Oil jumps after report OPEC reaches deal to limit crude output in November

CNBC

Oil prices settled up nearly 6 percent on Wednesday after OPEC sources said the group has struck a deal to limit crude output at its policy meeting in November, its first agreement to cut production since the market crashed two years ago on oversupply.

The Organization of the Petroleum Exporting Countries reached agreement to limit its production by nearly a million barrels per day to 32.5 million bpd in talks held on the sidelines of the Sept. 26-28 International Energy Forum in Algiers, the sources told Reuters.

OPEC will agree to concrete levels of production for country at its Nov. 30 meeting in Vienna, the sources said.

After reaching its group target, it will seek support from non-member oil producers to further ease the global glut, they added.

Brent crude settled up $2.72, or 5.9 percent, at $48.69 a barrel, hitting a more than two-week high of $48.96. U.S. West Texas Intermediate (WTI) crude settled up $2.38, or 5.3 percent, to $47.05 a barrel.

The oil rally spilled over into the stock market, with Wall Street's index of energy shares rising 4 percent on track to its best day since January.

"This is a historic deal. This is the first time OPEC and non-OPEC will agree together in over a decade. This should put a floor on oil and should see oil move back toward the $60s," Phil Flynn, analyst at Chicago-based brokerage Price Futures Group.

"The cartel proved that it still matters even in the age of shale! This is the end of the 'production war' - OPEC claims victory."

Other analysts saw a selloff down the road, citing OPEC's general lack of adherence to quotas.

"We don't know yet who's going to produce what. I want to hear from the mouth of the Iranian oil minister that he's not going to go back to pre-sanction levels. For the Saudis, it just goes against the conventional wisdom of what they've been saying," said Jeff Quigley, director of energy markets at Houston-based Stratas Advisors.

Oil prices have more than halved from highs above $100 a barrel in mid-2014 as surging production from U.S. shale oil combined with other global oversupplies and OPEC output.

As oil traders looked to OPEC to cut output, key members such as Saudi Arabia and Iran became more protective of individual market share. The deal in Algiers follows failed talks in Qatar in April for a production freeze.

Oil prices gyrated earlier in the day after U.S. government data showed a surprise drop in domestic crude stockpiles for a fourth week in a row. The drawdown was offset by a 2 million barrel build in gasoline stockpiles, compared with expectations in a Reuters poll for a gain of 178,000 barrels.

US oil settles at $35.62 a barrel, plunges over 10% for week

U.S. oil futures settled lower on Friday after the International Energy Agency (IEA) warned that global oversupply of crude could worsen next year.

Brent and U.S. crude's West Texas Intermediate (WTI) futures fell as much as 5 percent on the day and 12 percent on the week as mild pre-winter weather and a plummeting U.S. stock market added to the toll on oil prices.

Oil traders and analysts were perplexed by the intensity of the decline, coming exactly a week after Dec. 4 meeting of the Organization of Petroleum Exporting Countries all but abandoned price support for crude after removing its production ceiling in an oversupplied.

 

The IEA, which advises developed nations on energy, warned that demand growth was starting to slow.
"Consumption is likely to have peaked in the third quarter and demand growth is expected to slow to a still-healthy 1.2 million bpd (barrels per day) in 2016, as support from sharply falling oil prices begins to fade," the energy watchdog said in its monthly oil report.

Crude prices have fallen with little restraint since the Organization of the Petroleum Exporting Countries' meeting last week. Data also showed OPEC pumped 31.7 million bpd in November, more oil than any month since late 2008.

Banks such as Goldman Sachs have said oil could fall to $20 a barrel if the world runs out of capacity to store unwanted supply.

"The WTI and Brent markets are trending at this point with no real interest from anyone to buy," said Scott Shelton, broker and commodities specialist at ICAP in Durham, North Carolina.

"The forecast remains incredibly warm for the U.S. That's a large drag on demand and means less demand for distillates and more for export, which drags down the rest of the world as well."

U.S. weather forecasts call for warmer-than-normal temperatures through Christmas that would curb heating demand, boosting U.S. gasoline futures higher than heating oil prices in December for the first time in at least five years.

Gasoline's premium to heating oil for the January contracts widened as the heating oil contract slumped almost 6 percent while gasoline fell 0.4 percent.

Shale Is ‘Here to Stay’ Conoco Chief Tells OPEC

Read? Shale Is ‘Here to Stay’ Conoco Chief Tells OPEC

When Ryan Lance, chief executive officer of ConocoPhillips, told an OPEC conference in 2012 the industry was under-estimating shale, oil was trading near $100 a barrel and his warning fall on deaf ears.

Two years and a price crash later, Lance returned to the same forum on Thursday and had no problem winning the attention of officials and executives. Shale oil “is here to stay,” Lance said, speaking over a chart showing the almost vertical rise in U.S. shale output.

His message: shale has not only transformed the global energy industry, but has also proved far more resilient to lower oil prices than most had expected. It’s a truth the global oil industry is rapidly taking on board.

In June 2012, when Lance spoke at the last biennial seminar held by the Organization of Petroleum Exporting Countries, the U.S. was pumping 6.2 million barrels a day. Now, it produces 9.5 million barrels at day, the highest since 1972.

The increase -- 3.3 million barrels a day over three years -- is largely due to shale producers and is larger than the current output of the United Arab Emirates, OPEC’s third-largest producer behind Saudi Arabia and Iraq.

From Rex Tillerson, CEO of Exxon Mobil Corp, to Ben van Beurden, his counterpart at Royal Dutch Shell Plc, oil captains said in Vienna this week shale was weathering cheap oil far better than expected by cutting costs and focusing on the best drilling areas.

BP Plc CEO Bob Dudley summarized the new view, saying in Vienna: “It has been very resilient -- the industry didn’t know it.”

Resilient Shale

The surge in shale production -- and its immunity to lower prices -- has re-drawn the global energy map, forcing OPEC six months ago into a policy U-turn that sent oil prices from $100 to $60.

For most executives participating at the OPEC seminar, the question is no longer at what price shale producers would go bankrupt, but at what point they start drilling again, boosting output further.

With the support of billions of dollars in fresh debt and equity issuance, companies from Whiting Petroleum Corp. to EOG Resources Inc., have indicated that if oil prices stabilize at around $65 a barrel, they will start growing again.

Lance said that shale break-even costs have dropped 15 percent to 30 percent in recent months while the amount of oil drillers are able to suck out the ground from each well has increased up to 30 percent.

“This business will survive at $100 Brent oil pricing and it will survive at $60-70 Brent pricing,” he said.

Shale Sprinter

Conoco believes that the sweet spots of the U.S. shale industry can generate returns of 10 percent with oil prices as low as $40 a barrel. If true, that puts shale on an equal footing with conventional fields and well above deepwater offshore projects and Canadian tar sands, which require higher prices.

While other industry leaders avoided pinning down the level at which shale is profitable, Claudio Descalzi, the head of Italian oil giant Eni SpA, used an athletic metaphor to explain the strength of shale.

“The shale industry is like a sprinter, very agile. They run, they win, they stop and rest, and they do it again,” he said in an interview in Vienna. “Shale is very resilient.”

Meanwhile, major oil companies are like marathon runners. “And you can’t run one marathon after another one,” he said.

The unexpected staying power of shale production, coupled with surging output from Saudi Arabia and Iraq, could cap the recovery in oil prices, analysts and traders said.

Chris Bake, a senior executive at Vitol Group, the world’s largest independent oil trader, said in an interview in May that shale producers could add up to 500,000 barrels a day of extra output of West Texas Intermediate recovers to $70 a barrel. The U.S. benchmark traded $59.40 a barrel om Thursday.

Brent holds above $60 after Saudi price increases

SINGAPORE - Brent dipped on Wednesday but held above $60 a barrel, supported by a rise in Saudi crude prices and air strikes on oil facilities in Libya.

In a move widely seen as showing Saudi Arabia's confidence about a recovery in demand, the OPEC kingpin raised the official selling prices (OSPs) for its oil deliveries to Asia and the United States on Tuesday.

"This is a sign that prices have bottomed out because it means Saudi is confident in raising prices without being afraid of losing market share," said Tony Nunan, a risk manager at Mitsubishi Corp in Tokyo.

In the past seven weeks, Brent crude has risen from a six-year low to hold above $60 a barrel despite continued concern about a global oversupply.

The April Brent contract was down 29 cents at $60.73 by 0043 ET, after rising 2.5 percent on Tuesday, while U.S. crude futures edged up 2 cents to $50.54 a barrel.

Air strikes on oil terminals and an airport in Libya on Tuesday helped to underpin prices.

However, uncertainty about talks between major powers and Iran over its nuclear program capped oil price gains. Any sign of a lasting agreement between Tehran and six world powers could result in a flood of Iranian crude returning to the market.

"We still have the big question mark over Iran. This month is the crunch time for P5+1 talks," Nunan said.
Some investors are also looking to weekly U.S. government inventories data due later on Wednesday to provide more price support, after an industry report showed a smaller-than-expected build-up in U.S. commercial crude stocks last week.

Data from the American Petroleum Institute on Tuesday showed U.S. crude stocks rose 2.9 million barrels last week versus analysts' expectations of an increase of 4.2 million.


Talks between Royal Dutch Shell and a local union will resume on Tuesday.

Any resolution between the two in the biggest U.S. refinery walkout in 35 years could narrow West Texas Intermediate's (WTI) spread with Brent, Phillips Futures analyst Daniel Ang said in a note.

Brent's premium over U.S. crude was at close to $10 a barrel on Wednesday, down from about $13 at the start of the week. REUTERS

Oil tops $60 for first time in 2015, industry spending cuts support

CNBC


 

Getty Images

 

Pumpjacks operated by XX pump petroleum from the ground on September 23, 2014 near Ruehlermoor, Germany.

 

Oil rose above $60 a barrel on Friday for the first time this year, bringing its gain this week to almost 4 percent, supported by signs that deeper industry spending cuts may curb excess supply.


Also supporting oil, growth in Germany's gross domestic product beat expectations, as did plans for a meeting between Greek officials and creditors. Euro zone GDP data is due later on Friday.

Read MoreShiller warns bond investors: Beware of 'crash'!

The price of Brent crude collapsed from $115 in June to $45.19, the lowest in almost six years, in January due to oversupply. Since January, mounting signs of lower industry spending have helped prices move higher.


Apache Corp, a top U.S. shale oil producer, said on Thursday it would cut capital spending and its rig count in 2015 following the price collapse, keeping its output growth mostly flat. 

Brent for April delivery was up 76 cents at $60.04, after briefly gaining more than $1. The March contract expired overnight. U.S. crude was up 61 cents at $51.82.

"During the last weeks, crude oil rebounded driven by improved market sentiment and by expectations that low prices will lead to lower supply growth in 2015," said Daniela Corsini, analyst at Intesa Sanpaolo, in a report.

Read MoreThe looming threat to American oil output


Besides Apache's update, Royal Dutch Shell's chief executive said on Thursday supply might not be able to keep up with growing demand as companies reduce budgets, and France's Total announced investment and job cuts.


Still, analysts at JBC Energy in Vienna pointed out in reference to Apache's moves that spending cuts can easily be reversed.


"While the company expects North American onshore production to be flat this year, they emphasize their flexibility to come back very quickly if the price environment or the cost structure changes sufficiently," JBC said.


"This is generally what makes most people doubt that the latest rally can be sustained."


A weaker U.S. dollar, which makes dollar-denominated commodities cheaper for holders of other currencies, has also supported oil this week, analysts say.

OPEC is to blame for the oil swoon: BIS

CNBC



The price of crude oil has fallen roughly 60 percent since mid-2014, which has largely been put down to worries of a global glut of crude, coupled with dwindling consumption.

But after four years of Brent crude remaining relatively stable at $100 per barrel, changes in production and consumption "fall short of a fully satisfactory explanation" for the abrupt collapse in oil prices, a new report has found.


Instead, the Bank for International Standards (BIS) blames the decision taken by the Organization of the Petroleum Exporting Countries (OPEC) at a November meeting to focus on market share, rather than cutting output, for the collapse in the oil price.

A report from the BIS, the global forum for central banks, published Saturday said the last two episodes of comparable oil price declines were seen in 1996 and 2008 and were associated with sizeable reductions of oil consumption and, in 1996, with a significant expansion of production.


"This seems to be in stark contrast to developments since mid-2014, during which time oil production has been close to prior expectations and oil consumption has been only a little weaker than forecast," the bank said.


"Rather, the steepness of the price decline and very large day-to-day price changes are reminiscent of a financial asset. As with other financial assets, movements in the price of oil are driven by changes in expectations about future market conditions. In this respect, the recent OPEC decision not to cut production has been key to the fall in the oil price," the group said.

The finance minister of top OPEC exporter Saudi Arabia told CNBC this week that the country will continue to dip into its cash reserves and use its ability to borrow to temper the ongoing storm in oil markets. Ibrahim Abdulaziz Al-Assaf said Saudia Arabia had been preparing for a period of cheap oil. 


"We have learned from the past…obviously the oil market, everybody knows, goes through ups and downs and peaks and valleys," he said on Thursday.

"We have the resources…we (have) built the buffers to help us in sustaining our policies and not disrupting them so I am comfortable that we will be able to continue that," Al-Assaf said. 

But OPEC are not the only culprits. The BIS said the substantial increase in debt borne by the oil sector in recent years was also a major factor in exacerbating the oil price. 


The willingness of investors to lend against oil reserves has enabled oil firms to borrow large amounts, while energy companies have issued substantial amounts of investment-grade and high-yield bonds, the BIS said.

"Against this background of high debt, a fall in the price of oil weakens the balance sheets of producers and tightens credit conditions, potentially exacerbating the price drop as a result of sales of oil assets," the bank said. 

"The build-up of debt in the oil sector is a reminder that high debt levels can induce significant macro-financial interactions. Such interactions need to be understood better in order fully to appreciate the macroeconomic impact of falling oil prices," they added.

Cheap Oil Burns $390 Billion Hole in Investors' Pockets

CW8888: Any investment by nature is risky


(Bloomberg) -- Investors have a message for suffering U.S. oil drillers: We feel your pain.

They’ve pumped more than $1.4 trillion into the oil and gas industry the past five years as oil prices averaged more than $91 a barrel. The cash infusion helped push U.S. crude production to the highest in more than 30 years, according to data compiled by Bloomberg.

Now that oil prices have fallen below $45, any euphoria over cheaper energy will be tempered by losses that are starting to show up in investment funds, retirement accounts and bank balance sheets. The bear market has wiped out a total of $393 billion since June -- $353 billion from the shares of 76 companies in the Bloomberg Intelligence North America Exploration & Production index, and almost $40 billion from high-yield energy bonds, issued by many shale drillers, according to a Bloomberg index.

“The only thing people are noticing now is that gas prices are dropping,” said Sean Wheeler, the Houston-based co-chairman of the oil and gas industry team for law firm Latham & Watkins LLP. “People haven’t noticed yet that it’s also hitting their portfolios.”

The money flowing into oil and gas companies around the world in the last five years came from a variety of sources. The industry completed $286 billion in joint ventures, investments and spinoffs, raised $353 billion in initial public offerings and follow-on share sales, and borrowed $786 billion in bonds and loans.

50 Cents

The crash caught investors and lenders by surprise. Eight months ago, Houston-based oil producer Energy XXI Ltd. sold $650 million in bonds. Demand was so high that the company more than doubled the size of the offering, company records show. The debt is now trading for less than 50 cents on the dollar, and the stock has declined 88 percent.

Energy XXI, which has more than $3.8 billion in debt, is one of more than 80 oil and gas companies whose bonds have fallen to distressed levels, meaning their yields are more than 10 percentage points above Treasury debt, as investors bet the obligations won’t be repaid, according to data compiled by Bloomberg.

The stocks and bonds of Energy XXI and other struggling energy firms have been bought up by pension funds, insurance companies and savings plans that are the mainstays of Americans’ retirement accounts.

Institutional investors had more than $963 billion tied up in energy stocks as of the end of September, according to Peter Laurelli, a New York-based vice president of research with eVestment, an analytics firm in Marietta, Georgia, that gathers data on about $22 trillion of institutional strategies.

Bank Lenders

Energy XXI’s second-largest reported shareholder is a group of funds managed by Vanguard Group Inc., the biggest U.S. mutual-fund firm, according to data compiled by Bloomberg. The top reported owner of the bonds Energy XXI issued in May is Franklin Resources Inc. in San Mateo, California, also known as Franklin Templeton Investments, which manages multiple funds that bought Energy XXI’s debt, according to data compiled by Bloomberg.

Energy XXI didn’t return calls and e-mails seeking comment. The company has “plenty of liquidity,” Greg Smith, a spokesman, said in a December interview.

A reckoning may also be in store for Energy XXI’s bank lenders. The company, which drills in the Gulf of Mexico, has tapped $974 million of a $1.5 billion credit line extended by a group of banks including Gulfport, Mississippi-based Hancock Holding Co.’s Whitney Bank; Amegy Bank of Texas, a subsidiary of Salt Lake City-based Zions Bancorporation; and Comerica Inc. in Dallas, according to data compiled by Bloomberg. Energy XXI has also borrowed money from banks in the U.K., Australia, Canada, Spain and Japan.

Struggling Drillers

The three U.S. banks are also among the lenders to other struggling drillers. The loans are backed by oil reserves that are worth less at today’s prices than they were when banks last performed scheduled revaluations of the collateral.

Representatives of Amegy, Comerica and Hancock declined to comment on the performance of specific loans. Shares of Zions have declined 15 percent this month. Comerica is down 9.8 percent, and Hancock slid 15 percent.

“This is a big deal for banks in states like Texas where oil is one of the most prominent businesses,” said Brady Gailey, an Atlanta-based analyst at Stifel Financial Corp.’s KBW unit. “There are going to be loan losses and it’s going to hit multiple banks that have exposure to that credit. It will slow economic growth, it could ding real estate values, banks will lose money and their stock will get slammed.”

Regional Lender

One regional lender with energy exposure is Lafayette, Louisiana-based MidSouth Bancorp Inc., with 21 percent of its $1.25 billion of lending tied to oil and gas, according to regulatory filings.

Rusty Cloutier, MidSouth’s chief executive officer, said he’s not worried about the oil decline hurting his business because the bank’s portfolio consists of experienced oil and gas companies.

“There will be some players that get hurt, but the real players in the energy market aren’t going anywhere,” Cloutier said. “Companies who are leveraged very highly and got into the business not long ago, those are the ones that are going to get hurt.”

Hundreds of smaller banks in states such as Texas, Colorado, Oklahoma and North Dakota have also plunged into energy lending during the oil boom.

‘Very Concerned’

Gil Barker, the Office of the U.S. Comptroller of the Currency’s top overseer of community banks in states including Texas and Oklahoma, said he has confidence that the smaller lenders were doing what they should, though circumstances might change.

“We’re very concerned about the banks located in these oil-producing areas,” he said. “A prolonged time of low oil prices is really going to cause banks significant problems.”

More people will be affected than realize it, said Michael Shaoul, who helps oversee about $9 billion as CEO of Marketfield Asset Management LLC in New York. “So much of this has ended up in 401(k)s and in pension funds and in mutual funds, and that’s where the bulk of the pain is going to be felt.”

Researchers just discovered two new, dangerous chemicals in fracking waste — and they’re already polluting our waterways

A Duke study reveals two new reasons to worry about unregulated fracking

Lindsay Abrams


Two dangerous chemicals not previously associated with fracking can be found in industry wastewater, Duke University scientists say, and they’re polluting Pennsylvania and West Virginia waterways.

In a study published Wednesday in the journal Environmental Science & Technology, the researchers identified high levels of ammonium and iodide — two potentially harmful and unregulated chemicals — in wastewater samples taken from oil and gas production sites, along with disposal sites in Pennsylvania and a spill site in West Virginia.

Before this, they say, no one knew that the two chemicals even existed in wastewater. And that’s a problem, because that water is being both accidentally and deliberated dumped into streams and rivers, where the iodide can combine with the chlorine in tap water to form carcinogenic compounds and the ammonium can cause harm to aquatic life.

The scientists found the chemicals in both fracking and conventional wells, leading them to believe that they’re naturally occurring and released by drilling activity — they’re probably not, in other words, part of the secretive cocktail of chemicals injected into the ground as part of the fracking process. But they nonetheless join the list of the dangerous substances making their way into the water supply as a result of fracking, while the findings highlight the risks of fossil fuel extraction that go beyond just unconventional drilling.

The most outrageous part, however, is just how little regard those risks are given. Some 837 billion gallons of wastewater are produced by U.S. gas and oil operations every year, including 280 billion from fracking, while a piece of Bush-era legislation known as the “Halliburton Loophole” exempts the latter from portions of the Safe Drinking Water and Clean Water Acts that would subject it to EPA oversight. So even though the researchers found ammonia levels 50 times the EPA’s maximum safety threshold, there’s little to be done.

“We are releasing this wastewater into the environment and it is causing direct contamination and human health risks,” study co-author Avner Vengosh, a professor of water quality and geochemistry at Duke’s Nicholas School of the Environment, told the Daily Climate. “It should be regulated and it should be stopped. That’s not even science; it’s common sense.”

OPEC price war in Asia intensifies as oil falls below $50

(Reuters) - Even as Saudi Arabia and its Gulf OPEC allies appear united in their refusal to cut output to boost global oil prices, they are becoming locked in an increasingly fierce battle to secure market share in Asia.

Oil prices have slumped below $50 a barrel, the weakest since 2009, triggering a price war between producers to secure customers in Asia. And the price outlook remains grim with Goldman Sachs slashing its three-month benchmark crude forecasts to just above $40.

The United Arab Emirates (UAE) last week joined Kuwait and Iraq in pricing crude they sell to Asia below that of OPEC's top producer Saudi Arabia.

The discounts show how Gulf members, who account for more than half of OPEC output, are prepared to take on each other to retain market share and, in so doing, put more pressure on global oil prices.

"It's a fight for the market," said Tushar Bansal of consultancy FGE, who says Gulf producers such as the UAE are prepared to stomach lower prices to hold their market share. 

The UAE's Abu Dhabi National Oil Company (ADNOC) set the official selling price (OSP) for flagship grade Murban in December at a discount to similar quality Saudi's Arab Extra Light for the ninth month in a row, data from Reuters and trade sources showed last week.

This was despite Saudi Arabia raising its prices to customers in Asia after sharp reductions in previous months.

ADNOC had felt it had to reduce prices to ensure its crude remained attractive to Asian refiners, a source familiar with their strategy said.

GOLDMAN LOWERS PRICE FORECAST

Goldman Sachs has lowered its average 2015 price forecast for benchmark Brent and WTI futures to $50.40 and $47.15 per barrel, respectively.

The U.S. bank cut its three-month price forecast for Brent to $42 from $80 and U.S. crude to $41, down from $70, adding it would need to stay near $40 for most of the first half of 2015 before it would hold up shale oil investments.

"To keep all capital sidelined and curtail investment in shale until the market has rebalanced, we believe prices need to stay lower for longer," its analysts said in a report.

As well as targeting North American shale, oil ministers from OPEC, including the UAE, have called for exporters, such as Russia, to cut output to lift prices. Russia, in turn, wants OPEC and Saudi Arabia in particular to cut production first.

Over the past decade, UAE's Murban OSP has been on average 15 cents a barrel higher than Saudi's Extra Light OSP, but the relationship between the grades switched since April last year, the data showed. In September, Murban was priced at the widest discount to Extra Light in over a decade at $2.28.

Another Abu Dhabi grade, Upper Zakum, also flipped into a discount against Saudi's Arab Medium in December, even though Upper Zakum has been priced at an average premium of $1.11 a barrel above the Saudi grade in the last decade.

ADNOC sets its prices two months behind those of Saudi, Kuwait and Iraq, which gives the UAE's main producer more time to react to market changes.

The UAE, OPEC's fifth largest producer, has been expanding its output and remains on track to boost production capacity to 3.5 million barrels per day by 2017, up from about 2.8 million bpd, its oil minister said in remarks published last week.

The UAE's price cuts have spurred demand for Abu Dhabi grades in the spot market, with Taiwanese refiner CPC Corp buying volumes of Murban crude at the start of the year.

But Bansal of consultancy FGE warned that to restore market balance output cuts will have to come from OPEC and non-OPEC producers.

"If no one blinks, then prices will continue to drop."

High Noon on the Gulf Coast: Canada, Saudi oil set for showdown

NEW YORK - As a test of wills between OPEC nations and U.S. shale drillers fuels a global oil market slump, a brewing battle between Canadian and Saudi Arabia heavy crudes for America's Gulf Coast refinery market threatens to drive prices even lower.

While the stand-off between the oil cartel and U.S. producers of light, sweet shale oil has captured the limelight in recent months, the clash over heavier grades - playing out in the shadowy, opaque physical market - may put even more pressure on global prices that have halved since mid-2014.

Two factors will come into play over the next few weeks: From the North, new oil pipelines will pump record volumes of Canadian crude to the southern refineries, many better equipped to process heavy crudes than lighter shale oil.

From the Middle East, top exporter Saudi Arabia is offering crude at discounted prices in an attempt to defend its remaining share of the important regional market, which has shrunk by more than half in recent months.

"So far, the Gulf Coast has suffered from an oversupply of light oil, but now there's competition for heavier crude," said Sandy Fielden at RBN Energy. With the Saudis already facing fierce competition for their light grades, the arrival of Canadian crude "could add insult to injury", he said.

On Monday, Saudi Aramco stepped up its counteroffensive, cutting its monthly U.S.-bound price for Arab Medium for a sixth straight month, putting it at the deepest discount against the regional sour crude benchmark since December 2013. .

The timing of this clash may magnify its market impact as Houston-area oil refiners shut down for maintenance in early spring, further reducing their demand by an estimated 1 million barrels a day (bpd).

"We'll see that overhang into the summer, at least," said one physical crude trader.

That will put further pressure on U.S. prices and may spur investors in New York and London to extend a sell off in crude futures.


The looming clash of barrels comes at a time when oil markets already face a global glut expected to last for a year or longer.

Large volumes of foreign heavy oil reaching the Gulf Coast will give many U.S. refiners more choice after they have upgraded their systems to process cheaper, heavier crudes. The new supply also marks a breakthrough in Canada's years-long effort to bring its growing Alberta oil sands crude output to new markets.

Enbridge Inc's 600,000 bpd Flanagan South pipeline, which runs from Illinois down to the Cushing, Oklahoma, oil hub began commercial service on Dec. 1; Enterprise Product Partner announced that its 450,000 bpd Seaway Twin pipeline from Oklahoma to Freeport, Texas, shipped its first volumes on Dec. 21.

That promises another quantum leap for Canadian crude after its U.S. Gulf Coast sales already hit a record 274,000 bpd in October, nearly three times as much as a year earlier, according to U.S. data.

The new flows will compete with other crudes as well. Some refiners see Saudi's medium crude as a more direct substitute for Mexican and Venezuelan crudes.

However, some refiners are likely to blend oil sands crude with overabundant super-light U.S. condensate, creating medium blends that may rival Saudi Arabia's main grade, said Citi global commodities strategist Ed Morse. He warns the clash could set up another tumble in global prices.

The growing pressure on the Gulf market is already showing up in pricing and inventories.
Mars Sour, a domestic grade similar to Arab Medium, has fallen to a discount of $1.90 a barrel compared with U.S. crude futures after trading at a premium over 45 cents two months ago.

Crude oil inventories in the U.S. Gulf have risen to nearly 200 million barrels, a record high for late December and up some 15 percent from a year earlier.

The build-up comes as Saudi Arabia shifts its focus to fiercely defend what remains of its market in the United States - the world's largest consumer of oil.

Until recently, it seemed to be holding its own in part thanks to a major expansion of its joint-venture Motiva Enterprises refinery.

Saudi crude sales to the U.S. Gulf rose by a third to a record high of nearly 1 million bpd in the two years to 2012, a period where gushing shale production had begun to displace foreign suppliers.

But this year it has begun to lose ground, with shipments tumbling to 461,000 bpd in October, data from the U.S. Energy Information Administration showed.

Ironically enough, the decline was driven partly by a one-third cut in imports by Motiva, jointly owned by Saudi Aramco and Royal Dutch Shell.

Other customers have also turned away. Valero Energy Corp's cut imports by 85 percent in the first 10 months of 2014, with Saudi purchases falling to just 35,000 bpd, according to EIA data. Marathon Petroleum Co cut Gulf Coast imports to 33,000 bpd in October from 205,000 bpd 10 months earlier.

While most Saudi customers agree on annual contracts with little room to reduce purchases, the Kingdom's state oil firm knows it needs attractive prices to retain long-term buyers.

"As refiners look at Canadian crude availability long term, they'll be thinking about ways to give themselves more options" said Richard Mallinson, an analyst at Energy Aspects in London. REUTERS

Oil Below $60 Tests U.S. Drive for Energy Independence

By Asjylyn Loder


Oil’s biggest bust since the global recession was good for a few cases of whiplash.

Just two months ago, Continental Resources Inc., the shale driller founded by billionaire Harold Hamm, budgeted for $80-a-barrel oil and planned to spend $4.6 billion in 2015. Six weeks later, with crude down 29 percent in the interim, Continental cut its 2015 budget to $2.7 billion. 

Halliburton Co., the world’s biggest provider of fracking services to oil companies, announced Dec. 11 that it would dismiss 1,000 workers. Two months earlier, Chairman and Chief Executive Officer Dave Lesar said “our sector will be fine” if oil prices range between $80 and $100 a barrel.

 

The U.S. shale boom that’s brought the country closer to energy self-sufficiency than at any time since the 1980s will be challenged in 2015 as never before. The benchmark U.S. crude price has fallen below $60, demand growth is weakening and OPEC, which controls 40 percent of supply, is unwilling to cut output.

“The extent and rapidity of the price decline has been a surprise,” said Andy Lipow, president of Lipow Oil Associates LLC, an energy consultant in Houston. “They’re facing a new reality.”

West Texas Intermediate reached a 2014 peak of $107.73 in June before dropping to $51.68 in electronic trading on the New York Mercantile Exchange at 10:38 a.m. London time. That’s below the break-even price for 37 of 38 U.S. shale oilfields, according to Bloomberg New Energy Finance. 

RBC Capital Markets and CIBC World Markets predict prices will remain below $60 for the first three months of 2015. Societe Generale SA’s Michael Wittner forecasts an average of $64.50 in the first quarter and $61.50 in the second.

Shale Drillers 

 

Some of the largest U.S. shale drillers, such as Irving, Texas-based Pioneer Natural Resources Co., Continental and Chesapeake Energy Corp., both based in Oklahoma City, have been spending money faster than they make it, borrowing to pay for their expansion, according financial statements filed with the U.S. Securities and Exchange Commission.

Current oil prices are “not a sustainable long-term trend,” said Warren Henry, a spokesman for Continental. Halliburton is well positioned to handle any market environment, said Emily Mir, a company spokeswoman. Gordon Pennoyer, a spokesman for Chesapeake, declined to comment. Representatives from Pioneer didn’t return e-mails and phone calls seeking comment.

In 2014, U.S. oil output increased by 1 million barrels a day for the third consecutive year, pushing production to the highest in more than three decades, according to the U.S. Energy Information Administration.

Budget Cuts 

 

Fatih Birol, chief economist of the International Energy Agency in Paris, said Dec. 22 that investment will decline in the U.S. in 2015. The 76 drillers in the Bloomberg Intelligence North America E&P Valuation Peers Index spent $184.9 billion in the 12 months through Sept. 30, according to data compiled by Bloomberg. Continental, ConocoPhillips and Houston-based Apache Corp. are among the companies that have announced budget cuts.

The slump may push Texas into a “painful regional recession,” Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York, wrote in a Dec. 18 report.

Texas pumps 37 percent of U.S. oil output, EIA data show. The oil and gas industry accounts for 11 percent of the state’s economy, according to Feroli. The effects may extend to housing and other businesses, he wrote.

The U.S. isn’t the only place suffering whiplash. OPEC members excluding Iran are facing the lowest export revenue in a decade. The EIA estimates OPEC will take in $446 billion this year from overseas crude shipments, from $703 billion in 2014.

More Barrels 

 

OPEC has refused to cut output to boost prices, choosing to defend market share as the shale boom reduces U.S. imports and leaves more barrels seeking alternative destinations.

Prices will rebound, Saudi Arabian Oil Minister Ali Al-Naimi said Dec. 21 in Abu Dhabi. Suppliers from outside OPEC should cut “irresponsible” output, United Arab Emirates Energy Minister Suhail Al Mazrouei said at the same event.

The economy of Russia, the second-largest crude exporter, may contract about 4 percent in 2015 if oil stays at $60, according to Finance Minister Anton Siluanov. Oil and natural gas accounted for 68 percent of Russia’s export revenue in 2013, according to the EIA. Russia’s ruble dropped to a record low, echoing weakness in the currencies of other energy producers from Norway to Canada and Mexico.

Heating Oil 

 

The collapse in oil has also reduced costs for consumers. U.S. drivers are paying the lowest average gasoline prices since 2009 and buying the cheapest heating oil in five years. Goldman Sachs Group Inc. analysts said last month that cheaper U.S. gasoline will boost economic growth by 0.5 percentage points this year.

“The benefit to consumers is a lot bigger than the hit to oil producers,” Mark Zandi, chief economist for Moody’s Analytics Inc. in West Chester, Pennsylvania, said in Dec. 23 interview. “If we stay at $60 a barrel, consumers will save $150 billion on gasoline. It’s huge. If history is any guide, the bulk of that money will be spent and will drive economic growth.”

GRANTHAM: 'US Fracking Is A Very Large Red Herring'

By Myles Udland | Business Insider


Jeremy Grantham is not a believer in the shale fracking boom.

Back in November, we highlighted Grantham's full quarterly letter to GMO clients, in which he said, among other things, that the US shale boom had been "a very large red herring."

So while some say the fracking boom has helped keep oil prices low and aided the US on its path to energy independence, Grantham thinks it might have set us on a path to nowhere.

"Its development has been remarkable," Grantham writes.

"It will surely be seen in the future as a real testimonial to the sheer energy of American engineering at its best, employing rapid trials and errors — with all of the risk-taking that approach involves — that the rest of the world finds so hard to emulate. Similarly, it will always stand out as remarkable proof that, so late in the realization of the risks of climate change and environmental damage, the US could expressly deregulate such a rapidly growing and potentially dangerous activity."

The overall thrust of Grantham's letter is that the world will soon be devoid of the resources it is going to need to sustain our current economic model, which over the past 150 or so years has been predicated on cheap energy, namely oil.

A concern Grantham has with fracking is that the boom hasn't been accompanied by any real concern as to the environmental damage it may be inflicting.  But Grantham is also hugely skeptical on the potency of the shale boom because it doesn't address the problem of our need for cheap oil.

Grantham writes: Fracking "has not prevented the underlying costs of traditional oil from continuing to rise rapidly  or the cash flow available to oil-producing countries like Saudi Arabia, Iran, and especially Venezuela from getting squeezed from both ends (rising costs and falling prices)."

And as we saw last week, OPEC announced that it would not impose production cuts despite the sharp decline in oil prices seen over the past few months, and it seems unlikely that Grantham would be surprised by this.

Because if your national economy is chiefly predicated on exporting oil, you have made your bed and therefore must lie in it as oil prices drop.



 Deutsche Bank The US shale boom, in one chart.

But the US boom, which as Grantham notes has accounted for almost all of the increase in global oil production over the past several years, has been undertaken by companies, not countries.

And so with an eye toward profit, Grantham writes, these companies "have drilled, as always, the best parts of the best fields first, and because the first two years of flow are basically all we get in fracking, we should have expected considerably better financial results by now. The aggregate financial results allow for the possibility that fracking costs have been underestimated by corporations and understated in the press."

And with a decline in oil prices set off by too much supply, it will be these companies that are forced to pare production, which will reduce supply, which will create — once again — expensive oil.

"The current fall in price does nothing to offset the squeeze on the total economy from rising costs," Grantham writes. "It merely transfers massive amounts of income from one subgroup (oil producers) to another (oil consumers), in a largely zero-sum game.

 

FRED

"Oil consumers tend to spend more and save less than oil companies so short-term impacts are favorable. But we should not be carried away with enthusiasm because the declining investment from the oil industry will lower future growth. When, as now, oil costs are still rising even as prices fall there is of course a particularly savage effect on the profits of oil companies, squeezed from both ends.

"They must and will rapidly adapt by reducing expenditures and therefore oil production with the fairly obvious result that prices will rise again. The only longer-term price relief and net benefit to the economy will come when either we reverse recent history and start to find more oil more cheaply, which will be like waiting for pigs to fly, or when cheaper sources of energy displace oil."

And so for Jeremy Grantham, nothing fundamental has changed about our relationship with oil:  pigs still don't fly.