News 5th November 2014

Oil Import Decline to U.S. Revealed by Louisiana as Truth

Things are slowing down at the U.S.’s largest oil-import hub.

Just six years after importing more than 1 million barrels a day from countries including Saudi Arabia, Nigeria and Iraq, the Louisiana Offshore Oil Port is receiving just half of that from overseas, highlighting a nationwide trend at harbors from Mississippi to Pennsylvania. What’s more, with U.S. output soaring to a 31-year high, neighboring Texas has become the port’s second-biggest supplier.

“U.S. oil production has significantly changed the flows of oil around the world and LOOP is at the fulcrum,” Jamie Webster, head of global oil markets at IHS Inc., said by telephone from Washington Nov. 3. “We’re now essentially receiving nothing from Nigeria. This is a huge change. I’m an oil markets man and not an economist, but in general, this is a big stimulus” for the U.S.

Booming oil and gas production created more than 159,000 jobs between 2007 and 2013, Bureau of Labor Statistics data show. The country will be self-sufficient in energy by 2030, BP Plc says.

A four-decade ban on exporting most U.S. crude has stranded the bulk of America’s surging production within the nation’s borders, blocking inbound global shipments. Some cargoes permitted for export, such as those from Alaska, have begun moving overseas. South Korea last month received its first shipment of Alaskan oil in more than a decade.

U.S. Consumers Benefit

Oil that the U.S. once imported now floods world markets, driving down prices 28 percent since June. That’s helped bring $3 gasoline back to U.S. pumps and provided what Citigroup Inc. describes as a $1.1 trillion boost to the global economy. Lower energy prices will translate into savings for Americans and will probably boost spending, said Amy Myers Jaffe, executive director of energy and sustainability at the University of California at Davis.

“It’s not just that people will have this benefit of lower gasoline prices, they’ll have this whole benefit of having a stronger U.S. economy and more jobs,” Myers Jaffe said.

Oil prices have maintained their decline as OPEC, the supplier of 40 percent of the world’s oil, resists pressure to curb production and help eliminate a global surplus. On Nov. 3, Saudi Arabian Oil Co. cut prices for all of its crude grades to the U.S., an e-mailed statement from the company showed.

A sustained stretch of low prices is unlikely to stop soaring output from major U.S. fields, with executives of oil companies including Continental Resources Inc. Chairman Harold Hamm and Occidental Petroleum Corp. Chief Executive Officer Stephen Chazen saying last month that production could be sustained even if prices fall lower.

Lower Prices

“Oil prices are lower, but they’re not low enough to really put a big pinch on that activity,” said Ken Medlock, senior director of the Center for Energy Studies at Rice University’s Baker Institute in Houston. “You probably would need to see oil prices come off another $10 to $20 to see that fade.”

Horizontal drilling and hydraulic fracturing have drawn crude from previously inaccessible formations in Texas and North Dakota, propelling U.S. output to 8.97 million barrels a day, the highest level since 1983. Restrictions on exports have made U.S. oil cheaper than global crudes, so imports have fallen 31 percent since 2005 to 7.5 million barrels a day.

“Why is oil $80 instead of $95?” said David Hackett, president of Stillwater Associates LLC in Irvine, California. “All of a sudden all this oil is getting to the coast and pushing back world supplies.”

Supertanker Port

The shift is being felt 20 miles (32 kilometers) offshore in the Gulf of Mexico at the LOOP. Built in 1981, it’s the only U.S. port that can unload the world’s largest supertankers.

Shipments into the port peaked in 2005 at 1.18 million barrels a day, according to Louisiana state records. Imports have fallen to 510,000 barrels a day this year, and since May the port has received more oil from Texas than any country other than Saudi Arabia.

The U.S. Customs district in Morgan City, Louisiana, where the LOOP’s barrels are tallied, had 46 percent less petroleum import tonnage in September than the year before, according to Datamyne Inc.

Morgan City has plenty of company. Philadelphia, home to the East Coast’s largest refining complex, had a 31 percent drop. Pascagoula, Mississippi, shipments declined 35 percent. Port Arthur, Texas, which brings in oil for some of the oldest refineries in the U.S., saw a 32 percent decline.

Refining Profits

Returning to its roots, Exxon Mobil Corp. (XOM)’s Beaumont refinery is now processing more domestic crude. It imported 32,000 barrels of oil a day in July, down from around 220,000 in 2012. The refinery was built in 1903 by John D. Rockefeller’s Standard Oil Co. to process crude from the Spindletop gusher 4 miles away.

Third-quarter refining profit climbed to $1.02 billion from $592 million a year earlier, the Irving, Texas-based company reported Oct. 31. That more than offset a $297 million decline in earnings from oil and gas production.

American refiners from Marathon Petroleum Corp. (MPC) to Phillips 66 have said in conference calls within the past week that they’re buying fewer expensive foreign crudes and more oil from the Bakken in North Dakota and Eagle Ford in Texas.

Domestic Crude

Instead of bringing in oil by ship, refiners have turned to pipelines and rail. Phillips 66 used 3,200 rail cars to get more of its crude from U.S. sources.

The company said 95 percent of its oil in the third quarter was either domestic or heavy oil priced below benchmarks. Phillips 66 will add 500 rail cars to its fleet by early next year, and expects to use only the less expensive crudes by the end of 2015, CEO Greg Garland said on an Oct. 29 conference call.

Back at LOOP, Terry Coleman, the port’s vice president for business development, said equipment has been reconfigured to accommodate smaller tankers and the shift in flows. On top of tanker unloadings and receipts from offshore drilling platforms, the company is now linked to an onshore pipeline operated by Royal Dutch Shell Plc, he said by phone yesterday.

“Given its size and its historical importance, LOOP is really the bellwether of the structural change that has taken place,” Darryl Anderson, managing director of Wave Point Consulting in Victoria, Canada, said by phone Nov. 3. “What it’s telling us is that there has been a fundamental change in U.S. energy sources.”

Saudi Oil Market Fight Shifting to U.S. as Asia Prices Rise

Saudi Arabia’s increase in oil prices for Asia signals the world’s biggest crude exporter is shifting the focus of its fight for market share on U.S. buyers.

While Saudi Arabian Oil Co. boosted differentials for supplies to Asia next month after cutting some November prices to the lowest in almost six years, American buyers will get another month of reductions. The Middle East producer isn’t prepared to surrender sales in the U.S., where a shale boom has lifted output to the highest in more than 30 years, according to Idemitsu Kosan Co., Japan’s third-largest refiner, and Elements Capital Inc., a Tokyo-based hedge fund that focuses on energy.

Global oil prices slid into a bear market last month on speculation the biggest OPEC producers were discounting their crude to maintain market share, resisting calls to cut output amid slowing demand growth. West Texas Intermediate futures slumped to the lowest in three years yesterday on signs the Saudis are prepared to go even lower to shore up U.S. demand.

“Asia needs to buy the crude from Saudi Arabia regardless of price fluctuations,” Ken Hasegawa, an energy trading manager at Newedge Group in Tokyo, said by phone. “On the other side of the world, they’re trying to expand their share of the U.S. market and lowered prices.”

WTI crude futures were up 0.2 percent at $77.35 a barrel in electronic trading on the New York Mercantile Exchange at 7:57 a.m. in Singapore. They slid 2 percent to $77.19 yesterday, the lowest settlement since Oct. 4, 2011. Brent closed 2.3 percent lower at $82.82, the least in four years, on the London-based ICE Futures Europe exchange.

Asian Demand

Saudi Arabia can count on sales to Asia for revenues as most customers hold long-term contracts that require them to take deliveries, Hasegawa said. The country shipped 68 percent of its crude exports to Asia and 19 percent to the U.S. last year, data from the U.S. Energy Information Administration show.

The biggest oil consumers in Asia including China, Japan, India and South Korea count Saudi Arabia as their largest supplier. The region accounts for about one-third of global oil demand, according to the International Energy Agency in Paris.

“Asia’s demand for Saudi crude has been relatively stable, so Saudi Arabia can raise prices slightly to improve their profits,” Gao Jian, an oil analyst with Shandong-based consultant SCI International, said by phone. “Meanwhile, they have to cut their prices to the U.S. further so as to be competitive against crude produced domestically.”

Market Share

Arab Light, the biggest Saudi crude stream, will sell in Asia next month at 10 cents a barrel below the average of Oman and Dubai grades, compared with a discount of $1.05 for November, Aramco’s statement showed. That’s still attractive to refiners given current product crack spreads, according to Setoh Shohei, a former crude trader who is currently a Tokyo-based manager at Japan Biofuels Supply LLP, a joint venture of Japanese refiners. He estimated its value at a premium of 45 cents.

“The Saudis probably adjusted prices for the U.S. market to compete with shale oil, their big rival,” Sagishima Toshiaki, an official in the Treasury department at Idemitsu Kosan, said in Tokyo. “Asia is a premium market for them.”

While the increase in Saudi prices to Asia was higher than expected, it shouldn’t be viewed as a reluctance to keep market share, according to Bernard Leung, a oil strategist for Bloomberg First Word who traded crude for 15 years.

Saudi Arabia’s share in China increased to 17.2 percent in September from 15.7 percent a month earlier, he said. A rise in freight rates from the Persian Gulf to Asia indicates that demand is improving, according to Leung.

The increase in official selling prices will be followed by other Middle East producers, which may keep supplies from Saudi Arabia competitive, he said.

Shale Boom

State-run National Iranian Oil Co. may raise the December official selling prices of its crude to Asia for the first time in five months, according to a quarterly formula based on Saudi prices that the Tehran-based company has used previously.

“The Saudis didn’t lower price differentials for Asia because they know well that they won’t lose the Asian market,” Takashi Hayashida, the chief executive officer of Elements Capital, said by phone.

The U.S. is pumping oil at the fastest pace in more than three decades as a combination of horizontal drilling and hydraulic fracturing, or fracking, has unlocked supplies from shale formations in the central U.S., including the Bakken in North Dakota and the Eagle Ford in Texas.

Production expanded to 8.97 million barrels a day in the week ended Oct. 24, according to the EIA, the Energy Department’s statistical arm. That’s the most in data going back to Jan. 14, 1983.

“It’s now a game of chicken between OPEC members and the U.S. to fight for market share” in the world’s biggest oil-consuming nation, Will Yun, a commodities analyst at Hyundai Futures Co. in Seoul, said by phone.

Saudis Go Back to the Future to Take on U.S. Shale Rivals

The Saudi oil minister’s visit to Venezuela this week is also a trip through time.

Flash back to December 1998 when Saudi Arabia looked to its fellow OPEC member for help lifting oil prices from about $10 a barrel.

Back then, the Saudis were defending their dominance in the global oil market from new suppliers in Latin America. Now the desert kingdom is cutting prices to the U.S. to contend with upstart shale producers. To win the showdown, the Saudis are trying to bring OPEC’s weaker members in line before the Nov. 27 meeting of the organization, said Seth Kleinman, head of European energy research at Citigroup Inc. in London.

“Shale is in the Saudis’ sights,” Kleinman said by e-mail. “It’s going to be shale or it’s going to be OPEC.”

Ali Al-Naimi, Saudi Arabia’s oil minister, flew to Venezuela for a conference that starts this week, according to two people with direct knowledge of his plans who asked not to be identified because they’re not authorized to speak to the media. He’s due to attend a gas forum in Acapulco, Mexico, on Nov. 11 and 12.

The trip is reminiscent of the 1990s, when Saudi Arabia’s competition with Venezuela and Mexico for shipments to the U.S. Gulf Coast drove down prices, according to Mike Wittner, head of oil market research at Societe Generale SA in New York. Al-Naimi may be collecting pledges to cut production, he said.

Under Pressure

“Saudi Arabia wants to see a cut shared out between all the members of OPEC,” Wittner said by phone. “You’d expect Venezuela to say, ‘We’ll consider it if everyone else does it as well.’ It’s all about shared pain.”

The Organization of Petroleum Exporting Countries is under pressure because of the historic expansion of U.S. production from hydraulic fracturing and horizontal drilling. U.S. fields are pumping 8.97 million barrels a day, the most since the 1980s, according to the U.S. Energy Information Administration. Meanwhile, global consumption will increase the least since 2009 as economic growth slows in Europe and Asia, the Paris-based International Energy Agency said.

West Texas Intermediate crude, the U.S. benchmark, touched a three-year low of $75.84 a barrel yesterday, down from $107.73 on June 20. Citigroup changed its forecast for WTI on Oct. 20 to $84 a barrel next quarter, from a previous estimate of $89.50.

Shale Boom

The shale boom sets up a direct challenge as the U.S. is poised to leapfrog Saudi Arabia and Russia as the world’s largest oil producer. The IEA initially said that would happen by 2020, then last November moved up its prediction to 2015. Saudi Arabia’s output rose 1 percent to 9.75 million barrels a day in October, according to data compiled by Bloomberg. The kingdom remains the world’s biggest oil exporter.

The Saudis can stem the growth of shale oil as even temporarily lower prices dim investors’ enthusiasm to fund drilling, according to Kleinman, the Citigroup analyst. About one-third of U.S. shale production loses money at $80 a barrel, according to Sanford C. Bernstein & Co. A Bloomberg Intelligence stock index of North American exploration-and-production companies dropped 20 percent since Oct. 1.

Saudi Arabian Oil Co., the state-owned producer, lowered the premium for sales to the U.S. Gulf Coast by 45 cents a barrel on Nov. 3 to the smallest since December. At the same time, Aramco increased prices for exports to Asia and Europe.

Big Swings

“The fact that they’re cutting prices in the U.S. and not in other areas does seem to lend credence to the theory that they are going after U.S. shale production, which has been the biggest threat to their market share,” said Chad Mabry, an analyst at MLV & Co., an investment bank in Houston. “It’s a reminder that even with the balance of power in the oil market seemingly shifting to the U.S., it’s the Saudis that really can dictate big swings in the market if they decide to.”

Trying to defend prices by acting alone backfired for the Saudis in the past. In the 1980s, the kingdom cut output by almost two-thirds as new supply from areas such as the North Sea created a glut, leading to years of budget deficits.

Today, supplies are surging within OPEC, too. Libyan output almost tripled since June to 850,000 barrels a day, data compiled by Bloomberg show. Iraq pumped 3.3 million barrels a day in October, within 3 percent of February’s 13-year high. The bloc’s total production rose to a 14-month high of almost 31 million barrels a day.

Market Share

“Saudi Arabia is not going to give up market share to Iraq, to Iran, to other countries who are cheating” by pumping more, Daniel Yergin, the Pulitzer Prize-winning oil historian and vice chairman of Englewood, Colorado-based consultancy IHS Inc., said in an Oct. 31 interview on Bloomberg Television. “It’s hard to see an OPEC deal at the end of November.”

Saudi Arabia can withstand lower prices because it has enough currency reserves, Yergin said -- $738.6 billion, according to the International Monetary Fund. The bear market is a bigger strain for weaker economies such as Venezuela, which is suffering after years of currency controls, supply shortages and the world’s highest rate of inflation, which deterred foreign investment.

Venezuela’s call last month for an emergency OPEC meeting went nowhere. Now the country is preparing a proposal to halt the price declines, President Nicolas Maduro said Oct. 31 on state television. Ecuador is collaborating on a strategy to increase prices at the November meeting, Finance Minister Fausto Herrera said yesterday in Quito.

“The Venezuelans are the most worried because they are in the worst fiscal situation,” Sarah Emerson, managing principal of ESAI Energy Inc. in Wakefield, Massachusetts, said by phone. “It makes perfect sense for Naimi to visit Venezuela, the most fragile country in OPEC.”

White House Monitoring Oil Drop as No Action Seen on Reserves

The Obama administration said it's monitoring oil markets as prices fall to a three-year low, though there’s no immediate indication that the government will take advantage and add to the Strategic Petroleum Reserve.

The reserve, kept in underground caverns along the Gulf Coast, contained 691 million barrels of oil as of Oct. 31, the Department of Energy said on its website. The capacity is 727 million barrels.

President Barack Obama’s spokesman, Josh Earnest, said today he wasn’t aware of any discussions at the White House about using cheaper oil to bring the reserve to its maximum capacity.

West Texas Intermediate touched $75.84 a barrel, the lowest intraday price since Oct. 4, 2011 as Saudi Arabia price cuts deepened a selloff in crude. The drop has been a boon to U.S. consumers as the average retail price for a gallon of gasoline has fallen below $3 for the first time in almost four years.

Earnest said the White House is “regularly briefed on and even directly monitoring the global oil supply and its impact on demand.”

He directed questions about the reserve to the Energy Department, which declined to comment.

The reserve is maintained to compensate for disruptions in crude oil supplies. It last was filled to capacity at the end of 2009 and now contains the equivalent of 94-day supply of oil imports, according to the Energy Department.

Saudi Oil Market Fight Shifts to U.S. as Asia Prices Rise

Saudi Arabia’s increase in crude prices for Asia signals the world’s biggest oil exporter is focusing its fight for market share on the U.S.

Global oil prices slid into a bear market last month on speculation the biggest OPEC producers were discounting their crude to maintain market share, resisting calls to cut output amid slowing demand growth. West Texas Intermediate futures resumed the slide today, slumping to the lowest in three years, on signs the Saudis are prepared to go even lower to shore up U.S. demand.

Oil Prices

WTI crude futures fell as much as 3.7 percent to $75.84 a barrel, the weakest since Oct. 4, 2011, on the New York Mercantile Exchange. Brent declined as much 3.2 percent to $82.08 on the London-based ICE Futures Europe exchange.

Asian Demand

Arab Light, the biggest Saudi crude stream, will sell in Asia next month at 10 cents a barrel below the average of Oman and Dubai grades, up from a $1.05 discount for November, Aramco’s statement showed. That’s still attractive to refiners given current product crack spreads, according to Setoh Shohei, a former crude trader who is currently a Tokyo-based manager at Japan Biofuels Supply LLP, a joint venture of Japanese refiners. He estimated its value at a premium of 45 cents.

Market Share

The rise in official selling prices will be followed by other Middle East producers, which may keep supplies from Saudi Arabia competitive, he said.

Shale Boom

Production expanded to 8.97 million barrels a day in the week ended Oct. 24, according to the EIA, the Energy Department’s statistical arm. That’s the most in data going back to Jan. 14, 1983.

“It’s now a game of chicken between OPEC members and the U.S. to fight for market share,” in the world’s biggest oil-consuming nation, Will Yun, a commodities analyst at Hyundai Futures Co. in Seoul, said by phone.

Halliburton CEO Expects Shale to Reverse Oil Price Slump

Halliburton Co. (HAL) Chief Executive Officer Dave Lesar is joining the chorus of oil executives who say they aren’t worried about falling oil prices, and expect them to climb next year.

“Despite what people are thinking, demand is creeping up, albeit at a lower rate than it has been,” he said. The downward pressure on prices is mostly due to an oversupply, and Lesar said that will quickly prove self-correcting, especially when it comes to U.S. shale production.

Unlike with conventional oil, shale wells peter out quickly and companies depend on constant new drilling to maintain production levels. This also makes shale more responsive to price movements. Lower prices will discourage new drilling, quickly removing the glut in crude supplies, Lesar said.

As the the world’s biggest supplier of fracking services, Halliburton has perhaps the best perspective on what’s driving the U.S. shale boom.

In an interview at the company’s Houston headquarters, Lesar also said the supply-demand imbalance is temporary, and that prices are likely to remain between $80 and $100 a barrel.

The breakneck pace of shale drilling in recent years has pushed oil output to 31-year highs just as forecasts for global demand were cut. U.S. crude prices plunged more than 25 percent since June to hover around $80 a barrel, and the industry is poised for them to drop even more.

Falling prices may be detrimental to Halliburton because oil producers would have less cash for the equipment and hydraulic fracturing services Lesar’s company provides.

Three Necessities

Lesar sees North America as its most promising region for deploying its new fracking gear. To make shale drilling economic, a country needs three things: good rock soaked in oil and natural gas, ample infrastructure such as pipelines to carry the petroleum to market and a profitable price.

For now, the U.S. is the only market with all three, Lesar said. “The reality is I can put it to work in the U.S. at a higher profit today, so why would I build and send to China or Saudi Arabia or Australia?”

More than any of its peers, Halliburton is tied to the ups and downs of North America, where it generates about half its sales. More than 80 cents out of every dollar of profit in the region comes from its fracking division.

Halliburton would take the biggest hit out of all the major oil-services companies if North America drilling slows, said Rob Desai, an analyst at Edward Jones in St. Louis. “That’s the unfortunate part of the way they’re tilted,” he said.

Production Budgets

Oil companies are already reevaluating their plans. Exploration and production budgets for North America are expected to stay flat next year, Jim Crandell, an analyst at Cowen & Co., wrote in an Oct. 20 note to investors. Spending was previously expected to climb 10 percent.

Halliburton posted a 70 percent jump in third-quarter net income from a year earlier. Analysts expect that to slow, partly due to the usual end-of-year industry slowdown, to a 30 percent increase for the current period.

Lesar, a 61-year-old accountant, was groomed by former Vice President Dick Cheney to take over as CEO of Halliburton, and the company’s shares have doubled since he was appointed in August 2000.

Shale Gas

To get there, Halliburton had to get through a period of rising competition from smaller companies that piled into shale when it was still all about gas. That led to a glut in equipment and drove down the prices Halliburton could charge. Lesar doesn’t see that repeating in shale oil fields, where wells draw from dense rock and dry out faster than conventional production.

Shale oil requires constant drilling to maintain production, and it’s harder than extracting gas. It requires a deeper understanding of geology, better targeting ability and improved technology that smaller rivals lack. The priority now is making oil drilling as efficient as possible.

“What drew people into the last upcycle was gas drilling,” Lesar said. “The science and the technology in oil fracking are way harder. That, by its definition, really limits the playing field to a much smaller group of companies.”

Russia-Ukraine Crisis Shields EU Gas From Oil Price Rout

The risk of disruptions to Russian natural gas flows through Ukraine this winter is protecting European prices from the rout that sent oil to a four-year low.

U.K. gas for next quarter fell 13 percent since mid-June, less than half the 28 percent plunge in Brent crude over that time. While Brent is typically the benchmark used to set the price on almost half the gas supply in Europe, the Russia-Ukraine conflict, along with supply-and-demand fundamentals in the market, is having a bigger impact on gas prices than the decline in oil.

First-quarter supply interruptions are still possible as Ukraine may struggle to pay Russia $3.1 billion by year-end under an agreement brokered by the European Union last week for gas already consumed, according to Societe Generale SA. The 28-nation EU, which gets 15 percent of its fuel from Russia through Ukraine, sought to avoid repeats of 2006 and 2009, when disputes between the former Soviet republics over gas debts and prices led to shortages across the region amid freezing weather.

“Right now, gas prices in Europe are really linked to the Russian-Ukrainian crisis, so I don’t think the impact from oil is as big as it could be,” Edouard Neviaski, chief executive officer of GDF Suez Trading, a unit of France’s biggest utility, said in an interview in London. “Gas prices have gone down a little bit, but nothing of the same magnitude.”

First-quarter gas in the U.K., Europe’s biggest market, dropped 1.1 percent yesterday to 55.33 pence a therm ($8.85 a million British thermal units) on the ICE Futures Europe Exchange in London, as Brent fell 2.4 percent to $82.73 a barrel. The European gas benchmark is at its lowest for the time of year since 2010 after the region’s mildest year in half a century left storage sites at record levels.

Brent Slump

Russia halted gas supplies to Ukraine on June 16, with OAO Gazprom saying Ukraine’s debt stands at $5.3 billion. The cut came after Russia annexed Ukraine’s Crimea peninsula in March and as a conflict between Kiev and pro-Russian rebels in the eastern part of the country killed more than 4,000 people. Brent crude started to slump in June as growth in U.S. production added to slowing demand in Europe and China.

The oil slump, caused by a global oversupply as the U.S. produces the most crude since at least 1983, has the most “downside potential” on summer gas, Neviaski said. The contract for the six months from April has lost 7.4 percent since June 19, when Brent reached its highest this year.

Gas Agreement

Russia will resume gas flows to Ukraine after it receives $1.45 billion, the first tranche of debt repayment, and cash for November supplies under the accord signed Oct. 30 in Brussels. Supplies would halt if state gas company NAK Naftogaz Ukrainy doesn’t pay by Jan. 1, Russian Energy Minister Alexander Novak said Oct. 31.

Ukraine has funds to pay for 4 billion cubic meters (141 billion cubic feet) of gas in November and December, said Energy Minister Yuri Prodan. The price will be about $378 a thousand cubic meters, according to the accord.

While the additional volume would help Ukraine, the nation would still face shortages in the event of a cold winter, according to Chris Main, a London-based analyst at Citigroup Inc. Ukraine average demand in the winter of 2012-13 was about 6 billion cubic meters a month, he said.

The EU didn’t give any guarantees to Russia on Ukrainian payments, Marlene Holzner, an energy spokeswoman for the European Commission, told reporters in Brussels Oct. 31. The eastern European nation can use funds under an existing EU and International Monetary Fund assistance package, possibly drawing 760 million euros ($952 million) from it ahead of schedule, she said.

Demand Slump

The security of gas transit to Europe in 2015 is “still open to question,” Thierry Bros, a Paris-based analyst at Societe Generale, said in an Oct. 31 report. The bank cut its first-quarter U.K. gas price forecast 12 percent to 61 pence a therm after the deal. The price fell 6.8 percent last month.

European gas demand is set to fall 9 percent this year, its fourth annual drop, according to Brussels-based lobby group Eurogas. Temperatures will be warmer than average this month in the mildest year since 1964 before plunging below normal this winter, according to forecaster MDA Weather Services.

“In Europe, it is much more about incremental demand, which has been incredibly mild to date, and what happens with Russia,” Christopher Bake, head of origination at Vitol Group, said in an interview Oct. 29. “The geopolitical impact on European gas could be more sustainable short term.”

Spot Indexation

Naftogaz says the price it pays Gazprom under its long-term oil-indexed contract is higher than on spot markets in Europe. With crude falling, long-term supplies may become cheaper than on spot hubs, Bros said in an Oct. 16 report.

Ukraine’s gas price from April onward as well as the size of its outstanding debt to Gazprom will be settled in a Stockholm arbitration court. Gas buyers from EON AG to GDF Suez SA have won price revisions from sellers including Gazprom through talks or arbitration after they posted losses selling gas into domestic markets. Oil’s drop probably won’t change the trend toward more spot indexation in contracts, Neviaski said.

“People want competitive long-term gas supplies and to be competitive in the long run, it means you need to be indexed on markets, so I don’t think the lower oil prices will change the trend we have been seeing for the past three to four years,” he said. “It can even help to accelerate the convergence.”

TransCanada Says Keystone XL Costs Increase to $8 Billion

TransCanada Corp. (TRP) said delays in receiving U.S. approval for its Keystone XL project have increased costs by 48 percent to $8 billion, raising the price customers will have to pay to ship oil on the proposed pipeline.

TransCanada has been waiting since 2008 for a U.S. decision on the line that would carry crude from Alberta’s oil sands across the border to Gulf Coast refineries. The Calgary-based company has spent about $2.4 billion on the project as of Sept. 30, it said in a statement today. It had previously estimated the 1,179-mile (1,897-kilometer) project would cost $5.4 billion.

TransCanada is seeking to boost its crude transportation business to bring expanding supplies from oil-sands projects to refiners and export terminals. Output from Western Canada is forecast to more than double to 4.8 million barrels a day by 2030 from 1.9 million last year, according to the Canadian Association of Petroleum Producers. In addition to Keystone XL, TransCanada has proposed the C$12 billion ($10.5 billion) Energy East line that would bring crude to Canada’s Atlantic Coast.

Even with the price increase, Keystone XL will still be the cheapest transportation option to move Canadian oil to the Gulf Coast, Paul Miller, TransCanada president of liquids pipelines, said on a conference call today. That includes using the proposed Energy East line and then loading it onto tankers for the trip south, he said.

Shippers will cover 75 percent of the added cost to build Keystone XL, Chief Executive Officer Russ Girling said on the call. If the price continues to climb above $8 billion, TransCanada will cover half of the additional charges. Girling estimated in September that Keystone XL’s costs may rise to as much as $10 billion.

Environmental Opposition

Environmental groups oppose Keystone XL and other outlets for oil-sands crude, saying the production process creates more carbon-dioxide emissions than regular oil and the pipelines pose the threat of spills. President Barack Obama initially rejected Keystone XL in 2012 over risks tied to its path in Nebraska.

TransCanada subsequently split up the project, building the southern portion first and refiled for approval for the northern leg, which would cross the border and thus requires U.S. approval, with an alternate route in Nebraska.

The U.S. State Department has delayed its ruling on the pipeline as a Nebraska court decides whether a state regulator should review the line’s path through the state. A ruling may come soon, Secretary of State John Kerry said last week.

Quarterly Results

To be less expensive than other pipeline alternatives, TransCanada would probably need to charge less than $9 a barrel, said Patrick Kenny, an analyst at National Bank Financial in Calgary. Before boosting costs, TransCanada had been planning to charge $7 to $8 a barrel to use the pipeline, Girling said in a May interview.

TransCanada outlined the higher costs for Keystone XL as it released third-quarter financial results today, reporting adjusted per-share profit that beat by 1 Canadian cent the average of 10 analysts’ estimates compiled by Bloomberg. Net income dropped to C$457 million, or 64 cents a share, from C$481 million, or 68 cents, a year earlier, in part because of lower Alberta electricity prices.

TransCanada gained 0.3 percent to C$55.20 at the close in Toronto. The shares have risen 14 percent this year.

Canada needs Keystone XL, Energy East and other projects to handle crude from the oil sands, Denis Durand, chief economist at Jarislowsky Fraser Ltd., said at a Bloomberg Focus Day event in Montreal today. “Oil is sticky but we are stuck with it.”

Oil Prices

By Isaac Arnsdorf |

Oil is so much more than a fuel. It’s a force even bigger than its $3.4 trillion market. It’s a weapon, a strategic asset, a curse. It’s a maker and spoiler of fortunes, a leading indicator and an echo chamber. All these roles have a part in setting its price. The result is a peculiar market that says as much about global economics and politics as it does about supply and demand.

The Situation

After four years when the highest average oil prices in history often seemed to defy economic gravity, petroleum fell in mid-2014. It had risen to $107.73 a barrel in June, even as Americans and Europeans drove fewer miles in more fuel-efficient cars, curbing consumption of gasoline, the biggest source of oil demand. Meanwhile, supply expanded as the sustained higher prices made techniques such as deepwater drilling and fracking pay off. Those fundamentals started to register in the summer, as Chinese imports sagged, Europe teetered on the brink of recession, and the stronger U.S. economy made barrels priced in dollars relatively more expensive. Instead of stanching the glut by pumping less oil, Middle East exporters engaged in a price war to defend their market share. New sources of supply such as Canadian oil sands and U.S. shale have loosened the OPEC cartel’s grip on the market. Saudi Arabia stands to gain as lower prices hurt political and economic rivals such as Russia and Iran, already facing strain from sanctions. Cheap oil also helps Saudi producers compete better against the U.S., where production costs more. In mid-October, the price dipped below $80 a barrel, testing the level at which U.S. drillers in North Dakota and Texas can still turn a profit. On Oct. 30, ConocoPhillips became the first major oil company to announce plans to reduce spending in some emerging U.S. oil fields as lower prices make them less profitable.

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The Background

Through the mid-20th century, a group of multinational oil giants known as the Seven Sisters (including the companies that became Exxon Mobil, Chevron and BP) dominated the market. Controlling the barrels from the wellhead to the gasoline tank, they traded mainly with each other on confidential terms; there was no open market. Countries with oil fields wrested more control with the formation in 1960 of the Organization of Petroleum Exporting Countries. The cartel’s Arab members used their power for political and economic ends, shocking the global economy with embargoes in 1973 and 1979. In the 1980s, OPEC infighting, the emergence of new suppliers and the development of futures exchanges gave rise to new market-based prices. Today the international benchmark is Brent crude from the North Sea, which has the advantage of political stability but lately is contending with declining output that makes trading sparse. The U.S. benchmark, West Texas Intermediate crude, started trading at less than the Brent price in 2010 as supplies of shale oil became plentiful. Last year, the European Union raided offices of Shell, BP and others to investigate possible manipulation of reference prices produced by the publisher Platts.

The Argument

As the world industrializes and consumes more energy, each new barrel of oil costs more than it used to, because the cheapest and easiest oil has already been pumped. This observation gave rise to a theory called “peak oil,” which holds that world production will eventually max out and decline as oil fields deplete. Skeptics of this notion point to the technological innovations that let U.S. producers extract oil and gas from previously impermeable shale, unlocking vast new resources, albeit at greater expense; the issue isn’t quantity but cost. The other variable, of course, is demand, and the stunning weakness this year raises long-term questions about oil’s future as consumers grow more efficient and switch to alternative fuels such as natural gas and renewable power. Oil supplied 31 percent of the world’s energy in 2012, down from 46 percent in 1973. There may come a day when oil gets cheap because it’s unwanted. That’s the argument often advanced by advocates of divestment. They warn of a financial crisis caused by a bursting “carbon bubble” of inflated energy-company valuations after fossil-fuel prices rise to account for the costs of contributing to global warming.

'Price war' hits WTI, Brent prices hard

NEW YORK, Nov. 4 (UPI) -- Crude oil prices for December delivery suffered major losses Tuesday on word Saudi Arabia was adjusting its oil prices further to shore up its market position.

West Texas Intermediate for December delivery fell well below the $80 threshold in Tuesday, shedding nearly $2 per barrel in the opening round to hit $76.87. Brent did no better, dropping more than $2 per barrel after the opening bell to trade at $82.55 for the December contract.

Long-term contracts traded Tuesday show WTI staying well below the $80 mark through 2016. Brent rallies toward the $90 mark.

The plummet comes as Saudi Arabia cut its price to the U.S. market, which may be a sign it's working to compete amongst major shale players in the United States. For Asian economies hungry for more energy, but slowing down, the lead producer in the Organization of Petroleum Exporting Countries hiked the price.

Most OPEC producers need less money per barrel to keep output steady than their American shale counterparts. The break-even point in shale is about twice as much as elsewhere.

That's led some in the industry to view the recent price fluctuations as a "price war" rather than a reflection of shifting supply dynamics in North American and demand in Asia.

Dave Lesar, the chief executive officer at oil services company Halilburton, told Bloomberg News oil prices should enter a period of correction by next year.

"Despite what people are thinking, demand is creeping up, albeit at a lower rate than it has been," he said.

U.S. energy debate could shift with power on Capitol Hill

WASHINGTON, Nov. 4 (UPI) -- Results for Tuesday's U.S. elections may favor a pro-energy platform, though advocates fear the results will move the debate away from prevailing climate winds.

"With zero precincts reporting, we can confidently project American energy is a landslide winner in the 2014 midterm elections," Jack Gerard, president and chief executive officer at the American Petroleum Institute, wrote in a Monday column for online political news magazine The Hill.

With key states changing from blue to purple during the second term of the Obama administration, Republicans are widely expected to emerge from the Tuesday elections with control over both the House and Senate.

Republicans, and a few Democrats, have pressed the White House to take advantage of oil and gas trends that advocates like Gerard see as positioning the United States as an "energy superpower."

The elections come on the heels of a U.N. report that blames fossil fuels for the steady increase in emissions of carbon dioxide, a potent greenhouse gas. Inside Climate News, a Pulitzer Prize-winning publication on clean energy debates, reports a Republican victory could "spell trouble" for a low-carbon agenda.

Races in nine states -- Alaska, Arkansas, Colorado, Georgia, Kansas, Iowa, Louisiana, New Hampshire and North Carolina -- will be key to determining which party holds the Senate

Turnout may sway the vote either way, with rain forecast for the Pacific Northwest, Midwest and states along the Mississippi River. Low turnout favors Democrats, though the final tally could hinge on potential runoffs in Louisiana and Georgia.

For Louisiana, it's a tight race for incumbent Sen. Mary Landrieu, a Democrat with strong ties to the oil industry. A Republican loss there may be a win, given her alignment with policies embraced by the API and others in the pro-oil camp.

Alaska also plays big in the energy debate, where big money is betting on what the industry sees as an "anti-fossil fuel" candidate, incumbent Sen. Mark Begich, a Democrat.

And then there's Keystone XL. The pro-energy platform in the Republican party centers on the controversial pipeline from Canada. Before the midterms, Secretary of State John Kerry told his Canadian counterparts a decision was expected sooner than later.

With the poles expected to move, so too should the energy narrative in the United States.

Sanctions bite for Russia, European Commission says

BRUSSELS, Nov. 4 (UPI) -- Sanctions on a Russian economy that depends largely on the export of natural resources are taking "a heavy toll," the European Commission said Tuesday.

The EC published its autumn outlook on regional economies. An October stress test on European banks found they'd be able to withstand financial crises, though European Commissioner for Investment Jyrki Katainen said in a statement the situation in Europe "is not improving fast enough.

Real growth in gross domestic product member states is expected to reach 1.3 percent for 2014 and increase to 1.5 percent by next year.

In its analysis for Russia, the EC said the economy there was entering a period of stagflation.

"Geopolitical tensions over the situation in Ukraine, including sanctions, have exacerbated existing structural bottlenecks linked to an exhausted growth model largely centered on the export of natural resources," the report said. "This is taking a heavy toll on the growth outlook."

The EC said there was a small recovery in the Russian investment climate in the latter half of 2013, though that evaporated in 2014. Uncertainties over Russia's reaction to geopolitical concerns over a Ukraine moving closer to Western powers are making would-be investors worried, the commission's report said.

"This is further aggravated by the effect of recent sanctions, which effectively prevent access to Western capital markets for some main Russian companies in the banking, defense and oil sectors," the report said.

In late October, the Russian currency traded at an all-time low against the dollar as sanctions on the energy sector took their toll.

British energy company BP said when it released its third quarter results last week the depreciation of the Russian currency in part had a "significant impact" on its financial performance.

From its operations related to Russian oil company Rosneft, BP said net income for the quarter was $110 million compared with $808 million during the same period last year.

Reserves offshore Congo greater than expected, SOCO says

LONDON, Nov. 4 (UPI) -- Results from a production test from a well off the coast of the Republic of Congo exceeded expectations by a wide margin, SOCO International said Tuesday.

SOCO, which has headquarters in London, serves as the operator of the so-called Marine XI block off the western Congolese coast. In a statement, the company said its exploration well in the area "significantly exceeded" its expectations by producing at a rate of 5,174 barrels of oil per day and 3.65 million cubic feet of gas per day during testing.

SOCO's announcement comes one week after Italian energy company Eni said it made a significant oil discovery at a basin off the western coast of Congo.

In the Minsala Marine shallow-water prospect, the company said it found about 1 billion barrels of oil equivalent, of which 80 percent exists as oil.

The prospects were enough to start preparations for commercial development of the well, Eni said.

Reserves off the West African coast are similar to those in Brazil in that they're located beneath a thick layer of submarine salt. Eni said it's already discovered about 4 billion barrels of oil in basins off the Congolese and Gabonese coasts since it started work there more than four years ago.

SOCO outlined no further plans other than to say it was analyzing well data to see if the latest results were continuous with other reserve basins in the area.

TransCanada moves closer to eastern Canadian market

CALGARY, Alberta, Nov. 4 (UPI) -- Pipeline planner TransCanada Corp. said Tuesday it was moving ahead with a transit system in the east of Canada expected to bring shale gas to the market

The company said it was moving ahead with plans for its Vaughan pipeline project, which it says is the next stage in the development of gas infrastructure in southern Ontario.

"Over the past year, TransCanada has announced plans to invest almost $2 billion in facility enhancements to allow growing supplies of Marcellus gas to reach Ontario and Quebec markets," Russ Girling, president and chief executive officer of TransCanada, said in a statement. "These enhancements help minimize the duplication of infrastructure, reduce delivery costs and improve the diversification of gas supply to markets in Eastern Canada."

TransCanada in recent weeks has focused its strategies heavily on the eastern Canadian markets. Last week, the company announced it submitted a formal application for its Energy East pipeline project for eastern Canadian oil refineries.

The Energy East oil pipeline involves the construction of a new 930-mile segment and converting 1,800 miles of gas line for oil service. Like the gas system, the company said Energy East would make eastern Canadian refineries more competitive.

The Natural Resources Defense Council said TransCanada can expect "considerable opposition and numerous hurdles" to Energy East.

Tar sands, the grade of crude oil designated for Energy East is controversial because it's carbon intensive to produce and can linger in the environment longer than conventional crude oil if spilled. Opponents of natural gas sourced from shale basins like Marcellus argue the drilling procedures and chemicals used in the process called fracking pose a significant threat to the environment.

With more than 60 years servicing the Canadian market, TransCanada said it's the leader in terms of responsible energy developments.

AAA: U.S. oil production keeps gas prices low

WASHINGTON, Nov. 4 (UPI) -- The substantial increase in U.S. oil production is expected to offset any concerns about instability in foreign producers and keep gas prices low, AAA said.

AAA reported a national average price for a gallon of gasoline Tuesday of $2.97, down 33 cents from one month ago. Nearly half of all U.S. states are recording average prices below the $3 mark, the first time that's happened in nearly four years.

The motor club said in a weekly price report the price at the time is a reflection of a North American oil market able to provide a buffer against violence in Iraq and Eastern Europe.

"Abundant global oil production, particularly the substantial increases to U.S. production, continues to outweigh any concerns of possible supply disruptions due to geopolitical instability," its Monday market report said.

The U.S. Energy Information Administration said most of the price of gasoline is driven by Brent crude oil prices, the global benchmark. For Tuesday, Brent shed more than $2 per barrel, which should translate to lower prices at the pump if the downward trend is extended.

In its monthly market report for October, EIA said the yearly average price for a gallon of gasoline should end 2014 at $3.45, about 6 cents less than last year. The yearly average price for 2015 is projected at $3.38.

Gasoline prices generally decline after September when the summer driving season ends and refineries switch to a winter blend of gasoline, which is less expensive to produce.

Marathon latest to take hit on low oil prices

HOUSTON, Nov. 4 (UPI) -- Marathon Oil said in its quarterly report double digit production growth from North American shale basins wasn't enough of a buffer against low oil prices.

In Oklahoma, Marathon reported third quarter shale production of 19,000 barrels of oil equivalent per day, an increase of 27 percent year-on-year. Its best well for the quarter was in the emerging South Central Oklahoma Oil Province, or SCOOP.

In the Eagle Ford play in Texas, considered among the most prolific shale basins in the United States, production was up 43 percent year-on-year to 117,000 barrels of oil equivalent per day.

For Bakken, the North Dakota shale basin at the heart of the North American oil boom, production was 47 percent higher than third quarter 2013 to 56,000 barrels of oil equivalent per day, with nearly 90 percent of that emerging as crude oil.

Total North American exploration and production during the third quarter realized $292 million in income, up from the $242 million during third quarter 2013.

Nevertheless, the 20 percent drop in oil prices on the global market wasn't enough to boost Marathon's earnings.

The company posted earnings for third quarter late Monday at $431 million, down from the $569 million year-on-year.

Marathon share prices shed 2 percent in Monday trading.

GDF Suez strengthens foundation in China

SHANGHAI, Nov. 4 (UPI) -- French energy company GDF Suez said it strengthened its position in China by signing a multi-tiered deal with its counterparts at Shenergy Group.

Chairmen of both companies signed development deals in Shanghai. The deal extends to liquefied natural gas, power generation and training.

"This agreement illustrates the commitment and strengthening involvement of GDF SUEZ in sustainable growth in China," GDF Suez Chairman Gerard Mestrallet said in a Monday statement.

Shenergy Group steers large energy infrastructure projects and is the largest supplier of gas and electricity in Shanghai.

GDF Suez has more than two dozen separate joint ventures established in 20 Chinese cities.

In general, Asian economies are growing faster than the rest of the world, which in turn is tilting the poles of energy demand away from a North America relying more on its oil and gas reserves to satisfy its needs.

China is one of the largest energy consumers in the world. The World Bank in October, however, said Chinese growth drops from 7.4 percent to 7.2 percent in 2015 as Beijing works to address financial vulnerabilities and build a more sustainable economic model.

Syncrude Canada's October output reaches 351,600 b/d, highest since 2007

Houston (Platts)--3Nov2014/515 pm EST/2215 GMT

Syncrude Canada's synthetic crude oil output was 351,600 b/d in October, the highest average production rate since August 2007 when it reached 374,650 b/d, the joint venture's largest shareholder, Canadian Oil Sands, said Monday.

October's output was 81,600 b/d higher than September's total and up 43,300 b/d year on year, it added.

The joint venture estimates full-year 2014 production of 274,000-280,500 b/d. Through the first nine months of 2014, Syncrude output was 257,200 b/d.

The JV's Mildred Lake oil sands facility near Fort McMurray, Alberta, has three cokers with a combined nameplate capacity of 350,000 b/d of synthetic crude output.

The partners in the Syncrude Canada venture are Canadian Oil Sands (36.74%), Imperial Oil (25%), Suncor (12%), Sinopec (9.03%), Nexen (7.23%), Murphy Oil (5%) and Mocal Energy (5%).

--Josh Brown, joshua.brown1@platts.com

--Edited by Jason Lindquist, jason.lindquist@platts.com

Brazil October LNG imports up 102% on month

Houston (Platts)--4Nov2014/446 pm EST/2146 GMT

Brazilian imports of liquefied natural gas surged 102% during October totaling 1,257,028 cubic meters, up from imports of just 622,700 cu m during the month prior, data from Platts unit Bentek Energy showed Tuesday.

The rebound in October LNG volumes comes following record high imports in August that totaled 1,621,604 cu m amid severe drought conditions that have recently strained the country's electric grid.

Since April, Brazil's hydroelectric reservoirs, which typically supply up to 80% of the country's power, have seen water levels steadily decline. In September, reservoir levels in the critical Southeast Midwest region, home to 70% of Brazil's hydroelectric generation capacity, averaged 25.3%, down from 38.8% in April.

As of Monday, reservoir levels in the region stood at just 18.3%, according to data from Brazil's National Electric System Operator.

Those are the lowest levels seen in 13 years, when reservoir capacity dipped below 21% amid an energy crisis that resulted in a series of rolling blackouts in 2001-2002.

LNG IMPORTS SUPPLY NORTHEAST

During October, Brazil sent more than 78% of the country's globally-sourced LNG to import terminals in the Northeast. The terminal Salvador, Bahia, alone received 705,628 cu m, or roughly 56% of the monthly volume for October, while the terminal in Pecem, Ceara, received 281,400 cu m.

Typically, Brazil sends nearly 65% of its LNG import volume to the Guanabara Bay import terminal in Rio de Janeiro, according to data from Bentek.

The recent shift in LNG import destinations might be explained by changing dynamics in the global energy markets, according to one US-based market source.

"Brazil buys [LNG] short term and is always looking at the economics," he said. "An alternative to gas for them is oil. Since Brent crude prices have dropped, it could be impacting their demand for alternatives to natural gas, like fuel oil and diesel."

Argentina gas consumption rose 3.3% in September on-year: government

Buenos Aires (Platts)--31Oct2014/417 pm EDT/2017 GMT

Natural gas consumption in Argentina rose 3.3% to an average of 133.1 million cubic meters/d in September compared with 128.9 million cu m/d in the year-earlier period, government statistics agency Indec said Friday.

September gas consumption was up 4.1% compared with August's 127.9 million cu m/d, the data showed.

Gas consumption grew by more than a third between 2003 and 2011 on strong economic growth and price controls, but has tapered since 2012 as the economy slows and this year fell into recession.

Even so, shortages continue at times of peak demand in the colder months of May to September as gas production continues to decline.

Gas output fell 20% to an average of 114 million cu m/d in the first half of 2014 from 143.1 million in 2004, according to the Argentine Oil and Gas Institute, an industry group.

This has led to a rise in imports of Bolivian gas and global supplies of liquefied natural gas.

Why is Saudi Arabia cutting oil prices for the U.S.?

Today's move by Saudi Arabia to cut the price of oil destined for the U.S. while raising it for customers in Europe and Asia is shaking up international energy markets.

The Saudis, OPEC's largest oil producer, are feeling the pinch brought on by America's historic shale oil boom, which has helped the U.S. push past Saudi Arabia as the world's largest oil producer. But Greg Priddy, director of global energy and natural resources at Eurasia Group, a political risk consulting firm, downplays the notion that the Saudis are starting a price war or acting to regain the Kingdom's previous level of exports to the U.S., which has fallen sharply in recent years.

"The market has maybe overblown the significance of it a little bit in this idea that it's a targeted move against U.S. shale production," he told CBS MoneyWatch.

Priddy notes that U.S. shale oil has significantly contributed to a decrease in Saudi oil exports to the U.S. Over the past two months alone, those exports have fallen to under 1 million barrels a day, compared to its recent daily average of 1.4 million barrels. That trend underscores "that we're heading into a very oversupplied market next year if we don't have either Saudi production restraint or volume losses elsewhere," he said.

The surprise U.S. price cut by Saudi Arabia will heighten scrutiny on the meeting in Vienna of the Organization of the Petroleum Exporting Countries later this month. For now, many analysts are downplaying the Kingdom's latest price adjustment.

"This is the last pricing schedule they are going to put out ahead of [the meeting]," Joseph Posillico, senior vice president of energy derivatives at Jefferies, told Reuters. "Some market participants are going to look at these numbers and try to gauge what they are going to do. I would not put too much weight on this as an indicator."

Priddy thinks Saudi Arabia will eventually trim production to avoid a deeper fall in prices in 2015. He also expects the sharp decline this year in U.S. gasoline prices to continue. The national average of a gallon of gas has fallen below $3, the first time that's happened in nearly four years.

Crude oil prices on Tuesday fell to their lowest level since 2011, with December futures declining $1.59 on the New York Stock Exchange.

Falling U.S. energy prices could boost the economy by encouraging consumers to spend on other goods and services. Consumer spending accounts for roughly two-thirds of economic activity. But cheaper oil also could dent oil company profits, potentially hurting communities around the country involved in shale oil production.

Exclusive: Canada's far east refinery swaps Iraqi crude for U.S. shale

By Jarrett Renshaw

NEW YORK (Reuters) - Canada's Come by Chance refinery, on the far eastern tip of the country, has swapped out its mainstay Iraqi crude to run almost wholly on U.S. shale oil, industry sources say, the latest sign of how the shale boom is redrawing global oil trade.

Some two months after South Korea's national energy firm agreed to sell the refinery to a newly formed New York-based commodities group, the 115,000-barrel-per-day (bpd) plant in Newfoundland has already begun making significant changes in its crude oil diet, according to two sources familiar with its operations, who spoke on condition of anonymity.

Today, the facility is running mainly on crude oil being shipped out of Texas, according to the sources as well as shipping data compiled by Thomson Reuters. That is a big switch from the first nine months of the year, when over 70 percent of its feedstock was coming from Iraq, data show.

The switch at Come by Chance - a town named for its remoteness on the island of Newfoundland - is the most dramatic sign yet of how a growing bounty of light, sweet U.S. shale oil is displacing other producers in refineries worldwide.

While rapidly rising North American production has already squeezed out imports across most of the U.S. Gulf and East coasts, and some of Canada, the Come by Chance refinery is the furthest-flung plant to make such a major switch, suggesting that cheaper domestic prices are compensating for higher freight costs.

The big shift in feedstock from generally sour Iraqi crude to light, sweet U.s. shale has not been entirely trouble-free, however. In the past few weeks, the facility has been running at anywhere between 90,000 and 105,000-bpd as it adjusts to the new slate, one of the sources said. Both of the sources said it was currently running at about 105,000 bpd, still below capacity.

Asked to confirm the switch from Iraqi crude oil to U.S. crudes at the Canadian refinery, a spokesman for the Korean National Oil Company, South Korea's state-run oil company, said the incoming owners are now making those decisions. He said the deal was expected to close in November.

The new owners, SilverRange Financial Partners, a little known merchant bank run by two former senior Wall Street oil traders, also declined to comment, citing the pending sale.

That deal is expected to close “imminently,” a source said.

TANKERS FROM TEXAS

As part of the sale, the new owners negotiated a new supply and offtake agreement with BP Plc, ousting Australia's Macquarie Bank Ltd, which had pioneered shipments of Texas shale oil all the way to Newfoundland several years ago.

But over the first nine months of this year, those shipments were intermittent. Imports of U.S. crude to Newfoundland and Labrador, whose only refinery is Come by Chance, came to around 20,000 bpd, or about 20 percent of the refinery's intake, according to Statistics Canada trade data. By contrast, imports from Iraq averaged 73,000 bpd.

Since October, however, that appears to have shifted substantially.

According to vessel flow data analyzed by Thomson Reuters’ Freight Research & Forecasts, only four oil tankers have discharged about 2.25 million barrels of crude at Come by Chance since late September -- all of them from Texas. That is an average rate of more than 100,000 bpd, five times the norm.

The last cargo from Iraq berthed in mid-August, the data show. From April through August, six tankers unloaded some 10 million barrels of Iraqi oil at the refinery -- more than one tanker a month.

GOODBYE IRAQI SOUR?

The growing reliance on U.S. grades follows the announcement in September that a New York-based SilverRange, run by Neal Shear, former top commodities banker at Morgan Stanely, and ex-Lehman Brothers executive Kaushik Amin, were buying the aging refinery from KNOC.

It is unclear what, if any, contractual arrangements still exist between the refinery's new operators and Iraq's State Organization for Marketing of Oil (SOMO). Iraqi oil has been a mainstay at the plant for years, including the long period it was run by Swiss oil trader Vitol.

Officials at Iraq’s SOMO said they do not comment on commercial issues.

The switch is particularly notable because Iraq has done better in the U.S. market than many other foreign suppliers, such as Nigeria and Algeria.

U.S. imports from Iraq are running at around 380,000 bpd this year, down from nearly 500,000 bpd four years ago, according to U.S. government data. Imports from Nigeria, however, have fallen from over 1 million bpd to near zero.

The growing flow of U.S. crude up the Atlantic Coast - bypassing a number of Pennsylvania and New Jersey refiners who are getting their U.S. shale supplies via costly rail shipments - may stoke even more debate over the so-called "Jones Act", a near century-old law that requires all vessels sailing between U.S. ports to use U.S.-build and -crewed ships.

U.S. refiners, such as PBF Energy are pressing Washington to ease the rules, which require them to use U.S. ships that can cost four times as much as shipping crude from Texas to Canada on a foreign-flagged tanker.

Exports of U.S. crude to Canada - which are largely exempted from a contentious ban on most foreign sales of domestic oil - have surged to record highs this year, reaching nearly 400,000 bpd this summer, up from around 70,000 bpd just two years ago. Exports dipped to about 280,000 bpd in September, according to Reuters calculations based on Census Bureau data on Tuesday.

(Reporting by Jarrett Renshaw, additional reporting by Ahmed Rasheed in Baghdad and Meeyoung Cho in Seoul; Editing by Jonathan Leff and Tomasz Janowski)

UPDATE 1-White House says oil price plunge good for U.S. consumers

(New throughout, adds details from briefing)

By Roberta Rampton

Nov 4 (Reuters) - Plunging oil prices have given U.S. consumers a break at the gasoline pump, a White House spokesman said on Tuesday, but he declined to say whether the government would take advantage of the price slide to top up the U.S. emergency oil supply.

Asked whether the oil price slide had implications for President Barack Obama's economic, energy or climate policies, White House spokesman Josh Earnest said the growth in U.S. energy production in recent years had helped the U.S. economy.

"There are many families across the country that feel like they benefit from the fall in prices at the pump that they see," Earnest said at a briefing. Falling gasoline prices can stimulate the broader economy, giving consumers more funds to spend on other things.

"As we move forward and we continue to look for opportunities to expand economic growth, to create jobs and expand economic opportunity for middle-class families, the American energy sector will continue to be an important part of that," he said.

Earnest said he was not aware of any discussion at the White House about replenishing the Strategic Petroleum Reserve (SPR), the country's emergency stockpile of crude oil which is about 5 percent shy of capacity. He said any announcement about that would come from the Department of Energy.

Crude oil prices fell more than 3 percent at one point on Tuesday to their lowest level since October 2011. A day earlier, Saudi Arabia cut export prices to the United States, a move analysts said was aimed at slowing booming U.S. crude production.

The SPR was designed to hold 727 million barrels of oil in huge salt caverns along the Gulf of Mexico, but currently has only about 690 million barrels in stock.

"The administration, in particular the experts in the administration, are closely and continuously monitoring the global oil supply and demand situation," Earnest said.

In September, an Energy Department official said officials were engaged in a broad, long-range review of the reserve in light of increased domestic production and declines in imports. (Reporting by Bill Trott and Roberta Rampton; Editing by Doina Chiacu, Ros Krasny and David Gregorio)

Saudi reliance on oil 'dangerous', says billionaire prince

AFP

https://s.yimg.com/ea/img/-/141105/09515bde3b72b6bf2b522943e2d8b470f555d620-1a5huqd.jpg

Jeddah (Saudi Arabia) (AFP) - The fall of crude oil prices below $80 a barrel proves Saudi Arabia's reliance on petroleum revenue is "dangerous", billionaire Prince Alwaleed bin Talal said on Tuesday.

"Clearly the fact that the price of oil went down to below 80 proved that we were correct by asking the government to have other sources of income", Alwaleed told reporters in the western Saudi city of Jeddah.

"Saudi Arabia depends 90 percent on oil, which is not right, it's wrong and it's dangerous, actually," added the prince, who is a nephew of King Abdullah.

The prince is one of the world's richest men, whose investments span a range of sectors including global media and hotel brands.

He is also a philanthropist known for his outspoken views in the conservative kingdom.

His comments came as the benchmark US crude price hit a three-year low of $75.84 on Tuesday before recovering slightly.

Brent North Sea crude dropped to $82.02 at one point -- its lowest level in four years.

Prices had already begun falling heavily on Monday "after it was reported that Saudi Arabia cut its selling price to the US possibly in a bid to compete with US shale oil", Singapore's United Overseas Bank said in a note to clients.

The kingdom is the biggest producer in the OPEC oil cartel, which is to hold a key production meeting on November 27 in Vienna.

International Monetary Fund chief Christine Lagarde has warned that oil-dependent Gulf states will face budget shortfalls if the decline in oil prices persists.

They have fallen sharply since the middle of June owing to a global supply glut.

Alwaleed said the price fall points to the need for Saudi Arabia to have "an active sovereign wealth fund and to put in it all the excess foreign exchange that you have, all the money you have, and have it earn somewhere between five to 10 percent."

This would be similar to the sovereign funds in Kuwait, Abu Dhabi and Norway, he said.

Saudi Arabia said in June it was preparing to launch its first sovereign wealth fund.

- World's 'tallest' tower -

The mustachioed Alwaleed made his comments during a visit to the site of Kingdom Tower, which will rise more than one kilometre (almost 3,300 feet) to be the world's tallest building.

Alwaleed's Kingdom Holding is a founder of the company developing the project, first announced three years ago and which will top Dubai's Burj Khalifa, currently the record-holding skyscraper.

Kingdom Tower is slated for completion in 2018, Alwaleed said.

Cranes tower over the four-storey foundations of the building, whose final height will only be declared later.

"It's very confidential," said Alwaleed, adding the building would include a hotel, apartments and offices.

He denied it would add to a glut of office space in the kingdom.

"This is a very mixed-use project," he said under a tent in the humid air, as hammering sounded within the metal, wood and concrete building skeleton behind him.

"We are in the process right now of pre-sale," he said.

"All underground work has been completed completely and right now we are on the verge of building a floor every four days. Clearly we expect demand to be tremendous."

The 170-storey tower is being developed at a cost of 4.6 billion riyals ($1.2 billion) as "a global icon of Saudi Arabia's progress, success and achievements," its developers said in a statement.

AFP

Brazil oil output hits record 2.36 million barrels per day in September

By Reuters | 4 Nov, 2014, 09.40PM IST

Natural gas production climbed nearly 14 per cent in September from the same month a year ago to 88.9 million cubic meters per day, ANP said.Natural gas production climbed nearly 14 per cent in September from the same month a year ago to 88.9 million cubic meters per day, ANP said.

SAO PAULO: Brazil's oil output reached a record 2.358 million barrels per day in September, up nearly 13 per cent from a year earlier, national oil regulator ANP said on Tuesday.

Natural gas production climbed nearly 14 per cent in September from the same month a year ago to 88.9 million cubic meters per day, ANP said. Rising production coincided with a 13 per cent drop in natural gas flaring.

The Roncador field located in the Campos Basin off the Rio de Janeiro coast continued to be Brazil's most productive field.

Campos Basin produced 75 percent of Brazil's oil, followed by Santos Basin off Sao Paulo's coast with nearly 16 per cent. State-run oil company Petrobras is Brazil's largest producer with 2.14 million bpd, followed by Royal Dutch Shell Plc, then Statoil ASA.

Saudi Arabia is not declaring a volume war (yet): Kemp

By John Kemp, Reuters

Saudi Aramco cut the price of December crude deliveries to US refiners on Monday in order to protect its competitiveness amid an erosion of its US market share by rival exporters such as Canada and Iraq.

In August, US crude imports from Saudi Arabia slipped below 900,000 barrels per day, according to the US Energy Information Administration.

With the exception of a brief period in 2009 and early 2010, Saudi exports to the United States fell to the lowest level since 1988.

US imports from Saudi Arabia in August were just 70 percent of the average level for the past ten years which has been around 1.3 million barrels per day.

Saudi oil, which is priced at a differential to a US sour crude marker, had become too expensive compared with alternatives available to US refiners.

So Saudi Aramco has been forced to cut the differentials for US refiners by between 45 and 50 cents (depending on grade) per barrel even as it raised differentials for refiners in Europe and Asia.

Some commentators have interpreted the US price cuts as a signal the kingdom is initiating a deliberate price-war targeting US shale producers. The reality is more complex.

Most Saudi exports to the United States are much heavier and certainly sourer than the light sweet oils being produced from shale formations like North Dakota's Bakken and Texas' Eagle Ford.

Aramco has therefore been spared head-to-head competition from rising US shale output, which has mostly fallen on US imports from West Africa.

However, the company's market share over the summer was hit by competition from Iraq, Venezuela, Brazil andCanada, so Aramco has cut its prices in the region to stabilize sales and buy back some of its lost share.

Saudi Aramco prices its crude sales against different benchmarks in the United States, Europe and Asia and applies a different set of differentials in each region to reach a final selling price.

Past experience suggests differentials are primarily used to offset variations between the regional benchmarks to ensure Aramco's crude sells at broadly the same price in each region.

Final selling prices vary much less between the regions than the differentials themselves.

For example, the differentials for Arab Medium grade delivered in December range by more than $4 per barrel from a discount of $5.00 in Europe and $1.60 in Asia to a discount of just 65 cents in the United States.

But the outright prices (benchmark plus or minus the differential) currently range just over $2 between the most expensive region (Asia) and the cheapest (the United States).

For Arab Light, the differentials vary by $4.95 per barrel, but outright sales prices currently vary by just $1.78.

Traders and refiners need liquid benchmarks to hedge their exposure to fluctuations in crude. But none of the benchmarks closely resembles the grades of oil marketed by Saudi Aramco, which is why the company has to apply large and variable monthly adjustments to its selling prices via the differentials.

Saudi Aramco's marketers attempt to ensure (1) refiners buy all the cargoes which the company has on offer and (2) sales prices in the three regions are broadly equalised.

The first point is obvious. Saudi oil has to be priced competitively with other similar grades or refiners will buy something else instead.

The second is more subtle. Saudi exports are protected against inter-regional arbitrage by destination clauses: oil sold to a refiner in the United States cannot be diverted and resold to a refiner in Asia.

But other crudes can be arbitraged between the regions and so can the final products produced from refined oil.

Refiners are all, to some extent, competing against one another in both the market for buying crude and in the sale of refined products.

Aramco must price its crude to ensure its customers are not put at a competitive disadvantage in either market.

While most Saudi oil is sold on long term contracts (with market-linked pricing) Aramco would rapidly lose customers if its oil proved to be expensive compared with other grades.

The potential for arbitrage in both crude and product markets ensures that inter-regional differences in final selling prices are ordinarily no more than $2-3 per barrel.

Changes in official selling prices are often interpreted as evidence of a "grand strategy" for market management by senior policymakers in Riyadh and Dhahran.

For the most part, however, Saudi Aramco's pricing strategy is reactive rather than proactive. The company adjusts differentials in response to current and forecast market conditions to maintain the competitiveness of its oil sales.

At the margin, Saudi Aramco can adjust differentials to push slightly more oil into the market or hold sales back, as well as to alter the balance of sales between regions.

But most of the changes in differentials are driven by the need to react to external events (such as refining demand and the availability of competing crudes) rather than Saudi strategy.

The distribution of Saudi sales to the three regions displays a high degree of stability over time (in contrast to the differentials themselves).

In the case of the United States, Aramco's crude was too expensive in June, July and August, and export volumes slumped by almost 700,000 barrels per day.

Like any other marketer, to reverse some of those losses, Aramco has cut its differentials to make its oil more attractive.

The price cuts will intensify the competitive pressure on U.S. shale producers, but that is an indirect consequence of the policy, not its primary objective, which is to maintain market share.

In any event, the Americas accounted for less than 20 percent of Saudi exports in 2013, according to the U.S. Energy Information Administration.

In the much larger Asian market, which accounted for almost 70 percent of sales in 2013, where Aramco's oil has been competitive, the company has actually boosted differentials for December sales by around $1 per barrel.

Changes in differentials in the US market are not a sign that Saudi Aramco is declaring a volume war on US shale producers or other oil exporters (any more than differential increases in Asia signal the opposite).

But that might be the unintended consequence if everyone tries to defend their market share. Sooner or later someone somewhere has to cut: whether it is the Saudis and OPEC, non-OPEC suppliers like Canada, US shale producers, or all of them.

John Kemp is a Reuters market analyst

Oil majors: Is the four-year low priced in?

Jenny Cosgrave

Brent crude oil fell to its lowest in over four years on Tuesday as Saudi Arabia cut its selling price to U.S. buyers in an apparent attempt to hang onto to its share of the world's largest market.

Brent crude futures fell below $82.50, levels not seen since October 2010 following a 25 percent price fall since June this year and oil majors have not been immune to the slide.

European energy giants BP and Total are both down over 10 percent in the last six months, Royal Dutch Shell has fallen over 8 percent and U.S. groups Exxon Mobil and Chevron are both down around 6 percent lower over the same period.

But the precipitous descent of the oil price in recent weeks has not pushed energy shares to new lows, as much of the damage of Brent's decline "has already been done" according to asset managers.

"Despite the sharp tumble in the price of oil, we believe there are a number of companies not only hedged against the recent fall in the oil price, but also in a position to benefit from M&A or strengthening credit ratings," fund managers at Kames Capital Phil Milburn and Claire McGuckin said.

"We are overweight midstream companies, which tend to be more fee-based than commodity-exposed businesses, and underweight the independent energy companies," he said.

The duo said they are avoiding businesses using debt to ramp up production levels given their exposure to the oil price.

Oil cartel the Organization of the Petroleum Exporting Countries said on Tuesday that it is concerned about crude oil prices that, but is not panicking.

The United Arab Emirates energy minister declined to say if OPEC would cut output when it meets at the end of this month's much awaited meeting in Vienna.

Falling oil prices, coupled with a strengthening dollar have been putting downward pressure on inflation expectations, which has helped U.S. Treasurys trade at lower and lower yields according to the Bank of America Merrill Lynch.

This in turn feeds into higher implied volatilities in equities, the bank said.

Analysts have questioned whether the weakness in oil price could cap gains in stock markets. But chief market technician at Sterne Agee Carter Worth said the four-year low was more of a macroeconomic concern rather than a stock specific one.

"It is an issue for the S&P in that it speaks to the macro subject at hand which is – is there a disinflationary environment that continues and what does that mean for the ability for equities to advance at the incredible rate that they have been doing," he said adding that markets appear to have "priced in" the oil price into share price of oil majors.

"The energy shares market has not really made incremental new lows, even as energy has made new lows, meaning the damage has already been done over the last two to three months," he added.

Jenny CosgraveWriter / Assistant Producer, CNBC.com

Venezuela, with world's largest reserves, imports oil

For the first time in its 100-year history of oil production, Venezuela is importing crude — a new embarrassment for the country with the world's largest oil reserves.

The nation's late president Hugo Chávez often boasted the South American country regained control of its oil industry after he seized joint ventures controlled by such companies as ExxonMobil and Conoco. But 19 months after Chávez's death, the country can't pump enough commercially viable oil out of the ground to meet domestic needs — a result of the former leader's policies.

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The dilemma — which comes as prices at U.S. pumps fall below $3 per gallon — is the latest facing the government, which has been forced to explain away shortages of basic goods such as toilet paper, food and medicine in the past year.

"The government has destroyed the rest of the economy, so why not the oil industry as well?" says Orlando Rivero, 50, a salesman in Caracas. "How much longer do we have to hear that the government's economic policies are a success when all we see is one industry after another being affected?"

While Venezuela has more than 256 billion barrels of extra-heavy crude, the downside is that grade contains a lot of minerals and sulfur, along with the viscosity of molasses. To make it transportable and ready for traditional refining, the extra-heavy crude needs to have the minerals taken out in so-called upgraders, or have it diluted with lighter blends of oil.

The latter tactic is what state oil company Petroleos de Venezuela SA (PDVSA) is using since it doesn't have the money to build upgraders, which perform a preliminary refining process, and its partners have been unwilling to pony up cash because of the risk of doing business in the country.

For the first time in its 100-year history of oil production, Venezuela is importing crude — a new embarrassment for the country with the world's largest oil reserves.

The country does have billions of barrels of medium and light crude sitting in the ground, but production of that has fallen because of a lack of investment and planning.

"PDVSA used to be an oil company before Chávez took office," says Jose Toro Hardy, a former director of PDVSA and a member of the country's opposition. "With Chávez it became an arm of the revolution, and used to keep Chávez and his supporters in power. Having to import oil is a tremendous failure for PDVSA, for Venezuela."

Used as the government's cash cow, PDVSA was forced to fund many of the country's graft-ridden social programs as well as cover the political campaign expenses for Chávez's successor, Nicolas Maduro. That meant the company had to cut back investments in its key oil and natural gas businesses.

Last year, with its total revenue of $116 billion, the company paid more than $33 billion to support the government's social programs as well as an investment fund — that's $10 billion more than it invested in its operations. Many suspect PDVSA's real contributions are much higher because of off-the-books dealings, Toro Hardy says.

Government officials have tried to downplay the significance of Venezuela's decision to import crude from Algeria and Russia. The company in a statement warned Venezuelans not to believe criticism by the opposition, repeating a constant government theme that setbacks are the result of an "economic war" being waged against the country, a campaign it says is aimed at toppling the regime.

Meanwhile, PDVSA heavily subsidizes oil, costing the company billions each year for gas that costs consumers just cents per gallon. At the same time, the drop in the price of oil worldwide is also beginning to affect the nation, as each $1 drop in oil price costs the country more than $700 million in lost revenue.

Maduro, whose popularity has plummeted to a less than 40% approval rating in the face of soaring inflation and widespread shortages, hasn't commented publicly on the imports. Calls to PDVSA seeking comment weren't returned.

Toro Hardy and others have repeatedly charged that 15 years of Chavismo gutted PDVSA, Venezuela's golden goose. Oil accounts for 95% of the country's exports, and oil taxes make up more than 40% of government revenue.

Current oil production at an estimated 2.7 million barrels per day is 13% lower than when Chávez took office in 1999. The country's refineries have suffered repeated accidents and shutdowns, including a fire and explosion at the Amuay plant that killed 42 people two years ago. Sporadic shortages of gasoline, motor oil and lubricants are common.

Venezuela has cratered oil exports to the U.S. as well, dropping from 1.5 million barrels a day to less than 800,000 barrels a day as a result of a deal where Venezuela borrowed money from China that was repayable only in oil.

Still, in a country where the appearance of milk, hand soap or shampoo creates long lines of shoppers, many Venezuelans have other things on their mind than PDVSA.

"When there's no gasoline, I'll be worried," Rivero says. "Right now, I have find to sugar."

Global oil markets and oil prices

The Institute for Energy Research (IER) has highlighted that there have been many ups and downs in the oil market over the last decade that have caused oil prices to either escalate or drop. Of particular note is the oil price drop in 2008 from a price of US$ 146/bbl in just 6 months, a price decline of over 75%. The current price decline, which has caught forecasters by surprise, is much less – closer to 25% - but has ramifications throughout the oil producing and consuming world.

Reasons for the decline

According to the IER, over the past three years high oil price have generated interest in oil production in areas previously thought too expensive to explore such as the Arctic and East Africa. With that, technological breakthroughs in oil and gas extraction and infrastructure have made the development of unconventional oil resources possible in areas that were though too high cost, or too high risk, or too far away from established markets.

More specifically, global oil production has been on the rise, particularly in North America. Due to the shale oil renaissance in the US from hydraulic fracturing and directional drilling technology, oil production has increased by 71% from average 2008 volumes to the latest production data collected by the EIA for July 2014. Likewise in Canada, oil production driven largely by oilsands, has increased by 26% from average 2008 production volumes to the latest production data reported by EIA for June 2014. Further, Russia has been setting records for oil production, producing 10.5 million bpd on average for 2013, 7.5% higher than its average production for 2008. Further, Libya, Nigeria, and Iraq have unexpectedly resumed their oil production.

In Libya, fighting and protests have curtailed production. The country is now working to sustain its production, which is averaging 900 000 bpd of oil for October – 15% higher than September. In Nigeria, oil production is often disrupted by unrest in the Niger River Delta, the country’s main oil producing region. In August, however, Nigerian oil production reached 2.3 million bpd – the most since January 2006. Its production gain in August of 380 000 bpd was the biggest one month gain since 1989. Iraq’s oil production hit its highest level in 35 years in February at 3.6 million bpd, but has since fluctuated because of logistical constraints and political turmoil. In July, its oil production dropped to 3.1 million bpd, but even this level is above what it had been producing for decades, according to EIA data.

IER highlights that added to the increasing oil supply is shrinking demand. Last month, the International Energy Agency (IEA) cut its global oil demand growth for 2014 and 2015 by 0.9 million bpd and 1.2 million bpd, respectively, because of a slowdown in demand growth in the second quarter of 2014 and a weaker outlook for Europe and China. Oil demand has stagnated or risen less than expected across Europe, Japan, China and much of the emerging world. A number of factors (e.g. slow economic growth, increased energy efficiency) have influenced oil demand in these countries.

According to the EIA, Europe’s oil demand has been declining since 2006. Europe’s oil consumption levels are at their lowest since the early 1990s. Between 2008 and 2013, oil consumption in Europe dropped by 11% due to a bleak economic outlook, increasing energy efficiency and a switch to alternative forms of energy. Further, the International Monetary Fund just downgraded Europe’s growth to less than 1%.

In Japan, the combination of a declining, ageing population and improved efficiency have cut Japan’s oil consumption by 15% between 2005 and 2013, IER explains. Imports of crude are falling, with OPEC taking much of the supply reduction. By March 2014, Japan’s total refining capacity had dropped to its lowest level since 1970 – just below 4 million bpd, a decline of approximately 1 million bpd (20%) from 2010. Further, Japan has decided to restart some of its nuclear reactors, which is expected to reduce demand for fuel oil in the power sector even more in the future.

China’s GDP growth in the third quarter of this year dropped 7.3%, its weakest rate in five years. China’s growth in oil demand has also been declining, increasing only 1.8% in the first nine months of this year, down from demand growth of 6.7% in 2011, 3.4% in 2012, and 2.5% in 2013. Despite China’s economy and oil demand growth being down, the country is taking advantage of the oil price drop by building its commercial inventories and filling its strategic petroleum reserve with less expensive oil imports.

Stopping the oil price slide

According to the IER, Saudi Arabia tried and failed to stop the price slide in August by cutting its oil production by 400 000 bpd. Having been unsuccessful, it has now decided to maintain its market share, accepting a near term loss in revenue over the next two years due to a world oil price below the breakeven price needed for balancing the national budget. By accepting the lower oil price and seeking to maintain market share, IER holds that the Saudis hope to slow or halt unconventional oil production in the US and Canada, to hurt its adversaries (Iran and Iraq) and to hinder Russia’s ability to fund the Assad regime in Syria.

Saudi Arabia is not likely to contain US shale oil production by letting oil prices drop to US$ 80/bbl for a year or two. Industry experts believe that oil prices would need to fall at least another US$ 20/bbl to affect the oil boom in the US. For instance, oil drilling in Texas’ Eagle Ford Shale would remain economic to drill at an oil price of US$ 53 – US$ 65/bbl and in North Dakota’s Bakken Shale at an oil price of US$ 60 – US$ 75. Some North Dakota producers indicated that their cheaper wells are profitable to produce at US$ 25/bbl and their higher cost wells are profitable at US$ 45/bbl because some of their losses would be protected under the federal tax code. At these lower oil prices, these companies may not drill new wells, but they can survive producing from their existing wells.

Adapted from a report by Emma McAleavey.

Published on 04/11/2014

"We are concerned, but not panicking," UAE minister says as oil prices tumble

By Reuters

The United Arab Emirates is concerned about crude oil prices that have lost more than a quarter of their value since June, but is not panicking, the UAE energy minister said on Tuesday.

Brent crude fell towards $84 a barrel on Tuesday, after top oil exporter Saudi Arabia cut prices to the United States.

The cut had hammered oil prices on Monday as it underscores Saudi efforts to fight for market share in the world's largest oil consumer while raising prices to Asia and Europe.

The absence of signs that the Organization of the Petroleum Exporting Countries (OPEC) could curb output also continued to weigh on sentiment as abundant supplies of high-quality oil such as US shale have overwhelmed demand in many markets, filling stocks worldwide.

"Yes we are concerned but we are not panicking," Suhail bin Mohammed al-Mazroui told Reuters when asked if he was worried about the recent decline in global oil prices.

He declined to say if OPEC would cut output when it meets on Nov. 27 in Vienna. The gathering is shaping up to be one of OPEC's most important in years.

"As I said before let's wait, we are having a meeting at the end of the month," the minister said on the sidelines of an industry event in Abu Dhabi.

"We as a group of producers are not the only ones producing, there are others... Our role is to balance the market with supply, this is what we will always do."

While some OPEC members have voiced concern over the drop in prices, indications are that OPEC is unlikely to cut its output target.

OPEC's secretary general said last week that OPEC's oil production is unlikely to change much in 2015.

OPEC members Iran and Kuwait have said a cut in output at the next meeting was unlikely. Saudi Arabia has yet to comment publicly.

Saudi Arabia adds to oil power with new refineries

* Saudi becoming refining powerhouse with new plants

* With excess volumes, Riyadh seeks foothold in global market

* Saudi refining production set to outpace crude output- analysts

By Rania El Gamal and Reem Shamseddine

DUBAI/KHOBAR, Saudi Arabia, Nov 4 (Reuters) - Saudi Arabia's tighter grip on the oil market from the desert derrick to the petrol pump, thanks to two new refineries, is redefining its role as a crude exporter and OPEC kingpin.

The two state-of-the-art plants will give it 800,000 barrels per day in refining capacity online in 2015, part of an ambitious downstream drive which will see its refining capacity rise to 8 million bpd in a decade.

While a lot of that will target its rapidly growing economy with the majority likely to be consumed domestically after 15-20 years, for now Riyadh is to become a major exporter of refined oil products such as gasoline, diesel and jet fuel.

"There is clearly a rebalancing in the kingdom as it is becoming a bigger player in the downstream. While Saudi may lose on crude exports, it will be gaining as product exports rise in the coming years," said Yasser Elguindi of Medley Advisors.

"So you are giving with the right hand even if you are taking away with left."

Crude exports from the OPEC heavyweight have been sliding in recent months to their lowest levels in almost three years.

State run Saudi Aramco and its subsidiaries own, or have equity interest in, domestic and international refineries with a total worldwide refining capacity of 4.9 million bpd, of which its equity share is 2.6 million bpd, making it the world's sixth-largest refiner.

In the kingdom a 400,000-bpd refinery, known as SATORP, in Jubail, reached full capacity in mid 2014 and another 400,000 bpd plant, the Yasref refinery in Yanbu, started trial runs in September with the first gasoil export cargo seen in December.

Aramco's CEO Khaled al-Falih said in May the company's downstream investments would exceed $100 billion over the next decade as high growth markets of the Far East and the Middle East "will make us one of the largest downstream players on the planet by volume."

The company has set up offices in Europe and Singapore to sell more oil products, industry trading sources say.

It has been exporting hundreds of thousands of tonnes of product monthly to Europe and Asia and snapped up spot deals through its trading arm to supply jet fuel to the United Arab Emirates, and gasoline to Kuwait and Bahrain this year, the sources said.

"One thing I think is very sure you are going to see in the next 3-5 years is going to be a shift in Saudi exports away from crude and towards products," Bob McNally, a White House adviser to former President George W. Bush and now president of the Rapidan Group energy consultancy, said after a recent trip to Saudi Arabia.

OPEC ROLE

Aramco Trading was set up in 2012 to trade and sell products directly to refiners. Other national oil companies, including China's Sinopec and CNPC, have significantly increased their trading arms too.

Traders are keeping an eye on Aramco as it starts direct sales of gasoil cargoes in Europe, reducing the role of middle men traders. Privately traders say if more companies followed Aramco's model it could squeeze them out of their niche markets.

"They are very active. They have a lot of volumes of gasoil, they are going to target end users, European customers and they will be moving cargoes that way. We have also seen them moving jet fuel this year," said one Gulf-based trader.

Saudi exported 6.663 million barrels of crude per day in August, down from 6.989 million bpd in July, according to the latest official data reported by the Joint Organisations Data Initiative (JODI). The August crude export figures were the lowest since March 2011.

At the same time, products exports in August were at record high at 1.023 million bpd, the highest since at least 2002, the start of JODI's records. That was up from 707,000 bpd a month earlier and compared to 621,000 bpd in August 2013.

That would take total oil exports from Saudi in August to 7.686 million bpd, close to its crude export levels last year.

The forecast shift to products exports could weaken its hand in the Organization for the Petroleum Exporting Countries (OPEC), some analysts say.

"By 2018-19 Saudi Arabia will be producing two thirds product and one third crude. That will have great implication for OPEC," Fereidun Fesharaki, chairman of energy consultant FGE, said on the sidelines of the Oil and Money conference in London.

"You can't be the king of crude if you're not the number one exporter." (Additional reporting by Jessica Jaganathan in Singapore and Ron Bousso in London, editing by William Hardy)

Islamic State Looks To Mediterranean To Continue Oil Operations

By Claude Salhani | Tue, 04 November 2014 23:49 | 0

There is serious concern that the battle for control of Syria by the group calling itself the Islamic State may soon shift from the mountainous region where the fight for the border town of Kobani continues, as fresh troops from Iraqi Kurdistan known as Peshmergas, arrived via Turkey to assist their fellow Kurds in what is turning out to be one of the most vital battles of this war.

The battle of Kobani, while still unresolved, has nevertheless had a desired effect of sorts: to keep units of the IS tied down in a battle of attrition. Which is perhaps why the group, who thus far have been tactically mobile on the battlefield, may decide to go for the next step: control of an outlet to the Mediterranean Sea.

Access to the sea is absolutely crucial to the group’s survival as an oil and gas producing state. The terrorist group would need to have control of a port from where they could deliver oil and natural gas to tankers and then on to international markets.

Troops loyal to Syrian president Bashar Assad are expecting the worst, believing that such an attack is imminent and Syrian special forces have deployed across a pinnacle of hills just northeast of Latakia, the country’s principal port. The front line near Latakia is already considered one of Syria's most dangerous frontlines.

In recent weeks there have been repeated missile attacks from Islamist forces around Latakia. Access to, and control of the port is of primary importance for two reasons: First, it would grant the Islamic State its greatest territorial victory to date. From a public relations perspective this would prove to potential recruits and financial supporters of theIS who remain hesitant to get off the fence that the group has the strategic wherewithal to continue operations for some time to come.

Second, the loss of Latakia for the Assad regime could be a death blow to the president and forces loyal to him given that the Latakia region is the home of the president and that tens of thousands of Syrians from all over the country have flocked there when their homes turned into frontlines. Forcing Assad out of power in itself is not a negative outcome, however, having the IS win such a prize would be disastrous for the region and beyond.

Additionally, an assault on the Latakia region would be catastrophic on the humanitarian level, as it would send a tsunami of refugees scurrying for a new safe haven. With a secure access to the sea, the Islamic State would find itself in an even stronger financial position.

Meanwhile, it is worth noting that IS represents a real and present danger to the security of civilization: both Eastern and Western civilization. Dialogue is next to impossible with an organization capable of such cruelty and barbarous savagery. They have enslaved women and girls taken from villages and towns they have conquered, selling them for $10 in the town marketplace.

While every civilized society tries to protect and safeguard their children, the IS, in yet another video, shows young boys receiving military training on how to carry out urban warfare.

Several years ago while being interviewed on a Washington, DC news radio station I was asked by the news anchor if I thought there would one day be peace in the Middle East and what would it take to reach that point, and that I had 30 seconds for my answer before he had to take a commercial break.

I replied that yes, I did think there would be peace in the Middle East but only when the antagonists develop greater love for their children than hate for their enemies.

With that in mind, it would appear that peace in the Middle East is still a long way off. As it currently stands there is far too much hatred among the current antagonists to contemplate any serious peace efforts.

By Claude Salhani of Oilprice.com

Analysts expect oil slide to stop in the next few months

PETALING JAYA: Winter, already on its way in the northern hemisphere, may just be what crude oil prices need to stave off further price drops.

Analysts believe a rise in demand during the winter months could put a floor to crude oil prices despite US benchmark West Texas Intermediate (WTI) and Brent continuing to be bearish.

WTI fell US$1.76 (RM5.88) to close at US$78.78 a barrel, while Brent slid 39 US cents to US$84.39 on Monday after Saudi Arabia decided to sell crude oil to the United States at a lower premium.

IHS Energy Insight vice-president Victor Shum told StarBiz that should demand pick up noticeably during the winter months, and with a few supply disruptions, Brent could trade in the US$90 to US$95 range.

“If demand increases, it will help reduce the supply overhang in the market and help put a floor to prices,” he noted.

However, Shum said until that happened, prices were likely to be pressured downwards because the Organisation of the Petroleum Exporting Countries (Opec) producers, and especially Saudi Arabia, had not indicated any production cuts.

According to Bloomberg data, Monday’s close saw WTI at the lowest since June 28, 2012. Since the beginning of the year to Nov 3, Brent had plummeted 20.27% to US$84.78.

A week ago, Goldman Sachs Inc analysts slashed their 2015 crude oil forecast to US$75 for WTI and US$85 for Brent in the first quarter of next year.

The International Monetary Fund has also revised downwards 2014’s global economic growth forecast to 3.3% from 3.4% and next year to 3.8% from 4%.

Shum said prices would have to be lower for longer before affecting oil producers.

“The Saudis are willing to sell crude at a lower price in order to maintain their market share,” he said.

Opec pumps about 40% of world crude oil output and according to reports, its members have been engaged in a price war to maintain market share in the backdrop of weakening demand and a rise in US production.

Oversea-Chinese Banking Corp Ltd economist Barnabas Gan said in an email reply that the market should track the production and price trends of Opec producers such as Saudi Arabia from now until the Nov 27 Opec meeting.

“Any price cut by Saudi Arabia, like the recent cut of all oil grades to US customers, should continue to drag prices if further discounts are seen in the future,” he said.

Furthermore, Gan said the value of the US dollar would also be a determining factor for oil prices. “In this, the increasingly expensive US dollar, given the depreciating yen and euro, had also added to downside pressure for oil prices,” he said.

Meanwhile, Phillip Futures Sdn Bhd product specialist David Ng said the main concern was the supply overhang due to the unexpected ramp up of production in the Middle East and US shale oil coming onstream.

He said there could be some seasonal demand coming in from the winter months, but sees this to be more positive for gas rather than oil. “Fundamentally, we don’t see any sharp increase in demand, especially with the softer demand in Europe and the China slowdown. We’re hoping to see a reduction in production when Opec meets on Nov 27 but this is highly unlikely,” Ng added.

Phillip Futures sees WTI at US$75 to US$80 and Brent at US$80 to US$85.

Meanwhile, at Bursa Malaysia, falling oil prices affected sentiment on oil and gas stocks. SapuraKencana Petroleum Bhd, the biggest name in the sector, saw heavy volume as it shaved 12 sen to close at RM3.27.

UMW Oil & Gas Corp Bhd slid two sen to RM3.25, Dayang Enterprise Holdings Bhd was down 9 sen to RM2.85 and Petra Energy Bhd lost 10 sen to RM2.65.

Among Petroliam Nasional Bhd (Petronas)-related stocks, Petronas Gas Bhd declined 14 sen to RM21.80 and Petronas Dagangan Bhd dropped two sen to RM20.50.

It's Still Too Early For Tanking Oil Prices To Curb U.S. Drilling

Ray Gerrish repairs a drilling rig near Watford City, N.D. Oil industry analysts predict that oil prices will have to remain low for at least several months before having a significant effect on U.S. production.

Jim Gehrz/MCT/Landov

Oil prices fell again Tuesday, to just below $76 a barrel before recovering slightly — one day after Saudi Arabia cut prices for the crude it sells in the U.S. market.

During most of the last quarter-century, that would have been viewed as a very positive development for the U.S. economy. But oil production here has increased so quickly in the past several years, the continuing price drops pose a potential threat to U.S. oil producers.

Jason Bordoff, director of the Center on Global Energy Policy at Columbia University, says it's kind of amazing there's now a national conversation about whether a drop in oil prices might be harmful.

"That is not a conversation we would have been having five or 10 years ago, and it just demonstrates how dramatically the U.S. oil production outlook has changed," he says.

The rapid growth in oil production has made the U.S. the world's largest oil producer, largely due to the shale oil boom in North Dakota and Texas. The dramatic increase in drilling activity there has boosted U.S. job growth and the overall economy significantly.

The 25 percent drop in oil prices since June has spawned conspiracy theories that Saudi Arabia and OPEC are driving prices down to force U.S. shale producers to stop drilling. Last week, the OPEC secretary-general said that, with oil at around $80 a barrel, half of all U.S. shale projects would become uneconomic.

Saudi Arabia's oil minister, Ali Al-Naimi, shown in Kuwait last month, has played down the drop in oil prices. The country continues to pump oil at high levels, saying it wants to preserve its market share. But this has also contributed to a 25 percent drop in oil prices since June.

Pumpjacks at the Inglewood oil fields in California in March. Some of the most controversial methods of oil extraction, like fracking, oil sands production and Arctic drilling, are also expensive. That's made them less profitable as the price of oil continues to fall.

Falling Oil Prices Make Fracking Less Lucrative

Bordoff disagrees. "I think that probably overstates the case," he says. "We may see some slowdown in the growth rate of U.S. oil production, but I think U.S. oil production will continue to grow."

Bordoff predicts that prices would have drop below $70 a barrel, and stay there for 6 months or more, to have a significant effect on U.S. production.

Daniel Katzenberg, senior energy analyst at Robert W. Baird & Co., also says he doesn't "expect to see really material slowdowns in activity yet." He thinks oil companies could begin to cut back on drilling if prices were to remain in the current range — around $75 a barrel — until January.

But even with some cutbacks, Katzenberg expects U.S. oil production would continue to grow — just a bit slower. "I don't believe that we are facing another bust at this point," he says.

Up in the booming oil fields of the Bakken formation in North Dakota, Niles Hushka runs an engineering and oil services firm. He says there's little concern about current prices curbing drilling.

"The reason that no one's reacting is that it's pretty normal," he says.

Since drilling began ramping up in the Bakken in 2007, oil has averaged about only $70 a barrel, Hushka says. And, he notes, the cost of production continues to go down. That's because the infrastructure to support the drilling and transporting of oil is now in place, and the technology of fracking oil shale continues to improve.

"I think that OPEC is sadly mistaken," he says. "I think ... in order to discourage production, especially in the Bakken, you're going to be looking at prices down in the $40 range."

And Hushka says there's still lots of room in the system to drive costs down. Several pipelines on the drawing boards, for instance, could reduce transportation expenses for Bakken crude by $7 a barrel, making production there even more competitive.

BHP to sell US oil without govt approval

BHP Billiton will soon sell US oil abroad without explicit permission from the US government, another sign that the decades-old federal ban on crude exports is crumbling.

The Australian-based resources group's deal to sell about $US50 million of ultralight oil from Texas to foreign buyers without formal government approval is likely to be only the first of many such moves as energy companies seek new markets and higher prices for the surge of crude now pumped in the US.

Washington has been sharply divided over whether to allow US oil exports, which have been restricted since the Arab oil embargo in the 1970s. Big oil companies including Exxon Mobil Corp have called for an end to the ban, saying that overseas sales would create US jobs and improve the balance of trade.

But opponents have said they fear that exports would cause gasoline prices to rise in the US, hurting consumers and angering voters.

BHP said Tuesday that it had signed an agreement to sell 600,000 barrels of oil that hasn't gone through the traditional refining process that turns oil into gasoline and other fuels. The company declined to identify the buyers for the ultralight oil, known as condensate. The few similar cargoes that have been exported with government approval have gone to Asia and Europe.

"We took the necessary time to thoroughly examine the issues involved and ensure the processed condensate was eligible for export," the company said.

The Commerce Department didn't immediately respond to requests for comment. Department officials there have maintained that there has been no change to US oil export policies.

For nearly 40 years the US has allowed exports of refined fuel, such as gasoline and diesel, but not overseas shipments of oil itself except in rare cases. Even those, including limited crude sales to Canada, have required a special permit from the US Commerce Department.

As The Wall Street Journal reported in June, two Texas energy companies received confidential rulings from the department that allowed them to export sell a lightly processed version condensate even though it hadn't been handled by a refinery.

BHP plans to sell the same kind of oil to Asia even though it doesn't have a government ruling.

Global oil prices have dropped sharply since late June as companies pump more crude, from Libya to North Dakota. Meanwhile, world-wide demand for fuels is tepid. Lower oil prices translate into cheaper gasoline and diesel, putting money in the pockets of consumers.

But energy companies with substantial investments on the line worry that low crude prices will force some of them to stop drilling. They have grown increasingly eager to circumvent the ban on international sales of US oil and gain access to new markets.

Refiners and other buyers of light oil across Asia are interested in American condensate so they can diversify their supply from the Mideast.

The companies that received special permission from the US government to export minimally processed oil are Enterprise Product Partners LP, a Houston-based pipeline and oil-storage operator, and Pioneer Natural Resources Co., a Dallas-based oil producer. They used their rulings from the Commerce Department's Bureau of Industry and Security to ship the first tanker of condensate overseas at the end of July.

BHP sold some ultralight oil from its Eagle Ford fields in South Texas to Enterprise for that first cargo and has participated in some of the pipeline company's more recent exports, which will approach 4 million barrels by year-end.

In the process, BHP said it learned the rules for lightly processing the ultralight oil, which were spelled out in Enterprise's ruling from the government.

Other energy and trading companies have applied for private rulings from the federal government, which hasn't approved any since spring.

Canada oil producers set to cut 2015 spending as price tumbles

By Scott Haggett and Nia Williams

Nov 4 (Reuters) - Falling oil prices will lead to lower capital spending in Western Canada next year, observers say, as both oil sands and light oil producers look to cope with less cash coming in the door.

North American benchmark oil prices touched $75.84 a barrel on Tuesday, the lowest since October 2011, after Saudi Arabia cut export prices to the United States.

Although Canadian producers say they are in a strong position to withstand a slump in crude prices, falling profits from oil production look likely to prompt lower capital spending as the hardest-hit look to for ways ride out the storm.

"It's probably going to force a lot of people's hands into doing transactions," said Sonny Mottahed, chief executive of Black Spruce Merchant Capital.

"The (smaller) companies are going to immediately feel the impact on cash flow, so they may start curtailing spending darn fast. The bigger companies ... may continue to forge ahead. They can probably endure as long as a year of depressed oil prices."

Canadian producers are in the midst of firming up spending plans for 2015, with most expected to announce their budgets in coming weeks.

Talisman Energy Inc has cut its current year budget by 6 percent to $3 billion and said it would take the price outlook into account when finalizing its 2015 capital spending program.

"These are difficult times in the energy sector, no doubt about that," Hal Kvisle, Talisman's chief executive said on a Tuesday conference call.

Oil sands producer MEG Energy Inc has also lowered its 2014 spending to C$1.6 billion ($1.4 billion) from C$1.8 billion.

Western Canada's oil and gas producers are forecast to spend about C$76.7 billion in 2014, according to figures compiled by FirstEnergy Capital. With cash flows declining because of lower prices, the investment bank expects that to drop to C$71.1 billion in 2015.

However, most spending on oil sands projects in northern Alberta is already locked in and cuts are more likely to hit early-stage projects.

"If we were to get consistent lower commodity prices that's probably only really going to show in oil sands production maybe four or five years from now," said FirstEnergy analyst Michael Dunn.

Indeed, Suncor Energy Inc, said it expects to spend between C$7 billion and C$8 billion next year, about the same as 2014, as it builds its new Fort Hills oil sands mine.

"We have to cut our cloth within our means, but you will not see capital budget coming up and down and these projects being stopped and started," Suncor chief executive Steve Williams said on an Oct. 30 conference call.

Despite the gloomy outlook, producers and industry observers said it was unlikely any oil sands producers would take the costly step of shutting in production.

"Any cash flow is better than none," FirstEnergy's Dunn said. (1 US dollar = 1.1406 Canadian dollar) (Editing by David Gregorio)

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News 5th November 2014

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