016

A Secret About Oil You Won’t Find Anywhere Else

This is going to be a far larger problem than Wall Street realizes.

In early 1983 – the first week of February, to be precise – the inventory of crude oil in the U.S. reached an all-time economic high. I say “economic high” because nominal supply of crude oil has since far surpassed its 1983 number. In fact, current U.S. crude-oil inventory (504 million barrels) is the actual all-time high. Supply today is about 150 million barrels more than total supply in 1983.

Obviously, we have a lot more oil in storage than we’ve ever had before – about 40% more. But nominal supply numbers aren’t as important as you might think. Demand for crude oil in our economy has grown a lot since 1983.

To make a bona fide “apples-to-apples” comparison to today’s supply glut, we should measure the amount of oil supply relative to consumption. In 1983, the number of days’ worth of consumption in the U.S. hit a peak of 33.4. That’s the largest amount of crude oil we’ve ever held in private storage, relative to demand. That’s the all-time highest amount of “economic supply” – supply in relation to actual demand.

Much like today’s glut, the glut of oil from the mid-1980s was caused by a sustained increase in U.S. production. More oil was coming from Alaska’s North Slope. The Trans-Alaska pipeline began operation in July 1977. It had an immediate effect on total U.S. supply.

U.S. oil production grew from 227 million barrels per month in 1977 to almost 270 million barrels per month in July 1986 – an increase in monthly production of 18.9% over nine years. As you might remember, gasoline prices fell to well below $1 per gallon… and we saw a commercial real estate and banking crisis in Texas. Houston real estate didn’t recover for 20 years.

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

This Is How Government Dealt With Dissent And Revolt In Collapsing Venezuela – “Soldiers Shooting Civilians In The Streets, Paramilitaries Roaming Neighborhoods”

February 27, 2016

This Is How Government Dealt With Dissent And Revolt In Collapsing Venezuela – “Soldiers Shooting Civilians In The Streets, Paramilitaries Roaming Neighborhoods”

Editor’ Note: The initial report about this incident was printed in error. While the videos and images below were believed to be recently recorded, several readers contacted us to report that these incidents occurred in February 2014 and not February 2016.

We have modified portions of this article but have left the majority of this report intact. In terms of possible responses and consequences of economic collapse in the United States, Europe and elsewhere, the events in Venezuela could happen anywhere when governments lose control of the populace.

Venezuela is in complete chaos as a result of their economic collapse.

And as a result, state-rationed food and groceries have run out, prices are hyper-inflated and millions of people are waiting in huge lines for any goods that are available. Black markets have gone boom, with neighbors making necessities available to other neighbors, but they must avoid crackdown from a jealous State that is desperate to hang onto power.

The free-fall of oil prices on the global stage has snapped the South American socialist nation into sudden and harsh disaster. Venezuela has slightly more oil than Saudi Arabia, and trades the second largest volume, after OPEC, and was even more vulnerable than Russia to the economic warfare that has taken place in the last few years.

Things are very bad now, and they were already falling apart. Nicolas Maduro took over after Hugo Chavez’ death in 2013, but without the force of Chavez’ cult of personality, he has been unable to hold an already unrealistic economy together any longer – and the people are on the verge of complete revolt.

*Editor’s Note: The following reports were taken in 2014 but are as relevant to the conversation today as they were then*

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

In Spite Of Oil Price Slump, Canadian Oil Output To Increase

February 26, 2016

In Spite Of Oil Price Slump, Canadian Oil Output To Increase

It was yet another depressing headline congruent with the rest of the bad news bombarding the battered Canadian oilpatch for 15 months. On February 22 Postmedia (National Post, Calgary Herald, Edmonton Journal) carried the headline, “Canadian oil production growth could come to ‘complete standstill,’ IEA warns.”

It was based on the Medium-Term Oil Market report released by the International Energy Agency (IEA) on February 21 looking at global crude supply and demand for the next five years through the end of 2021. Based in Paris, the IEA is made up of 29 member countries which fund its research and reports into global energy markets.

The problem is that the headline is not true. At least not for the next three years, which is an eternity for the many exploration and production (E&P) and oilfield services (OFS) companies trying to figure out how to finish 2016 on the right side of the grass. Thanks to oilsands and east coast offshore projects still under construction, Canadian oil output is going to rise by 100,000 barrels per day (b/d) this year, 285,000 b/d in 2017 and 200,000 b/d in 2018, a total of 585,000 b/d. This is more oil than OPEC members Ecuador and Libya averaged in the fourth quarter of 2015.The two big projects which will move the needle on Canadian output the most are Suncor Fort Hills and Hebron, along with several others.

What the IEA actually wrote – which the headline writers apparently missed – was, “We are likely to see continued capacity increases (in Canada in) the near term, with growth slowing considerably, if not coming to a complete standstill, after the projects under construction are completed.” Which is 2019, unless the developers of these projects pull the plug.

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

Halliburton Cuts 5,000 Jobs, 8% Of Workforce

February 25, 2016

Halliburton Cuts 5,000 Jobs, 8% Of Workforce

It turns out oilfield services isn’t a good place to be during epic crude downturns.

Halliburton – which cut thousands upon thousands of jobs in 2015 – is back it, announcing an additional 5,000 layoffs on Thursdsay. The cuts amount to 8% of the company’s remaining workforce. We say “remaining” because as CNN notes, “the latest pink slips bring Halliburton’s job cut tally to between 26,000 to 27,000 since employee headcount peaked in 2014.”

The company will also look to sell assets (because everyone wants the kind of assets Halliburton owns with oil at $30) and is projecting $1.6 billion in capex this year.

“We regret having to make this decision but unfortunately we are faced with the difficult reality that reductions are necessary to work through this challenging market environment,” Emily Mir, a spokeswoman, said Thursday in an e-mailed statement. “We thank all impacted employees for their many contributions to Halliburton.”

Revenue plunged 42% in Q4 the company said last month hit, of course, by the ongoing oil rout. “Let me sum it up,” CEO Dave Lesar said on the call, “2016 is shaping up to be one tough slog through the mud.”

For 5,000 now jobless workers, this year will be a “tough slog through the mud” as well.

On the bright side, the stock is ripping:

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