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

10/10/15

Lithium Market Set To Explode – All Eyes Are On Nevada

While other commodities are floundering or completely collapsing in this market, lithium—the critical mineral in the emerging battery gigafactory war—is poised to explode, and going forward Nevada is emerging as the front line in this pending American lithium boom.

Most of the world’s lithium comes from Argentina, Chile, Bolivia, Australia and China, but American resources being developed by new entrants into this market have set up the state of Nevada to become the key venue and proving ground for game-changing trade in this everyday mineral. Nevada is about to get a boost first from Tesla’s (NASDAQ:TSLA) upcoming battery gigafactory, and then from all of its rivals.

For several years, experts have been predicting a lithium revolution, and while investors were being coy at first, the reality of the battery gigafactories is now clear, and nothing has hit this home more poignantly than Tesla’s recent supply agreements with lithium providers who will be the first beneficiaries of this boom, followed by a second round of lithium brine developers that are climbing quickly to the forefront.

As Jeb Handwerger—founder of Gold Stock Trades—recently told the Resource Investor: “This is just the beginning. We’re in the early stages of a revolution in powering transportation and homes. This really is disruptive technology. Annual growth in the battery space could be around 20 percent, which means that demand could double every five years. These batteries make smartphones, laptops, tablets, electric cars and even solar energy practical.”

Tesla—which will require large quantities of lithium at cheaper prices–has already signed agreements to purchase lithium from Canadian Bacanora Minerals Ltd and British Rare Earth Minerals Plc. in Mexico but has indicated that it is looking closer to home, and particularly in Nevada, which is ground zero for Tesla’s battery units.

For Nevada, there can be no more significant validation than Tesla’s lithium supply agreements. Albemarle Corp. already has the producing Rockwood mine, but Tesla and other gigafactory contenders are concerned about new lithium resources.

And the newest entrant on this scene—Dajin Resources Corp – has two projects in Nevada, only a short distance from Albemarle’s Rockwood producing mine and in close proximity to Pure Energy Mineral’s lithium development project, which just signed a preliminary supply agreement with Tesla.

Focused on the exploration of energy metal projects, Dajin has strategically located targets in Nevada, including over 3,800 acres in Alkali Lake, which is only 12 kilometers from the producing Rockwood Lithium Mine. It also has the Teels Marsh project, which covers over 3,000 acres in the Mineral County desert lake basin and is about 80 kilometers away from producing mines and new exploration targets that are all on the site of a volcanic eruption that many believe could have contributed lithium.

Where future supplies are concerned, investors will be looking closely at Dajin, which is 100% self-owned and operated. If it can post similar success in terms of exploring lithium brine, it could easily pop up as a favorite stock on investors’ radar.

And the brine is the place to be, putting Nevada at the front line of the North American lithium revolution at a time when other minerals are collapsing. The lithium, found in salty water, or brines, is the most cost-effective on the market; it’s cheap and easy to extract, giving competing battery gigafactories new, affordable American lithium resources that will be a global game-changer.

At the end of the day, Nevada has enough lithium brine to earn it a place among the key global venues—a list that for now includes the “Lithium Triangle” of Bolivia, Argentina and Chile, as well as China.

When it comes to lithium, “it’s all just talk if you don’t have an aquifer and a closed deep basin containing lithium,” says Dajin CEO Brian Findlay. “There aren’t many American properties out there like ours.”

Without lithium, there will be no battery gigafactories. In fact, one of these factories alone will need 15,000 tons of lithium carbonate a year just to get started—and the first is slated to come online as soon as next year.

Construction has already started on Tesla’s battery factory, where the assembly lines are expected to churn out enough lithium-ion batteries for 500,000 electric cars, according to Fortune magazine, and it should be operating at full capacity by 2020.

And the Tesla gigafactory is just the tip of this overall iceberg.

According to a report from the Centre for Solar Energy and Hydrogen Research, more than one million electric vehicles will be on the road globally by the end of this year—that means a spike in lithium demand, which Roskill consulting and research predicts will more than double from 2012 to 2017.

Even more than hybrid cars, grid storage and the ‘powerwall’ will drive lithium demand through the roof. In an interview with Reuters, General Electric said it expected this sector to quadruple to $6 billion by 2020 thanks to rising demand for industrial battery systems driven by increasing reliance on intermittent energy sources, such as wind and solar power, as well as the potential to add energy to the grid quickly when power needs spike.

Now the game is all about new resources—and specifically, American resources, with all eyes on the brine. Tesla knows this, and so do its competitors. Investors who know this will get in on the game before these new entrants start producing.

Article Source: http://oilprice.com/Energy/Energy-General/Lithium-Market-Set-To-Explode-All-Eyes-Are-On-Nevada.html

By James Stafford of Oilprice.com

06/4/15

The Evolution Of The Oil Weapon

In the age of derivatives, swaps, and electronic money transfers, a new form of warfare has emerged: financial warfare.

Recently, the US has passed sanctions on countries such as Syria, Venezuela, and North Korea , but the majority of energy related sanctions passed have been targeted at Iran and Russia.

An estimated 68 percent of Russia’s government revenue is derived from oil and gas exports, while 80 percent of Iran’s revenue comes from oil exports. That presents a very large target for the use of financial weapons.

To understand why financial warfare is now so commonplace, one must understand how it came into existence and what has been achieved taking such an approach.

The oil weapon first came into existence in 1965, when Egypt nationalized the Suez Canal. What resulted from this was a declaration of war by France, England, and Israel. As a way to counter this invasion, Saudi Arabia decided to ban exports to England and France. This embargo turned out to have minimal economic impact, as the US increased shipments to Europe, and international oil companies redirected shipments to England and France.

The next embargo imposed was in 1967, when Arab states imposed an embargo on the US, Britain, and West Germany. This embargo was enacted after a rumor surfaced that Britain and the US were providing air cover for Israeli planes, after Israel bombed Egyptian military airports in the 1967 war. This embargo failed, due to the fact that Arab oil revenues declined. This embargo also wasn’t enforced properly, as Western countries were still receiving oil from Arab countries.

But the most famous incident came in 1973. This was when OPEC issued a new embargo on countries that provided military aid to Israel, in the Yom Kippur war. This proved to have a greater economic impact on Europe and the US, because Saudi Arabia displaced Texas as the world’s swing producer.

The 1973 embargo led to an increase in domestic fuel prices, shortages of gasoline, and the rationing of gasoline fuel. This embargo changed the dynamics of US foreign policy.

After the 1973 embargo, Richard Nixon sent his secretary of state Henry Kissinger to Saudi Arabia with a proposed deal, to ensure that an embargo such as this would never happen to the United States again.

After some revisions, in 1976, the House of Saud and Henry Kissinger finally reached an agreement. The agreement did the following things, according to Marin Katusa’s 2014 book, “The Colder War.” The Saudi’s agreed to:

1. Give the US as much oil as it desired, for general consumption and national security measures. Thus increasing or decreasing oil production to the benefit of the US

2. To only sell oil for US dollars, and to reinvest profits in US treasury securities.

In return, the US guaranteed:

1. The protection of the Saudi Kingdom from rival Arab countries

2. The protection of Saudi oil fields

3. Protection from an Israel invasion.

The Saudi’s agreed to this because, even though they had vast amounts of oil, they didn’t possess an army which could protect them from its surrounding enemies; which included Iran, Iraq, and Israel.

This deal not only secured a steady supply of oil to the US, but allowed the US to expand its global footprint.

How the US and the Saudi’s colluded to topple the USSR

In 1982, a secret declaration for economic war with The Soviet Union was signed. This declaration included:

• No new contracts to buy Soviet natural gas
• Accelerate development of an alternate supply to Soviet gas for parts of Europe
• A plan to substantially raise interest rates on credit to the USSR
• The requirement of higher down payments and shorter maturities on Russian bonds.

This declaration made the USSR’s debt load much more burdensome, but what delivered the final blow to the USSR was the doubling of oil production from Saudi Arabia in 1986. This pushed oil prices down to roughly 10 dollars per barrel, thus vastly decreasing the USSR’s government revenue. This declaration combined with low oil prices, according to James Norman, author of the 2008 book, “The Oil Card,” is what led to the collapse of the USSR.

Today, the international financial system is much more sophisticated. Still, using financial sanctions with the intention of creating a de facto embargo on oil is a widespread practice today – just look at the cases of Iran and Russia.

Source: http://oilprice.com/Energy/Crude-Oil/The-Evolution-Of-The-Oil-Weapon.html

By John Manfreda of Oilprice.com