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20 December 2014

Press review 20-12-2014 - Contraction

The decline in petroleum prices continues to dominate the news. The Brent index fell further this week, finding an apparent bottom around 60 $/b; it may be merely temporary. All bets are off for 2015 and price forecasting at this stage is mostly a futile exercise. If earlier the owes of this price rout were coming mostly from North America, they now spread, with every other petroleum region facing a grim forecast.

Russia popped in the news in the first days of the week with drastic measures to support the ruble. The parallels with previous historical petroleum price bottoms in 1998 and 1985 are obvious and do not spell anything good. And it is not only petroleum, Russia relies on exports of all sorts of raw materials whose prices have fell across the board during 2014, in face of an anaemic world economy. One thing is now certain: 2013 will go in history as the year petroleum extraction in Russia peaked. Henceforth it is mostly about the steepness of the decline.

13 December 2014

Press review 13-12-2014 - A bursting bubble

American energy writer Richard Heinberg entitled his book on petroleum extraction from source rocks "Snake Oil". This title was a sharp choice, possibly in more ways than Richard himself could have anticipated. For a few years the US investment community was completely intoxicated with stories of limitless supplies of fossil fuels and even energy independence. Every day more wells would be drilled, more infrastructure would be sourced, more news of a bright future would be written. And more debt would be issued to feed the beast.

Until one day. It turns out source rocks were not so good after all, relying on wells with lifetimes counted in years, instead of decades. Thousands of millions of dollars were piled up on resources lying at the top end of the supply curve, thus vulnerable to the slightest shifts in the market equilibrium. Today that equilibrium renders source rocks money loosers and battered investors flee the market in hordes. Behind they leave a pile of debt on the verge of collapse, threatening the whole financial system; and not only in the US.

06 December 2014

Press review 06-12-2014 - Bitter Oranges

This week I attended the opening session of a photo-exhibition on the life of illegal immigrants stranded in Italy. Either because they fail to obtain a working visa or because they are prosecuted in their country of origin, these immigrants are left to their luck, at best getting a place to sleep in a container or a tent.

Three Luxembourgish researchers have been visiting regularly the camps where these immigrants live, documenting their stories and the ordeals they go through just to survive. They have to work to buy food and clothing; the orange harvest is the only possibility, where they can earn 0.5 € for each box of 22 kg. At the height of the harvest they earn little over 200 € per month; many months go by when they have no income at all. Although these migrants originate from all over North Africa, more than half of them were settled in Libya at the beginning of 2011. Back then they had relatively normal lives, with a real job and proper housing.

I have been writing on Libya and its demise for over six years, studying the implications to our economy and way of life. Behind all these big stories are real lives and great human suffering. All this happens literally in our neighbourhood, and goes largely unnoticed to the general public.

Bitter Oranges is the name of this research project. There is a photo gallery to visit and also a short video to watch.

29 November 2014

Press review 29-11-2014 - The Crash

This week started slowly in the petroleum market, with a six month adjournment of a final decision on Iran's Nuclear programme. But by Wednesday the press started conveying a general disagreement among OPEC members regarding action to tackle the recent decline in prices. The cut envisioned to marketed volumes looked too short to have a real impact. Thursday the Brent benchmark collapsed about 8% - the steepest single day drop I can remember. When OPEC finally announced it would remain put, the damage was already done.

The effect was almost immediately felt on the stock market, with service companies heavily battered. A new phase in the market cycle now unfolds, where weaker suppliers get systematically purged. The supply curve is illusive, but it is relatively safe to assert that heavy petroleums, deep offshore and much of the source rocks in North America are now in negative territory. The question left to answer is how deep the impact is going to be on the bond market.

22 November 2014

15 November 2014

Press review 15-11-2014 - Ravished Ukraine

Petroleum prices resumed the dive this week, with Brent closing below 80 $/b for the first time in four years. For now these are still small news on the backdrop of the world Economy, gripped with recession and spreading price deflation. The nervousness of governments is palpable in many countries.

Ukraine is back to the front pages with further escalation of the conflict. Combat intensified and the western media is reporting a large scale invasion of the Donbass by Russian forces. The mere risk a full out war poses on gas infrastructure is disturbing by itself.

There is still no gas flowing from Russia to Ukraine. The European Commission is having second thoughts and is for now refusing to foot the bill. A mild Autumn is supporting this policy, but on the wake of the Russia vilification campaign, leaving the Ukrainian nationalists out in the cold is not really an option.

08 November 2014

Press review 08-11-2014 - Brent is sinking

Commodities resumed the decline this week, pretty much all across the board. The economic outlook is grim, Governments appear week, with limited options, but are still keen on cutting ties with important partners such as Russia. This price rout is looking ever similar to what took place in 2008. For the energy sector in particular, these developments come at the worst of moments.

In a striking sign of times, the Brent petroleum field in the North Sea appears to be fast reaching the end of its economic life. The petroleum extracted from this field has been the benchmarks for about half of all the petroleum traded internationally. Ironically, the benchmark seems no longer able to support itself. Soon the media might have to start referring to a different international price index.