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21 March 2015

Press review 21-03-2015 - Transatlantic rift redux

Petroleum prices have endured days of great volatility this past week, with multi percentage point variations intra-day. At the end of the week the Brent index stood pretty much where it started: 55 $/b. Meanwhile the West Texas index (WTI) - the benchmark used to price petroleum extracted across the Atlantic - sank spectacularly to 43 $/b. This means the petroleum sold in the US is now over 20% cheaper than that sold in Europe. Such wide spread is unheard of, and adds another dimension to the rift opening between both continents.

In fact the present WTI levels are but a symptom of an industry out of control, that irrespective of price continues pumping petroleum to fulfil land leasing and other contractual obligations. "Race to the bottom" is an expression used in the US to describe this phenomenon, companies will keep extracting petroleum until they go bankrupt. Many of these companies have adjourned their 2014 balance declarations to the very end of the month, trying to delay as much as possible the day of reckoning.

But the ship is already sinking. The first sizeable American petroleum company went under this week, leaving behind more than 2 G$ in bonds, at best to be restructured, written down at worst. It is unlikely this to be the last company going bust.

Business Insider
A major US energy company has filed for bankruptcy
Akin Oyedele, 19-03-2015

Quicksilver Resources filed for Chapter 11 bankruptcy protection on Tuesday.

In regulatory filings, the energy company said it had $2.35 billion in debt and $1.2 billion in assets. Management said it would face a "potential liquidity shortfall" in the first quarter of 2016, for reasons including its mountain of debt and the oil crash, according to a regulatory filing.

"Quicksilver's strategic marketing process has not produced viable options for asset sales or other alternatives to fully address the company's liquidity and capital structure issues," CEO Glenn Darden said in a statement. "We believe that Chapter 11 provides the flexibility to accomplish an effective restructuring of Quicksilver for its stakeholders."
In the last couple of weeks over 7 G$ have been lost in the US bond market. This is just the beginning, as most companies are yet to submit their 2014 balances, thus disclosing their real financial state.
Oil Bonds Lose Investors $7 Billion in 10 Days
Sridhar Natarajan and Elliott Stam, 18-03-2015

Investors lured back into junk-rated energy bonds by their juicy yields are getting burned.

Oil prices have fallen more than 15 percent since March 4 to a six-year low of $42.3, wiping out $7 billion of market value of high-yield debt issued by energy companies. Prices on $1.45 billion of notes sold less than two weeks ago by Energy XXI Ltd., an oil producer that was being squeezed by its lenders, have fallen by as much as 10 percent. Comstock Resources Inc.’s $700 million of securities have declined by more than 7 percent since March 6.

The latest slump in crude is rekindling concern that oil companies will struggle to service the $120 billion of high-yield, high-risk debt they took on in the past three years amid the U.S. shale boom. That’s a sharp reversal from February when yield-starved bond investors were loading up on the debt again, pushing down borrowing costs to a two-month low.
In spite of these news, investors have so far remained willing to lend money to petroleum companies. In fact the high-yield bond market has had a stronger start in 2015 than it had in 2014.
Wolf Street
Junk-Rated Oil & Gas Companies in a “Liquidity Death Spiral”
Wolf Richter, 15-03-2015

The boom in US oil production will continue “to defy expectations” and wreak havoc on the price of oil until the power behind the boom dries up: money borrowed from yield-chasing investors driven to near insanity by the Fed’s interest rate repression. But that money isn’t drying up yet – except at the margins.

Companies have raked in 14% more money from high-grade bond sales so far this year than over the same period in 2014, according to LCD. And in 2014 at this time, they were 27% ahead of the same period in 2013. You get the idea.

[...] In the junk-bond market, bond-fund managers are chasing yield with gusto. Last week alone, pro-forma junk bond issuance “ballooned to $16.48 billion, the largest weekly tally in two years,” the LCD HY Weekly reported. Year-to-date, $79.2 billion in junk bonds have been sold, 36% more than in the same period last year.

But despite this drunken investor enthusiasm, the bottom of the energy sector – junk-rated smaller companies – is falling out.
The American petroleum industry is in great trouble and that is why the WTI sank.
The Reemergence Of The WTI/Brent Spread
Nick Cunningham, 16-03-2015

After a brief period earlier this year in which the spread between WTI and Brent had vanished, the difference between the two oil benchmark prices has widened once again.

For several years, WTI traded at a discount to Brent – sometimes by $5 to $10 per barrel – owing to the rapid increase in oil production from the United States where the WTI marker is based. With drillers unable to export their crude, higher supplies tended to somewhat saturate refiners’ ability to process crude. Moreover, the inability for pipeline builders to keep up with the pace of drilling also led to local supply gluts.

After the oil bust that began last year, the markets have been closely watching drilling activity in U.S. shale. Rig counts have dropped precipitously, tens of billions of dollars have been slashed from corporate spending budgets, and even some small oil players have missed debt payments.
Michael Klare granted us with another of his long reflections on the petroleum market. He takes a long term view on what the recent petroleum bust means for petroleum companies, especially those seeded in the OECD.
Big Changes Needed For Big Oil To Survive
Michael Klare, 12-03-2015

Many reasons have been provided for the dramatic plunge in the price of oil to about $60 per barrel (nearly half of what it was a year ago): slowing demand due to global economic stagnation; overproduction at shale fields in the United States; the decision of the Saudis and other Middle Eastern OPEC producers to maintain output at current levels (presumably to punish higher-cost producers in the U.S. and elsewhere); and the increased value of the dollar relative to other currencies. There is, however, one reason that’s not being discussed, and yet it could be the most important of all: the complete collapse of Big Oil’s production-maximizing business model.

Until last fall, when the price decline gathered momentum, the oil giants were operating at full throttle, pumping out more petroleum every day. They did so, of course, in part to profit from the high prices. For most of the previous six years, Brent crude, the international benchmark for crude oil, had been selling at $100 or higher. But Big Oil was also operating according to a business model that assumed an ever-increasing demand for its products, however costly they might be to produce and refine. This meant that no fossil fuel reserves, no potential source of supply -- no matter how remote or hard to reach, how far offshore or deeply buried, how encased in rock -- was deemed untouchable in the mad scramble to increase output and profits.
Arthur Berman publishes a series of informative graphs with leads on where the present petroleum market is headed. Note that the figures in this post refer strictly to extraction and consumption, not to supply and demand as Arthur implies.
The Petroleum Truth Report
World Oil Demand Surges: A Data Point For Price Recovery
Art Berman, 16-03-2015

World oil demand increased by 1.1 million barrels per day in February.

This is a potentially important data point that suggests a crude oil price recovery sooner than later. It is also important because it further supports the view that a production surplus and not weak demand is the main cause for the recent oil-price fall.

The latest data from EIA shows that February world liquids production was flat with January but consumption increased 1.1 million barrels per day. This reduces the relative production surplus (production minus consumption) from 1.68 million barrels per day in January to 0.56 million barrels in February. The chart below shows production (supply) in blue and consumption (demand) in red.
Adding lumber to the US bond market fire is a report announcing trouble ahead for American coal companies. Just as it happened with petroleum, the regional coal price is forecast to decouple from the international market and leave the local industry in trouble.
The Fly
U.S. coal sector predicted to see 'wave of bankruptcies'

The outlook for U.S. coal producers is "increasingly bleak," and the sector is likely to undergo "a wave of bankruptcies," Macquarie Research warned in a note to investors today. WHAT'S NEW: After Macquarie's commodity team lowered its forecast for met coal prices by $5 per ton for 2015 and 2016, analyst Anthony Young warned that U.S. coal prices will no longer move in conjunction with international coal prices. This decoupling, which will feature declines in U.S. coal prices, "will be a painful, but necessary, step to force rationalization on U.S. producers," and will continue until supply drops to levels that are balanced with demand, Young believes. The price decreases that occur during the process are likely to result in production cuts and bankruptcies over the near-to-medium term, the analyst predicted.
Regarding gas, the recent moves by Russia to divert the transit through Ukraine to Turkey remain the most relevant development. The Russian government and gas companies seem far ahead in their plans, with contracts now in place in all transit countries. While Europe will likely continue to get Russian gas, this development marks a major failure of its Energy and Foreign policies.
About Oil
The Turkish route for Europe
Nicoló Sartori, 16-03-2015

Vladimir Putin's announcement, with which the Russian President, on December 2, 2014 announced the closure of the South Stream project and the construction of a new gas pipeline with a landing point in Turkey, is expected to significantly change the European energy map. Through the Turkish Stream pipeline, in fact, Russia aims to strengthen its energy relations with Turkey – in search of new supplies to sustain its economic growth – but without blocking access to western European markets, a key point of Gazprom’s export strategies. Moscow's decision helps to strengthen Turkey’s role at the center of the Eurasian energy game. In addition to the transit of gas from Russia, Ankara is, in effect, crucial in the construction of the Southern Corridor, the initiative of the European Commission for transporting gas from the Caspian Sea (and, potentially, from the Middle East) to the European markets. Thanks to this role as an intersection, Turkey can contribute significantly to the development of the balance between Brussels and its energy partners.
One of the important news of the week that was largely ignored by the mainstream media is the stall of CO2 emissions from human activities in 2014. Was this a mere consequence of recessive policies? Or is it a new trend settling in? Whatever the case, this is certainly uncomfortable news for certain cornucopian institutions.
Emissions Stall Amid Growth for First Time in 40 Years
Mathew Carr, 13-03-2015

Global emissions were unchanged last year, the first time that’s happened amid economic growth in four decades, according to the International Energy Agency.

Carbon-dioxide emissions, which scientists say are responsible for climate change, were stable at 32.3 billion metric tons, even as the global economy advanced 3 percent, the Paris-based agency said today in a statement on its website, citing preliminary estimates. China, the world’s biggest emitter, generated more of its electricity from renewable sources including hydropower, solar and wind and less from coal, the dirtiest fossil fuel, it said.

The preliminary data suggests efforts to slow climate change may be more effective than expected, the IEA said. United Nations envoys are holding a series of meetings through the end of this year to try to seal a global deal limiting greenhouse gases in the period after 2020 in a bid to prevent emissions from rising to a level scientists say will lead to irreversible climate change.
On renewable energies, the trade war with China is again emerging, with the EU apparently ready to impose further duties on solar manufacturers. Naturally, it won't be these tactics to hike the cost of PV. And it is actually prompting China to extend its sphere of economic influence.
Renewable Energy World
Trade Wars Push China Solar Offshore
Doug Young, 17-03-2015

As a settlement to avoid anti-dumping tariffs for Chinese solar panels exported to Europe showed signs of unraveling last week, a new report emerged that showed a more positive trend for a sector that has become the subject of nonstop trade wars over the last four years. That newer trend has seen a growing number of embattled Chinese solar panel makers set up overseas factories, helping them to avoid punitive anti-dumping tariffs imposed by the U.S. on their domestically produced goods.

Both Beijing and the west should welcome and encourage this kind of development, which not only can help diffuse trade tensions but also benefits everyone, including governments inside and out of China and the solar panel makers themselves. Most fundamentally, such a development greatly reduces the complaints of unfair state-support lodged by western governments, since such new factories lack access to many of the beneficiary policies that manufacturers receive in China.

At the same time, such overseas investment boosts jobs in economies of recipient countries, while also helping China by raising its outbound investment and extending its global influence. Despite experiencing some short-term pain, the panel makers themselves also benefit by becoming more diversified and efficient through competition with western rivals on a more level playing field.
If the EU tries to salvage its outdated electricity market from affordable renewable energies, others are willing to tap in the benefits of the cost reductions achieved in these technologies since the turn of the century.
Renewables Poised For Massive Growth In The Middle East
Darrell Delamaide, 19-03-2015

Growing scale in renewable energy projects has sharply reduced the price of sustainable energy to near parity with fossil fuels, creating new opportunities for energy companies but also for investors.

This is the thrust of a report published this month by the National Bank of Abu Dhabi entitled "Financing The Future Of Energy," prepared by the University of Cambridge and PricewaterhouseCoopers.

The report focuses on renewable energy prospects in the wider Gulf region – the ‘West-East corridor’ stretching from Africa into Central Asia – in the context of global energy development.

According the report, US$48 trillion will need to be invested in energy infrastructure worldwide over the next 20 years, with the bulk of that investment in non-OECD countries such as those in the Gulf.
The deadline for an international agreement on Iran's Nuclear programme looms without relevant developments emerging this week. Is this the end of the negotiations? Or will there be a last hour break through?

Today is the first of Spring, enjoy.

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