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Expect low oil prices in 2020; tendency toward recession

Expect low oil prices in 2020; tendency toward recession

Energy Forecast for 2020

Overall, I expect that oil and other commodity prices will remain low in 2020. These low oil prices will adversely affect oil production and several other parts of the economy. As a result, a strong tendency toward recession can be expected. The extent of recessionary influences will vary from country to country. Financial factors, not discussed in these forecasts, are likely also to play a role.

The following are pieces of my energy forecast for 2020:

[1] Oil prices can be expected to remain generally low in 2020. There may be an occasional spike to $80 or $90 per barrel, but average prices in 2020 are likely to be at or below the 2019 level. 

Figure 1. Average annual inflation-adjusted Brent equivalent oil prices in 2018 US$. 2018 and prior are as shown in BP’s 2019 Statistical Review of World Energy. Value for 2019 estimated by author based on EIA Brent daily oil prices and 2% expected inflation.

Figure 2 shows in more detail how peaks in oil prices have been falling since 2008. While it doesn’t include early January 2020 oil prices, even these prices would be below the dotted line.

Figure 2. Inflation adjusted weekly average Brent Oil price, based on EIA oil spot prices and US CPI-urban inflation.

Oil prices can temporarily spike because of inadequate supply or fear of war. However, to keep oil prices up, there needs to be an increase in “demand” for finished goods and services made with commodities. Workers need to be able to afford to purchase more goods such as new homes, cars, and cell phones. Governments need to be able to afford to purchase new goods such as paved roads and school buildings.

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Past Point of No Return –John Rubino

Past Point of No Return –John Rubino

Financial writer and book author John Rubino sees the world careening toward a debt reset at an increasing pace. Rubino explains, “The coming monetary reset and what that means for gold and what that means for the rest of the global financial system, you don’t need a war to bring that about because we are making enough financial mistakes that will get us there in no time flat now without geopolitical turmoil. If you add a big war in the Middle East into the equation, then anything can happen. A scenario right now that is very, very feasible is we start shooting in the Middle East and Russia and China is on the other side of this in one way or another. They help Iran, and we have our allies helping us, and we start using these next generation weapons that are breathtakingly powerful. Nobody has any idea what’s going to happen when we start throwing these things at each other. . . . Oil spikes to $100 – $150 per barrel, and that tips the already extremely fragile global financial system over the edge. So, we get the ‘Greater Depression’ or the monetary reset or a hyperinflation or whatever we get sooner rather than later. It’s a disaster for everybody when it happens that way.”

Rubino says the monetary masters “tried to fix the financial system but could not do it.” Rubino says, “If you think you are beyond the point of no return financially as an individual, you borrow as much money as you can, and then go bankrupt. . . . Governments in the world are starting to do that now or behaving that way. . . . There is nothing they can do to fix the system. In the U.S., they tried to fix the system and scale back and they found out that is impossible…

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Venezuela collapse: looting, hunger, blackouts

Venezuela collapse: looting, hunger, blackouts

Looted grocery store in San Cristobal, Venezuela

Preface. Venezuela is experiencing a double whammy of drought and low oil prices, which has lead to blackouts and inability to import food, ultimately due to their oil production peaking in 1997.  The same fate awaits the U.S. someday when oil declines.

Related posts:

And Mexico may be the next to collapse, as you can read here.

***

2019. Venezuela’s Water System is Collapsing. New York Times.

In Venezuela, a crumbling economy and the collapse of even basic state infrastructure means water comes irregularly — and drinking it is an increasingly risky gamble. Scientists found that about a million residents were exposed to contaminated supplies. This puts them at risk of contracting waterborne viruses that could sicken them and threatens the lives of children and the most vulnerable.

The risks posed by poor water quality are particularly threatening for a population weakened by food and medication shortages. 

Electrical breakdowns and lack of maintenance have gradually stripped the city’s complex water system to a minimum. Water pumps, treatment plants, chlorine injection stations and entire reservoirs have been abandoned as the state ran out of money and skilled workers

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

Texas Hit Hard By Shale Slowdown

Texas Hit Hard By Shale Slowdown

Texas Shale Slowdown

Texas’ economy is perhaps the most vulnerable to oil price swings given its leading role in the country’s oil industry. Recently, as prices have remained low, talk has begun about the outlook for the state’s economy.

According to a recent Reuters report, for example, smaller independent oil and gas producers in the Lone Star State are struggling to get loans from banks as the latter become increasingly wary of the ability of the borrowers to return the money when the time comes.

Jobs in the Texas oil and gas industry are falling, too. The Houston Business Journal reported this month that September saw a 1,100 decline in the number of jobs in the mining and logging sector—the category that includes oil and gas jobs. Over the 12 months from September 2018, the state’s oil and gas industry added just 1,700 new jobs, which was the lowest number of new job additions to any Texas industry over the same period, data from the Texas Workforce Commission showed.

Yet not everyone is worried. The University of Houston Energy Fellows, for instance, wrote in an article for Forbes that “the alarm bells are premature.” While the experts that make up the group acknowledge there are plenty of reasons to be worried about the economy of Houston—the article focuses on the city—oil prices are not among them.

The trade war with China and the anticipation of a global economic slowdown caused by it is a top concern for any economy and Houston is no exception. Political economic problems in Europe are also a cause for worry. Yet, according to the University of Houston Energy Fellows, bankruptcies in the Houston oil and gas industry are only slightly higher this year than last, and the credit crunch energy independents are facing now is “far from comparable to 2015-16.”

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

Oil Erases All Saudi-Attack Gains After Iran Sanctions Report

Oil Erases All Saudi-Attack Gains After Iran Sanctions Report

Already helped by reports of a partial Saudi cease-fire with Yemen, oil prices have legged lower – erasing all the price gains since the Saudi-attack – on the back on a Reuters report saying that US offered to remove all Iranian sanctions in exchange for talks.

That’s not going to help the value of the Aramco IPO.

Oil Tumbles On Report Saudis Agree To Partial Ceasefire With Yemen

Oil Tumbles On Report Saudis Agree To Partial Ceasefire With Yemen

With the price of oil still on edge over the duration of Saudi Aramco repairs and speculation over how long until Saudi oil output is fully restored, moments ago Brent tumbled after a WSJ report that Saudi Arabia – which is hoping to come to market with the Aramco IPO in the coming weeks – is seeking to impose a partial cease-fire in Yemen, as Riyadh and the Houthi militants the kingdom is fighting try to bring an end to the four-year war that has become a front line in the broader regional clash with Iran.

Saudi Arabia’s surprise decision to de-escalate a long-running war follows a just as surprising move by Houthi forces to declare a unilateral cease-fire in Yemen last week, just days after claiming responsibility for the Sept. 14 drone and cruise missile strike on Saudi Arabia’s oil industry the WSJ notes. While the Houthis fired two missiles at Saudi Arabia earlier this week, the strike wasn’t seen by Saudi leaders as a serious attack that would undermine the new cease-fire efforts.

Houthi leaders initially said they were responsible for the attack on the oil facilities, but Saudi, U.S. and European officials have dismissed the claims as a transparent attempt to obscure Iran’s role in the strike. Yemeni fighters, these officials say, have neither the weapons nor the skills to carry out such a sophisticated strike.

In the days that followed the attack, an internal Houthi rift expanded between those who want to distance themselves from Iran and those who want to strengthen ties.

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

Oil Set To Spike After Report Saudi Repairs At Abqaiq May Take “Up To Eight Months”

Oil Set To Spike After Report Saudi Repairs At Abqaiq May Take “Up To Eight Months”

While S&P futures may spike at the open following Saturday’s news from the NYT that the “the delegation of Chinese agriculture officials that had planned to travel to Montana and Nebraska in the coming week didn’t cancel the trip because of any new difficulty in the trade talks” but “instead, the trip was canceled out of concern that it would turn into a media circus and give the misimpression that China was trying to meddle in American domestic politics”, oil too is likely to catch a bid after the WSJ reported that it may take “up to eight month”, rather than 10 weeks company executives had previously promised, to fully restore operations at Aramco damaged Abqaiq facility, suggesting the crude oil shortfall will last far longer than originally expected.


Saudi officials say there is little sense of calm at the highest levels of the company and the Saudi government, however. It could take some contractors up to a year to manufacture, deliver and install made-to-measure parts and equipment, the Saudi officials said. #OOTT https://twitter.com/summer_said/status/1175859119061909506 …https://www.os-repairs-could-take-months-longer-than-company-anticipates-contractors-say-11569180194 243:52 PM – Sep 22, 2019


The official reason for the delay: the supply-chain is unable to respond to the Saudi needs. Specifically, Aramco is” in emergency talks with equipment makers and service providers, offering to pay premium rates for parts and repair work as it attempts a speedy recovery from missile attacks on its largest oil-processing facilities.” 

Following a devastating attack on its largest oil-processing facility more than a week ago, Aramco is asking contractors to name their price for patch-ups and restorations. In recent days, company executives have bombarded contractors, including General Electric , with phone calls, faxes and emails seeking emergency assistance, according to Saudi officials and oil-services suppliers in the kingdom.

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

Energy Expert Warns Oil Shocks Hit The Economy With Incredible Speed, Usually Within Thirty Days

Energy Expert Warns Oil Shocks Hit The Economy With Incredible Speed, Usually Within Thirty Days

The lasting damage from the weekend’s attacks on Saudi oil infrastructure is yet to be fully assessed.  Having said that, we can make some broad statements about supply outages and economic cycles.

Although we tend to forget it, almost all of the major US recessions since 1945 have been triggered by wars in the Middle East involving Persian Gulf countries and oil politics.

Specifically:

  • The 1956-1957 Suez Crisis led to the closing of the Suez canal and rapidly precipitated a recession in the advanced economies
  • The Yom Kippur War of 1973 led to an embargo on oil exports to the US and other western countries, precipitating the first US post-peak oil shock
  • The Iran-Iraq War created another price spike, triggering the Second Oil Shock, two back-to-back recessions in the US (1979-1983)
  • Price increases associated with Saddam Hussein’s preparations for the First Gulf War tipped in the US into recession in 1991
  • The Arab Spring of 2011 created supply shortages which sent oil prices back over $100/barrel, leading to a two year recession in Europe

In recent times, only the 2001 Dot.com bust and the 2008 oil price spike were not associated with supply outages related to a conflict in the Middle East. A conflict-induced recession would not be an exception to the rule, but rather the typical trigger ending a late stage expansion in the west.  

Oil shocks hit the economy with incredible speed, usually within thirty days.  

The magnitude necessary to precipitate a price spike and a resulting recession is probably less than a loss of 3 mbpd, 3% of global supply.  Over the weekend, Saudi outages totaled 5.7 mbpd.  The oil price would have to reach around $110 / barrel to push the world into recession, before taking into consideration the phase of the business cycle.  The closest parallel is 1991, when a brief oil price spike pushed an already tottering US economy into recession.

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

Oil Explodes 20% Higher, Biggest Jump On Record

Oil Explodes 20% Higher, Biggest Jump On Record

With traders in a state of near-frenzy, with a subset of fintwit scrambling (and failing) to calculate what the limit move in oil would be (hint: there is none for Brent), moments ago brent reopened for trading in the aftermath of Saturday’s attack on the “world’s most important oil processing plant“, and exploded some 20% higher, to a high of $71.95 from the Friday $60.22 close, its biggest jump since futures started trading in 1988.

Source: Bloomberg
Source: Bloomberg

As Bloomberg notes, “for oil markets, it’s the single worst sudden disruption ever, surpassing the loss of Kuwaiti and Iraqi petroleum supply in August 1990, when Saddam Hussein invaded his neighbor. It also exceeds the loss of Iranian oil output in 1979 during the Islamic Revolution, according to data from the U.S. Department of Energy.”

Furthermore, in light of news that the Saudi outage could last for months, this could be just the start. As a reminder, according to Morningstar research director, Sandy Fielden, “Brent could go to $80 tomorrow, while WTI could go to $75… But that would depend on Aramco’s 48-hour update. The supply problem won’t be clear right away since the Saudis can still deliver from inventory.”

Of course, should Aramco confirm that the outage – which has taken some 5.7mmb/d in Saudi output after 10 drones struck the world’s biggest crude-processing facility in Abqaiq and the kingdom’s second-biggest oil field in Khurais – will last for weeks, expect the crude juggernaut to continue until the price hits $80, and keeps moving higher.

Finally, here is the price summary from Goldman commodity strategist Damien Courvalin, who earlier today laid out four possible shutdown scenarios, and the price oil could hit for each:

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

Russia Considers Possibility Of $25 Oil Next Year

Russia Considers Possibility Of $25 Oil Next Year

MBS Putin

Russia is considering the notion that oil prices may be as low as $25 per barrel in 2020, the country’s central bank said in its new forecast published on Monday, as cited by Reuters.

Russia’s Central Bank has forecast in its macroeconomic forecast that oil could possibly hit that low due to falling demand for oil and oil products worldwide, as well as from disappointed global economic growth.

The doom and gloom scenario was just one proposed by the bank. If that risk scenario actually materializes, Russia’s inflation could increase to 7% or 8% next year, on the back of falling gross domestic product to 1.5%– 2%.

Russia is perhaps uniquely positioned to withstand low oil prices, although $25 per barrel is pretty bleak.

One of the reasons why Russia is more impervious to low oil prices compared to its competition is that its currency weakens when oil prices fall. This provides some type of a cushion—at least to some extent—for its lower oil revenues. Russian oil companies can pay their expenses in this weaker ruble, but still rakes in US dollars for its oil exports. Further allowing it to withstand lower prices, are that Russia’s oil company’s taxes are designed to be less as oil prices fall.

So much so is Russia’s ability to adapt to lower oil prices, that it actually struggles with higher oil prices, which dent demand for its oil. Russia’s budget for 2019 was based on $40 oil.Meanwhile, Saudi Arabia needs $80—some say even $85—per barrel.

In August, Russia said its 2019 budget breakeven was at a Urals price of $49.20—the lowest breakeven in more than a decade.  This has Russia and Saudi Arabia—colleagues in the current production quotas designed to rebalance the market—at odds, and likely working toward perhaps different goals.

“A Murderer’s Row”: Oil And Gas Bankruptcies To Accelerate As $137 Billion Debt Matures Over Next Two Years

“A Murderer’s Row”: Oil And Gas Bankruptcies To Accelerate As $137 Billion Debt Matures Over Next Two Years

Oil and gas companies are facing an onslaught of bankruptcies as the “shale revolution” appears to be coming to an unceremonious end, at least on Wall Street, according to the Wall Street Journal

Companies like Sanchez Energy Corp., Halcon Resources Corp. and 26 other oil and gas producers have all filed for bankruptcy this year, already matching the 28 industry bankruptcies from all of 2018. The number is expected to rise as debt maturities for those looking to cash in on the shale revolution and make bets on higher oil prices years ago are now looming. 

5.7% of all energy companies with junk rated bonds are defaulting as of August, the highest level since 2017. The metric is “considered a key indicator of the industry’s financial stress.”

The defaults are on the rise as companies struggle to service debt, bring in new money and refinance existing debt. The once-darling shale business model has been under significant scrutiny from Wall Street over the last 18 months, adding to the headwinds for many companies. 

Investor interest has faded after years of meager returns while, at the same time, companies struggle to meet their cost of capital with oil prices below $60/barrel. 

Private companies and smaller drillers have felt the most pain thus far. These companies “collectively generate a large portion of U.S. oil,” and their distress is indicative of wider distress throughout U.S. shale. 

Patrick Hughes, a partner at Haynes & Boone said: “They were able to hang in there for a while, but now their debt levels are just too high and they’re going to have to take their medicine.” 

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

Possible Currency War Would Be A Disaster For Oil

Possible Currency War Would Be A Disaster For Oil

Yuan

Oil prices plunged on Friday after the U.S. and China both announced tariff hikes in tit-for-tat fashion. At the same time, markets opened on a positive note early Monday after President Trump struck a more conciliatory tone. But the respite could be brief.

Global financial markets are completely at the mercy of Trump’s twitter account these days. On Friday, stocks and commodities fell sharply after China announced an increase in tariffs on U.S. goods. In response, Trump announced yet another 5 percent increase in the suite of tariffs on Chinese goods, although, notably, he waited until after financial markets had closed for the week.

Over the weekend at the G-7 Conference in France, Trump sent mixed messages on the trade war, suggesting he had “second thoughts,” with his team subsequently clarifying that his second thoughts regarded his regret he hadn’t hiked tariffs by an even greater amount. Nevertheless, traders took comfort in his comments about wanting to make a deal with China, in addition to his assertion that China had called him up asking for a return to negotiations.

Stocks opened up on a positive note on that news. However, it should be noted that Chinese officials said that they were “not aware of” the phone call that Trump alluded to. When pressed by reporters about the nature of the phone call, Trump said: “I don’t want to talk about calls. We’ve had calls. We’ve had calls at the highest levels.”

If we’ve learned anything over the past few months, it is that these events turn on a dime. The incoherent strategy from the White House, and the complete lack of an official policymaking process, makes it impossible to predict how events will unfold. It is odd then that financial markets were so sanguine at the start of the week.

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

Debunking ‘Lower Oil Supply Will Raise Prices’

Debunking ‘Lower Oil Supply Will Raise Prices’

We often hear the statement, “When oil supply is lower, oil prices will rise because of scarcity.” Now, we are getting to see firsthand whether oil prices really do rise, as oil supplies become more scarce.

Figure 1. Figure from the OPEC Monthly Oil Market Report for August 2019 showing world and OPEC oil production by month.

Figure 1 shows that world oil supply hit a peak in November 2018 and has declined since then, mostly because of a decline in OPEC’s production. So, total oil production seems to be down for about eight months, relative to the peak in November 2018.

Despite this big cutback by OPEC in its oil production, prices have not responded as OPEC had hoped:

Figure 2. Average monthly spot Brent Oil prices, based on EIA data.

In fact, as I write this, Brent oil price is currently quoted as $60.48, which is back in the range of December 2018 and January 2019 low prices. Also, reducing production doesn’t seem to be reducing inventories. Figure 3 suggests that they are now higher than they were before the reduction in oil supply took place.

Figure 3. Figure from the OPEC Monthly Oil Market Report for August 2019 showing OECD commercial oil stocks.

Why aren’t oil prices rising and oil inventories falling, if oil production has fallen?

The basic issue is that the economy is very much interconnected under the laws of physics, because energy is required for every activity that is considered part of GDP. Energy is required for any kind of heat or any kind of movement. Energy is even required for electricity. Without energy from the sun, food can’t grow; without supplemental energy of some kind (such as using electricity to heat an electric stove or burning animal dung or sticks), it becomes impossible to cook food or smelt metals.

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

Persian Gulf Conflict Could Send Oil Beyond $325

Persian Gulf Conflict Could Send Oil Beyond $325+

Drone

The possibility of Iran attempting to close the Strait of Hormuz to tanker traffic has increased significantly in recent weeks, as has the possibility of a Persian Gulf War, especially with the Islamic Republics’ intentional destruction of a U.S. surveillance drone on June 20.

This act provides weight to Tehran’s threat that it will inflict a heavy toll on U.S. allies in the region if attacked by American forces and will not allow these same countries to export their oil if it can’t export its own.

The memory remains remarkably fresh in Iran of the 1951-53 oil embargo that toppled the democratically-elected government of Prime Minister Mohammed Mossadegh – and the CIA installing the despot Mohammad Reza Pahlavi, the so-called Shah of Iran, in his place.

The impact on oil markets of an Iranian closure of the Strait of Hormuz would be enormous.

Strait of Hormuz Closure

The leadership of the Iranian Navy and the Revolutionary Guard Navy, knowing they could never challenge the U.S. in a conventional naval contest, have been accumulating considerable asymmetric and other capabilities to enable the Islamic Republic to close the Strait of Hormuz since the “tanker war” in the Persian Gulf during the 1980-88 Iran-Iraq War.

These capabilities include thousands of sea mines, torpedoes, advanced cruise missiles, regular-sized and mini-submarines, and a flotilla of small fast-attack boats, most of which are concentrated in the strait region. Related: Oil Prices Set For Worst Weekly Drop In Five Weeks

Pentagon planners believe Iran would use all of these capabilities in an integrated fashion to both disrupt maritime traffic in the Strait of Hormuz and attempt to deny American and allied forces access to the region. Iranian naval forces are viewed as a “credible threat” to international shipping in the strait.

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

TROUBLE AT THE BAKKEN: Oil Production Finally Peaking?

TROUBLE AT THE BAKKEN: Oil Production Finally Peaking?

Is the mighty Bakken Shale Oil Field finally peaking?  Well, according to the data from the folks at the North Dakota Department of Mineral Resources, oil production in the Bakken has been flat for the past six months.  And, to make matters worse, production has been flat even though oil prices increased from a low of $42 in January to the mid $60’s in April.

So, something seriously wrong is going on in North Dakota.  What a difference in the Bakken’s recent oil supply compared to the field’s heyday when production surged from 300,000 barrels per day in 2011 to over 1.1 million barrels per day in 2014.  Furthermore, the oil price the shale companies in the Bakken are receiving is now $48 a barrel versus the West Texas Intermediate price of $57.

If we look at the past seven months, the North Dakota Bakken has only added 36,000 barrels per day (bd) of new oil production compared to 114,000 bd during the same period last year:

As we can see in the chart above, the output from Sep 2017 to Apr 2018 enjoyed an upward trend, while the Sep 2018-Apr 2019 has been flat.  You can see this better in Enno Peters chart from ShaleProfile.com.  I highly recommend followers check out his site as he provides updates on the top shale oil and gas fields in the United States using state data from over 100,000 wells.

These charts from ShaleProfile.com show the annual change production by different colors.  Here we can see that Bakken oil production increased steadily from 2011 to 2014, plateaued in late 2014 and 2015, declined in 2016, raised in 2017-2018, and has plateaued once again in 2019. The likely culprit for the plateau in Bakken oil production has to do with the lower oil price and the reduction of investment funds available to the shale companies that continue to spend more money than they make.

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

Olduvai IV: Courage
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