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30 January 2016

Press review 30-01-2016 - Budgetary difficulties

This week ended up being an anti-climax to all those pundits trying to bury the petroleum market at Davos. The Brent index rallied substantially, finishing the week with a 10% gain. This is likely not a definitive pull away from the depressed market, but shows well the utter volatility engulfing petroleum trading.

Exporting nations with little exception show publicly their discomfort with these petroleum prices. For many of them a second year of budget cuts is going to be an hard pill to swallow, that in some cases could spell serious social and political challenges.

Energy Matters
Low oil prices, budget deficits and OPEC
Roger Andrews, 26-01-2016

In November 2014 the OPEC countries met in Vienna and agreed to keep pumping oil to maintain their market share rather than cut production to support the oil price. In a post written a month later I addressed the question of how these countries were positioned to withstand an extended period of low oil prices and high budget deficits. More than a year has now passed, so it’s time to take a look at how they have done so far and to see what their actions presage for the future.

Results to date:

OPEC is known to have suffered economic damage as a result of low oil prices, but exactly how much? I made the following estimates from the October 2015 IMF World Economic Outlook Database. They include all the OPEC countries except war-torn Libya, where the data are not particularly meaningful. All the figures given in this post are in (or estimated from) US dollars unless otherwise specified:

GDP, 11 OPEC countries combined: Down from $3,392 billion in 2014 to $2,849 billion in 2015, a decrease of $543 billion.

Budget deficit, 11 OPEC countries combined: Up from $17 billion (0.5% of GDP) in 2014 to $278 billion (9.8% of GDP) in 2015, an increase of $261 billion.

Indications of self-induced extraction cuts were floated by the press throughout the week, with a few denials along the way. In any case, it seems some sort of bargaining is going on behind the scenes between Russia and Saudi Arabia. The question is whether other OPEC members are willing to follow suit.
Russia says studying proposal for global oil production cuts
Darya Korsunskaya and Rania El Gamal, 28-01-2016

Russia said on Thursday that OPEC had proposed oil production cuts of up to 5 percent in what would be the first global deal in over a decade to help reduce a glut of crude and prop up sinking prices.

It remained unclear whether Russian Energy Minister Alexander Novak was referring to a months old proposal by OPEC members Venezuela and Algeria or a new proposal backed by OPEC leader Saudi Arabia. Saudi officials did not immediately comment on the proposal, and a Gulf OPEC delegate said it came from Venezuela and Algeria.

For non-OPEC member Russia, the world's top producer, that would represent an output cut of around 500,000 bpd.
The shale subprime blow out was brought a notch closer, as the all-powerful rating agencies start washing their hands out of the mess they greatly facilitated. Once again, I do not expect a recovery of the petroleum market before the shale subprime bond pile is sorted out.
Moody's puts 175 commodity firms on review over bleak outlook
Ron Bousso, 22-01-2016

Moody's has placed 175 oil, gas and mining companies on review for a downgrade due to a prolonged rout in global commodities prices that it says could remain depressed for some time.

Warning of possible downgrades for 120 energy companies, the rating agency said there was a "substantial risk" of a slow recovery in oil that would compound the stress on firms already pummeled by a 75 percent drop in prices since June 2014.

It said it was likely to conclude the review by the end of the first quarter which could include multiple-notch downgrades for some companies, particularly in North America.

A ratings downgrade makes borrowing more expensive for companies.
These downgrades, and others to come, mean immediate losses to the investors involved. Which in turn means an increased effort to keep the "shale oil" bandwagon going.
Junk Bond Market Braces for What Could Be a $117 Billion Logjam
Cordell Eddings, Michelle Davis and Fion Li, 22-01-2016

When credit markets were booming, investors snatched up longer-term bonds from energy and mining companies, among others. They may have made a big mistake.

Some $117 billion of the securities maturing in 10 years or more could be cut to junk by the end of 2017, strategists at UBS Group AG estimate, more than twice the amount currently outstanding in that market.

Holding a bond that loses its investment-grade rating is not usually fun. Owning long-term bonds that get cut to junk could be especially painful for investors -- many of the current holders will have to sell them, and few junk bond portfolio managers want to take the risk of lending to speculative-grade borrowers for more than a decade.

In other words, prices on these bonds could fall even more than they already have.
In Texas petroleum extraction is falling at a rate of 5% - per month. Less petroleum, means fewer revenues to keep the ghost "shale" companies from vanishing.
Texas oil production slumps 5 percent
Daniel J. Graeber, 22-01-2016

Crude oil production of 70.9 million barrels in November for Texas was nearly 4 million less than the previous month, a state energy regulator said.

The Railroad Commission of Texas, the state's energy regulator, reported crude oil production for November at 70.9 million barrels per day, about 4 million barrels, or 5 percent, lower than for the month of October.

A decline in crude oil prices means less capital is available for exploration and production. While some inland shale basins in Texas are more resilient than others in the weakened market, the state regulator said it issued 727 original drilling permits in December, about 51 percent less than the total issued for the same month in 2014, as the appetite wanes.
The next US "Shale" state in line is North Dakota. Figures for this winter should already show relevant declines in extracted volumes.
The Barrel
Despite holding steady, North Dakota braces for oil supply crash
Brian Scheid, 26-01-2016

When North Dakota oil production broke above 1 million b/d for the first time in April 2014, many expected that the 2 million b/d threshold would be breached in relatively short order.

With WTI spot prices averaging over $100/b in the months that followed, some even speculated that 2 million b/d may be too modest of a goal for a state in the throes of a shale oil renaissance.

But prices, and those expectations, have come crashing down.

Now, rather than striving for 2 million b/d, state officials are hoping to maintain production above 1 million b/d.

And there are indications that a significant drop in Bakken supply may already be underway.
The involvement of Russia in the war in Syria and Iraq has produced visible effects. Daesh and Al-Qaeda seem farther from defeating the Shiites and the mythical Free Syrian Army is nowhere to be seen. The question now is for how long is Russia able to sustain its commitment.
The Independent
Syrian civil war: Why the endless conflict is at a decisive point
Patrick Cockburn, 24-01-2016

The Syrian peace talks between government and opposition will begin in the next few days in Geneva in an atmosphere of almost undiluted gloom about the prospects for success. The two sides hate each other and have spent five years trying to kill each other, making it unlikely that they will agree to share power in any way except geographically, with each side keeping the territory it currently holds and defending it with its own armed forces.

[...] But, while we may not see many positives emerge from the talks in Geneva, the political landscape in the region is a little more conducive to peace than previously. The Russian military intervention four months ago means that Assad is not going to lose, though he is unlikely to win decisively. He remains in power but only because of the increased support from Iran, Russia and Hezbollah in Lebanon and, even with their backing, his army has not recaptured cities he lost last year, such as Palmyra and Idlib. President Assad may not want to talk in Geneva, or subsequently, but he is more than ever dependent on these external allies who do not want to be mired in an endless Syrian civil war.

[...] The big loser here could be Turkey, which seemed to be in such a strong position to extend its influence across the Middle East in 2011. Its image as an economically prospering, democratic yet Islamic, state was attractive to many Arab protesters looking to overthrow and replace dictatorial rule. But the Turkish President, Recep Tayyip Erdogan, soon made clear that he was supporting a Sunni Arab sectarian takeover that was anti-Shia, anti-Kurd and anti-secular and was bound to be resisted. Having first backed the Muslim Brotherhood, Turkey then tolerated or helped Isis, al-Nusra and extreme jihadi groups.
An interesting twist to this war was almost missed in the mainstream media, but luckily there was an odd exception. It turns out one of the Russian pilots of the Su-24 shot down by the Turkish air force was killed by a Turkish "rebel". Two important points to note: (i) this story lends credibility to the thesis of this being a planned trap; and (ii) the "rebels" in this region the mainstream media so much touts could be nothing more than Turkish forces. In essence, Turks and Russians are directly fighting each other in Latakia.
The Independent
Syria conflict: Russian air force and local militia hunt for Turkish nationalist suspected of killing pilot
Laura Pitel and Nadia Beard, 27-01-2016

A Turkish ultra-nationalist who allegedly killed a Russian pilot is being hunted by the Kremlin’s forces in Syria.

Alparslan Celik – who claimed to have attacked the pilots of an Su-24 fighter shot down by Turkey in November – was reportedly being targeted in the province of Latakia after a string of gains by forces loyal to President Bashar al-Assad.

With the aid of Russian air power and local militias, the Syrian military has captured a series of rebel-held towns in the province, which shares a border with Turkey.

[...] He subsequently said that Lieutenant Colonel Oleg Peshkov deserved to die, prompting the Russian foreign ministry to demand his arrest. Mr Celik then taunted Moscow with a jibe that he had yet to be killed by “the dust and smoke from your bombs”. However, in a statement published by the Turkish newspaper Vatan, he conceded that rebels were struggling to contend with air strikes that have been pounding the region.
More clues emerged on a likely intervention by NATO in Libya, this time with allusions to some sort of participation by the US. After years supporting Al Qaeda and Daesh in Syria, it will be the utmost irony if NATO starts fighting them in Libya.
The Intercept
The U.S. Intervention in Libya Was Such a Smashing Success That a Sequel Is Coming
Glenn Greenwald, 27-01-2016

The immediate aftermath of the NATO bombing of Libya was a time of high gloating. Just as Iraq War advocates pointed to the capture and killing of Saddam Hussein as proof that their war was a success, Libya war advocates pointed to the capture and brutal killing of Muammar el-Qaddafi as proof of their vindication. War advocates such as Anne-Marie Slaughter and Nicholas Kristof were writing columns celebrating their prescience and mocking war opponents as discredited, and the New York Times published a front-page article declaring: “U.S. Tactics in Libya May be a Model for Other Efforts.” It was widely expected that Hillary Clinton, one of the leading advocates for and architects of the bombing campaign, would be regarded as a Foreign Policy Visionary for the grand Libya success: “We came, we saw, he died,” Clinton sociopathically boasted about the mob rape and murder of Qaddafi while guffawing on 60 Minutes.

Since then, Libya — so predictably — has all but completely collapsed, spending years now drowning in instability, anarchy, fractured militia rule, sectarian conflict, and violent extremism. The execution of Saddam Hussein was no vindication of that war nor a sign of improved lives for Iraqis, and the same was true for the mob killing of Qaddafi. As I wrote the day after Qaddafi fled Tripoli and Democratic Party loyalists were prancing around in war victory dances: “I’m genuinely astounded at the pervasive willingness to view what has happened in Libya as some sort of grand triumph even though virtually none of the information needed to make that assessment is known yet, including: how many civilians have died, how much more bloodshed will there be, what will be needed to stabilize that country, and, most of all, what type of regime will replace Qaddafi? … When foreign powers use military force to help remove a tyrannical regime that has ruled for decades, all sorts of chaos, violence, instability, and suffering — along with a slew of unpredictable outcomes — are inevitable.”
A portrait of the forces presently supported by the European Union in Ukraine. At some point this grave mistake will came back haunting us.
Nazi Roots of Ukraine’s Conflict
Jonathan Marshall, 28-01-2016

On the lovely cobblestone streets admired today by tourists flowed the blood of some 4,000 Jews who were massacred by locals in 1941, during the German occupation. They were egged on by the radical Organization of Ukrainian Nationalists (OUN), whose founder and wartime leader is today a national hero to many of his countrymen.

On April 28, 2011, the 68th anniversary of the formation of a Ukrainian Waffen-SS division, hundreds of people marched through Lviv, with support from city council members, chanting slogans like “One race, one nation, one Fatherland!”

Two months later, residents celebrated the 70th anniversary of the German invasion “as a popular festival, where parents with small children waived flags to re-enactors in SS uniforms,” according to the noted Swedish-American historian Per Anders Rudling.

Later that year, extreme right-wing deputies at a nearby town in the Lviv district “renamed a street from the Soviet-era name Peace Street to instead carry the name of the Nachtigall [Nightingale] Battalion, a Ukrainian nationalist formation involved in the mass murder of Jews in 1941, arguing that ‘Peace’ is a holdover from Soviet stereotypes.’”
Some hard numbers on the slowdown in steel production and consumption in China. Naturally, the big story is what this will mean for coal extraction in that country.
China Focus: Fund to help those made redundant by overcapacity cut

Industrial closures are on the horizon. Crude steel production capacity will be cut by 100 to 150 million tonnes, while coal production will be reduced by "a relatively large amount," the State Council said in a statement released Sunday without elaborating on a time frame.

The steel production slash could translate into the loss of jobs for up to 400,000 workers, estimated Li Xinchuang, head of China Metallurgical Industry Planning and Research Institute.

Li said more people will be affected in the upstream and downstream industries.

"Large-scale redundancies in the steel sector could threaten social stability," said Li.

In the coal sector, 7,250 mines with outdated production capacity have been closed in the last five years.
One country feeling the waning appetite for coal in China is the US. This compounds with local policies to reduce the reliance on fossil fuels.
Seeking Alpha
The U.S. Coal Industry Is In A Hopeless Situation

  • The U.S. coal industry is in an increasingly untenable situation, especially considering the recent global climate deal and U.S. solar investment tax credit extension.

  • An increasing number of actions are being taken to reduce or altogether shut down coal consumption in the U.S.

  • The rapid technological advancements taking place in renewables will likely only accelerate the U.S. coal industry's current downward spiral.
Interesting data on Wind out of Germany. And on who is profiting with the energy transition.
Renewables International
Returns from offshore wind: too high?
Craig Morris, 27-01-2016

Alpha Ventus exceeded its yield forecast by 3.1 percent in 2015, a year with above-average wind conditions. Over the first five years of operation, the twelve 5 MW turbines (six Adwens and six from Senvion) at an average capacity factor of 47 percent, compared to closer to 20 percent for Germany’s onshore turbine fleet.

[...] With production probably far above expectations, feed-in tariffs for offshore wind in Germany are probably too high. There was great outcry when the feed-in tariffs for PV were too high for a few years, but there has been almost no complaining about excessively high rates for offshore wind – probably because citizens and community projects benefited from PV incentives, whereas big utilities benefit from high rates for offshore wind. Money talks, so the complaining about PV was loud, but the utilities will not complain about their own excessive returns.
Have a pleasant weekend.

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