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Why the Saudi Princes are Panicked
Why the Saudi Princes are Panicked
The Saudi deputy crown prince, Mohammed bin Salman, recently pulled the plug on an output freeze deal that was scheduled to have been signed by oil producers in Doha, Qatar. Since then, the press has been filled with the same story: Prince Mohammed was offended because Iran was a “no show” in Doha. So, he shredded the draft output freeze agreement.
As it turns out, there is an economic story that explains why the Saudis began, in late 2014, to pump crude as fast as they could – or close to as fast as possible. In fact, there is a good reason why the Saudi princes are panicked and pumping.
Let’s take a look at the simple analytics of production. The economic production rate for oil is determined by the following equation: P – V = MC, where P is the current market price of a barrel of oil, V is the present value of a barrel of reserves, and MC is the marginal recovery cost of a barrel of oil.
To understand the economics that drive the Saudis to increase their production, we must understand the forces that tend to raise the Saudis’ discount rates. To determine the present value of a barrel of reserves (V in our production equation), we must forecast the price that would be received from liquidating a barrel of reserves at some future date and then discount this price to present value. In consequence, when the discount rate is raised, the value of reserves (V) falls, the gross value of current production (P – V) rises, and increased rates of current production are justified.
When it comes to the political instability in the Middle East, the popular view is that increased tensions in the region will reduce oil production. However, economic analysis suggests that political instability and tensions (read: less certain property rights) will work to increase oil production.
…click on the above link to read the rest of the article…
“China Is Hoarding Crude At The Fastest Pace On Record”
“China Is Hoarding Crude At The Fastest Pace On Record”
In the aftermath of China’s gargantuan, record new loan injection in Q1, which saw a whopping $1 trillion in new bank and shadow loans created in the first three months of the year, many were wondering where much of this newly created cash was ending up.
We now know where most of it went: soaring imports of crude oil.
We know this because as the chart below shows, Chinese crude imports via Qingdao port in Shandong province surged to record 9.86 million metric tons last month based on data from General Administration of Customs.
As Energy Aspects pointed out in a report last week, “Imports through Qingdao surged to another record as teapot utilization picked up, leading to rising congestion at the Shandong ports.”
And sure enough, this kind of record surge in imports should promptly lead to another tanker “parking lot” by China’s most important port. This is precisely what happened when according to reports, some 21 crude oil tankers with ~33.6 million bbls of capacity signaled from around Qingdao last Monday, according to data compiled by Bloomberg. 12 of those vessels, with about 18 million bbls, were also there 10 days earlier, data show.
As Bloomberg adds, port management had met to discuss measures to ease congestion, citing an official at Qingdao port’s general office, however for now it appears to not be doing a great job. Incidentally, putting Qingdao oil traffic in context, last year the port handled 69.9 million metric tons overseas oil shipments, or ~21% of nation’s total crude imports, more than any other Chinese port.
So what caused this surge in demand? The answer is China’s “teapot” refineries.
According to Oilchem.net, the operating rate at small refineries in eastern Shandong province rose to 51.84% of capacity as of the week ended Apr. 22. The utilization rates climbed as various teapot refiners completed maintenance and restarted production.
…click on the above link to read the rest of the article…
“We Haven’t Seen This Is In Our Lifetimes” – CEO Says “Alberta Is In A Depression”
“We Haven’t Seen This Is In Our Lifetimes” – CEO Says “Alberta Is In A Depression”
Regular readers know that we’ve covered Alberta’s decline at length (refresher here), so there is no need to give much of a backstory other than to say that the situation seems to get worse for the Canadian province as each day passes even as oil has rebounded in the past two months.
Toronto’s “Condo King” Brad Lamb tried to put things into context when he said the situation is “worse than 2008.” However, on Friday we received an even more gloomy (albeit realistic) description of the economic situation in Canada’s energy hub, Alberta. In a very blunt interview with BNN, Murray Mullen the CEO of trucking company Mullen Group, said that the situation has moved well past recession, and should be described as a depression.
“Well, if you’re involved in the oil patch directly, drilling activity or anything like that I think we’ve gone beyond recession and it’s more a depression. The facts are that this latest round of commodity price collapse that happened the first part of this year I think really put the nail in the coffin for the industry.”“The damage has already been done basically for this year. Even though it seems like the oil price and even natural gas is starting to recover, there was no room for error because commodity prices had fallen so low in 2015, and then when it happened in 2016, and it’s not just crude oil, it’s natural gas also. We’re just kind of trapped in a difficult market dynamic that we haven’t seen in probably most of our lifetimes.”
“There’s no investment activity going on below $40, it just goes to zero.”
…click on the above link to read the rest of the article…
“China Is Hoarding Crude At The Fastest Pace On Record”
“China Is Hoarding Crude At The Fastest Pace On Record”
We now know where most of it went: soaring imports of crude oil.
We know this because as the chart below shows, Chinese crude imports via Qingdao port in Shandong province surged to record 9.86 million metric tons last month based on data from General Administration of Customs.
As Energy Aspects pointed out in a report last week, “Imports through Qingdao surged to another record as teapot utilization picked up, leading to rising congestion at the Shandong ports.”
And sure enough, this kind of record surge in imports should promptly lead to another tanker “parking lot” by China’s most important port. This is precisely what happened when according to reports, some 21 crude oil tankers with ~33.6 million bbls of capacity signaled from around Qingdao last Monday, according to data compiled by Bloomberg. 12 of those vessels, with about 18 million bbls, were also there 10 days earlier, data show.
As Bloomberg adds, port management had met to discuss measures to ease congestion, citing an official at Qingdao port’s general office, however for now it appears to not be doing a great job. Incidentally, putting Qingdao oil traffic in context, last year the port handled 69.9 million metric tons overseas oil shipments, or ~21% of nation’s total crude imports, more than any other Chinese port.
So what caused this surge in demand? The answer is China’s “teapot” refineries.
According to Oilchem.net, the operating rate at small refineries in eastern Shandong province rose to 51.84% of capacity as of the week ended Apr. 22. The utilization rates climbed as various teapot refiners completed maintenance and restarted production.
In the aftermath of China’s gargantuan, record new loan injection in Q1, which saw a whopping $1 trillion in new bank and shadow loans created in the first three months of the year, many were wondering where much of this newly created cash was ending up.
…click on the above link to read the rest of the article…
Stunning Photos Of Huge Oil Supertanker Lines Forming “World’s Biggest Traffic Jam”
Stunning Photos Of Huge Oil Supertanker Lines Forming “World’s Biggest Traffic Jam”
– Reuters
Last week we revealed what we thought was a “shocking photo” of nearly 30 oil tankers caught in a traffic jam off the Iraqi coast, an indication of just how much excess oil is currently parked offshore.
To be sure, the record offshore storage is a problem because with the front-end contango collapsing, DB warned just several weeks ago when comparing the current level of floating storage (157.3 million barrels) versus that in early February (126.6 million barrels), that there may be an additional 31 million barrels of inventory to be drawn down between now and the next inventory trough over the next several months. It calculated that “depending on the duration of drawdown (three months or six months) this could mean anywhere from 165-330 kb/d of incremental supply.”
But the photo above, meant to do DB’s thesis justice, was nothing in comparisons to what Reuters would reveal today.
Because as ports struggle to cope with a global oil glut, huge queues of supertankers have formed in some of the world’s busiest sea lanes, where some 200 million barrels of crude lies waiting to be loaded or delivered, Reuters reports today.
The vessels, filled with oil worth around $7.5 billion at current market prices, would stretch for almost 40 km (25 miles) if formed up in one straight line.
Something not quite so theoretical, and yet almost identical taking place right now, is shown in the photo below, which shows VLCC supertankers traveling between India and Southeast Asia, courtesy of Reuters.
…click on the above link to read the rest of the article…
Saudis Retaliate To “Oil Freeze” Fallout: Ban Transport Of Iranian Crude In Territorial Waters
Saudis Retaliate To “Oil Freeze” Fallout: Ban Transport Of Iranian Crude In Territorial Waters
At first, when it announced the terms of its “oil freeze” agreement with Russia one month ago, Saudi Arabia seemed willing to grant Iran a temporary exemption from the supply freeze, at least until it recovers its pre-embargo production levels. That however changed on Friday when the country’s Deputy Crown Prince Mohammed bin Salman, shocked Saudi Arabia’s Arab allies in the Persian Gulf, telling Bloomberg his country would only join the freeze curbe Iran – and all other OPEC member nations – also joined.
Following the Friday announcement, yesterday Iran’s oil minister Zangadeh made it clear that the country rejects Saudi demands, and would continue ramping up production at will, in the process making the April 17 Doha meeting meaningless.
And then, in a new and unexpected retaliation by Saudi Arabia for Iran’s intransigence, moments ago the FT reported that Saudi Arabia has taken steps to slow Iran’s efforts at increasing oil exports, banning vessels that transport Iranian crude from entering their waters, according to traders and shipbrokers.
More details from FT:
Iranian vessels carrying the country’s crude are restricted from entering ports in Saudi Arabia and Bahrain, according to a circular sent by a shipping insurance company to its members in February.The notice said ships that have called to Iran as one of its last three ports of entry will also require approval from the Saudi and Bahraini authorities before entering their waters. Shipbrokers and traders have relayed the same messages since.
Iranian oil executives have expressed their concern about the message circulating in the market, saying it is only adding to problems they face in selling their crude.
Saudi Aramco, the state oil company, and The National Shipping Company of Saudi Arabia (Bahri) did not respond to requests for comment.
…click on the above link to read the rest of the article…
Iran Oil Minister Rejects Saudi Demand To Freeze Crude Production
Iran Oil Minister Rejects Saudi Demand To Freeze Crude Production
Today, what little hope there may have been that Iran will suddenly change its mind and join the production freeze evaporated on Sunday when Iran’s oil minister rejected a Saudi demand to stop throttling up its petroleum production. As the WSJ adds, this threatens what has become a farcical deal to “limit crude output and raise prices” when the major oil producers meet in Doha on April 17.
The follows Zanganeh’s admission that Iran’s oil and condensates exports surpassed 2mm b/d, a trend Iran will certainly not want to imperil.
Iranian Oil Minister Bijan Zanganeh
As the WSJ notes, Zanganeh’s remarks were his first comments since a report emerged last week that Saudi Arabia, the world’s largest crude exporter, would limit its production only if Iran followed suit.
The dueling positions by the Middle East’s two biggest rivals for power and economic might have set off a scramble among other oil-producing nations to salvage a deal to freeze their output and stop growth in the world’s petroleum supplies. Global oil production outpaces demand by almost two million barrels on any given day, sending prices to their lowest levels in over a decade.
Ironically, in advance of the Doha meeting which many thought had a chance of reaching some agreement, other OPEC members had pushed their oil production to the limit, flooding the market with even more excess supply. Most will find it virtually impossible to throttle production back.
…click on the above link to read the rest of the article…
“Production Freeze” Narrative Collapses In Two Days: Russian Oil Output Hits New Post-Soviet Record
“Production Freeze” Narrative Collapses In Two Days: Russian Oil Output Hits New Post-Soviet Record
Source: stockboardasset
Indeed, it’s been a tough two days for oil bulls holding on to hope that excess oil production will normalize in the near term and that the world’s oil suppliers would somehow manage to curb oil production in the aftermath of the OPEC’s November 2014 cartel collapse.
First it was yesterday’s Bloomberg story which cited the Saudi Deputy Crown Prince Mohammed bin Salman as saying that the Saudis would not participate in an oil production freeze unless everyone including Iran which has made it joined “If all countries including Iran, Russia, Venezuela, OPEC countries and all main producers decide to freeze production, we will be among them.”
The second one came overnight.
Recall that one month ago, just as Russia and Saudi Arabia were finalizing their “agreement” to freeze oil production which was the major catalyst for the oil surge from its 13 year lows hit in early February, we got the surprising news that far from throttling production, Russian crude and condensate production just set new post-Soviet daily record of 10.92 million barrels.
Well, overnight we got the latest update of Russian oil output, and according to Bloomberg it just set a new post-Soviet high in March “as the success of a proposed crude production freeze between OPEC members and other major producers appeared to be in doubt.”
Bloomberg reports that Russian production of crude and a light oil called condensate climbed 2.1 percent in March from a year earlier to 10.912 million barrels a day, according to the Energy Ministry’s CDU-TEK unit. That narrowly beat the previous high of 10.910 million barrels in January.
…click on the above link to read the rest of the article…
Presenting, “The Company That Bribed The World”
Presenting, “The Company That Bribed The World”
This won’t exactly come as a surprise: the global oil industry is corrupt.
We are, after all, talking about the most financialized commodity in the history of the world, and up until a few years ago, it was controlled by a cartel comprised entirely of nations run by caricatures and stereotypes that the Western public generally regarded as a kind of necessary evil in a world that revolves around fossil fuels.
More recently, we’ve seen how oil funds terrorism and how crude prices are manipulated by the Gulf monarchies to secure “ancillary diplomatic benefits” in the never-ending quest to perpetuate Sunni hegemony in the Arabian Peninsula.
In short, blood money and oil money are synonymous concepts and at the end of the day, any geopolitical dispute that can’t be explained by sectarianism, tribalism, or some other ancient cultural rift, can very likely be explained by a dispute over energy.
Given the above, we weren’t at all shocked to learn that a heretofore obscue firm based in Monaco has made a killing by perfecting the art of oil market bribery and corruption. But even if the story isn’t surprising, it is nonetheless intriguing and with that in mind we present below excerpts from “The Company The Bribed The World,” a collaborative piece by Huff Post and Fairfax Media.
* * *
From The Huffington Post
A massive leak of confidential documents has for the first time exposed the true extent of corruption within the oil industry, implicating dozens of leading companies, bureaucrats and politicians in a sophisticated global web of bribery and graft.
After a six-month investigation across two continents, Fairfax Media and The Huffington Post can reveal that billions of dollars of government contracts were awarded as the direct result of bribes paid on behalf of firms including British icon Rolls-Royce, US giant Halliburton, Australia’s Leighton Holdings and Korean heavyweights Samsung and Hyundai.
…click on the above link to read the rest of the article…
WTI Crude Slides Back Into Red For 2016 As The Fed And Oil Remain On Unsustainable Paths
WTI Crude Slides Back Into Red For 2016 As The Fed And Oil Remain On Unsustainable Paths
But WTI Crude has given up all its early morning “see oil is fixed” gains in a hurry as once again the algo ramps give way to the realization that, as OilPrice’s Leonard Brecken notes, comes even as for all intents and purposes OPEC has nearly reached its production limits and Iran still plans in increasing output.
What started the entire correction, in my view, was the carry trade on buying the Euro ahead of more quantitative easing (QE) and the Fed playing games by talking up a recovery and threatening to raise rates. That created a double whammy on a strong U.S. dollar beginning in the summer of 2014 when oil prices peaked.
At the same time, U.S. producers did manage to ramp up output even further in the second half of 2014, at a time of rising inventories. By the first half of 2015 things began to self-correct as inventories began to fall. Oil prices started to make a recovery but reversed as OPEC flooded the market with more oil, which began in late 2014. Meanwhile the nuclear deal with Iran opened up the prospect of a new source of supply, a fact that was overhyped by the media.
Demand remained strong for gasoline despite the weakening global economy, much to the media’s surprise. Inventories rose in absolute terms, but in terms of days of supply, storage remained at much more modest levels, only eclipsing the upper end of the historic five-year range in 2016.
…click on the above link to read the rest of the article…
Venezuela Runs Out Of Electricity, Will Shut Down For A Week, El Nino Blamed
Venezuela Runs Out Of Electricity, Will Shut Down For A Week, El Nino Blamed
Or at least that’s how Maduro described the situation in a “thundering” speech to supporters at what he called an “anti-imperialist” rally in Caracas last Sunday.
Meanwhile, thousands of demonstrators held counter-rallies calling for the President’s ouster. Maduro angered the opposition – which dealt Hugo Chavez’s leftist movement its worst defeat at the ballot box in history in December – last month when he used a stacked Supreme Court to give himself emergency powers he says will help him deal with the country’s worsening economic crisis.
“Now that the economic emergency decree has validity, in the next few days I will activate a series of measures I had been working on,” he said, following Congress’s declaration of a “food emergency.”
Needless to say, Maduro’s “measures” didn’t do much to help the situation on the ground, where Venezuelans must queue in front of grocery stores and where 90% of medicine is scarce.
Venezuela is the world’s worst performing economy and barring a sudden (not to mention large) spike in crude prices, the country will in all likelihood default this year as 90% of oil revenue at current prices must go towards debt service payments.
But that hasn’t deterred Maduro, who has vowed to remain defiant in the face of (loud) calls for his exit. “Let them come for me,” he bellowed on Sunday. “I will hang on to power until the final day.”
Maybe so, but one place that’s not “hanging onto power” is the Guri Dam, which supplies more than two-thirds of the country’s electricity. As The Latin American Herald Tribune writes, the dam “is less than four meters from reaching the level where power generation will be impossible.”
…click on the above link to read the rest of the article…
The Liquidity Endgame Begins: Whiting’s Revolver Cut By $1.2 Billion As Banks Start Slashing Credit Lines
The Liquidity Endgame Begins: Whiting’s Revolver Cut By $1.2 Billion As Banks Start Slashing Credit Lines
Earlier today we reminded readers about the circular (and why note fraudulent conveyance) scheme hatched by JPMorgan to reduce its secured loan exposure to Weatherford, when just two weeks ago none other than JPM underwrote an WFT equity offering in which it sold equity in the company, and which proceeds were promptly used by the company to repay the JPMorgan revolver.
We then showed that it wasn’t just Weatherford: most of the “uses of funds” from the recent record surge in oil and gas equity offerings, have been used to repay the secured debt/revolver facilities, thereby eliminating funded and unfunded balance sheet exposure of major US banks.
But while lender banks are all too eager to take advantage of the brief surge in equity prices just so they can “help” their clients dilute their shareholder base so to repay the very same lender banks, they know quite well that the equity offering window is rapidly closing; in fact it will slam shut as soon as the price of oil resumes its downward trajectory.
That does not mean they are out of options to reduce their exposure to US shale, however. Quite the contrary, and in fact the “exposure reduction” is about to begin in earnest. We hinted at what it would look like in early January when we reported that already some 25 of the most distressed shale companies have seen their revolving bases slashed by as much as 50%.
These were just the beginning. As Bloomberg wrote earlier, U.S. exploration and production companies must brace for further cuts to their borrowing-base credit lines this spring, as part of the spring 2016 borrowing base redeterminations.
…click on the above link to read the rest of the article…
“They Should Leave Us Alone”: Iran Wants No Part Of Oil Freeze Until Output Higher
“They Should Leave Us Alone”: Iran Wants No Part Of Oil Freeze Until Output Higher
On Tuesday, Kuwait’s oil minister Anas al-Saleh delivered a rather stark warning to the rest of OPEC when he said the following about the much ballyhooed crude output freeze: “I’ll go full power if there’s no agreement. Every barrel I produce I’ll sell.”
That was a response to a question about what Kuwait would do if all major producers failed to agree to the freeze. Of course “all major producers” includes Iran and having just now begun to enjoy the financial benefits of being free to sell its oil without the overhang of crippling international sanctions, Tehran isn’t exactly thrilled about the idea of capping production at the current run rate of around 3 million b/d.
As soon as sanctions were lifted, Iran immediately committed to boosting production by 500,000 b/d and said that by the end of the year, it would bring an additional 500,000 b/d of supply online. That would put Iranian production at around 4 million b/d total and, as we noted back in January, would mean the country will be raking in between $3 and $5 billion every month by the end of 2016.
Whether or not those numbers are ultimately achievable is debatable, but the point is, Iran came back to market at a rather inauspicious time. President Hassan Rouhani is attempting to rebuild his country’s economy and Tehran is attempting to attract tens of billions in investments. Taking the foot off the pedal now would be a bitter pill to swallow.
On Sunday, we got the latest from Iranian Oil Minister Bijan Zanganeh and the message was unequivocal: “They should leave us alone as long as Iran’s crude oil has not reached 4 million. We will accompany them afterwards.”
…click on the above link to read the rest of the article…
The “Terrifying Prospect” Of A Triumph Of Politics Over Economics
The “Terrifying Prospect” Of A Triumph Of Politics Over Economics
All of life’s odds aren’t 3:2, but that’s how you’re supposed to bet, or so they say. They are not saying that so much anymore, or saying that history rhymes, or that nothing’s new under the sun. More and more theys seem to be figuring out that past economic and market experiences can’t be extrapolated forward – a terrifying prospect for the social and political order.
Consider today’s realities:
Global economies have grown to their current scale thanks to a glorious secular expansion of worldwide credit – credit unreserved with bank assets and deposits; credit extended to brand new capitalists; credit that can never be extinguished without significant debt deflation or hyper monetary inflationEconomies no longer form sufficient capital to sustain their scales or to justify broad asset values in real terms
Markets cannot price assets fairly in real terms without risking significant declines in collateral values supporting them and their underlying economies
Politicians that used to anguish (rhetorically) over the right mix of potential fiscal policies, ostensibly to get things back on track (as if somehow finding the right path would have actually been legislated into existence), have come to realize the limits of their power to have a meaningful impact
Monetary authorities have become the only game in town,assassinating all economic logic so they may juggle public expectations in the hope – so far successfully executed – that neither man nor nature will be the wiser.
The good news for policy makers is that man remains collectively unaware and vacuous; the bad news is that nature abhors a vacuum. The massive scale of economies relative to necessary production (not to mention already embedded systemic leverage) suggests this time is truly different.
…click on the above link to read the rest of the article…
IA’s Dire Oil Forecast: $34 Crude Due To Far More Resilient Production, Oversupply And Lower Demand
IA’s Dire Oil Forecast: $34 Crude Due To Far More Resilient Production, Oversupply And Lower Demand
Instead, the pain is only just beginning, after the EIA revised its 2016 supply forecast higher as “production is more resilient to lower prices than previously expected” – why thank you desperate momentum chasing “investors” of other people’s money, who can’t wait for that secondary offering to repay JPMorgan’s credit facility.
The EIA also revised its forecast demand lower as a result of a decline in global economic growth.
Yes, someone finally admitted that demand is lower.
End result: a cut in forecast oil prices for 2016 and 2017 from $37 and $50 to just $34 and $40.
Here is the summary, with the troubling parts highlighted:
Global oil inventories are forecast to increase by an annual average of 1.6 million b/d in 2016 and by an additional 0.6 million b/d in 2017. These inventory builds are larger than previously expected, delaying the rebalancing of the oil market and contributing to lower forecast oil prices. Compared with last month’s STEO, EIA has revised forecast supply growth higher for 2016 and revised forecast demand growth lower for both 2016 and 2017. Higher 2016 supply in this month’s STEO is based on indications that production is more resilient to lower prices than previously expected. Notably, revisions to historical Russian data, which raised the baseline for Russian production, carry through much of the forecast. Additionally, lower expectations for global economic growth contributed to a reduction in the oil demand forecast.
And the details:
…click on the above link to read the rest of the article…
