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How Fracking Changed the Economics of Oil Production Around the World

James Meadway, chief economist at the New Economics Foundation, explains the interrelated economics behind China’s ‘Black Monday’ stock market crash, Middle Eastern oil and US fracking.

The ‘fracking revolution’ has transformed the economics of oil production globally, with the US becoming a bigger producer than Saudi Arabia and – after decades of dependency on oil imports – even being able to export some of its surplus production.

US shale oil is unusual, too, in being privately owned: most of the world’s oil reserves (over 70 percent) are in state hands. Like the North Sea 30 years ago, in a world dominated by state-owned companies and publicly owned reserves, US shale could look like a new frontier for private operators on the search for fat profits.

New technology, high oil prices, and plentiful cheap credit have encouraged the boom. Some $200bn has been borrowed to invest in fracking in the last few years, accounting for 15 percent of the entire $1.3tr US junk bond market. Investors were, in effect, betting on continuing high oil prices making their investments profitable for years to come.

Price Slump

Last year’s slump in prices trashed that calculation. From a mid-year high of $115 per barrel, by the end of 2014 the price per barrel had fallen by more than 40 percent. More than half of US shale rigs have been laid up since October.

The driver, last year, was the behaviour of OPEC – the Organization of Petroleum Exporting Countries. OPEC is a cartel agreement among major oil producers that seeks to manage the international market for oil. With oil prices already plunging over the summer, OPEC could be expected to ease off on production. Restricting supplies should, thanks to the magic of the market, produce a decent increase in the sale price of oil. Instead, with Saudi Arabia taking the lead, OPECdecided to continue production levels. No agreement on restricting output could be reached. Prices slumped.

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Fallout From Petrodollar Demise Continues As Qatar Borrows $4 Billion Amid Crude Slump

Fallout From Petrodollar Demise Continues As Qatar Borrows $4 Billion Amid Crude Slump

Early last month in “Cash-Strapped Saudi Arabia Hopes To Continue War Against Shale With Fed’s Blessing,” we noted the irony inherent in the fact that Saudi Arabia, whose effort to bankrupt the US shale space has blown a giant hole in the country’s fiscal account, was set to tap the debt market in an effort to offset a painful petrodollar reserve burn.

“Saudi Arabia is returning to the bond market with a plan to raise $27bn by the end of the year, in the starkest sign yet of the strain lower oil prices are putting on the finances of the world’s largest oil exporter,” FT reportedat the time.

The reason this is so ironic is that at various times, we’ve characterized persistently low crude prices as essentially a battle between the Fed and the Saudis. Many struggling US producers would likely have been out of business months ago were it not for the fact that ZIRP has kept capital markets wide open, allowing otherwise insolvent drillers to stay afloat. Obviously, that works at cross purposes with Riyadh’s efforts to “preserve market share”, and so ultimately, the Saudis are betting their FX reserves can outlast ZIRP.

There are other factors at play here that weigh on Saudi Arabia’s financial situation including two proxy wars and the defense of the riyal peg which is why turning to the bond market is an attractive option especially considering that capital markets are so favorable thanks to – and here’s the irony – the very same Fed policies that are keeping US shale producers in business. 

But Saudi Arabia’s “war” with the US shale space isn’t unfolding in a vacuum and now Qatar is looking to borrow to alleviate the financial strain. Here’s more from Bloomberg:


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Why Saudi Arabia Won’t Cut Oil Production

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.

Related: Some Small But Welcome Relief For WTI

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.

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China Loses All Control: Arrests Journalist, Financial Executive Over Market Crash

China Loses All Control: Arrests Journalist, Financial Executive Over Market Crash

For two months, China has been on a quest to control both the stock market itself and the narrative around the stock market.

After an unwind in the CNY1 trillion back alley margin lending complex sparked a late June selloff, China cobbled together a plunge protection team run by China Securities Finance (an arm of CSRC) and began intervening in the market.

That effort has cost an estimated CNY900 billion so far.

On July 20, Caijing magazine suggested that CSF was setting up to scale back the market interventions which many believed had kept the SHCOMP from collapsing altogether. Here’s what happened next:

That suggestion caused futures to slide in China and in short order, the “rumor” was denied by CSRC. Now, the reporter who penned that story has been arrested for, as Bloomberg put it earlier today, “spreading fake stock and futures trading information.”

This comes on the heels of a move by Beijing earlier this week to suppress discussion of Monday’s market rout, which, along with the selloffs it triggered in bourses across the globe, was dubbed “Black Monday.”

Of course this isn’t the first time – and it probably won’t be the last – that China has cracked down on the media for “subversive” coverage of financial markets. Early last month, Beijing reportedly banned the use of the phrases “equity disaster” and “rescue the market.” That said, throwing reporters in jail marks a new escalation in the war on financial reporters, or, as the managing editor of The South China Morning Post put it, “you already know it’s risky to be political journalists in China – Now financial reporter is risky job too.”


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Saudi Arabia Faces Another “Very Scary Moment” As Economy, FX Regime Face Crude Reality

Saudi Arabia Faces Another “Very Scary Moment” As Economy, FX Regime Face Crude Reality

“They are working for their market share, not for the price,” Kazakh Prime Minister Karim Massimov told Bloomberg on Saturday, during the same interview in which he predicted that sooner or later, dollar pegs in Saudi Arabia and the UAE would have to be abandoned.

The Saudis are essentially betting that their FX reserves all large enough to allow the Kingdom to ride out the self inflicted pain from persistently low crude prices on the way to bankrupting the US shale space. But the battle for market share comes at a cost, especially when ultra easy monetary policy in the US has served to kept capital markets open to heavily indebted drillers, allowing otherwise insolvent producers to remain in business longer than they otherwise would. It is, as we’ve noted before, afight between the Saudis and the Fed.

In the midst of it all, the petrodollar has died a rather swift if quiet death and as we documented on Saturday, the demise of the system that has served to underwrite decades of dollar dominance has left emerging markets in no position to defend themselves in the face of China’s move to devalue the yuan. With Kazakhstan’s decision to float the tenge, we are beginning to see the post-petrodollar world (or, the “new era” as Karim Massimov calls it) take shape.

Over the weeks, months, and years ahead we’ll begin to understand more about the fallout and nowhere is it likely to be more apparent than in Saudi Arabia where widening fiscal and current account deficits have forced the Saudis to tap the bond market to mitigate the FX drawdown that’s fueling speculation about the viability of the dollar peg. Here’s Bloomberg on why the current situation mirrors a “very scary moment” in Saudi Arabia’s history.

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US Recession Imminent – World Trade Slumps By Most Since Financial Crisis

US Recession Imminent – World Trade Slumps By Most Since Financial Crisis

As goes the world, so goes America (according to 30 years of historical data), and so when world trade volumes drop over 2% (the biggest drop since 2009) in the last six months to the weakest since June 2014, the “US recession imminent” canary in the coalmine is drawing her last breath



As Wolf Street’s Wolf Richter addsthis isn’t stagnation or sluggish growth. This is the steepest and longest decline in world trade since the Financial Crisis. Unless a miracle happened in June, and miracles are becoming exceedingly scarce in this sector, world trade will have experienced its first back-to-back quarterly contraction since 2009.

Both of the measures above track import and export volumes. As volumes have been skidding, new shipping capacity has been bursting on the scene in what has become a brutal fight for market share[read… Container Carriers Wage Price War to Form Global Shipping Oligopoly].

Hence pricing per unit, in US dollars, has plunged 14% since May 2014, and nearly 20% since the peak in March 2011. For the months of March, April, and May, the unit price index has hit levels not seen since mid-2009.


World trade isn’t down for just one month, or just one region. It wasn’t bad weather or an election somewhere or whatever. The swoon has now lasted five months. In addition, the CPB decorated its report with sharp downward revisions of the prior months. And it isn’t limited to just one region. The report explains:


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How Big Oil Was Saved From The Oil Price Crash

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.

Related: The Front-Runners In Fusion Energy

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.

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The PetroYuan Is Born: Gazprom Now Settling All Crude Sales To China In Renminbi

The PetroYuan Is Born: Gazprom Now Settling All Crude Sales To China In Renminbi

Two topics we’ve deemed critically important to a thorough understanding of both global finance and the shifting geopolitical landscape are the death of the petrodollar and the idea of yuan hegemony.

Last November, in “How The Petrodollar Quietly Died And No One Noticed,” we said the following about the slow motion demise of the system that has served to perpetuate decades of dollar dominance:

Two years ago, in hushed tones at first, then ever louder, the financial world began discussing that which shall never be discussed in polite company – the end of the system that according to many has framed and facilitated the US Dollar’s reserve currency status: the Petrodollar, or the world in which oil export countries would recycle the dollars they received in exchange for their oil exports, by purchasing more USD-denominated assets, boosting the financial strength of the reserve currency, leading to even higher asset prices and even more USD-denominated purchases, and so forth, in a virtuous (especially if one held US-denominated assets and printed US currency) loop.



The main thrust for this shift away from the USD, if primarily in the non-mainstream media, was that with Russia and China, as well as the rest of the BRIC nations, increasingly seeking to distance themselves from the US-led, “developed world” status quo spearheaded by the IMF, global trade would increasingly take place through bilateral arrangements which bypass the (Petro)dollar entirely. And sure enough, this has certainly been taking place, as first Russia and China, together with Iran, and ever more developing nations, have transacted among each other, bypassing the USD entirely, instead engaging in bilateral trade arrangements.

Falling crude prices served to accelerate the petrodollar’s demise and in 2014, OPEC nationsdrained liquidity from financial markets for the first time in nearly two decades:


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OPEC is frying bigger fish than just Canada’s oilsands

OPEC is frying bigger fish than just Canada’s oilsands

OPEC keeping the taps wide open, letting Saudi Arabia pick off many birds with one stone

OPEC’s masterminding of the world oil market is leaving Canada to wonder where exactly our reeling energy industry fits within the scheme of the cartel’s strategic thinking.

By leaving its production targets unchanged at its semi-annual meeting in Vienna this week, the Organization of the Petroleum Exporting Countries is sticking with a measure that will continue to bleed competitors around the world.

In Canada, the fallout of the oil shock is already something of a national preoccupation. The idea, then, that our oil industry, at least in the mind of OPEC kingpin Saudi Arabia, is just some happy collateral damage likely won’t do much for any lingering traces of our bygone global inferiority complex.

‘Here is a situation in which the Saudis, with one single chess move, are able to achieve multiple objectives’— OPEC watcher Atif Kubursi

“Obviously, we weren’t the main target, but anything that slows overall growth of non-OPEC production is good in the eyes of the Saudis,” said Vincent Lauerman, the director of energy and the environment at the Conference Board of Canada. “Taking us down a couple notches certainly supports their end goal.”

The rationale that OPEC’s move away from production quotas last November, which cratered global oil prices, was a cannon shot in the battle for market share is certainly valid.

Many birds with one stone

That said, squeezing the competition by keeping the oil market oversupplied is only one of the kingdom’s many objectives. For the Saudis — whose wants can be taken as synonymous with those of OPEC despite the fractious nature of its various factions — the real elegance of this latest oil price war is how it serves so many of its purposes with a single stroke.

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Global oil glut grows to 2 million barrels a day as OPEC pumps more

Global oil glut grows to 2 million barrels a day as OPEC pumps more

International Energy Agency predicts oversupply of refined fuel, but points to rising demand

Fresh data on worldwide crude production shows the global glut of oil is growing with Saudi Arabia’s production near record highs, according to the International Energy Agency.

And there are signs the oversupply is moving into the market for refined products such as gasoline, meaning the recent rally in oil prices could lose steam, the IEA said in a report released today.

OPEC crude supply rose by 160,000 barrels a day to 31.21 million barrels a day in April, the highest since September 2012.  Iraq and Iran boosted their output and top exporter Saudi Arabia was increasing its rig count.

There has been a slowdown in U.S. production, but global oil supply is still exceeding demand by two million barrels a day.

Many in the North American oilpatch have accused the Saudis of keeping output high to drive down U.S. production.

On the up side, there has been recovery in demand for crude as the U.S. and European economies gain steam. Demand for crude this year is projected to grow to as high as 1.1 million barrels a day, with the big surge expected later in the year.

U.S. data released today shows commercial crude inventories fell by 2.19 million barrels in the week ended May 8, the second week that inventories have fallen after rising for months.


WTI slips to $60

The new data on the worldwide oil glut hit oil prices in afternoon trading. West Texas Intermediate crude was down 62 cents to $60.13 US a barrel at the close, while Brent oil, the international crude contract, was off 34 cents at $66.52.

Meanwhile, Western Canada Select, the main Canadian contract continued to close the gap with WTI, moving close to its high for the year of $52.50.

Refiners have been buying more crude to take advantage of the low prices and are refining oil for summer driving earlier than usual. The signs of an uptick in oil prices helped accelerate their purchase of crude.

There are plenty of players who predict a fresh downturn in WTI prices as U.S. producers see the higher prices and turn the taps on again.


Saudi Arabia: the great oil game

Saudi Arabia just increased oil production to a record level, never reached in previous history. They are doing that in a moment of record low oil prices. What do they have in mind? (Image from Arthur Berman)

When the collapse of the oil prices started, in the summer of 2014, everyone noticed that Saudi Arabia was not playing their traditional role of “swing producers”, that is varying their production in such a way to maintain reasonably constant prices. Facing a slump in demand, they should have reduced production; but they didn’t.

Initially, I thought the Saudis were simply taken by surprise and they were slow to react. But now, with the recent increase in Saudi production, it is clear that they have something in mind. Maybe they haven’t engineered the market collapse, but in some way they are riding it.

Though this be madness, yet there is method in it. But what method could there be in raising production just when prices are lowest? Every single textbook in economics will tell you that the market should adapt to changes in demand and offer in exactly the opposite way: facing a reduced demand, production should go down, too. 

Of course, as we all know, what you read in textbooks of economics has little to do with the real world. And, in the real world, there is a well known market strategy that consists in bankrupting your competitors by selling below cost. The idea is to create a monopoly and recoup later what the winner of the struggle has lost at the beginning. It is, of course, illegal, but the very fact that there are laws against it, means that it is done.

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Just as Global Oil Glut Deepens, China Cuts Oil Imports

Just as Global Oil Glut Deepens, China Cuts Oil Imports

“We don’t want to lose our share in the market,” Kuwait Oil Minister Ali al-Omair said on Thursday. OPEC had to maintain production despite the plunge in price since last summer, he said, underscoring Saudi Arabia’s position. OPEC would not cut production to goose prices. It would not let the American fracking boom off the hook.

The price of oil promptly dropped. West Texas Intermediate is trading at $43.79 a barrel as I’m writing this, having annihilated much of the Fed-inspired rally on Wednesday.

No one wants to cut production. In fact, in the US production is still soaring. Demand is lackluster. What gives? Crude oil is piling up around the globe.

Commercial inventories across all OECD countries can now supply 28 days’ of OECD demand, near the very top of the range, the EIA reported.

In the US, the amount of oil in commercial storage facilities (not counting the Strategic Petroleum Reserve) is at historic highs. Another 9.6 million barrels were added during the latest week. To put that in perspective: the US produces 9.3 million barrels per day. So in one week, the US added nearly one day’s production to its already high crude oil stocks! According to the EIA, stocks now amount to 458.5 million barrels, up 22% from a year ago.

By another measure, at the end of February the US was sitting on 29 days’ supply, the most since the 1980s when the last big oil bust was wreaking havoc in the American oil patch.


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Three Reasons Why US Shale Isn’t Going Anywhere

Three Reasons Why US Shale Isn’t Going Anywhere

Have you ever noticed that during extreme economic cycles, when trends are roaring on the upside, or conversely crashing back down to earth, there often appears an air of extremism in news headlines? Take America’s most recent shale oil boom, and bust, for example. On the way up, you may have seen – Why OPEC Could Be Dead in 10 Years. Conversely, now you may have read, Why It Might Be ‘Game Over For The Fracking Boom’.

In the end, the answer lies somewhere in-between. OPEC, although often plagued with internal discord, will still remain the global defacto 900-pound gorilla of crude, and US producers will continue to find ways to crack shale rock cheaper and more efficiently, immunizing themselves to nail-biting commodity roller coaster dips like what was just experienced. And in 2008 (-55%). And in 2001 (-32%). And in 1998 (-38%)….

BP, in its recently-released “Energy Outlook 2035”, predicts OPEC’s market share will return to approximately 40 percent of global demand within 15 years, up from 33 percent today, which is what all this fuss is about anyway.

Related: No Real Oil Price Relief Until Q3

Here are 3 reasons why America’s shale will continue to produce going forward:

1. Oil companies, both large and small, have seen what is possible.

In 2004, Texas oilman George Mitchell made hydraulic fracture stimulation commercially viable by unlocking the right combination of water pressure and lubricants to allow oil and gas to predictably flow from dense shale to the wellbore. A decade ago, producers believed shale held vast oil and gas resources, but to what extent they could be developed had not been determined. Until now.


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OPEC’s Strategy Is Working Claims Saudi Oil Minister

OPEC’s Strategy Is Working Claims Saudi Oil Minister

Saudi Oil Minister Ali al-Naimi, the architect of OPEC’s strategy to regain market share by causing the price of crude oil to plunge, says his plan is working, and data from petroleum research firms seem to back him up.

Making his first public comments in two months, al-Naimi told reporters in the southwestern Saudi city of Jazan that the markets have cooled off, and cited Brent crude, the global benchmark, as an example, noting that its price has stabilized at about $60 per barrel.

He also pointed to data that inexpensive oil is driving up demand, notably in China and the United States, which eventually could lead to price stability or to a price rebound.

But Al-Naimi warned naysayers not to upset this new balance. “Why do you want to rock the markets?” he asked. “The markets are calm. … Demand is growing.”

Related: OPEC Considers Emergency Meeting On Oil Prices

If al-Naimi is right, then his strategy was correct, and it acted quickly. It was only three months ago at OPEC’s headquarters in Vienna that the Saudi ministerpushed through a plan to maintain oil production at 30 million barrels a day, declaring a price war with US shale oil producers who rely on costly hydraulic fracturing, or fracking, to extract oil embedded tightly in underground rock.

The US shale producers had not only created a global oil glut, which was depressing the price of oil, but they also had turned their country from OPEC’s biggest customer to a nation headed towards energy independence.


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Saudi Arabia Says Hard for OPEC to Give Up Oil-Market Share – Bloomberg

Saudi Arabia Says Hard for OPEC to Give Up Oil-Market Share – Bloomberg.

Saudi Arabia and OPEC would find it “difficult, if not impossible” to give up market share by cutting crude production, the country’s oil minister said.

Global oil markets are experiencing “temporary” instability caused mainly by a slowdown in the world economy, Oil Minister Ali Al-Naimi said, according to comments published today by the Saudi Press Agency. He reiterated the country’s intention to maintain output amid plunging prices.

“In a situation like this, it is difficult, if not impossible, that the kingdom or OPEC would carry out any action that may result in a reduction of its share in market and an increase of others’ shares,” Naimi said, according to the state-run news agency. Saudi Arabia, the largest producer in OPEC, will stick to its oil policies, he said.

The Organization of Petroleum Exporting Countries decided Nov. 27 to keep its production target unchanged at 30 million barrels a day, ignoring calls from members including Venezuela to curb output to tackle a supply glut. Crude prices, which had already fallen 30 percent for the year by the November meeting, plunged after the decision, extending the drop to 43 percent.

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Olduvai IV: Courage
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Olduvai II: Exodus
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