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25 April 2016

Press review 24-04-2016 - Where the press get it wrong

The Doha meeting last weekend was a major failure, with what appeared to be an easy agreement torpedoed by Saudi Arabia. From then on the media went on a frenzy, announcing the imminent collapse of market benchmarks. The Brent index went in the opposite way, and by Tuesday was trading at 46 $/b. The European benchmark h,as now erased the huge losses of early December, when it lost almost 20% of its value in a week on the face of all those well paid pundits out there. But what the media is reluctant in reporting is the formation of a backwardation structure in the futures market - at odds with the calls of price collapses.

Another point the media is not really getting right is the so called "sluggish demand" meme thrown around as the root of the present under-priced petroleum market. The data show otherwise - particularly in China. From the news bits bellow and other assorted data points, I now estimate petroleum consumption to have already surpassed 10.5 Mb/d in China. This means it could very well hit 11 Mb/d still this year.

None of this means a price recovery is around the corner, there are still at least the above ground stocks to go through. This supply destruction cycle still has some bad news in store. However, some fundamental changes are about.

China Imports Record Oil as Higher Margins Boosts Purchases

China’s crude imports climbed to a record in the first quarter as higher refining margin encouraged refiners to boost purchases.

The world’s biggest energy user increased inbound shipments to 91.1 million metric tons in the first three months of the year, data from the Beijing-based General Administration of Customs showed on Wednesday. That’s equivalent to about 7.34 million barrels a day, 6 percent higher than the previous quarter and 13 percent up from the same period last year, according to Bloomberg calculations. Imports last month fell about 4 percent from February’s record to 7.71 million barrels a day, the third-highest ever.

[...] China may surpass the U.S. as the world’s largest crude importer this year with average inbound shipments of 7.5 million barrels a day, driven by independent plants’ purchases and stockpiling demand, said Zhong Fuliang, vice president with China International United Petroleum & Chemicals Co., the trading arm of the nation’s biggest refiner. The U.S. imported 7.37 million barrels a day last year, according to Energy Information Administration data.
Transforming "good" news into "bad". The article below contains important data bits worth reflecting upon, but it is also remarkable in the way it exemplifies the negative sentiment the press is attempting to convey at this moment.
Seeking Alpha
Rising Chinese Demand For Oil: Good But Not Great
Matthew Allbee,

15-04-2016 The Chinese economy is an important catalyst for oil (NYSEARCA:USO) demand. Despite its "emerging market" status, China creates more than 16% of the world's GDP. On top of this, China is also one of the top worldwide importers of oil. So, fears that Chinese economic growth may be slowing have been worrisome to oil bulls.

Some of this fear was assuaged on Wednesday when Chinese released import figures, showing that oil imports had actually increased 13% from the same period last year. This jump was the result of refiners profiting from a Chinese law that freezes retail fuel prices when oil is below $40 a barrel.

This boost in demand was a plus for oil markets, but even more encouraging was the overall trade numbers which showed exports and imports increasing. This could be a sign that the Chinese economy is no longer slowing, which it appeared to be in at the end of 2015.
Great things are happening in China. Consumption is on fire, but the extraction decline is accelerating. It is not too hard to forecast a relevant rise in petroleum imports in years to come.
China's crude oil output in March down 3.9 pct on year ago
Chen Aizhu, 15-04-2016

China's domestic crude oil production recorded a rare fall of 3.9 percent in March over the same month last year, official data showed, as sustained low oil prices took a harder hit on producers.

An output cut from China, the world's fourth-largest producer, would help ease a global glut that has more than halved prices since mid-2014.

Data from the National Bureau of Statistics released earlier on Friday showed China produced 17.37 million tonnes of crude oil last month, or about 4.09 million bpd, the lowest rate since July 2014 on a daily basis.
Little attention has been given by the western press to Iraq. The country looks increasingly ungovernable, with the Shiites removing their support to the incumbent office. In some ways, Iraq seems to be going down a path similar to Libya. The various factions seem increasingly divided, framed in a rapidly degrading economic context. For how long can such a setting last before petroleum extraction is significantly impacted?
International Business Times
Iraq Government Teeters On Edge Of Collapse As Fight Against ISIS Drags On-
Erin Banco, 18-04-2016

The government in Iraq is teetering on the edge of collapse as Prime Minister Hader al-Abadi tries to reshuffle his cabinet and rid the country of corruption. Members of Parliament continue to protest his efforts to appoint new leaders and are calling for his ousting. Meanwhile, religious Shiite heavyweights are pressuring Abadi to press forward with his reform movement.

Muqtada al-Sadr, a powerful Iraqi Shiite cleric who supports Abadi, called on the government to form a new cabinet in the next 72 hours in a handwritten letter published on social media. He warned that if the government does not move forward with negotiations, it could collapse altogether.

[...] The infighting has turned Baghdad into a cauldron of chaos. Parliament is almost nonfunctional, the president doesn’t have a cabinet, and the Kurds in Erbil now more than ever are pushing for outright independence in oil exports, angering the energy officials in the capital. Almost all of the politicians Abadi has tapped to take office have refused their appointments. This is all happening while the police and security forces battle the Islamic State group, aka ISIS, which still controls the major city of Mosul and much of western Iraq.
And speaking of Libya, it is also fertile ground for Daesh, with the inevitable impact on petroleum extraction. Was it for this that Muammar Kaddafi was executed?
International Business Times
Fear Of ISIS Attacks In Libya Shuts Down Major Oil Fields
Alessandria Masi, 17-04-2016

“There have been attacks on oil fields. All attacks [were] by ISIS,” Amin Mneina, a regional engineer at an international development company who formerly worked at an oil field, told International Business Times. “The National Oil company has been warning fields [about] expected attacks and [advised] evacuating the fields that are thought to be in danger of an armed attack.”

In recent weeks, ISIS has increased the number of assaults in and around its northeastern Libyan stronghold of Sirte, leaving oil and gas employees in the area concerned that militants will try to seize their facilities — home to roughly 80 percent of Libya’s oil reserves.

Oil is Libya’s most treasured resource, but control and security of liquid gold has become as fractured as the country’s divided political system. The ensuing chaos has seen oil production in Libya plummet, and the recent ISIS threat to the essential commodity will likely see production fall even lower.
Possibly the country most affected by the present supply destruction cycle is Venezuela. There is a feedback loop forming where the economic strains imposed by the under-priced petroleum market is impacting extraction itself, compounding further the country's budgetary owes.
Financial Times
Venezuela faces oil production disruption
Andres Schipani

Venezuela’s economic and political woes are set to curtail Opec member’s oil production, adding to a growing list of supply disruptions that are helping to prop up global crude prices.

Analysts believe chronic power shortages in the country could soon affect the oil sector, with output declining 100,000-200,000 barrels per day this year.

Dangerously low water levels at Venezuela’s giant Guri dam — which provides more than a third of the country’s electricity — may also force the country to shut the site to avoid turbine damage, which is likely to hit oil production and could force officials to redirect some oil exports towards electricity supplies and diesel generators.
As referenced in previous reviews, the decline of petroleum extraction in Mexico is a secular trend brought about by sheer depletion. Naturally, this supply destruction cycle is not helping, forcing stakeholders to face the stark reality.
Mexico's reserves slashed by a fifth: regulator
Ronald Buchanan

Mexico's proven hydrocarbon reserves fell to 10.24 billion boe in January, a drop of 22.2% from the 13.17 billion boe of a year earlier, the National Hydrocarbons Commission announced March 31.

Ulises Neri, head of the commission's technical unit, told a meeting of the commission's executive that the drop was due in part to the reduction in value of the proven reserves as a result of the sharp fall in world markets, and to the drop in exploration activity by the state company Pemex.

Proven oil reserves fell to 7.6 billion barrels on January 1, down from 9.71 billion barrels a year earlier, Neri added.
Closing the petroleum news section, a reflection on Saudi Arabia's actions last weekend. Could the apparent unwillingness of the kingdom to remain a cartel leader be related to an inevitable demise of its market prowess?
Saudi Arabia slowly losing oil market share

Saudi Arabia, the world's biggest exporter of crude oil, is slowly but surely shrinking in global markets, recent statistics revealed.

The setback is due to intensifying competition from Russia and other oil producers.

At a summit of the world's leading oil-producing nations on Sunday, Saudi Arabia refused to freeze oil output. Iran, which did not attend the summit, wants to increase its production now that sanctions against it have been lifted.

Competition for market share is fierce, casting a shadow over price trends.
Germany is finally putting an end to the subsidies to the coal industry. By 2018 all transfers of money from the federal government to mining companies should cease. Some companies are reacting in advance, quitting the extraction of resources that are unlikely to remain profitable.
Financial Times
Vattenfall offloads German lignite mines to Czech consortium
Guy Chazan and Henry Foy, 18-04-2016

Swedish energy group Vattenfall is planning to offload its lossmaking east German lignite mines to a Czech consortium, in a move aimed at cutting its carbon emissions and reducing its exposure to low European electricity and coal prices.

EPH, one of central Europe's largest energy groups, has agreed to acquire the assets in partnership with PPF Investments, controlled by Petr Kellner, the Czech Republic's richest man.

Like other traditional utilities with operations in Germany, Vattenfall has become a casualty of the country's Energiewende — a radical energy policy that involves shifting towards renewables and away from nuclear and fossil fuels.
Moving on to the alternatives, here is a remarkable view on what is recycling today. There is much food for thought here: how folks in Africa are growing far more industrious than us in this regard; how we are exporting pollution; the increasing value of certain resources. This is indeed a strange and unfair world, think about it the next time you need to dispose of some electronic device.
E-waste Republic
Jacopo Ottaviani

Over 40 million tonnes of electric and electronic waste (also known as e-waste) are produced worldwide every year. That is boundless heaps of refrigerators, computers, television sets, ovens, telephones, air conditioning units, lamps, toasters and other electric and electronic devices, with a total weight equal to seven times that of the Great Pyramid of Giza. The greatest producers of e-waste per person are the United States and the European Union, while developing countries, such as China, are producing an ever-increasing amount. Only a small part of this waste – about 15.5% in 2014 – is recycled with methods that are efficient and environmentally safe.

The West African country of Ghana, currently undergoing intense economic growth, is an important centre for receiving, re-using, recovering and disposing of electronic waste. Accra, the capital, hosts a thriving second-hand market, a sprawling network of repair shops, and a range of activities which attempt to tap into the full potential of e-waste. And yet, it is also the location of an enormous and heavily polluted electronic waste dumpsite.

More news on the growth of solar power in Africa. While here in Europe governments keep fighting against renewable energies, in less welthier places there is a bit more of pragmatism. In the next few years solar will continue growing in these countries that can not afford fossil fuels oriented policies.
20 MW Solar PV Project Connected To Grid In Ghana, Largest In Country

A 20 megawatt (MW) solar photovoltaic (PV) project developed by the Chinese firm Beijing Xiaocheng Company (a subsidiary of Beijing Fuxing Xiao-Cheng Electronic) was recently connected to the grid in Ghana, according to recent reports.

The newly connected solar PV project represents the largest yet connected to the Ghanian grid, and also the largest PV installation in the African nation to date.

It's worth noting here that the development costs of the project were fronted directly by the Chinese firm -- all $30 million of the project costs were provided by Beijing Xiaocheng Company (BXC). The move thus represents another example of the increasingly close relationship between many Chinese firms and African nations. Notably, Ghana is currently in the midst of something of an "energy crisis" -- further increasing the importance of the new project.
Finalising this review is a reflection on the emergence of solar power. Scepticism is still wide, but raw numbers are hard to detract. This is a technology that is here to stay.
Why rise of solar, and fall in costs, still shocks energy experts
Giles Parkinson, 13-04-2016

The solar revolution is upon us, and yet many still don’t get it. Yes, they say, solar will play an increasing role in the world’s energy systems, but they still fail to comprehend to what extent solar will become the dominant energy provider in the decades to come.

This is true even of the International Energy Agency, which nevertheless concedes that solar will become the biggest individual source of power by 2050. It is true of Bill Gates, who is still searching for an energy miracle when there is one right in front of him. And it is certainly true of the fossil fuel industry which, having given up fighting for its future on environmental grounds, still wants to believe that coal is the key to unlocking “energy poverty”.

Last week’s Future of Energy conference in New York, hosted by Bloomberg New Energy Finance, included some fascinating insight into just how quick this transition to solar is happening. Here are a bunch of graphs to illustrate.

Have a good week.

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