03/20/17

WHAT WILL THIS WEEK’S HOUSING DATA SUGGEST?

By: Kent Engelke | Capitol Securities

Treasuries advanced last week, the first of several; following the Federal Reserve’s signal that it is not in any rush to lift rates. Oil prices however had the first weekly gain this month following an unexpected reduction in inventories and from Saudi Arabia’s comments that it may prolong production cuts into the second half of 2017. Equities ended the week nominally higher.

Several weeks ago, I quoted a WSJ journal article about the breakdown of the cross correlated trade, a trade that almost everyone is involved in as it has worked almost flawlessly for the last 10-12 years.

In my view — a view at this juncture is entirely rhetorical and conjectural — the last two weeks it has appeared that the trade is back in vogue. Or perhaps the more accurate statement to make is velocity of the trade has returned.

Oil and Treasuries were crushed, with the latter rallying sharply last week. Will oil follow suit this week, perhaps the result of falling inventories and bullish statements from the oil producing countries?

If oil does advance, will this squash the rally in Treasuries for such is historically viewed as inflationary?

Because of the tectonic change in trading mechanics, the massive influence of ETFs and algorithmic trading, trends that typically took months to unfold, now occur in a matter of days. A case can be made that such trends mask the real volatility beneath the surface, volatility that only benefits a few.

The economic calendar is sparse until the end of week. Data released include new and existing home sales, durable goods orders and several regional manufacturing indices.

Speaking of housing, will the dearth of homes available for sale increase inflationary pressures? As noted many times, since 2008 new home construction is about two-thirds the level to meet innate demand, the result of crushing regulation. Moreover, the inventory of unsold existing homes is also around record lows.

Will the acceleration in home prices, the result of the lack of inventories, begin to increase owners’ equivalent rent (OER) or what someone thinks they could rent their home for if it was indeed a rental? OER is closely correlated to home values, it plunged in 2008 and has been benign for a myriad of reasons.

Apartment rents are surging because of the lack of housing inventories. There is a debate… does OER follow apartment rents or vice versa?

OER represents between 30% and 35% of the accepted inflationary indices. I will continue to argue if OER suddenly accelerates, the odds of which I think are over 75%, inflationary expectations may become unanchored.

Wow! Such would make the recent drubbing in the bond market as benign an environment that will be acerbated by the proliferation of ETFs and technology based trading.

What will happen today and this week? There is a plethora of Fed speakers this week. Will the narrative be any different than the one expressed by the FRB Chair last Wednesday?

Last night the foreign markets were mixed. London was down 0.18%, Paris was down 0.30% and Frankfurt was down 0.31%. China was up 0.41%, Japan closed for a holiday and Hang Sang was up 0.79%.

The Dow should open nominally lower. The 10-year is off 2/32 to yield 2.52%.

03/3/17

The Secret Wealth Of The World’s Richest Oil Billionaires

A policy of nationalizing chunks of an economy inevitably creates oligarchs who skim profits off the country’s natural resources.

As such, you won’t be surprised to learn that the largest energy companies in the world are owned and operated by governments, and they include: Saudi Aramco, Russian Gazprom, China National Petroleum Corp. (CNPC), National Iranian Oil Co., Petroleos de Venezuela, Brazil’s Petrobras and Malaysia’s Petronas. How they’re run varies wildly—as does where their wealth goes.

While we’ve all been inundated with the massive amount of press on the scandals engulfing Brazil’s Petrobras, there are a few that stand out for creating and maintaining some of the world’s most interesting and colorful political leaders, who have grown their wealth through holdings in state-run oil and gas in some cases, and through more direct means in other cases.

Four state-run oil wealth stories stand out in today’s world: Russia, Azerbaijan, Kazakhstan, Angola and Brunei.

Vladimir Putin, Russia

Estimates of Russian President Vladimir Putin’s wealth only comes in ranges because most of his wealth is hidden through offshore companies or under clandestine financial devices.

The lower end of the range sits at US$40 billion – a 2007 figure based on research by mid-level Kremlin advisor Stanislav Belkovsky, which he later said had grown to US$70 billion. At this level, Putin already stands among Forbes’ Top 10 rankings of the world’s richest billionaires, though the magazine commented in 2015 that it could not verify enough of his assets to put him on the list.

Earlier this week, the International Business Times said Putin’s fortune could be as much as $200 billion.

The majority of Putin’s wealth comes from his stakes in the oil sector. He is said to own 37 percent of Surgutneftegaz, 4.5 percent of Gazprom.

“At least $40 billion,” Belkovsy told the Guardian in 2007. “Maximum we cannot know. I suspect there are some businesses I know nothing about.”

Putin’s trophies of wealth are far from subtle. His $1 billion palace on the Black Sea features “a magnificent columned façade reminiscent of the country palaces Russian tsars built in the 18th century,” according to the BBC, which also procured evidence that a secret slush fund had been created by a group of oligarchs to build the estate for Putin, personally.

It’s definitely not a lifestyle one can afford on a declared annual salary of around US$140,000.

In a 2012 dossier, Former Deputy Prime Minister Boris Nemtsov (later murdered) claimed that the Russian president owns a total of 20 palaces, four yachts and 58 aircraft.

“In a country where 20 million people can barely make ends meet, the luxurious life of the president is a brazen and cynical challenge to society from a high-handed potentate,” he said, according to the Telegraph.

But according to Putin himself, his wealth is not measured in money. In Steven Lee Myers’ book The New Tsar, Putin is quoted as saying: “I am the wealthiest man not just in Europe but in the whole world: I collect emotions.”

“I am wealthy in that the people of Russia have twice entrusted me with the leadership of a great nation such as Russia. I believe that is my greatest wealth.”

Azerbaijan

In 2003, Ilham Aliyev became the newly elected president of Azerbaijan. Thirteen years later, his name appeared in the Panama Papers – a massive leak of financial documents from the Panama-based law firm Mossack Fonseca, which revealed the shady financial dealings of some of the world’s most powerful political figures.

Months before the October 2003 presidential elections in Azerbaijan, Fazil Mammadov, Azerbaijan’s tax minister, began paperwork to form AtaHolding – a company that has become one of the nation’s largest conglomerates. It holds interests in telecommunications, construction, mining, and oil and gas for a total value of $490 million, according to the last filings in 2014.

A second entity – this time a foundation – called UF Universe holds more assets, but Panamanian laws regarding the confidentiality of foundations are strict, which makes uncovering dollar amounts difficult.

Aliyev’s two daughters and wife also have links to offshore companies managed by Mossack Fonsenca. Incidentally, Aliyev just named his wife Vice-President of Azerbaijan.

How much is the First Oil Family worth these days? No one really knows, but enough to make it onto this list.

Kazakhstan

Kazakh President-for-life Nursultan Nazarbayev was also named in the Panama Papers as a tax haven owner. He had two companies registered in the British Virgin Islands, which he used to operate a bank account with an unknown amount of funds, and a luxury yacht.

The revelations were particularly loaded with hypocrisy because of Nazarbayev’s push to encourage his country’s wealthy to repatriate funds from abroad in order to make them taxable.

“We’ve raised many rich people: billionaires, millionaires,” he said, when oil prices tanked in 2014 and the government began using sovereign wealth funds to fund operations. “They are showing off; (their) pictures in Forbes… They look good, with makeup, well-groomed, well-dressed. But it is Kazakhstan that enabled you to earn all this money… Bring the money here. We’ll forgive you.”

Angola

Things here may be about to change, because President Jose Eduardo dos Santos has said he plans to step down after decades in power, and won’t be running in August’s presidential elections, but still plans to control the ruling party. Here, wealth is all about Sonangol, which has been marred in controversy since the president last year named his daughter as the head of the state-run oil company.

Angola has massive oil wealth, yet the bulk of the country’s 22 million people live in poverty, and critics say he’s mismanaged the country’s oil wealth and created an elite that largely consists of his massively rich family. But this scheme is being hit hard by the fall in oil prices that began in mid-2014, and the people are no longer complacent in their poverty.

The president’s daughter, worth an estimated US$3.4 billion before she took over the state-run oil company, has been described by Forbes as Africa’s richest woman.

Brunei

And here’s one that’s probably not even on your radar, but it will be—sooner rather than later.

Vast reserves of oil and natural gas have made Sultan Hassanal Bolkiah of Brunei one of the richest leaders in the world. The Sultan is believed to be worth US$40 billion at the low end, and while ‘his’ holdings officially belong to Brunei, in reality they belong to the royal family.

Brunei is the third-largest oil producer in Southeast Asia, and pumps out, on average, 180,000 barrels per day. The royal family has controlled everything to do with oil and gas since the 1970s, and the line here between royal family assets and national assets is exceedingly blurry.

Vulnerable or Not?

The thing about these political oil leaders is that they’re not really vulnerable—yet. It would take an event such as that which brought down Gaddafi (said to secretly be worth US$200 billion) in Libya to change this.

In Brunei, things may be about to change, and the Sultan may find his wealth considerably downsized. Oil production is down 40 percent since 2006, and what’s left has lost a great deal of value due to low oil prices. Nearly 96 percent of Brunei’s exports are oil, gas and related products—that tops even Saudi Arabia, Kuwait and the UAE. Brunei could run out of oil in just over 20 years, but then again, the Sultan is said to have massive real estate holdings to tide him over.

Angola’s president is stepping down and the oil price crisis has hit him hard, but he’ll still control the ruling party and a new president will defer to him (and his daughter).

In Kazakhstan, Nazarbayev is president for life. In Azerbaijan, the family elite is as strong as ever and will continue to be so through any means necessary. In Russia, sanctions simply haven’t worked because they are designed to target those around Putin, and Putin appears to have designed it so they are always vulnerable to him first and foremost.

As Russian businessman and former Putin friend Sergei Pugachev notes to the Guardian, and as reported by U.S. News and World Report: “Everything that belongs to the territory of the Russian Federation Putin considers to be his. Everything – Gazprom, Rosneft, private companies. Any attempt to calculate it won’t succeed. … He’s the richest person in the world until he leaves power.”

Link to original article: http://oilprice.com/Energy/Energy-General/The-Secret-Wealth-Of-The-Worlds-Richest-Oil-Billionaires.html

By Zainab Calcuttawala for Oilprice.com

02/10/17

HOW DOES THE END OF THE FILIBUSTER AND 2014 OPEC ACTION RELATE?

By: Kent Engelke | Capitol Securities
From: 2/2/17

Will history regard Senator Reid’s 2013 ending of the Senate filibuster and the 2014 OPEC decision to flood the world with oil as two of the worst political calculations in recent history? Both have the potential to have an infinite number of unintended consequences as the intermediate future did not materialize as expected.

Commenting about the former, in 2013, the Democratic Party was convinced that it would maintain control of the Senate, win the White House in 2016 and perhaps regain control of the House. Senate Majority Leader Reid pushed through a procedural change that had previously prevented a simple majority ruling for many Presidential appointees. Under the newly passed regulation, only 51 votes were required for approval versus the historical 60.

It appears the Trump Administration will utilize this procedural change to confirm his cabinet appointees and perhaps the nomination to the Supreme Court, the proverbial nuclear option.

For the record, I am in favor of returning the filibuster.

How will the electorate view Democratic insistence of delaying Trump’s picks, a delay which at this juncture is viewed as symptomatic of everything that is wrong in Washington? Will this view change and Trump next be viewed as a proverbial bully by obtaining Senate approval by a change in the approval process that was instigated by the former majority?

As noted yesterday, Trump is a nationalist populist who ardently believes the people, not the government, make better decisions for the country. The majority of the electorate shares this view given the dominance of the Republican party in most levels of government, in some regards the greatest dominance in history.

And then there is OPEC. According to industry reports, there is 88% compliance with the production cuts. Many thought the inverse would occur. Moreover, Saudi Arabia and other cartel and non-cartel members have stated they would reduce production even more if conditions warranted.

I will argue OPEC et.al. does not have any choice other than to reduce production given the lack of infrastructure spending and large demands for monies to fund their entitlement programs. Many OPEC members require oil over $90 barrel to fund their needs.

The above has large implications for the markets. The proverbial animal spirits have been released believing Trump can reduce the power of today’s Administrative State. This releasing of spirits is a major reason for the recent market advance.

Regarding OPEC, will oil double again, the result of stronger demand and lower production as was the case in 1999? As noted many times, the similarities to that era and to today are uncanny. How will such events affect inflationary expectations?

Speaking of which, the Fed ended its two day meeting. As expected, there was no change in monetary policy, but acknowledged rising confidence among consumer and businesses following Trump’s victory.

The Committee reiterated their expectations for moderate economic growth, “some further strengthening” in the labor market and a return to 2% inflation. Policy makers gave little direction on when it might next raise borrowing costs, as officials grapple with the uncertainty created by the new administration. However there was little to alter the prevailing wisdom that there will be at least three increases in 2017.

Markets were relatively unchanged following the Fed’s announcement, thus suggesting it was essentially a non-event.

Last night the foreign markets were mixed. London was up 0.62%, Paris up 0.22% and Frankfurt unchanged. China was closed for a holiday, Japan down 1.22% and Hang Sang down 0.57%.

The Dow should open nominally lower on economic and political concerns. The 10-year is unchanged at 2.47%.

02/3/17

The Oil War Is Only Just Getting Started

It’s been a month now that investors and analysts have been closely watching two main drivers for oil prices: how OPEC is doing with the supply-cut deal, and how U.S. shale is responding to fifty-plus-dollar oil with rebounding drilling activity. Those two main factors are largely neutralizing each other, and are putting a floor and a cap to a price range of between $50 and $60.

The U.S. rig count has been rising, while OPEC seems unfazed by the resurgence in North American shale activity and is trying to convince the market (and itself) and prove that it would be mostly adhering to the promise to curtail supply in an effort to boost prices and bring markets back to balance. In the next couple of months, official production figures will point to who’s winning this round of the oil wars.

This would be the short-term game between low-cost producers and higher-cost producers.

In the longer run, the latest energy outlook by supermajor BP points to another looming battle for market share, where low-cost producers may try to boost market shares before oil demand peaks.

BP’s Energy Outlook 2017 estimates that there is an abundance of oil resources, and “known resources today dwarf the world’s likely consumption of oil out to 2050 and beyond”.

“In a world where there’s an abundance of potential oil reserves and supply, what we may see is low-cost producers producing ever-increasing amounts of that oil and higher-cost producers getting gradually crowded out,” Spencer Dale, BP group chief economist said.

In BP’s definition of low-cost producers, the majority of the lowest-cost resources sit in large, conventional onshore oilfields, particularly in the Middle East and Russia.

Although this view that low-cost producers would try to seize more market share comes from an oil major with significant interests in Russia and Iraq, for example, BP may not be wrong in predicting that the abundance of oil resources would prompt the lowest-cost producers to pump the most out of low-cost barrels before the world starts to unwind from too much reliance on oil.

Oil demand growth is expected to slow down in the years to come. BP pegs the cumulative oil demand until 2035 at around 700 billion barrels, “significantly less than recoverable oil in the Middle East alone“.

Middle East OPEC production growth would account for all OPEC output growth by 2035, BP reckons, noting that other OPEC production typically has a higher cost base and its market share would drop.

The U.S. liquids production is expected to rise by 4 million bpd to 19 million bpd by 2035, with growth mostly in the first half of the period, driven by tight oil and NGL output.

So, both OPEC’s Middle East members and the U.S. are seen increasing oil and liquids production in the next two decades.

However, OPEC – especially Saudi Arabia – has the recent bitter experience of its pump-at-will policy for market share backfiring on its economy when oil prices crashed.

Another market-share war would involve too many unknowns, including supply-demand basics, leaner and meaner non-OPEC producers, oil price effects on oil-revenue-dependent economies, or rationale for investments in higher-cost areas.

OPEC’s decision to deliberately cut supply and abandon the strategy of pursuing market share at all costs is currently benefiting the cartel’s competitor, U.S. shale.

Commenting on OPEC’s current and future relevance and influence on the oil markets, Wood Mackenzie said in an analysis last week:

The group may still be able to control oil prices to a limited degree, but the benefits of that control will accrue to parties outside the cartel. If OPEC remains a functional entity by the end of 2017, its greatest hits will surely be in the past.

Five or ten years from now, a possible market share ‘oil war’ would take place on a totally different battleground, and some regiments or battalions may lack essential armory to wage such war.

Link to original article: http://oilprice.com/Energy/Crude-Oil/The-Oil-War-Is-Only-Just-Getting-Started.html

By Tsvetana Paraskova for Oilprice.com

01/17/17

The Top 5 Places To Work In U.S. Oil And Gas

Anadarko Petroleum and Chevron have emerged as the top two employers in U.S. oil and gas, according to a survey conducted by the job site Indeed. The top five for the industry was completed by Plains All American at #3, Occidental Petroleum at #4, and Noble Energy at #5.

Indeed said that it ranked companies based on a number of factors but generally speaking, the better the site visitor ratings and reviews a company had, the higher it ranked on the “Best Places to Work” list.

The site has 200 million unique visitors monthly, lending credibility to its findings. The reviews and ratings it collected to compile the rankings included postings from current and former employees.

These, in the case of Anadarko, Chevron, and the rest of the best, praised the companies for their corporate culture, the compensation they received, the attractive work/life balance offered by the employer, and the good working environment, including additional training opportunities.

Besides praise, however, there was also criticism. For Anadarko, the reviews quoted by Oil and Gas 360 in the release of the survey seemed to focus on the management style that the employees were not particularly happy with. For Chevron, unsurprisingly, the “Cons” side of the reviews referred to the massive layoffs – 8,000 as of last April.

According to Indeed data, the number of new oil and gas job postings had inched up at the end of 2016, after taking a dive for most of the year, with sector players struggling to adjust to the new oil price environment and focusing on cost cuts, which are more often than not incompatible with new hiring or even employee retention.

This may change if the adjustment proves successful, and it seems there is a ready pool of former workers that are ready to return. A study by the University of Houston has found that about 60 percent of laid off oil and gas employees – out of 720 respondents – are still out of work. The study is ongoing, so the figures are not final, but for the time being they look promising for those who may want to start hiring again.

Others, however, have found new employment outside the energy industry, the study’s authors said, with just 13 percent of the sample finding new jobs in oil and gas. Those that defected to other industries may not return to oil and gas when the hiring environment changes, and one of the authors notes that this could turn into a problem for oil and gas employers.

The problem, Christiane Spitzmuller goes on to say, would translate into higher recruitment and training costs. These will need to be added to higher drilling and maintenance costs as oilfield service providers get to call the shots now that oil is a bit higher and E&Ps are ramping up production.

The potential hiring problem is aggravated by sentiment among former employees. According to the University of Houston study, over 70 percent of respondents said they were nervous about the future of the industry, with some 55 percent planning to leave oil and gas for good.

This is perfectly understandable in the context of some 215,000 layoffs in U.S. oil and gas – the same could occur during the next price crash. Still, energy companies could still lure at least some employees back, if they can keep up the benefits that made Anadarko, Chevron and Plains All American “Best Places to Work.”

Link to original article: http://oilprice.com/Energy/Energy-General/The-Top-5-Places-To-Work-In-US-Oil-And-Gas.html

By Irina Slav for Oilprice.com

12/8/16

Trump Could Fuel A Nuclear Energy Boom In 2017

With Trump at the helm, sentiment gives way to practicality in the energy industry. For the vast untapped potential of the nuclear energy industry and the uranium that feeds it, this could contribute to a market-disrupting revival that no longer bows to fear and the politics of economy.

While there have been some oversupply issues keeping uranium prices down, the bigger problem has been negative sentiment rather than real fundamentals, but the Trump presidency will see through that.

Trump’s take on nuclear energy is quite simple. As he noted after the 2011 Fukushima disaster in Japan: “If a plane goes down, people keep flying. If you get into an auto crash, people keep driving.

Now more than ever, demand for uranium appears to be assured. But more than that, it’s about to truly explode as a number of situations combine to form the new era of nuclear power.

If you are going to acquire uranium assets, now is the right time,” IsoEnergy Ltd. CEO and President Craig Parry told Oilprice.com. “If it’s not the bottom yet, you can certainly see it. And on that front we see the market at the early stage of what will become a roaring bull market.”

Parry might be onto something, and IsoEnergy is indeed in high acquisition mode, targeting the discovery and development of high-grade uranium deposits in and around the Athabasca Basin in Saskatchewan—home to some of the world’s biggest high-grade deposits.

Getting Ready for Uranium to Become an Irresistibly Hot Commodity

While Trump might inject a major boost of energy into the U.S. nuclear industry and the uranium market through deregulation, there are other factors coalescing around the world to make this a stellar new beginning for uranium and nuclear energy.

We’re already seeing the biggest uranium producers stocks reacting, including Cameco Corporation (NYSE:CCJ), AREVA (EPA:AREVA), BHP Billiton (NYSE:BHP), and Uranium One (TSE:UUU). Canadian Cameco’s stock was up 25 percent in November, and while the spot prices are low and set to rise, Parry points out that spot prices are all but irrelevant in this market, as almost all uranium is sold at long-term contract prices, which are presently coming in upwards of US$40 per pound, significantly higher than the current spot prices.

The outlook for uranium looks even more bullish when you consider that these contracts are now coming to a close, and uranium is poised to become a very hot commodity once again. Major American and European nuclear reactors are coming off supply in 2017 and 2018, and will be looking for long-term contracts once again.

The biggest uranium producer in the world, Canadian Cameco, said earlier this month that some 500 million pounds of uranium will be needed for nuclear reactors in the next ten years, and it hasn’t been contracted out yet. Buyers of this uranium will have to hit the market sooner rather than later.

Analysts at Cantor Fitzgerald recently predicted that there would be a “violent increase” in uranium prices at some point, theorizing that as much as 80 percent of the uranium market might be uncovered in terms of supply by 2025, and that demand would by then outstrip supply.

The low-price environment has choked off exploration activity for uranium and we are at the point where there are not enough uranium projects in the pipeline that can adequately meet the coming demand,” the London Telegraph quoted Cantor as saying.

All of this coincides with a phenomenal number of new nuclear reactors being built, which will also enter the market at the same time.

(Click to enlarge)

The end result? We’re looking at the biggest deficit ever in the uranium market by 2018.

So we have over 20 Chinese nuclear reactors already under construction, plans from India to significantly increase its nuclear demand, and plans to restart over 20 Japanese reactors. These three things are major demand drivers that will wake the sleeping giant that is uranium.

And as demand soars, North America is sure to play a key role in the future of uranium supply.

In North America—and even from a global standpoint—there is no better place to explore for uranium than Saskatchewan’s Athabasca Basin, which is to uranium what Saudi Arabia is to oil.

(Click to enlarge)

Two of the largest producing uranium mines in the world—McArthur River and Cigar Lake–are in the Athabasca Basin. In and around this area, where Canada’s Cameco is the key player, junior IsoEnergy is focusing on new exploration and development at Thorburn Lake, Radio, North Thorburn and Madison.

Now that Trump is president-elect, the speculation is that Trump will make good on promises to reform the licensing and permitting processes for nuclear power plants. What this means is that we could be sitting right on the edge of a revolution in next generation nuclear technology.

This means a major push for next-generation nuclear projects such as PRISM, the brainchild of General Electric and Hitachi.

So not only does demand for uranium across the next two decades seem assured, it is poised to paint an attractively tight supply picture in the coming decades.

As the New Year is ushered in, falsely negative sentiment on uranium is likely to be ushered out the door and the real fundamentals will become more visible.

The bottom line is this: While uranium prices have been on a very long and gradual decline for some 13 years, analysts agree that they’ve reached their bottom and the climb back up is poised to be a lot faster than the decline.

Trump is all about harnessing untapped potential, and as atomic energy advocates are quick to point out: Nothing has more untapped potential on multiple fronts than nuclear energy, and right now is the time to buy into quality assets while uranium is at a multi-year low but at the early stage of a bull market.

Link to original article: http://oilprice.com/Alternative-Energy/Nuclear-Power/Trump-Could-Fuel-A-Nuclear-Energy-Boom-In-2017.html

By James Stafford of Oilprice.com

11/3/16

Can Oil Markets Survive An OPEC Implosion?

A technical meeting that was supposed to iron out some wrinkles for a deal to cut oil production ended in acrimony over the weekend, and OPEC’s effort at coordination could be at yet another impasse.

Following the Algiers agreement at the end of September, a tentative deal that called for a collective reduction in oil output in the range of 200,000 to 700,000 barrels per day, OPEC scheduled a meeting on October 28-29 in Vienna to put some meat on the bones of the pact so that it could be officially sealed at the end of November.

But after weeks of papering over differences between its members and trying to put some positive spin on the prospects for a deal, OPEC not only failed to agree on individual production quotas, but its members also bickered over data and even which countries are supposed to participate. The group spent two days negotiating, and came away with nothing more than a statement that said they would continue talking.

The biggest hang up at this point is Iraq, which has two fundamental complaints. First, Iraqi officials dispute the data being used to calculate its oil production levels, arguing that the sources OPEC is using for its official estimates are underestimating Iraq’s output. That would hamstring Iraq more than it feels is fair, forcing it to cut deeper under the deal.

More importantly, Iraq is demanding an exemption from the deal entirely, arguing that it should be allowed to produce as much as possible because of its costly war against the Islamic State. Iran, Nigeria and Libya have been granted exemptions, due to the effect of sanctions (Iran) and disrupted supply because of security issues (Nigeria and Libya) – Iraq wants the same treatment.

That resulted in some friction at the Oct. 28 gathering in Vienna, a meeting that reportedly stretched on for 12 hours. As the WSJ notes, the success of this type of agreement at the end of November tends to require a consensus from lower-level officials ahead of time, something that did not occur this past weekend. That casts some serious doubt on the viability of the overall deal. On Oct. 29, another meeting with non-OPEC producers such as Brazil, Russia, Azerbaijan, Mexico, Oman and Kazakhstan, also ended with very little progress and zero commitments. Moreover, non-OPEC countries will have little impetus to offer any concessions if OPEC itself cannot come to terms. Russia said upfront that it would not cut its production, and it would only freeze if OPEC agreed to cut first.

The challenges standing in the way of the deal were evident right after the Algiers announcement at the end of September. Getting all members on board for a production cut was always going to be an uphill battle. But after this weekend, the odds of a deal look increasingly grim. “It’s more likely that OPEC will come away with no decision in November than that they’ll reach an agreement,” Fabio Scacciavillani, chief economist at the Oman Investment Fund, told Bloomberg on Oct 30. “If they are able to agree, it will likely be a wishy-washy deal that’s hobbled by too many exemptions.”

With competing interests, the discord seen over the weekend in Vienna was somewhat predictable. And the results of the fallout are predictable too: oil prices dropped more than 1 percent on Monday during early trading, with both WTI and Brent dipping below $50 per barrel and dropping close to one-month lows. Hedge funds and other money managers cut their long positions on oil futures and increased short bets for the week ending on October 25, a sign that the markets are losing confidence in a deal. “The price balloon is deflating in response to increasing doubts that OPEC will deliver a credible agreement on production control,” David Hufton, CEO of brokers PVM Group, told Bloomberg. “The combined OPEC and non-OPEC dance rhythm is one step forward followed by two steps back.”

In fact, the chances of a deal might deteriorate even further in the remaining days before the official meeting at the end of November. OPEC likely increased oil production in October, which would require even steeper cuts than they previously laid out. That could put a deal of any significance entirely out of reach.

By Nick Cunningham of Oilprice.com

Link to original article: http://oilprice.com/Energy/Oil-Prices/Can-Oil-Markets-Survive-An-OPEC-Implosion.html

10/12/16

For How Long Can OPEC Talk Up Oil Prices?

Not a day passes without OPEC making oil and gas headlines, and today is surely no exception. Seemingly in lockstep with OPEC, the market is once again pacified on the promise that changes to the global oil supply glut are a’ comin’.

Yesterday, the Wall Street Journal quoted anonymous sources close to the matter who had it on good authority that the Saudi’s were willing to cut “up to” 400,000 barrels per day (and that they had planned to do so all along, with or without an OPEC agreement). We can assume this figure is off August or September levels, which are near-record highs for the oil-rich country.

Of course, there are 400,000 different possible production cut figures included in this “up to 400,000” range—including a big fat zero—so fundamentally speaking, like so much of the OPEC speak, this could mean nothing.

But this isn’t the first time OPEC chatter or supposition or guesswork has moved markets, and it won’t be the last. Because, as Oilprice contributor Rakesh Upadhyay pointed out back in August, just a month before the freeze was announced, fundamentals aren’t what’s driving the oil market—speculation is. And nothing feeds speculators like OPEC.

As Upadhyay wrote, “Though most analysts agreed that a production freeze was not going to alter the fundamentals, prices rose sharply, with the hedge funds adding record long positions,” as evidenced by the chart below, which shows what happened in February when OPEC cuts were on the table for Doha. Fundamentals didn’t change—the glut wasn’t easing—yet hedge funds and speculation on OPEC rumors drove up prices.

IMG URL: http://oilprice.com/images/tinymce/saap1.png

The hope quickly faded when the Doha meeting fell short of expectations, but prices continued to climb. Then, the market found new hope in the Vienna meeting. We then wondered—this time quite wistfully—if a freeze could… maybe, possibly… happen in that meeting over the summer, much in the same way one might hold onto hope that we might someday win the lotto. Our hopes were dashed yet again—but not before the market reflexively inched up again.

Soon after, Saudi comments, which indicated that a new spirit of cooperation among OPEC members might be taking shape, sending prices upward yet again. An unofficial meeting was announced. Algiers, they said. “Stabilize the market” they said (which can apparently be done with talk, rather than production cuts). Russia chimed in, vacillating between joining the “market stabilization” efforts and not. We asked ourselves, this time ever more cautiously, dare we hope again? Most thought not, but speculators threw caution to the wind, moving markets this way and that on almost a daily basis in response to every utterance regarding the freeze.

Then the announcement came that OPEC had reached a deal. The earth shook, moving markets again— this time by a large percentage—and this time backed up by a more tangible hope.

Meanwhile, the industry scrambled to make sense of what it all meant. How big would the cut be? Which members would do the cutting? How did Saudi Arabia and Iran reach any kind of consensus when they were worlds apart—on multiple fronts? And then there was the ultimate question that had every analyst from here to Venezuela furiously figuring and calculating and refiguring and recalculating: just how high could prices go?

Speculators continued to largely disregard the ins and outs of the deal, which were absent at the time, and we saw markets tick up happily in response.

When the size of the production cut—between 240,000 and 740,000 barrels per day—was announced, one could feel the weight of the disappointment within the industry overall. The analysts wanted more; wanted deeper. Most OPEC members had been scrambling to reach record high oil production leading up to the meeting, some successful. Given current production levels, the small cut was seen by most analysts as a mere token gesture that would do very little to address what most would agree is the reason behind the price “problem”—the global supply glut.

And further skepticism surfaced over the fact that no specific member had agreed to any specific cut—they just agreed that as a group, “they” would do some cutting—some months down the road—and that the “they” in that equation wouldn’t be Iran. And it wouldn’t be Nigeria. And it wouldn’t be Libya.

And still, amid all this ambiguity and mystery, and with some distant promise to shave a mere 240,000 barrels of oil per day off OPEC’s record production figures, oil climbed above $50 a barrel. Today, Brent is trading at $52.64, which is a 12-month high-a monumental swing on mere talk.

And sure, some minor fundamentals have changed, such as five weeks of crude oil inventory draws in the U.S., but those inventory numbers are still way too high. In reality, OPEC hasn’t actually done anything to ease the glut. They’ve just talked… about talking… two months from now. In fact, the only actions that OPEC has taken is to pump oil at record paces, adding to the glut, and hoping that speculators will lap up what they’re dishing out in rhetoric. That’s what OPEC is doing today.

So happy are the markets on this wispy nothingness, in fact, that some are suggesting the oil markets are poised for a major meltdown, as speculators buy up contracts that are equal to a year’s worth of U.S. consumption—amounts that can’t possibly be delivered and will be pushed off to next month’s contracts or cancelled. To put this in perspective, there are 480 million barrels of oil on order for delivery in November to Cushing, Oklahoma—a facility that is capable of handling only 50 million per month.

What will also be pushed aside are some other cold, hard facts, such as Libya’s production increases, or Iraq’s, or Iran’s, and how fundamentally, this means the remaining OPEC members would have to make deeper cuts to offset these increases and still meet the organization’s promised cut. Deeper cuts that could hurt whichever member is tasked with taking on this burden.

But to keep the market’s eye on the OPEC ball despite market saturation, the Algerian Energy Minister, desperate to save his country from an economic collapse, made yet another announcement on behalf of OPEC that the bloc would be willing to cut yet another 1% “if we need to” on top of the cuts proposed out of the meeting in Algiers, adding that there would be even more meetings forthcoming—the first of which will be in Istanbul on Oct 9-13, again, on the sidelines of another energy meeting, the World Energy Congress. But this time, the informal talks about the freeze will include non-OPEC Russia and non-OPEC Azerbaijan.

As Reuters reports, the meeting signals that OPEC “is more serious now about managing the global supply glut.” Russia apparently doesn’t share this perceived seriousness, with Russia’s Energy Minister Alexander Novak saying on Friday that he doesn’t expect to sign a deal with OPEC during this meeting. Just more talk.

And yet another meeting is scheduled in Vienna for October 28 and 29, according to OPEC sources, followed by a “long-term strategy” meeting on November 1-4, and a technical meeting again in Vienna on November 23 and 24, and possibly a follow-up meeting of the High Level Committee a day later on November 25. Finally, recommendations will be presented at the previously disclosed and much anticipated meeting on November 30.

That’s plenty of evenly spaced talk that is sure to keep OPEC in media headlines, and give the oil speculators something to play with until that time. After that, it’s anyone’s guess as to how long prices will hold, but it’s likely that regardless of the outcome of the 30 November recommendation meeting, OPEC will continue to feed the beast with talk—and the market will readily accept the handout, even if it’s in lieu of the fundamentals.

By Julianne Geiger for Oilprice.com

Link to original article: http://oilprice.com/Energy/Energy-General/For-How-Long-Can-OPEC-Talk-Up-Oil-Prices.html

08/24/16

OPEC’s Output Freeze: What Has Changed Since Doha?

It’s possible that OPEC is crying wolf with hints of an output freeze next month in Algiers; but it’s also possible that they are ramping up production to take the sting out of a freeze. This is a delicate balancing act that the Saudis need to play very carefully.

The official chatter is that the OPEC meeting in Algeria from September 26 to 28 could conclude with an agreement to freeze production by the member nations, with even Russia joining forces in a freeze that may prevent further oil price erosion. But everyone’s a bit gun-shy after the false hopes of the last round in Doha—even if a freeze at levels that existed then wouldn’t have meant much either—and it’s hard to blame them. The question is, how many times can the Saudis cry wolf without forever losing the ability to leverage this chatter to affect a rise in oil prices?

But lets rewind a bit to the nature of the recent chatter. The Saudi Energy Minister has indicated that Saudi Arabia, OPEC’s largest producer, is willing to proceed with a production freeze.

“We are, in Saudi Arabia, watching the market closely, and if there is a need to take any action to help the market rebalance, then we would, of course in cooperation with OPEC and major non-OPEC exporters,” said Saudi Energy Minister Khalid Al-Falih, reports Reuters.

“We are going to have a ministerial meeting of the International Energy Forum in Algeria next month, and there is an opportunity for OPEC and major exporting non-OPEC ministers to meet and discuss the market situation, including any possible action that may be required to stabilize the market.”

The hopes of reaching an agreement in Doha were scuttled by Saudi Arabia, because it wanted its arch rival, Iran, to participate in the freeze. Unfortunately for oil prices, Iran had made it clear that it would not join any such discussion until they reached pre-sanction levels of oil production.

What has changed from Doha to Algeria?

Iran

Iran’s oil production is close to its pre-sanction levels, meaning that its first cited prerequisite for any discussion has now been met—a criteria that was not met at the time of the Doha meeting. In addition, increasing oil production further by Iran is a big ask—it would need billions of dollars worth of investments in both upstream and downstream facilities to make this happen. With oil prices languishing below $50 a barrel, major oil companies are reluctant to commit huge sums of money for new oil projects.

Iran’s oilfields are mature, and more than half of its wells have an annual decline rate of 9 percent to 11 percent, according to Michael Cohen, an analyst at Barclays in New York. Therefore, at their existing production levels, they need an additional 200,000 to 300,000 barrels a day annually to replace the shortfall from their aging wells.

Iran needs more money and investment to continue pumping at the current rate, making it more likely for Iran to agree to some kind of an arrangement where they continue to pump oil at a rate close to their target of 4 million barrels a day.

That said, the last thing that Iran wants is to be sidelined, so Tehran is bound to make its presence felt at the meeting with strong statements. But at the end of the day, it is unlikely that Iran will scuttle an agreement where it has everything to gain and nothing to lose.

“There may be a little bit more to it this time. I’m still very skeptical, but it’s just with Iran being where they are production-wise, they’ll be more inclined to eventually go along with a deal,” said Again Capital’s John Kilduff, reports CNBC.

Saudi Arabia

The oil-rich nation underestimated the resilience of the U.S. shale oil drillers when they declared war on them in 2014. American oil has not only kept flowing—the shale producers have managed to bring down production costs considerably. This ability was not anticipated by Saudi Arabia.

Meanwhile, Saudi Arabia has burned more than $175 billion in reserves since August 2014. The Saudis have introduced austerity measures and plans to monetize their crown jewel Saudi Aramco to survive the oil downturn. Nevertheless, things are not going well for this nation, which youth is struggling to find jobs as shown in the chart below.

IMG URL: http://cdn.oilprice.com/images/tinymce/2016/Oil%20Graphs%201.png

A large population of unemployed youths who cannot take care of their families can sow seeds of frustration, and the Arab Spring will still be fresh in the memory of the rulers.

Saudi Arabia is struggling to grow in this oil downturn. Barring the 2009 dip, the current growth rate of 1.5 percent is the worst in a decade, according to data compiled by Bloomberg.

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If oil prices remain low, the Saudi plan to sell shares in Saudi Aramco might not fetch them the valuations they expect, and a nation that cannot provide the most basic of amenities—food for its foreign workers—says a lot about their financial condition.

Saudi Arabia has seen the recent slide in crude oil prices towards the $40/barrel mark, which could have gone deeper without the chatter of a production freeze. And since they have already cried wolf once in Doha, doing so again in Algiers decrease the importance of any ‘chatter’ leverage they have in the future.

Rest of the nations already onboard

Barring Iran and Saudi Arabia, the rest of the nations were in agreement about the need to freeze production during the Doha meeting.

From OPEC to Russia, everyone is at record production levels

The oil-producing nations want to ensure that even if there are talks of a production freeze, they should not feel the pinch. Hence, even before the meeting, they will try to produce more, rather than less. The recent ramping up may very well be an indication that a freeze—although at a level higher than what would have likely come out of the Doha meeting—may be on the horizon.

The oil markets are so sensitive that even a statement of agreement by OPEC at the end of the meeting is enough to send oil prices flying above the resistance level of $51 a barrel.

What about the shale oil producers?

Though U.S. production is declining and experiencing a flurry of bankruptcies, the remaining companies are much better positioned to continue pumping at lower levels to survive the downturn.

Though the risk remains that the shale oil drillers will come back in full force when oil prices recover, the risk is worth taking. OPEC and Russia have realized that any new world order will have to include the shale oil companies. They are a large enough force not to be neglected or defeated.

With all of this in mind, an agreement between OPEC and Russia is more feasible in Algiers than it was in Doha. It might not mean much though, with output levels soaring ahead of the meeting. A freeze at current levels—or levels reached by the time of the meeting—won’t do much to change the fundamentals, nor is there any indication that a freeze would have long legs.

Link to original article: https://oilprice.com/Energy/Energy-General/OPECs-Output-Freeze-What-Has-Changed-Since-Doha.html

By Rakesh Upadhyay for Oilprice.com

08/4/16

Today’s Downturn Sets Markets Up For A Dramatic Oil Price Spike

Another oil price downturn threatens to deepen the plunging levels of investment in upstream oil and gas production, which could create a more acute price spike in the years ahead.

Oil and gas companies have gutted their capex budgets, necessary moves as drillers went deep into the red following the crash in oil prices. But the sharp cutback in investment means that huge volumes of oil that would have otherwise come online in five or ten years now will remain on the sidelines.

The industry will cut spending by $1 trillion through 2020, according to Wood Mackenzie. Those reductions are creating a “ticking time bomb” for oil supply. The consultancy projects that the market will see 5 million barrels of oil equivalent per day (mboe/d) less this year, compared to expectations before the collapse of oil prices. And next year, the industry will produce 6 mboe/d less than it otherwise would have had the spending cuts not been made.

This is creating the conditions for a supply crunch and a price spike. The reason is simple: demand continues to rise by some 1.2 million barrels per day each year, but supplies are no longer growing because of the spending cuts. That is not a problem today as production still slightly exceeds demand and high levels of crude oil and refined products sit in storage. But by as early as the end of 2016 the oil market could tip into a supply deficit. And because the industry has scaled back so intensely on capex, global supplies could fall short of demand for quite a while. The end result could be a dramatic price spike.

This scenario has been described before by Wood Mackenzie, which published an estimate earlier this year that put the total value of cancelled projects over the past two years at $380 billion, projects that would have yielded 27 billion barrels of oil and gas.

So far, the markets are not pricing in the brewing supply crunch. Oil prices continue to fall, and speculators have taken the most pessimistic position in months, selling off long bets and buying up shorts.

Oil analysts and forecasters do not see a rapid rise in prices either. A Bloomberg survey of 20 analysts revealed a median price forecast of just $57 per barrel in 2017. No doubt that record levels of inventories are on their minds – even if oil production itself flips into a supply/demand deficit, it could take years to work through storage levels.

“We’re looking at a market that’s still in a very slow process of rebalancing and we don’t think that you’ll get a sustainable deficit until the second quarter of 2017,” Michael Hsueh, a strategist at Deutsche Bank AG, told Bloomberg. “Those deficits are necessary to draw down global inventories, but that will still take until the end of 2018, it appears.”

But the swing from surplus to deficit could be more dramatic than many think. Now that oil is once again entering a bear market, with WTI and Brent dropping to $40 per barrel, the industry could be forced to slash spending even deeper than it already has, leaving even more oil reserves undeveloped. And in any case, it is possible that high storage levels and the two-year production surplus is leading to a myopic view of the future – just because the markets are oversupplied today does not meant that they will in several years’ time.

Wood Mackenzie says that while U.S. shale has been the hardest hit by the steep fall in investment, the shale industry will be the first to bounce back because of the short-cycle nature of shale drilling. The price spike will lead to a resurgence in shale, and Wood Mackenzie is predicting that shale production doubles from the 2015 high-watermark of 4.5 million barrels per day to 8.5 mb/d by the mid-2020s.

But that is a long way off for oil executives dealing with deteriorating balance sheets and rising debt levels.

Link to original article: http://oilprice.com/Energy/Energy-General/Todays-Downturn-Sets-Markets-Up-For-A-Dramatic-Oil-Price-Spike.html

By Nick Cunningham of Oilprice.com