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20 February 2016

Press review 20-02-2016 - War prospects

This week was again market by a great deal of nervousness around petroleum prices, with the Brent index closing Friday pretty much where it opened on Monday. After much speculation, Saudi Arabia and Russia finally sat at the same table to discuss price support. There was an agreement of sorts, but on a freeze to January output levels, possibly the moment of Russia's all time high. These hollow promises did not crash the price as expected, but an initial cold reception to the agreement by Iran and Iraq produced more episodes of volatility.

And while the mainstream media reported Saudi and Russia at the same table over petroleum prices, the alternative media kept abuzz with rumours of imminent involvement by Saudi and Turkey in the war raging in Iraq and Syria. Spurious evidence of movements of troops, equipment and aircraft around Syria's border fuelled speculation of an impending start to the III World War. For a few days, it seemed like the mainstream and the alternative media were reporting on different worlds or perhaps on different time epochs.

By the end of the week the mainstream media conveyed direct messages from Turkish and Saudi diplomats confirming that an intervention is being considered. And remarkably, they clearly identify the Shiite coaliion - which includes Christians and Kurds and is backed by Russia - as their target. Hard to say where this will all end, but it is remarkable how the financial world appears completely dittached from these war prospects.

Financial Times
Turkey and Saudi Arabia consider Syria intervention
Sam Jones, Erika Solomon and Geoff Dyer, 18-02-2016

Turkey, according to two senior western diplomats, wants to create a buffer zone across its border “several kilometres deep” that would allow Ankara to check the expansion of the Kurdish militias in Syria that are its primary concern.

[...] Several senior moderate rebel leaders have met military officials in Ankara and Istanbul in recent days, Syrian opposition groups said, to work through plans for a potential “Islamic coalition” deploying in the north.

For much of Nato, the prospect of a member state deploying troops into an already congested theatre in which Russian forces are actively involved is a deeply unsettling prospect.

“Syria is spiralling out of control,” says Charles Lister, resident fellow at the Middle East Institute, a think-tank. “The situation in northern Syria has the potential to transform the trajectory of the entire Syrian crisis.”
Days before in a galaxy far away... An interesting aspect about this agreement, Russia supposedly extracted almost 11 Mb/d in December and January; I imagine they would be very glad to freeze it there. True that Russia has remarkably exceeded expectations, but there are limits to everything.
Financial Times
Saudi Arabia and Russia ministers agree oil production freeze
David Sheppard, Anjli Raval and Jack Farchy, 16-02-2016

Saudi Arabia has agreed with Russia to freeze oil output if they are joined by other large producers, in the first co-ordinated move to try to reduce a near record supply glut and halt the collapse in prices.

After watching oil prices fall 70 per cent since mid-2014, Saudi Arabia’s powerful oil minister Ali al-Naimi said an output freeze by some of the world’s major producers should start to stabilise the market.

The speed of the deal between the Opec powerbroker and the world’s largest crude oil producer surprised the market but traders remained sceptical that the provisional agreement would gain wider acceptance. Opec member Iran is seen as the biggest stumbling block.
Saudi's and Turkey's motives are not only related to the débâcle of the Sunni insurgence in Iraq and Syria. Iran is effectively rising as a regional power, bolstered by its return to international markets and its renewed alliance with Russia. Recall this old article on Iran's military capabilities, weapons such as the Su-30 fighter jet and the S-300 radar/missile system, represents an effective defence against the conventional weapons owned by Israel or Saudi.
The Diplomat
Confirmed: Iran and Russia to Co-Produce Su-30 Fighter Jet
Franz-Stefan Gady, 14-02-2016

During a recent television interview, Iran’s Defense Minister, General Hossein Dehqhan, announced that Iran will sign a contract with Russia for the co-production of an undisclosed number of Russian-made Sukhoi Su-30 multirole fighter aircraft, Fars News Agency reports.

Should the deal go through, Iran will be the second country in the world after India to produce a variation of the Su-30 fighter jet locally. However, as of now, it still remains unclear in what capacity Tehran will be involved in the aircraft production process.

According to a source within Iran’s Defense Ministry interviewed by Sputnik News, a contract could be signed as early as February 16, when the Iranian defense minister will arrive in Moscow to discuss the deliveries of S-300 air defense systems and the Sukhoi Su-30 aircraft.
On other geo-political news is one more attempt by the European Commission to reduce the continent's reliance on Russian gas. Again, there is no effort to reduce or substitute consumption. It should all happen magically inside the walls of the Commission's offices.
Financial Times
EU strengthens resilience to Russian gas supply threats
Christian Oliver, 26-02-2016

“After the gas crises of 2006 and 2009 that left many millions out in the cold, we said ‘never again’,” Miguel Arias Cañete, EU energy commissioner, told reporters at the launch of the EU’s security of supply proposals on Tuesday.

The most contentious proposal in the package is the European Commission’s bid to win increased oversight of gas supply contacts. Brussels has accused Gazprom of overpricing and other anti-competitive practices, such as in effect dividing the EU into national silos by preventing the re-export of gas.

These complaints are being addressed in a landmark antitrust case. People close to the talks say that Gazprom has already moved to change its business practices in important areas.

However, the commission is seeking to prevent the recurrence of such problems with greater powers to delve into contracts. It is proposing that it should be allowed to vet in advance any governmental agreement between a member state and an external supplier, such as Moscow.
Zooming now on the petroleum market. A simple explanation of where the industry is heading to with present prices. The mainstream media has great difficulty dealing with volatility, as the usual expedient of having pundits predicting the future to be a continuation of the past no longer functions. Volatility is an essential mechanism in the dynamics of a scarce commodity, as "permanent damage" keeps expensive resources eternally at bay.
Financial Post
World’s oil supply on the brink of being permanently damaged at these prices
Peter Tertzakian, 16-02-2016

[...] I explained that the price fall from $100 a barrel to $50 had economists pulling out cost curves to figure out who could keep drilling and still make money. The list was pretty lean, which is why dozens of mega projects were shelved or cancelled over the past 18 months. At year-end, oil prices slid from $50 to $40. The difference wasn’t measured in dollars, but in units of anxiety. But it didn’t stop there; going to $30 a few weeks ago caused white faces and a sense of panic in the industry. Pundits closed their drilling spreadsheets and opened the ones that spoke to covering operating costs – in other words the oil price at which producers start losing money just by turning on their pump jacks.

“Apparently, a lot of oil production can keep pumping for under $20 a barrel; that’s what the operating cost curves are showing.”

“Maybe,” I replied, “but I haven’t seen any companies moving their head office into tents by their pump jacks. Those analyst numbers you see being quoted are operating costs at the wellhead. They don’t include salaries, office overheads, rents, fixed fees, local taxes, and of course the corporate debt.”

I explained that therein lies the problem with oil prices in the $20-range: Most of the world’s oil industry (Canada not being unique) is gasping through a snorkel for cash. Forget about investment dollars; there isn’t any money to drill new wells when prices are below $30 let alone $20. Natural gas prices have collapsed too, as have petroleum products more recently. The flow in ‘cash flow’ is drying up fast. For a lot of companies just keeping the lights on and the bankers behind the portcullis is a money-losing proposition.
Without the confidence of stable high prices (as happened between 2010 and 2014) the industry is not able to muster the capital required to go after the harder to extract and lower quality reserves still underground.
Scottish minister worries remaining North Sea oil won't be extracted

Scotland's finance minister has told the British government he is concerned that some of Britain's remaining North Sea oil will never be recovered as companies active in the area have scaled down investments due to the weak oil price.

John Swinney, who is also Scotland's deputy first minister, urged British finance minister George Osborne in a letter to cut taxes on oil and gas companies and to consider giving loan guarantees to the sector to avoid early field shutdowns and more job losses.

[...] "The declining oil price has resulted in a number of North Sea projects being removed from company investment plans," Swinney wrote in the letter, published by the Scottish government.

"There is a serious risk that these resources will be permanently unrecoverable."
An often overlooked feature of the present petroleum market is the strict number of countries responsible for the extraction growth in the past couple of years. They are just three: USA, Iraq and Saudi Arabia. Canada and Russia also contributed, but modestly. No wonder then that "peak oil" is again frequently read in the alternative media that follows the monthly data.
Crude Oil Peak
World outside US and Canada doesn’t produce more crude oil than in 2005
Matt Mushalik, 14-02-2016

Personally, I wont be ready to label 2015 with "peak oil" before having a clear financial purge of the toxic assets related to the so called "shale oil boom". An industry that was not profitable at 100 $/b, is still going at 30 $/b, threatening to bring down banks and investment funds with it.
Energy loan worries climb as oil companies max out credit lines
Matt Jarzemsky, 12-02-2016

Struggling oil and gas companies are maxing out revolving credit lines typically used to cover short-term funding gaps, raising fresh concerns about banks’ exposure to the decline in energy prices.

Midstates Petroleum Co. MPOY, -6.67% , Linn Energy LLC LINE, +5.22% and SandRidge Energy Inc. SDOC, +11.22% in recent weeks drew down the full balance of their revolving credit lines, they said, collectively borrowing more than $1.5 billion to build up cash cushions as the oil slump heads into its second year.

[...] Some banks have started to explore selling revolving loans at a discount to distressed-debt funds, said people familiar with the matter, a sign they don’t expect to get paid in full on the loans, typically seen as safe. Distressed-debt trading desks at Goldman Sachs Group Inc. GS, -0.56% , J.P. Morgan Chase & Co. JPM, +0.02% , Bank of America Corp. BAC, -0.90% and other banks have been quoting prices for some of the loans, though it is unclear if any have traded yet, the people said.
And it is not just petroleum companies or banks, entire countries linger in economic agony. If a large exporter like Nigeria or Venezuela falters, there will be no one left to make up for them.
Widespread Credit Downgrades Likely For Oil Producing Countries
Nick Cunningham, 11-02-2016

[...] According to the research firm, emerging market economies that depend on natural resource exports are not being realistic about the state of the markets, and many are using vastly overoptimistic assumptions about oil prices. On average, these countries assumed an oil price for 2016 that is more than 50 percent above what futures market is telling us that oil will trade for this year.

While many have suffered, the pain is not over. “We expect widespread rating downgrades and further bad performance across commodity-producing sovereigns,” Oxford Economics wrote in its January 27 report. The markets are already pricing in downgrades of around two to three notches for many of the countries in question.

Several of the Gulf States in the Arabian Peninsula, such as the UAE and Qatar, have massive sovereign wealth funds, which will allow them to withstand the bust in oil prices for quite some time. But for others, such as Venezuela, Libya, or Iraq, there is a limited and shrinking availability of fiscal firepower to weather the storm. Venezuela probably tops the list of countries that are facing the possibility of debt default, as its economic crisis deepens by the day.
On other resources, again some highlight on silver. This article resumes it pretty well: growing consumption meets declining mined volumes and declining stocks. Such trends can only go on for so long.
Profit Confidential
Silver Prices: Industry Expert Says Silver Prices Could Hit $100
Mourad Haroutunian, 11-02-2016

“I know that at $14.00 or $15.00 silver, that sounds stupid and it’s probably hilarious to many people, but that’s where I think it’s going,” Keith Neumeyer, the founder and CEO of First Majestic Silver Corp. (TSE:FR) told his host Mike Gleason. (“Top Silver Mining CEO: Don’t Laugh, We Could See $100+ Silver,” Money Metals Exchange web site, February 5, 2016.)

[...] Still, silver consumption is increasing every single year. The aboveground supplies of the metal in the 1980s were about five billion ounces; now, it’s just a billion ounces of silver that’s accountable.

That means people have consumed four billion ounces of silver in the last 30 years.

“It’s not coming back. It’s not in recycling. It’s in waste dumps, it’s in the ocean, it’s in stuff that will never be seen,” he said.
Nothing is infinite in this planet. If an uncontrolled run in silver prices sounds absurd, then take a good look at what is happening with Lithium.
Battery Boom Heats Lithium Gains as Outback Mining Stocks Soar
David Stringer and Martin Ritchie, 18-02-2016

The only things hotter than Western Australia’s scorched Outback are the mining companies preparing to supply the lithiumneeded by the likes of Nissan Motor Co. and Tesla Motors Inc. to meet booming demand for electric cars.

Lithium is providing a rare bright spot for miners, amid cratering prices of raw materials tied to heavy industry such as iron ore to coal. The material, also used in tablet computers and power storage, promises gains from China’s shift to consumer-driven growth and global attempts to curb reliance on fossil fuels.

Prices of lithium carbonate -- an industrial chemical used in lithium ion batteries -- have surged 47 percent in 2016 from last year’s average, according to London-based Benchmark Mineral Intelligence Ltd. Two of Australia’s five best-performing stocks in the past 18 months among a Bloomberg Index of 2,035 listed companies are developers of lithium materials operations. From 2015 to 2024, the market to supply lithium ion batteries for light vehicles may total $221 billion, according to Navigant Consulting Inc.
Tackling the finitude of our planet's resources is not just a technical or scientific challenge. Perhaps more important is the challenged posed by those accommodated to the flat earth economics status quo. The transition to a sustainable and resilient economy will not happen without a clear involvement from common folk.
Utilities Just Declared War On Solar
Nick Cunningham, 15-02-2016

[...] But the backlash from incumbent industries has also sprung to life. With solar and wind suddenly eclipsing fossil fuels as a preferred option for new power plant capacity, utilities and other fossil fuel interests are moving quickly to disrupt the progress of clean energy.

The industry argues that homeowners with solar must pay fees to cover their costs of using the grid. Solar proponents dismiss that argument, pointing to the costs saved by not needing to build new power plants.

However, the threat that solar poses to the utility industry is deeper than customers no longer needing to purchase electricity. Building new power plants and other large infrastructure is at the core of utility industry’s business model. Since those costs can be passed onto the ratepayer in the form of regulated rates, building expensive infrastructure is actually a source of profit. Customers switching to solar ends up hitting the utility’s bottom line twice by no longer buying as much electricity and upended the utility’s case for costly new power plants and transmission lines.
Ending a curious note on the transport sector - to which the largest part of the energy consumed in the world goes to. In first place I wonder what is the energy balance of this alternative route. Then I note that electrifying such a long rail road could be a step in reducing the reliance on finite fossil fuels. And finally I wonder on the role Iran can eventually gain in the economic relationships between Europe and the Far East.
Russia Today
First ‘Silk Road’ train arrives in Iran from China

The first freight train to resurrect the ancient Silk Road route arrived in Iran from China on Monday.

It took just 14 days for the 32-container train loaded with Chinese goods to complete the 5,900 mile (9,500km) journey from China’s eastern Zhejiang province through Kazakhstan and Turkmenistan.

It’s 30 days shorter than the sea voyage from Shanghai to the Iranian port of Bandar Abbas, according to the head of the Iranian railway company, Mohsen Pourseyed Aqayi.

“The arrival of this train in less than 14 days is unprecedented,” he said, adding that the revival of the Silk Road is crucial for the countries on its route.

Aqayi says there will be a train every month and more frequently if necessary.

The railway will not stop in Tehran, Aqayi said as they are “planning to extend the railway to Europe in the future” with transits generating more income for Iran.
Have a pleasant weekend.

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