US running out of room to store oil; price collapse next?
By Jonathan Fahey THE ASSOCIATED PRESS
NEW YORK — The U.S. has so much crude, it is running out of places to put it, and that could drive oil and gasoline prices even lower in the coming months.
For the past seven weeks, the United States has been producing and importing an average of 1 million more barrels of oil every day than it is consuming. That extra crude is flowing into storage tanks, especially at the country's main trading hub in Cushing, Oklahoma, pushing U.S. supplies to their highest point in at least 80 years, the Energy Department reported last week.
If this keeps up, storage tanks could approach their operational limits, known in the industry as ''tank tops,'' by mid-April and send the price of crude — and probably gasoline, too — plummeting.
''The fact of the matter is we are running out of storage capacity in the U.S.,'' Ed Morse, head of commodities research at Citibank, said at a recent symposium at the Council on Foreign Relations in New York.
Morse has suggested oil could fall all the way to $20 a barrel from the current $50. At that rock-bottom price, oil companies, faced with mounting losses, would stop pumping oil until the glut eased. Gasoline prices would fall along with crude, though lower refinery production, because of seasonal factors and unexpected outages, could prevent a sharp decline.
The national average price of gasoline is $2.44 a gallon. That's $1.02 cheaper than last year at this time, but up 37 cents over the past month.
Other analysts agree that crude is poised to fall sharply — if not all the way to $20 — because it continues to flood into storage for a number of reasons:
•U.S. oil production continues to rise. Companies are cutting back on new drilling, but that won't reduce supplies until later this year.
•The new oil being produced is light, sweet crude, which is a type many U.S. refineries are not designed to process. Oil companies can't just get rid of it by sending it abroad, because crude exports are restricted by federal law.
•Foreign oil continues to flow into the U.S., both because of economic weakness in other countries and to feed refineries designed to process heavy, sour crude.
•This is the slowest time of year for gasoline demand, so refiners typically reduce or stop production to perform maintenance. As refiners process less crude, supplies build up.
•Oil investors are making money buying and storing oil because of the difference between the current price of oil and the price for delivery in far-off months. An investor can buy oil at $50 today and enter into a contract to sell it for $59 in December, locking in a profit even after paying for storage during those months.
Two-thirds full
The delivery point for most of the oil traded in the U.S. is Cushing, a city of about 8,000 people halfway between Oklahoma City and Tulsa at an intersection of several pipelines. The city is dotted with tanks that can, in theory, hold 85 million barrels of oil, according to the U.S. Energy Department, though some of those tanks are used for blending or feeding pipelines, not for storing oil.
The market data provider Genscape, which flies helicopters equipped with infrared cameras and other technology over Cushing twice a week to measure storage levels, estimates Cushing is two-thirds full.
Hillary Stevenson, who manages storage, pipeline and refinery monitoring for Genscape, says Cushing could be full by mid-April. Supplies are increasing at ''the highest rate we have ever seen at Cushing,'' she says.
Full tanks — or super-low prices — are not a sure thing. New storage is under construction at Cushing, and there are large storage terminals near Houston, in St. James, Louisiana, and elsewhere around the country that will probably begin to take in more oil as prices fall far enough to cover the cost of transporting the oil.
Also, drillers are cutting back fast because oil prices have plummeted from $107 a barrel in June, and demand is showing signs of rising.
While the Energy Department reported another enormous rise in crude stocks last week, up 8.4 million barrels from the week earlier, it also reported that diesel and gasoline supplies fell more than expected. That leads some to conclude that demand for crude will soon pick up, easing the surplus somewhat.
But many analysts believe oil prices will fall through the spring, before summer drivers start to relieve the glut.
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As U.S. runs out of room to store oil, prices continue to drop
Associated Press
Several oil pipelines intersect in Cushing, Okla., including the White Cliffs pipeline. Cushing is the nation’s primary trading hub. Although tanks are filling up, new storage is being built there and at other sites.
NEW YORK — The United States has so much crude oil that it is running out of places to put it, and that could drive oil and gasoline prices even lower in the coming months.
For the past seven weeks, the country has been producing and importing an average of 1 million more barrels of oil every day than it is consuming. That extra crude is flowing into storage tanks, especially at the main trading hub in Cushing, Okla., pushing U.S. supplies to their highest point in at least 80 years, the Energy Department reported last week.
If this keeps up, storage tanks could approach their operational limits, known in the industry as "tank tops," by mid April and send the price of crude — and probably gasoline — plummeting.
"The fact of the matter is, we are running out of storage capacity in the U.S.," Ed Morse, head of commodities research at Citibank, said at a recent symposium at the Council on Foreign Relations in New York.
Morse has suggested oil could fall to $20 a barrel from the current $50. At that rock-bottom price, oil companies, faced with mounting losses, would stop pumping oil until the glut eased. Gasoline prices would fall along with crude, although reduced refinery production, because of seasonal factors and unexpected outages, could prevent a sharp decline.
Other analysts agree that crude is poised to fall sharply, for a number of reasons:
• U.S. oil production continues to rise. Companies are cutting back on new drilling, but that won't reduce supplies until later this year.
• The new oil being produced is light, sweet crude, which is a type many U.S. refineries are not designed to process. Oil companies can't get rid of it by sending it abroad, because crude exports are restricted by federal law.
• Foreign oil continues to flow into the United States — because of economic weakness elsewhere, and to feed refineries designed to process heavy, sour crude.
• Oil investors are making money buying and storing oil because of the difference between the current price of oil and the price for delivery in far-off months. An investor can buy oil at $50 today and enter into a contract to sell it for $59 in December, locking in a profit even after paying for storage during those months.
The delivery point for most of the oil traded in the United States is Cushing, a city of about 8,000 people, halfway between Oklahoma City and Tulsa, at an intersection of several pipelines. The city is dotted with tanks that can, in theory, hold 85 million barrels of oil, according to the Energy Department.
Hilary Stevenson, who manages storage, pipeline and refinery monitoring for market data provider Genscape, said Cushing could be full by mid April. Supplies are increasing at "the highest rate we have ever seen at Cushing," she said.
But full tanks — or super-low prices — are not a sure thing. New storage is under construction at Cushing, and there are large storage terminals near Houston, in St. James, La., and elsewhere that will probably begin to take in more oil as prices fall far enough to cover the cost of transporting the oil.
Also, drillers are cutting back fast because oil prices have plummeted from $107 a barrel in June.
The Energy Department reported another enormous rise in crude stocks last week, up 8.4 million barrels from the week earlier, but it also reported that diesel and gasoline supplies fell more than expected. That leads some to conclude that demand for crude will soon pick up, easing the glut somewhat.
But many analysts think oil prices will fall through the spring, before summer drivers start to relieve the glut.
Where crude oil is stored in the U.S.
The biggest crude storage fields in the United States, and how much they can hold:
Cushing, Okla.: 82 million barrels
Louisiana Offshore Oil Port: 67 million barrels
Houston: 36 million barrels
Beaumont-Nederland, Texas: 30 million barrels
St. James, La.: 30 million barrels
Source: Genscape market data
As U.S. runs out of room to store oil, prices continue to drop 03/03/15 [Last modified: Tuesday, March 3, 2015 8:36pm]
© 2015 Tampa Bay Times
Saudis Boost Oil Price to Asia Most in 3 Years as Demand Grows
(Bloomberg) -- Saudi Arabia, the world’s largest crude exporter, increased the pricing terms for Arab Light sold to Asia by the most in three years as demand improved.
State-owned Saudi Arabian Oil Co. said Tuesday it will sell cargoes of Arab Light in April at 90 cents a barrel below Asia’s regional benchmark. That narrows the discount by $1.40 from March, the biggest price increase since January 2012, according to data compiled by Bloomberg. The company also raised prices it offers to refiners in the U.S.
“We expected an increase, but the degree of increase is on the higher side of expectations,” Eugene Lindell, a senior analyst at JBC Energy GmbH in Vienna, said Tuesday by phone. “The Asian market is a little bit stronger compared to the last months,” and Aramco’s adjustments reflect that strength.
Three months after Saudi Arabia made clear it would defend market share against rising U.S. production rather than cut output to support prices, the strategy is showing signs of working, according to analysts from banks including Standard Chartered Plc and Bank of America Corp. Oil producers outside the Organization of Petroleum Exporting Countries are curbing investment and idling drilling rigs. Demand is growing and the market is calm, Saudi Oil Minister Ali Al-Naimi said Feb. 25.
“Saudi Arabia has committed to staying with its policy of flooding the market with crude,” John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy, said Tuesday by phone. “The Saudi pricing formula is a technical methodology.”
Saudi Production
Output in Saudi Arabia climbed 130,000 barrels to 9.85 million a day in February, the highest level since September 2013, according to a Bloomberg survey of oil companies, producers and analysts.
Demand from Asian refiners increased, while weather disruptions to Iraqi exports constrained supply, Lindell said. Iraq exported 2.3 million barrels a day from the southern oil hub of Basra last month, compared with about 2.4 million in January, according to the country’s Oil Ministry.
The narrowing of the April discount is a reflection of “stellar refining margins” in Asia, Amrita Sen, chief oil analyst at consultants Energy Aspects Ltd., said by e-mail from London.
Middle Eastern producers are increasingly competing in Asia with cargoes from Latin America, North Africa and Russia. Exporters in the Persian Gulf sell mostly under long-term contracts to Asian refiners at a premium or discount to the average of regional benchmarks Oman and Dubai crude.
March Discount
The discount on March sales of Arab Light to Asia of $2.30 a barrel was the widest in at least 14 years, when Bloomberg began compiling the data. Iraq, Kuwait and Iran joined Saudi Arabia in cutting their March crude prices for Asia in a signal the competition for market share that began last year was continuing.
The change in the Arab Light discount for April was bigger than the median estimate of $1.10 a barrel in a Bloomberg News survey of 10 refiners and traders. Aramco also increased the price, relative to regional benchmarks, of the other four grades of crude it ships to Asia and all four it offers to U.S. refiners.
Brent crude for April settlement climbed $1.48 to $61.02 a barrel Tuesday on the London-based ICE Futures Europe exchange. Brent is used to price more than half of the world’s oil. West Texas Intermediate for April delivery, the U.S. benchmark grade, rose 93 cents to $50.52 a barrel on the New York Mercantile Exchange.
To contact the reporters on this story: Grant Smith in London at gsmith52@bloomberg.net; Mark Shenk in New York at mshenk1@bloomberg.net; Anthony DiPaola in Dubai at adipaola@bloomberg.net
To contact the editors responsible for this story: David Marino at dmarino4@bloomberg.net; Alaric Nightingale at anightingal1@bloomberg.net Richard Stubbe
Russia Billionaire Sees Oil Hitting $100 as Global Output Drops
March 3, 2015
(Bloomberg) -- When Leonid Fedun first studied the oil market in 1978, he was a young officer in the Red Army asked to research the impact of prices on NATO forces. More than three decades later, the billionaire shareholder in Russia’s second-largest oil company is still at it.
Fedun, 58 and vice president of OAO Lukoil, says crude prices will rally quickly later in the year and may finish 2015 near $100 a barrel. The situation today, he says, bears little relation to the late 1980s when Saudi Arabia’s desire to hold onto market share kept prices low for almost five years.
“We expect a healthier market and I wouldn’t be surprised to see $80 to $100 by the end of the year,” Fedun said in an interview Tuesday while visiting London to present Lukoil’s 2014 results to investors.
The rebound will be sharper than others predict -- including BP Plc Chief Executive Officer Bob Dudley and Goldman Sachs Group Inc. -- because costs are higher relative to prices than in the 1980s, forcing more oil off the market faster, he said. In the earlier slump, low-cost output from young fields in the North Sea and Alaska maintained oversupply, according to Fedun, who wrote a research paper on the market at that time.
“Within five to six months, we’ll witness a dramatic drop in production,” he said, pointing to a falloff in investment in U.S. shale fields, Latin America and the North Sea.
Even in Russia, where lower drilling costs mean relatively stable production, output this year may fall as much as 4 percent, Fedun said.
Market Upended
In November, on the day that Saudi Arabia upended the global oil market by persuading the Organization of Petroleum Exporting Countries to keep supply unchanged, Fedun said Riyadh’s policy was aimed at crashing the U.S shale industry, where he compared growth to the dot-com boom.
Three months later, Saudi Arabia, the world’s largest crude exporter, can consider the policy a success as the number of rigs operating in U.S. fields declines sharply, he said.
hmark U.S. oil prices dropped from more than $100 a barrel in June to $43.58 on Jan. 29. Since then, they’ve recovered to $50 a barrel.
BP’s Dudley said last month the price could stay below $60 a barrel for as long as three years and $100 oil wouldn’t return for a “long time.” Goldman Sachs said on Feb. 19 that crude may relapse back to $39 a barrel.
Whatever direction the market takes, Fedun, who joined with CEO Vagit Alekperov in the 1990s to build Lukoil from the wreckage of the Soviet oil industry, said Russia is more resilient to lower prices than in the late 1980s.
Army Career
Then, as he came toward the end of his army career, he saw how the state-run economic system, which had little flexibility on exchange rates or investment, caused production to slump by half by the early 1990s.
“We don’t see any of those factors today,” he said.
Lukoil said Tuesday it’s committed to increasing dividends even after profit fell 39 percent last year because of oil prices and impairment charges.
The company is “not afraid” to pay out as much as half of profit, Fedun said on a call with investors. Lukoil earlier reported a decline in 2014 net income to $4.75 billion from $7.83 billion a year earlier.
To contact the reporter on this story: Will Kennedy in London at wkennedy3@bloomberg.net
To contact the editors responsible for this story: Will Kennedy at wkennedy3@bloomberg.net Dylan Griffiths, Robin Saponar
Why $100 Oil Won't Be Coming Back for a Long Time
(Bloomberg) -- Get ready for an L-shaped oil recovery.
A growing consensus is emerging from the likes of BP Plc, the International Energy Agency, shale wildcatters and even the Saudis that a near-term recovery to $100-a-barrel crude isn’t in the cards. Instead, expect a range of $50 to $60 for at least the next few years.
When oil prices plunged sharply in 2008, they rebounded almost as quickly. Several months ago, industry and government touted the same U or V-shaped recovery this time out. On closer examination, a new factor in the marketplace -- shale oil -- has changed their minds.
“This is the new normal,” Dennis Cassidy, co-leader of the oil and natural gas practice for consulting company AlixPartners, said in an interview. His group sees an L-shaped chart that could extend for three to five years.
Unlike other petroleum formations, the nature of shale -- with multiple inexpensive, short-lived wells -- means producers can stop and start drilling on a dime. On the one hand, this allows them to quickly cut costs in a downturn; on the other, every time prices tick up, so will their output -- renewing downward pressure on prices.
While an offshore well usually costs about $100 million to drill, and takes as long as 10 years and billions more to begin producing from a new field, a shale well requires only several million dollars and a few weeks to coax out oil and gas.
No Coordination
“When the price of oil recovers, most shale formations will be aggressively exploited,” said Leonardo Maugeri, a former Eni SpA vice president and now a researcher at Harvard University’s Belfer Center for Science & International Affairs. Based on his appreciation of shale’s special qualities, he predicted the current glut in 2012.
No central authority tells shale drillers, who have been described as the new “swing producers,” what to do. Unlike the Organization of Petroleum Exporting Countries, the effect they’ll have in holding down prices comes from a set of independent decisions influenced by the need to deliver shareholder returns.
The expectation that U.S. producers will boost drilling as soon as prices improve is why oil executives, including BP Chief Executive Officer Bob Dudley, are saying they don’t see $100 a barrel returning for a “long time.”
Chesapeake Energy Corp. and Oneok Partners LP are among companies basing their budgets on an assumption that oil will stick to about $50 to $55 a barrel this year, with $65 the ceiling for next year.
Gas Echo
The current oil market is an echo of the 2012 natural gas crash, in which shale producers inadvertently created a glut that hasn’t yet been resolved. In that instance, even after prices fell to the lowest level in more than a decade, gas output continued to grow, according to data from the U.S. Energy Information Administration.
That reflected the industry’s ability to adapt to lower prices by improving productivity and reducing expenses, said Bloomberg Intelligence analysts Vincent Piazza and Gurpal Dosanjh in a report this month. Market observers who see historically higher costs as proof of an eventual decline in oil should “appreciate the industry’s experience in cost cutting,” they wrote.
After sinking to a low near $44 a barrel in January, crude prices have hovered around $50 in recent weeks, rising and falling a few dollars on the latest comments from OPEC members or government reports on drilling activity, production and inventories. U.S. crude rose less than 1 percent to $49.92 at 8:58 a.m. in New York.
Found Bottom
This is not the first ever L-shaped recovery. Talisman Energy Inc. CEO Hal Kvisle compared the current downturn to the late 1980s and early 1990s, noting that oil prices spiked briefly during the first Gulf War and then stayed around $20 a barrel through most of the rest of the decade as global production peaked from Alaska to Russia to Saudi Arabia.
A similar range of between $70 and $75 could occur now for many years, Kvisle told reporters Feb. 18.
“We’ve probably established the bottom of the range now, and we’ll see prices generally trend upwards, but I don’t think things are going to go upward in a dramatic fashion,” he said.
Just 10 years ago, surging demand in developing countries and increasingly difficult-to-get oil resources combined to push up crude prices on fears of running short. After briefly plunging below $40 during the 2008 recession, prices have traded mostly above $80 a barrel, and often above $100 for the past five years.
Those higher prices helped pay for the technology and innovation needed to develop U.S. shale fields and Canadian oil sands, leading to a North American production boom that’s now created an oversupply of oil as growth in global demand faltered on a weakening economic prospects in Europe and China.
OPEC’s Control
During boom and bust cycles since the early 1970s, a powerful OPEC, the cartel of oil-producing countries led by Saudi Arabia, coordinated output among its 12 members to raise and lower world crude prices. This time, it has refused to act to prop up prices, insisting that it’s up to U.S. shale producers to make the cuts needed to rebalance the market.
That was a startling change from several decades ago, when the majority of the world’s oil produced outside of OPEC countries came from projects such as offshore developments in the U.K.’s North Sea, requiring vast investments in new technology and pipelines to wring crude from hard-to-reach deposits.
Shale Dominance
Production from shale-rock formations makes up about half of total U.S. output, which also includes offshore projects in the Gulf of Mexico and wells drilled in past decades. Unlike the giant gushers behind previous oil growth, the shale boom was driven by thousands of new wells that could be drilled quickly and relatively cheaply, but faded fast after an initial burst of production.
The steep falloff in well output that was perceived as shale’s key weakness is proving to be an advantage in the downturn. With fewer new wells drilled to make up for declines, production will tail off faster than when the world relied on traditional wells.
“Shale has attributes that make it nimble. It is proving very responsive to prices,” said Jim Krane, an energy fellow at Rice University’s Baker Institute for Public Policy in Houston. “There are low barriers to entry, but also low barriers to exit. Other, conventional producers cannot do this.”
‘Swing Producer’
The flexibility to increase or slow output quickly has now made shale companies -- whose 4.3 million barrels a day represents about 5 percent of global output -- the world’s “swing producers,” according to Bloomberg Intelligence and the IEA.
It was a role they took on reluctantly -- and then ferociously as prices plunged late last year. U.S. oil companies slashed more than $50 billion from their spending and laid off tens of thousands of workers as prices continued a freefall and investors began to flee. The market value of U.S. shale companies has fallen by more than $200 billion since June, according to data compiled by Bloomberg.
“We’re not interested in growing oil, when oil is at the bottom of the cycle,” William Thomas, Chairman and CEO of EOG Resources Inc., the biggest U.S. producer focused on shale, said at a Credit Suisse Group AG energy conference Feb. 25. “We’re deferring growth until future years and prices gets better.”
Needing Growth
Stalled growth is not a story investors like to hear, so shale companies are walking a fine line between holding down costs and reassuring shareholders that they can turn the spigot back on as soon as prices recover. In comments Feb. 19 about fourth-quarter profits, Thomas talked about cutting drilling in half and also emphasized, “We will be ready to respond swiftly when oil prices improve and resume our leadership in high return oil growth.”
One way producers are preparing for the rebound is by leaving hundreds of wells half-finished. Companies already had learned to complete wells in a matter of days, compared to the weeks it took a few years ago. So the pre-drilled wells will be completed and turned even faster when prices rise.
EOG, Continental Resources Inc. and Concho Resources Inc. are among those leaving wells uncompleted, meaning they’re poised to produce quickly when the price is right. U.S. producers’ improving skills at operating profitably with oil between $50 and $60 will also support higher production and pressure prices lower.
$65 ‘Fine’
Continental, one of the earliest and most prolific producers in North Dakota’s Bakken shale formation, can weather low crude prices “forever,” Chairman and CEO Harold Hamm said Jan. 29 in an interview. EOG said this month that, thanks to improved technology and cost reductions, it can make more money with oil at $65 a barrel than it did three years ago when oil was $95.
“I don’t think anybody is thinking it’s going to go back to $95, but $65 would be great for EOG,” Thomas said at the Feb. 25 conference. “That would be fine with us and then hopefully we’ll get to that point.”
Most producers, like Devon Energy Corp., are moving rigs to the most prolific areas, or even going back to old wells to re-frack them and produce at a quarter of the previous price.
“The knowledge curve and the technology curve of shale are improving every six months,” said Harvard’s Maugeri. “This correlates to big improvements in cost and productivity” that will allow most producers to keep drilling through the downturn.
Getting Cheaper
Even as drilling rigs declined by a third since October, there’s been less than a 15 percent reduction in the growth of new output, showing how improved efficiencies will continue to prop up production rates, according to Drillinginfo Inc., an Austin, Texas-based oil and gas analytics firm.
Costs meanwhile continue to fall as companies such as Halliburton Co. that provide drilling and other oilfield services cut their prices by 20 percent to 30 percent to retain business, said Drillinginfo CEO Allen Gilmer.
“This whole episode has really highlighted the robustness of unconventional producers in the U.S., who can ramp up and ramp down,” he said in an interview. “If the point was to test the shale players, it probably has not worked out as assumed.”
All the additional supply waiting in the wings creates more volatility and uncertainty. Global prices should average $56 a barrel this year, with ups and downs making a “shark’s teeth” pattern based on headlines of the day, Paul Sankey, a Wolfe Research analyst, said in a Feb. 13 note to investors.
Steady at $70
Some producers are still counting on oil rebounding above $60 by the end of the year, and then to continue rising. Continental’s Hamm said he would not use hedging contracts to lock in oil prices at $70 a barrel because he thinks the price will go higher.
Ed Morse, Citigroup Inc.’s head of commodities research, who forecast that oil prices would fall before last year’s collapse, has said oil will probably hover around $70 for years. Morse doesn’t see the market staying as flat as an L-shape, though he suggested in a Feb. 9 note to investors that the global oil benchmark won’t exceed $75 by the end of 2016.
The self-correcting nature of low prices and shale may take years to resolve. The market will have to wait for supply reductions elsewhere, such as in Russia or Venezuela, or for global demand to strengthen enough to absorb extra output.
“We’re going to have a couple of years of this sloppy, $40-$60ish oil,” said David Foley, the head of energy deals for private equity giant Blackstone Group LP. A major geopolitical event could raise prices, he said, but “other than that, you just have to wait” for the gap between supply and demand to narrow again.
To contact the reporter on this story: Bradley Olson in Houston at bradleyolson@bloomberg.net
To contact the editors responsible for this story: Susan Warren at susanwarren@bloomberg.net Jim Efstathiou Jr., Will Wade
Iraq to review oil contracts with global firms
BAGHDAD, 13 hours, 25 minutes ago
Iraq has said that it is reviewing its oil production agreements with international firms because falling crude prices meant that the financial cost of existing service contracts were too high to bear.
Oil Minister Adel Abdel Mehdi said Iraq is negotiating to restore its state share in oil production contracts with international companies to 20-25 per cent, after it was reduced in recent amendments to around 5 per cent.
Last year, Iraq signed revised deals with Britain's BP, Italy's Eni and Russia's Lukoil, cutting final production targets and also lowering the share of the state partner to 5 per cent from 25 per cent.
As Iraq aims to hike production, it is also looking at proposals to change the structure of its payments to the foreign firms, which are currently based on a fixed fee for additional volumes produced.
"There are proposals to link the profitability of the companies with the oil prices, and not just with a specific fee per additional barrel," Abdel Mehdi said in a statement obtained by Reuters.
Another proposal for discussion was to link payments to how much companies manage to lower the production costs.
Abdel Mehdi said that under current contract terms, Iraq's payments due to international companies in 2015 would reach $18 billion. - Reuters
Saudi king keeps close hand on oil in new strategic team
RIYADH, 17 hours, 48 minutes ago
By Rania El Gamal and Angus McDowall
Saudi Arabia's subtle change of energy policymaker line-up since the accession of new King Salman in late January appears to give the king's inner circle a firmer hand on the kingdom's oil strategy than previous rulers have enjoyed.
The most notable change was the promotion of the king's son Prince Abdulaziz bin Salman, long a member of the No 1 crude exporter's Opec delegation, to the role of deputy oil minister from assistant oil minister, a post he had held for many years.
On the same day, King Salman formed a new body replacing the Supreme Petroleum Council and appointed another son, Prince Mohammed bin Salman, to head the new Supreme Council for Economic Development.
There are no indications that those moves will lead to changes in the fundamental way the kingdom makes its oil decisions or diminish the influence of veteran oil minister Ali Al-Naimi.
However, the king is clearly laying the ground for a generational shift in how Riyadh develops its energy and economic strategies.
"This would ensure that, whether it is a domestic policy through Prince Mohammed and the economic council or international oil policy through Prince Abdulaziz, it is still very closely guided by the king himself," said Sadad Al-Husseini, a former senior executive at state oil giant Saudi Aramco and now an energy consultant.
WHO'S NEXT IN LINE?
There is little merit in speculating about when Al-Naimi, who turns 80 in August, will retire or whom King Salman will choose to replace him.
Conventional thinking is that the ruling Al Saud family views the oil minister's job as so important that giving it to a prince might upset the dynasty's delicate balance of power and risk making oil policy hostage to princely politicking.
Saudi Arabia has had only four oil ministers since 1960, and none of them has been a royal.
The most prominent minister before Al-Naimi was Ahmed Zaki Yamani, who held the position from 1962 to 1986.
But since Abdulaziz's promotion, some diplomatic and Saudi sources have suggested the prince's lengthy experience in the sector might overcome what has always been seen as the impossibility of appointing a royal to the post of oil minister.
Abdulaziz, who is in his mid-50s, was appointed "deputy minister of petroleum and mineral resources at the rank of minister", according to a royal decree on January 29.
"This has increased speculation about whether this would mean Abdulaziz might be the next oil minister," a diplomatic source said.
"Before the promotion, the thinking was that it was probably a 90 percent chance for Falih and 10 percent for Abdulaziz," the source said, referring to Aramco head Khalid Al-Falih. "Now the dialogue has shifted."
Whatever King Salman has in mind for Abdulaziz, however, it seems clear that his son will remain a core component of the kingdom's energy team, along with other key players such as Al-Falih.
Since his appointment as chief executive of the oil company in 2009, Al-Falih has been regarded as one of a handful of Saudi figures whose views are closely watched by traders and analysts for any insight on the kingdom's oil thinking.
Al-Naimi took the reins at the oil ministry after a long career at Aramco, pointing towards a path by which the ruling family keeps highly experienced technical experts involved in wider energy strategy.
HOW THINGS WORK
The exact mechanics of Saudi decision-making have always been obscure, but there is a broad understanding that the king has the final say in a process that involves building consensus among top royals based on the advice of senior technocrats.
When it comes to oil, under the late King Abdullah that process involved the Supreme Petroleum Council, which included the crown prince, the foreign, interior and finance ministers, Al-Naimi and Aramco's chief.
But in one of his first acts as monarch, King Salman abolished that body and set up the Supreme Council for Economic Development to take over its duties, as well as those of another committee that focused on economic reforms.
The move was seen as an effort by the king to streamline policy-making by binning redundant committees that often included the same officials and replicated each other's work.
The new council has 22 minister members, including Al-Naimi.
Saudi oil policy -- especially when it comes to relations with the rest of the 12-member Organization of the Petroleum Exporting Countries, production and exports -- is ultimately decided by the king, market observers say.
But such decisions are based mainly on recommendations and consultations with the Ministry of Petroleum, top royals, senior advisers and technocrats at other related ministries such as finance and foreign affairs.
"Whenever the policy changes, it is not simply top down. This is still the result of studies and recommendations prepared by the Ministry of Petroleum and only becomes a national policy when they are reviewed and approved by the king," Husseini, the consultant, said.
Analysts and industry sources say the new council is likely to be more involved in setting domestic energy policies rather than anything that affects the global oil market, which has seen the price of Brent crude drop almost 50 percent since June.
It is too soon to tell what sort of influence Prince Mohammed will wield over the council, or how far he will defer to the advice of Al-Naimi and his eventual successors.
However, by making royal court chief and defence minister Prince Mohammed, his 35-year-old son, the new economic council's chairman, King Salman has given a relatively unknown official a big voice in crafting Saudi oil policy.
"He is a young minister and has the full trust of the king. He has also proven to be a pragmatic business leader. But being the head of the new council does not eliminate the role of the 22 minister members," said Mohammad Al Sabban, a former senior adviser to Al-Naimi.
The decisions of the new economic council "will most likely be adopted by consensus", he added.
Opec heavyweight Saudi Arabia has held steady since the January 23 death of Abdullah with its strategy of allowing the market to correct itself without cutting output despite a steep price drop, drawing public criticism from some other oil producers.
Demonstrating such continuity has long been important to the absolute monarchy at moments of change, something King Salman underscored by keeping Al-Naimi, despite a wide-ranging reshuffle.
Al-Naimi was the driving force behind Opec's November decision not to cut output and instead fight for market share.
On February 25, Al-Naimi said oil demand is growing and markets are calm, indicating that he feels vindicated.
"There will be no change in the Saudi oil policy. I am glad that finally Saudi Arabia proved to everyone that whatever (decision) was taken in November along with other Opec members was right," said Sabban. - Reuters
Oil prices recover from Monday's loss
Published: March 3, 2015 at 9:23 AM
Daniel J. Graeber
NEW YORK, March 3 (UPI) --NEW YORK, March 3 (UPI) -- Geopolitical issues helped oil prices recover ground lost during the previous session, with Brent crude oil moving Tuesday back above $60 per barrel.
Brent entered March on a down note as the rally that began in early February lost steam.
Markets rebounded Tuesday, however, as talks continue on Iran's controversial nuclear program. Iran's crude oil production is curtailed by sanctions. Ukraine, meanwhile, avoided a short-term natural gas crisis after debt talks with Russian and European negotiators.
Brent, the global benchmark, moved up 2.4 percent from the previous close to $61 per barrel early in the Tuesday session.
The Bank of England, meanwhile, warned investors should be wary of long-term bets in fossil fuels as major economies embrace policies to advance renewable energy alternatives.
Brent crude oil prices surged more than 15 percent from their $51.74 per barrel at the start of February. Prices are down about 40 percent from June 2014 highs, however, as markets stay weighted toward the supply side.
Gains in U.S. oil production and the status quo policy from the Organization of Petroleum Exporting Countries means supply outweighs demand. The situation was emphasized last week when U.S. government data showed crude oil inventories at record highs.
The U.S. Energy Information Administration said in a Tuesday report the low price of crude oil won't have a lasting impact on production in the Gulf of Mexico. U.S. oil production from the region should reach 1.52 million barrels per day this year and increase another 6 percent the following year.
The price for West Texas Intermediate, the U.S. benchmark for crude oil, wasn't as resilient as Brent, gaining only a fraction of a percent from the Monday close to trade at $49.88 per barrel for the April contract.
© 2015 United Press International, Inc. All Rights Reserved.
Energy trends changing investment dynamics
Published: March 3, 2015 at 8:09 AM
Daniel J. Graeber
LONDON, March 3 (UPI) --LONDON, March 3 (UPI) -- With world economies taking steps to lower their emissions, an official at the Bank of England said Tuesday investments in fossil fuels are becoming risky.
Paul Fisher, a deputy regulator at the bank, said insurers who invest in fossil fuels could face mid-term risks as global policies develop that would advance renewable energy or otherwise decarbonize the economy.
"As the world increasingly limits carbon emissions, and moves to alternative energy sources, investments in fossil fuels and related technologies -- a growing financial market in recent decades -- may take a huge hit," he said at a London conference.
His warning comes as the low price of oil has forced energy companies to cut back on spending and staff. British energy company BP already announced plans to shed staff and enacted a pay freeze. It ended 2014 with net debt of $22.6 billion. BP Chief Executive Bob Dudley said last month the company is entering a reset phase focused on streamlined spending in the low oil price climate.
A report from the European Union, meanwhile, finds regional industries working on low-carbon energy options grew more than 50 percent during the decade ending in 2011.
Protecting the environment makes economic sense, the report finds, but it adds that long-term goals of cutting emissions can't be achieved under current environmental policies.
European Commissioner for the Environment Karmenu Vella said the report shows regional policies aimed at curbing emissions and advancing renewable energy are delivering benefits, but there's no room for relaxation.
"We must stay ever vigilant to ensure that good policy, well implemented, means excellent environmental results both on land and at sea," he said.
© 2015 United Press International, Inc. All Rights Reserved.
Oil Gains on Supply Risks From Libya Attack, Iran Talks
March 3, 2015
(Bloomberg) -- Crude climbed as an attack on Libya’s biggest oil port and a disagreement between the U.S. and Israel about nuclear talks with Iran emphasized risks to supply across the Middle East.
Oil rose 2.5 percent in London and 1.9 percent in New York. The port of Es Sider wasn’t damaged in an attack by a plane belonging to Libya’s Islamist-backed government, the nation’s Petroleum Facilities Guard said. Israeli Prime Minister Benjamin Netanyahu told U.S. lawmakers that an emerging U.S. agreement with Iran would backfire and ensure that the Islamic Republic gains a nuclear arsenal. President Barack Obama won’t meet with Netanyahu during his visit to Washington.
“We’re up primarily because of mushrooming geopolitical worries,” Tom Finlon, director of Energy Analytics Group LLC in Jupiter, Florida, said by phone. “The situation in Libya continues to worsen. The president appears to be at odds with the Israeli government about Iran, which isn’t reassuring.”
Brent for April settlement climbed $1.48 to end the session at $61.02 a barrel on the London-based ICE Futures Europe exchange. The contract, the benchmark for more than half the world’s oil, fell 4.9 percent to $59.54 on Monday. The volume of all futures was 11 percent higher than the 100-day average at 2:52 p.m. in New York.
WTI Movement
West Texas Intermediate for April delivery rose 93 cents to settle at $50.52 a barrel on the New York Mercantile Exchange. Volume was up 2.6 percent from the 100-day average. The U.S. benchmark crude closed at a $10.50 discount to Brent.
A plane targeted Es Sider’s oil-storage tanks and air strip without inflicting fresh damage, said Ali Al-Hasy, spokesman for the nation’s Petroleum Facilities Guard. The port has been shut since December. An Islamist-backed government in Tripoli is fighting the internationally recognized administration based in the country’s east for control of oil resources.
Libya pumped 220,000 barrels a day of crude last month, down from 850,000 a day in October as violence has worsened in the country, according to a Bloomberg survey.
“Brent is rising more than WTI because geopolitical events are bidding up the international benchmark,” Bob Yawger, director of the futures division at Mizuho Securities USA Inc. in New York, said by phone. “There’ve been new attacks in Libya and the Iran nuclear talks continue to drag on.”
Montreux Talks
U.S. Secretary of State John Kerry resumed one-on-one talks with Iran’s Foreign Minister Javad Zarif Monday in Montreux, Switzerland. The talks, which continue through Wednesday, come as Iranian leaders made statements readying their nation for a resolution to the decade-long dispute over Iran’s nuclear program.
Netanyahu accepted the invitation from Republican House Speaker John Boehner of Ohio to address Congress without consulting President Barack Obama’s administration, adding to tensions with an ally that provides $3.1 billion a year in military aid to Israel.
“That deal would not prevent Iran from developing nuclear weapons -- it would all but guarantee that Iran gets those weapons, lots of them,” Netanyahu said Tuesday in Washington, speaking to a joint meeting of the U.S. House and Senate in an effort to head off an accord being negotiated between Iran and world powers. “It paves Iran’s path to the bomb.”
Saudi Pricing
Saudi Arabia, the world’s largest crude exporter, narrowed the discount on its Arab Light grade to Asia as demand improved. State-owned Saudi Arabian Oil Co. said it will sell cargoes of Arab Light in April at a discount of 90 cents a barrel to Asia’s regional benchmark. That’s $1.40 narrower than the discount for March supplies and the biggest price increase since January 2012, according to data compiled by Bloomberg.
The discount on March sales of Arab Light to Asia of $2.30 a barrel was the widest in at least 14 years, when Bloomberg began compiling the data. Iraq, Kuwait and Iran joined Saudi Arabia in cutting their March prices in a signal the competition for market share that began last year was continuing.
U.S. crude stockpiles probably rose 3.95 million barrels last week, extending a record high, according to a Bloomberg survey before an Energy Information Administration report Wednesday. Inventories climbed to 434.1 million over the seven weeks to Feb. 20, the most in data compiled by the EIA starting August 1982. Supplies in the Midwest, known as PADD 2, advanced 1.93 million barrels to a record 130 million.
Widening Spread
Crude supplies gained 2.9 million barrels last week, the American Petroleum Institute said, according to a person familiar with the report.
“The widening of the Brent-WTI spread has two parts, the accumulation of inventory in the mid-continent and the interruption of Libyan supply,” Sarah Emerson, managing principal of ESAI Energy Inc., a consulting company in Wakefield, Massachusetts, said by phone.
Inventories of gasoline and distillate fuel, a category that includes diesel and heating oil, probably dropped last week, according to the median of eight analyst responses in the Bloomberg survey.
“The bigger gain in the product markets makes sense,” Tim Evans, an energy analyst at Citi Futures Perspective in New York, said by phone. “We are anticipating another build in crude oil stocks and further minor declines in product inventories.”
Gasoline futures for April delivery rose 5.26 cents, or 2.8 percent, to $1.9499 a gallon, the highest settlement since Nov. 26. April ultra low sulfur diesel increased 5.22 cents, or 2.8 percent, to close at $1.9395 a gallon.
To contact the reporter on this story: Mark Shenk in New York at mshenk1@bloomberg.net
To contact the editors responsible for this story: David Marino at dmarino4@bloomberg.net Stephen Cunningham
How Low Can Oil Prices Go?
The tricky geopolitics of tumbling demand and rising supply
Ronald Bailey|Mar. 3, 2015 8:21 am
The price of oil in global markets has plunged by nearly 45 percent over the past six months. As a result, the price of a gallon of regular gasoline in the U.S. dropped from $3.68 in June to $2.37 in late December. In June, the U.S. Energy Information Administration had projected that a gallon of gas would average $3.48 per gallon in the second half of 2014. What happened? And where might oil prices go in the next two to five years?
We are awash in crude oil even as the world economy is slowing down, leading to lowered demand for crude. The glut in global production stems largely from the fracking boom in the United States, which has seen domestic oil production rise from 5 million barrels per day in 2008 to over 9 million barrels per day in November 2014. The predictable result of increased supply of petroleum is that the price is down: A barrel of benchmark West Texas Intermediate crude hovered around $55 at the end of December.
Over the Thanksgiving holiday, the Organization of Petroleum Exporting Countries (OPEC) declined, reportedly at the behest of Saudi Arabia, to reduce its members' production. Some analysts have suggested that the goal is to keep global oil prices low, thereby killing off fracking in the United States and preventing the drilling technique's spread to other parts of the world. It costs less than $10 per barrel to get oil out of the ground in most Middle Eastern countries, whereas production costs hover around $65 per barrel for U.S. fracked wells.
Michael Lynch, an analyst at Strategic Energy and Economic Research, thinks this strategy is unlikely to work. Lynch estimates that most fracked wells in the U.S. break even below $60. Although he says sustained lower prices are likely to cut future drilling investments by 10 to 15 percent, even that has an upside, because slackening demand for drilling rigs and crews will lower the costs for new fracked wells. In addition, technological improvements along with offsetting increases in production are reducing fracking costs by something like 10 to 20 percent annually. In any case, owners will pump oil from wells already drilled as long as production covers their variable costs.
Lynch argues that during the first decade of this century, oil prices were affected by the perceived threat to production capacity caused by strife in places like Iraq, Nigeria, Iran, and Venezuela. In effect, purchasers paid a security premium. He now believes, despite the continuing turmoil in the Middle East, that the geopolitical risk premium has abated somewhat. If that's true, leading-edge private oil companies might be enticed back to rescue the heroically mismanaged petroleum fields of certain oil-rich hellholes.
The sad fact is that nearly 80 percent of the world's oil reserves are in the hands of government-owned companies. It's not too far-fetched to believe that with the benefit of more knowledge and modern technology, the combined additional production from Libya, Iraq, Iran, Russia, Nigeria, Venezuela, South Sudan, and Mexico might amount to an extra 10 to 15 million barrels per day.
In the meantime, budget shortfalls stemming from lower oil prices might encourage unsavory petro-state regimes-Russia, Venezuela, Iran-to be more tractable. Furthermore, the International Monetary Fund estimates that lower oil prices will goose U.S. economic growth from 3.1 percent to 3.5 percent next year. So much for "peak oil."
During the last decade the alarums about the advent of peak oil grew ever more frenzied. For example, back in 2007 the Germany-based Energy Watch Group declared that the world's oil production had peaked in 2006 and predicted that it would drop by around 3 percent a year. By 2030, fearmongers predicted, the global availability of oil would be half of what it was at its apex.
Instead, world oil production increased from 77.6 million barrels per day in 2003 to 86.8 million barrels per day in 2013. Lynch's book The "Peak Oil" Scare and the Coming Oil Flood, scheduled for publication in spring 2015, predicts even larger leaps in the global production of crude. Lynch thinks world oil production will increase to around 110 million barrels per day during the next decade. In the meantime, global oil prices will oscillate around $60 per barrel and could conceivably drop to $40 per barrel within five years. I asked Lynch if this meant oil markets might be in for a replay of the price collapse that occurred in the 1980s. He replied that he thought so. In inflation-adjusted dollars, the price of oil reached its peak annual average of $106 per barrel in 1980 and then collapsed to an annual average of $30.80 per barrel in 1986.
At $40 per barrel today, the price of oil would, in inflation-adjusted dollars, just about equal the annual average price of $17 per barrel in 1998. Interestingly, in an interview with the Middle East Economic Survey, Saudi Arabia's oil minister, Ali al-Naimi, said OPEC's output would still not be cut. "Whether it goes down to $20, $40, $50, $60, it is irrelevant," he declared.
In a December Reuters op-ed, oil analyst Anatole Kaletsky divided the history of global oil prices over the past four decades into three eras. In Kaletsky's analysis, OPEC maintained pricing power from 1974 to 1985 and the price of oil bounced between $48 and $120 in inflation-adjusted dollars. This provoked more exploration and production that eventually broke OPEC's dominance, ushering in a period of competitive pricing between 1986 and 2004 where the price of crude ranged from $21 to $48 per barrel. As demand grew and supplies tightened, OPEC regained pricing power after 2004 and prices again fluctuated between $50 and $120 per barrel.
So has the global oil market reverted to competitive pricing of oil? Kaletsky is agnostic on that question, but he suggests that if the price remains at or below $50 per barrel for a year, it would indicate that we have returned to a competitive market and therefore that we'll see lower prices for many years to come.
Another factor to consider when attempting to project future prices is that demand for oil appears to have peaked in the United States and Europe. The recent period of sustained high prices encouraged drivers to buy more energy-efficient vehicles and to limit the amount of fuel they burned. U.S. gasoline consumption rose to 142 billion gallons in 2007 but has since fallen by 6 percent to 135 billion gallons in 2013. In the European Union, transport fuel consumption has fallen by 8.4 percent since peaking in 2007. In addition, the total estimated vehicle-miles traveled by Americans has dropped by more than 2 percent since then. (Lynch muses that low oil prices means we might "see the death of the electric car" once again.) Finally, if the big industrial countries do get serious in the next decade or so about cutting carbon emissions, that too will tank demand for oil.
In other words, oil consumption may well eventually reach its zenith. But not because we ran out of the stuff.
Science Correspondent Ronald Bailey (rbailey@reason.com) is the author of the forthcoming The End of Doom: Environmental Renewal in the 21st Century (St. Martin's).
Oil Rises as Strong Demand Outweighs Supply Concerns
Published March 03, 2015
| Reuters
Oil rebounded on Tuesday as Israeli Prime Minister Benjamin Netanyahu warned the Obama administration against accepting a weak nuclear deal with Iran, and rival Libyan forces targeted oil terminals in the African nation.
Higher prices imposed by Saudi Arabia for its crude buyers in Asia, the United States and northwest Europe were another positive development, traders said, although some had expected benchmark Brent and U.S. oil futures to rally even more on that.
U.S. crude futures were volatile on concerns that oil inventories in the United States had hit new record highs.
Oil got a strong start after rival Libyan forces carried out tit-for-tat air strikes on oil terminals and an airport, reviving fears over local crude supplies.
Gains accelerated just before noon in New York when Netanyahu told the U.S. Congress that the nuclear deal being negotiated by Washington and Tehran would almost guarantee nuclear weapons for OPEC member Iran.
"His speech may have reinforced the geopolitical tensions around Iran, though I don't believe this rebound has legs given the fundamental picture of oil oversupply," said Gene McGillian, senior analyst at Tradition Energy in Stamford, Connecticut.
front-month contract
U.S. crude's front-month
The U.S. market was choppy for most of the day on worries that domestic crude stockpiles had reached new all-time highs last week after an eighth straight week of builds.[EIA/S]
U.S. crude was also under pressure from a spread play versus Brent, as players bet on it to decline further before inventory data issued by the government-run Energy Information Administration on Wednesday. The American Petroleum Institute, an industry group, will issue its own stockpile data at 4:30 p.m. EST (2130 GMT) on Tuesday.
Brent's premium to U.S. crude
(By Barani Krishnan; Additional reporting by Robert Gibbons in New York, Libby George in London and Henning Gloystein in Singapore; Editing by David Evans, David Clarke, Meredith Mazzilli and Paul Simao)
This material may not be published, broadcast, rewritten, or redistributed. © 2015 FOX News Network, LLC. All rights reserved. Privacy | Terms
Oil glut: U.S. running out of room to store crude
NEW YORK — The Associated Press
The United States has so much crude that it is running out of places to put it, and that could drive oil and gasoline prices even lower in the coming months.
For the past seven weeks, the United States has been producing and importing an average of one million more barrels of oil every day than it is consuming. That extra crude is flowing into storage tanks, especially at the country’s main trading hub in Cushing, Okla., pushing U.S. supplies to their highest point in at least 80 years, the Energy Department reported last week.
If this keeps up, storage tanks could approach their operational limits, known in the industry as “tank tops,” by mid-April and send the price of crude – and probably gasoline, too – plummeting.
“The fact of the matter is we are running out of storage capacity in the U.S.,” Ed Morse, head of commodities research at Citibank, said at a recent symposium at the Council on Foreign Relations in New York.
Mr. Morse has suggested oil could fall all the way to $20 (U.S.) a barrel from the current $50. At that rock-bottom price, oil companies, faced with mounting losses, would stop pumping oil until the glut eased. Gasoline prices would fall along with crude, though lower refinery production, because of seasonal factors and unexpected outages, could prevent a sharp decline.
The average U.S. price of gasoline is $2.44 a gallon. That’s $1.02 cheaper than last year at this time, but up 37 cents over the past month.
Other analysts agree that crude is poised to fall sharply – if not all the way to $20 – because it continues to flood into storage for a number of reasons:
U.S. oil production continues to rise. Companies are cutting back on new drilling, but that won’t reduce supplies until later this year.
The new oil being produced is light, sweet crude, which is a type many U.S. refineries are not designed to process. Oil companies can’t just get rid of it by sending it abroad, because crude exports are restricted by federal law.
Foreign oil continues to flow into the United States, both because of economic weakness in other countries and to feed refineries designed to process heavy, sour crude.
This is the slowest time of year for gasoline demand, so refiners typically reduce or stop production to perform maintenance. As refiners process less crude, supplies build up.
Oil investors are making money buying and storing oil because of the difference between the current price of oil and the price for delivery in far-off months. An investor can buy oil at $50 today and enter into a contract to sell it for $59 in December, locking in a profit even after paying for storage during those months.
The delivery point for most of the oil traded in the United States is Cushing, a city of about 8,000 people halfway between Oklahoma City and Tulsa at an intersection of several pipelines. The city is dotted with tanks that can, in theory, hold 85 million barrels of oil, according to the Energy Department, though some of those tanks are used for blending or feeding pipelines, not for storing oil.
The market data provider Genscape, which flies helicopters equipped with infrared cameras and other technology over Cushing twice a week to measure storage levels, estimates Cushing is two-thirds full.
Hillary Stevenson, who manages storage, pipeline and refinery monitoring for Genscape, says Cushing could be full by mid-April. Supplies are increasing at “the highest rate we have ever seen at Cushing,” she says.
Full tanks – or super-low prices – are not a sure thing. New storage is under construction at Cushing and there are large storage terminals near Houston, in St. James, La., and elsewhere around the country that will probably begin to take in more oil as prices fall far enough to cover the cost of transporting the oil.
Also, drillers are cutting back fast because oil prices have plummeted from $107 a barrel in June. And demand is showing signs of rising.
While the U.S. Energy Department reported another enormous rise in crude stocks last week, up 8.4 million barrels from the week earlier, it also reported that diesel and gasoline supplies fell more than expected. That leads some to conclude that demand for crude will soon pick up, easing the surplus somewhat.
But many analysts believe oil prices will fall through the spring, before summer drivers start to relieve the glut.
Exxon plans $8-billion bond sale in its biggest deal
Elliott Stam
Bloomberg News
Exxon Mobil Corp. plans to sell as much as $8-billion (U.S.) of bonds in what would be its largest ever debt deal and the biggest energy-related offering since the plunge in crude prices.
The world’s largest oil company by market value boosted the deal by about 14 per cent after marketing $7-billion of debt earlier, according to a person with knowledge of the deal who asked not be identified citing lack of authorization to speak publicly. Irving, Tex.-based Exxon may issue the securities in as many as seven parts, the person said.
At the annual convention of the prospectors and developers association of Canada, our own Andrew Bell was down there yesterday to gauge the mood of the show as mining faces another year of uncertainy. He filed this report.
Eldorado Gold, battling to develop a mine in Greece in the face of government opposition, said it was blocked from completing construction of a processing plant at the site. Amber Kanwar reports.
Exxon holds top triple-A credit ratings from Moody’s Investors Service and Standard & Poor’s, making it one of only a handful of U.S. corporations that stands on nearly equal footing with governments in debt markets. Investors are hungry for the high-quality bonds, as they offer higher yields than sovereign debt with almost no additional risk.
“There’s tremendous appetite from the investor community to buy high-value corporate names like Exxon and Chevron,” said Dan Heckman, a senior fixed-income strategist at U.S. Bank Wealth Management in Kansas City, Mo. “People are always trying to seek out the cream of the crop.”
The longest-maturity portion may be 30-year notes that are expected to yield about 85 basis points more than comparable Treasuries, the person said. A basis point is 0.01 percentage point.
‘War Chest’
The new debt offering is probably motivated by the low cost of borrowing and a desire to be prepared for what lies ahead, according to Heckman.
“There’s good demand, spreads are still reasonable, and I think it is an insurance policy as well, in case spreads widen down the road or the company needs a war chest for acquisitions,” he said.
While the 50-per-cent drop in crude oil prices since June will hurt international oil companies, Exxon remains in a better position than most to weather the downturn, Moody’s said Tuesday in a report.
Proceeds from the bond sale may be used to fund general corporate purposes, including acquisitions, capital expenditures, and refinancing, according to the person familiar with the deal.
Why a cutback in oil production is sorely needed
How deep is the hole the oil industry is currently stuck inside? To figure that out, you only need to look as far back as last week, which saw another two trainloads full of oil derail and storage numbers that put U.S. crude stocks at record highs. Every new pipeline leak or train derailment puts the environmental risk of moving ever greater amounts of oil into even sharper relief. At the same time, storage tanks that are bursting at the seams say everything you need to know about the troubled economic returns currently plaguing the energy business.
Employees torque a pipe at a wedge well at Christina Lake, an in situ oil production facility half owned by Cenovus Energy Inc. and ConocoPhillips, in Conklin, Alberta, Canada, on Thursday, Aug. 15, 2013.
Despite a falling rig count, U.S. oil production is now running at more than nine-million barrels a day, its highest level since the early 1970s. In Canada, where companies are also slashing spending plans, total output this year is still slated to increase by hundreds of thousands of barrels a day.
Not long ago, hearing about those types of production gains would be music to the ears of investors. Today, the tune is decidedly more bearish. Increased crude production from shale plays and Alberta’s oil sands is only compounding the problems of an already glutted world oil market.
By most estimates, producers are pumping around two-million barrels a day more than is needed to meet global demand. According to a recent analysis by Bloomberg, more oil is now being held in U.S. storage tanks than at any point during the last eighty years. The refusal of high-cost marginal suppliers to put the brakes on production growth, let alone actually shut-in any output, suggests that oil prices, already cut in half since last year, could have even further to fall.
The dismal outlook for North American producers is once again being reflected in the price differential between benchmark U.S. crude and world oil prices. The spread between West Texas Intermediate and Brent crude, which was narrowing, is now beginning to open back up. The gap is particularly challenging for Canada’s oil sands producers, who can charge even less for every barrel of hard-to-refine bitumen. The more output that oil sands producers manage to churn out these days, the less their bitumen is worth. It’s clearly not a business model the market finds too attractive. The cool reception to a $1.5-billion share offering just announced by Cenovus is hardly bullish for the prospects of future financings. The way falling commodity prices are putting a hurt on balance sheets that’s grim news for the other companies that will surely need to tap the public markets before this current downturn shows any signs of turning around.
Further production growth also means more hundred-car tanker trains will be rolling through suburban neighbourhoods across the continent. With each one comes a growing risk of derailment, as well as the accompanying explosions like those that happened last week in northern Ontario and West Virginia.
Among the more disturbing aspects of those accidents is the involvement of new-and-improved tanker cars that are scheduled to replace the aging DOT-111 models. While Ottawa has just announced new regulations to make rail operators more accountable for spills by raising minimum insurance levels and requiring the bulking up of a compensation fund, such initiatives still won’t do anything to prevent more derailments from occurring. Indeed, rail shipments of crude, which have already quadrupled in Canada in the last few years, are expected to more than triple to 700,000 barrels a day by the end of 2016.
Instead of loading more surplus oil onto rail cars to be hauled to already over-stuffed storage tanks, both investors and communities across North America would be better off seeing the industry cut back on production. For companies that have already sunk a lot of money into drilling programs, however, cutting production will put their cash flow position into an ugly place. Although they may realize that less production would be good for everyone in the long run, getting out of their own way is proving tough to do. For the industry as a whole, that will only serve to draw out the time before prices start to firm up. For the rest of us, it means more oil trains will continue to roll through our backyards.
Libyan forces hit oil ports with air strikes, minor damage: official
BENGHAZI, Libya (Reuters) - A warplane belonging to the forces controlling the Libyan capital Tripoli bombed the oil ports of Ras Lanuf and Es Sidra on Tuesday, causing only minor damage, according to a security official allied with the internationally recognized government.
Oilfields and ports are increasingly a target in Libya's conflict, which pits two rival governments and their armed forces against each other, nearly four years after the uprising that ousted Muammar Gaddafi.
"They targeted the civil airport in Ras Lanuf, and oil tanks in Es Sidra. The rockets fell near the tanks, resulting in only minor damage," said Ali Hassi, who is a spokesman for the forces guarding Libya's oil infrastructure.
Es Sidra and Ras Lanuf -- responsible for half of Libya's oil output when operating normally -- have both been closed since December because of fighting between rival armed groups.
A spokesman for the Tripoli-allied forces did not immediately respond to a request to confirm the attack.
Islamist militants, who have profited from Libya's chaos to increase their strength, on Monday shelled two oilfields, Bahi and Mabrouk, hitting a pipeline to Es Sidra, although details of the extent of the damage were not known.
The North African OPEC nation's production is currently around 400,000 barrels per day, less than half the 1.6 million bpd it produced before the NATO-backed war that ousted Gaddafi in 2011.
(Reporting by Ayman al-Warfalli; Writing by Patrick Markey; Editing by Raissa Kasolowsky)
© Thomson Reuters 2015 All rights reserved.
Oil market jumps on Libya unrest
[LONDON] Brent crude prices rallied on Tuesday on unrest in crude producer Libya, but gains were tempered by oversupply worries on the eve of weekly US stockpiles data, dealers said.
European benchmark Brent North Sea crude for April delivery won US$1.68 to US$61.22 per barrel in London late afternoon deals.
New York's West Texas Intermediate (WTI) for April added 73 cents to US$50.32 a barrel.
Militia warplanes attacked a major oil export terminal in Libya on Tuesday, but were driven off by anti-aircraft fire without being able to hit their targets, a spokesman for guards there said.
In response, planes from the air force of the internationally recognised government struck Tripoli's militia-controlled Mitiga airport without causing any casualties.
The Al-Sidra terminal that was targeted is under the control of that government.
"Libyan crude production has once again been subject to disruptions," noted PVM analysts in a note to clients.
At the same time, WTI prices were held back by expectations of building US crude inventories.
"WTI is under-performing Brent ahead of the latest crude stocks data on Wednesday expected to show another increase after last week's record stockpile of US oil," added CMC Markets analyst Jasper Lawler.
The US government's Department of Energy will publish Wednesday its report on commercial crude inventory levels for the week ending February 27.
The DoE had revealed last week that US oil reserves surged by a bigger-than-expected 9.4 million barrels to a record 434.1 million barrels in the week to February 20.
In earlier deals on Tuesday, oil market gains were limited as dealers sat on the sidelines eyeing negotiations aimed at ending a strike at some US crude refineries.
Talks to settle a strike by workers at three major US refineries operated by Royal Dutch Shell are set to restart on Wednesday following a stalemate on February 20.
More than 5,000 workers spread across around a dozen installations have been on strike since February 1 demanding improved wages and safety conditions.
Dealers were also monitoring fresh marathon talks in Switzerland between the United States and crude producer Iran over Tehran's controversial nuclear programme.
The Islamic republic has been crippled by a series of UN and US sanctions, including on crude exports, aimed at bringing an end to its nuclear drive, which the West claims is being used to develop atomic weapons. Iran denies the claims.
The pace and intensity of the negotiations to hammer out a deal to rein in the nuclear programme in exchange for sanctions relief have gathered pace as a March 31 deadline for a political accord nears.
AFP
Brazil oil, gas output above 3 million barrels a day for 2nd month
RIO DE JANEIRO, March 3 Tue Mar 3, 2015 2:15pm GMT
(Reuters) - Brazil produced more than 3 million barrels of oil and equivalent natural gas a day (boepd) for the second straight month in January, 20 percent more than a year earlier, as the country benefited from the startup of long-delayed production systems.
The 44 companies operating in Brazil together produced an average 3.08 million boepd in the month, Brazilian oil regulator ANP said in a statement on Tuesday.
January output was little changed from December, falling by an average of 19,000 boepd, or 0.6 percent.
State-run Petroleo Brasileiro SA, or Petrobras, remained the dominant producer, with 2.59 million boepd, or 84 percent of Brazilian output in the month, down from 88 percent a year earlier.
Britain's BG Plc, which owns stakes in several giant offshore fields in the Santos Basin with Petrobras and other partners, was the No. 2 producer, with 140,562 boepd in the month, more than double the output of a year earlier. (Reporting by Jeb Blount; Editing by Lisa Von Ahn)
