Editor's Commentary: We present this report in order to help us keep the world in perspective. Despite the ongoing conflicts in many of the countries noted below, it's important that we not lose sight of what's really important: Oil. It is far too often that we engage in outrage over the various inhumanities occurring every day. - we're even guilty of this ourselves. We should try to keep our eyes on the ball and remember that all we see around us belongs to a very small number of people, and we need to protect their interests. We should remember that people are highly expendable - especially if they are not white - and that not a drop of oil can be wasted. So we urge readers to remember that nothing is so important as petroleum, and to give thanks to those few nations brave enough to march in to hostile places and rescue the oil for that small number of people who truly own it all. God Bless America. - prh, Editor Axis of Logic 1. Oil and the Global Economy Oil prices continued to fall last week with New York futures settling at $93.65 a barrel, the lowest since mid-January. Brent settled at $102.29, the lowest in 14 months. Despite what appear to be ever-increasing geopolitical risks that oil flows may be interrupted by events in the Middle East or the eastern Ukraine, the markets continue to ignore these developments and focus on weaker demand for oil and adequate supplies. US shale oil production continues to grow with North Dakota reporting that Bakken production was up by 53,000 b/d in June and is now over 1 million b/d. Some of this increase, however, is simply catching up with wells that could not be completed last winter due to bad weather. Refining along the US’s Gulf Coast hit a record 8.75 million b/d the week before last, pushing up refinery utilization in the region to a record 96.9 percent of capacity. This record, however, may be due to a redefinition of operable capacity. US demand for distillate was over 4 million b/d for the third straight week; however much of this increase may be going to exports which the EIA now puts at 1.2 million b/d. Last week’s count of drilling rigs showed a drop of 25 rigs drilling for oil, the largest drop since 2012. Some attribute the lower count to drillers moving more rigs to new locations, but others are suspicious that the drop in oil prices over the last seven months is forcing marginal drillers to slow down a bit while awaiting higher oil prices. One answer to why oil prices have stagnated in the face of so much political unrest is that many large oil traders, particularly the investment banks, have pulled out of the market in recent years, markedly reducing the speculative dollars chasing oil prices. While this has kept prices relatively stable in the last two years, pressures will build as less investment by major oil companies is taking place, and production slows in Middle Eastern countries. This will eventually lead to shortages which will someday result in a spike in oil prices as was seen in 2008. On the top of lower drilling expenditures by major oil companies and turmoil in the Middle East, we have the likelihood that the rapid growth in US shale oil production will come to an end before the decade is out, triggering higher prices if falling exports or reduced offshore drilling does not cause it first. Natural gas futures rebounded a bit at mid-week, but settled lower after new forecasts showed cooler temperatures coming for the northeastern US. US natural gas stockpiles rose by 88 billion cubic feet the week before last, but are still well below the five year average. 2. The Middle East & North Africa The political situation across the Middle East has clearly deteriorated in recent months. The war of attrition between Hamas and Israel continues apace, with Gaza slowly being pounded into rubble. Atrocities by the Islamic State have drawn the US and several European countries into the Iraqi/Syrian conflicts with both military and humanitarian support. The refugee situation grows worse across the region with increasing numbers risking their lives to find sanctuary in Europe; Libya is nearing total collapse; the lights are barely staying on in Egypt; and several other countries such as Sudan, Yemen, Lebanon and Jordan are in the throes of or facing imminent anarchy. For now the oil exports on which the world are so dependent are still flowing, though at a somewhat reduced pace, and the oil markets exhibit little concern. Some of the oil production from western Syria and northern Iraq seems to be financing the IS in its drive to conquer much of the region. It won’t be long before somebody comes up with the idea of bombing the IS’s oil production in Syria as a means of slowing their advances. So far the major oil producers: Saudi Arabia, Kuwait, southern Iraq, and the UAE have been largely untouched by the turmoil. However, it seems to be only a matter of time, be it two, five, or ten years before significant interruptions of Middle Eastern oil exports occur. Iraq: There was both good and bad news for oil production emerging from Iraq last week. Atrocities and military progress by the IS this summer has prompted Washington, Tehran, and several European governments to become directly involved in confronting them and some progress has been made in driving IS forces back in the north. The expansion of the US air campaign against the IS will make it very difficult for them to move motorized forces and heavy military equipment across the deserts of Iraq and Syria. However, driving them from populated areas will be difficult. The Byzantine politics of the current situation with US and Iran both fighting the IS in Iraq, but with Iran firmly on the side of the Assad government in Syria is already causing much confusion and hard policy choices. In the meantime, Iraqi and Kurdish oil production seems to be relatively safe for the minute as IS forces are being held away from or driven back from major producing regions. The worst news of the week came when what are believed to have been Shiite militiamen massacred 68 Sunnis during prayers in an isolated village north of Baghdad. This has prompted the Sunnis to pull out of negotiations to form a unified government which many see as the only long-term hope for the country. Currently oil production from Iraq is a mixed story. Output from the northern fields that have been occupied or threatened by the Islamists has stopped, but production continues to grow in the south where the international oil companies are making progress in opening new wells and building pipelines to move the oil to export terminals. The IEA, however, reports that Iraqi production last month was down to 3.1 million b/d from 3.6 in February. Although several oil companies have pulled their people out of Kurdistan in the face of the IS threat, the Kurds say they are making good progress on expanding the capacity of their export pipeline to Ceyhan, Turkey. Last week the capacity of the pipeline was doubled to 300,000 b/d and work is underway to increase this to 500,000. The dispute over who owns the oil being exported from Iraqi Kurdistan continues. However, with the Kurds now being seen as the main military bulwark against the IS, it is likely that the new Iraqi government will reach some settlement under western pressure. Syria: After a major battle, the Islamic State has succeeded in capturing a major government airfield in Raqaa province. Some 500 were reported as having been killed on both sides during the fighting. The base is reported as being the most significant in the region supporting several squadrons of fighter planes, helicopters, and considerable numbers of tanks, and artillery pieces. Some 1,000 government military personnel were reported to be stationed at the base. This loss is significant, for not only does it give the IS access to more arms and munitions but it is a major psychological blow against the Moscow and Tehran supported Syrian forces. Unofficial Syrian spokesmen are already suggesting that the West will have to come to terms with the Assad government if the Islamic State is to be stopped. Libya: At least one tanker carrying crude oil managed to leave Libya last week, but all the other news was bad. There are now a congress and a parliament both claiming to be the legitimate government of Libya. Over the weekend the weeks’ long struggle over Tripoli’s main airport came to an end when the Misrata militia which is pro the Islamic leaning congress drove off the Zintan militia. The new parliament is holed up in Tobruk near the Egyptian border. Tripoli has become a battleground – the gas stations are empty; foreigners, who can leave, have left; and there is little food. In Benghazi there is a similar situation. The big winners in all this seems to be the Islamists who are gradually gathering strength and now seem to be the most powerful force in Tripoli. The rough balance of power amongst the various militias which has kept the country going since the downfall of Gadhafi has broken down and the country is in the midst of what is likely to be a prolonged civil war. The government occasionally announces that oil production is climbing and the export terminals are open for business, but very little oil seems to be making it out of the country. If current trends continue, even this will soon stop. There seems to be another failed state in the making, which may or may not be able to export oil. Iran: Iran’s involvement in the Middle Eastern turmoil continues to increase. As the world’s largest Shiite country, Tehran feels responsible for protecting fellow Shiites in other countries who are under attack by Islamic State forces with the objective of destroying the Shiite religion. As a badly outnumbered religion, (Sunnis comprising roughly 90 percent of the world’s Muslims) Iran is already bearing the brunt of the Shiite side in several conflicts across the region. Moreover, Tehran has been locked in conflict with Washington for over 30 years and has been the major supporter of the Palestinians in their conflict with Israel. In the last few months Iran has been taking a more active role in supporting the Shiite government in Baghdad against the IS forces. In addition to military advisors to the Shiite government, pilots from the Iranian Air Force may be flying air strikes against the IS, and last week there was a report of an Iranian Army unit briefly crossing the border to help the Kurds drive IS forces out of a key town close to the Iranian border. Over the weekend however, the Iranian Foreign Minister said during a visit to Baghdad that Iraq has no need of Iranian troops as Baghdad’s Shiites are capable of defending themselves. Also over the weekend, Tehran says that it shot down an Israeli drone over its Natanz nuclear enrichment facility, reminding us that the Israeli threat to bomb Iran’s nuclear plants is still on the table. The Iranians have long said that, should they be attacked by Israel or anyone else, they would retaliate by closing the Straits of Hormuz throwing the world into economic turmoil and further escalation of conflict as the US and the West attempt to keep the oil flowing. At present it is hard to see where the negotiations and the concomitant oil sanctions are going. Tehran clearly has a major internal debate underway over its nuclear policies, which is why there has been so little progress in the negotiations despite the heavy sanctions on its oil economy. Iran’s deepening involvement in a variety of conflicts such as the Gaza conflict could easily expand into export threatening confrontations. At some point the Israelis may tire of Iranian-supplied rockets falling on their cities. The key decision point will come this fall when the extension of negotiations comes to an end. Events are moving so fast these days that we may have a completely different political situation this winter. 3. Ukraine As Ukrainian forces continue to attack the remaining separatist strongholds in eastern Ukraine, Moscow sent its aid convoy into and out of Ukraine despite the stringent objections of Kyiv. As Moscow has been quietly moving military supplies and weapons into Ukraine for many months, the purpose of the convoy was to show than Russians as well as the West can provide help to suffering civilians. In the meantime, NATO spokesmen continue to insist that Moscow is giving artillery support to the separatists by firing on government positions from inside Russia. The key moment in all this will come if and when the Ukrainian attack progresses to the point where it seems on the verge of wiping out the remaining dissident fighters. At this point Moscow will have to decide on whether to prolong the conflict indefinitely by directly intervening, allowing the dissidents to continue fighting from inside Russia, or agree on a settlement. So far the massive Russian oil and gas trade with the West has been little affected. Russian natural gas to Ukraine has been shut off, but the sanctions imposed on Moscow in retaliation mainly cover future contracts to develop its oil and gas. Exxon for example is going right ahead and helping Moscow with its Arctic drilling as the contracts were already in place. Perhaps the most serious fallout from the confrontation is the deal that Moscow seems to be cooking up with Tehran to take a large quantity of Tehran’s unsellable oil in return for bartered goods, and then sell the equivalent amount of oil on the open market. This could effectively undercut the Western sanctions on Tehran and encourage the Iranians to take a hard line position on the nuclear agreement complete with all the potential fallout that would incur. 4. Quote of the Week "A $5.00 decline in oil prices can roughly be offset by a 5 percent improvement in well productivity. But while oil prices have been relatively range-bound for the past five years, well productivity has been moving relentlessly higher. Accordingly, we believe oil and gas cash flows will move meaningfully higher as production growth and efficiency gains offset structurally bearish commodity price fundamentals." -- John Freeman, J. Marshall Adkins and Praveen Nara, oil industry analysts with Raymond James & Associates 5. The Briefs
Source URL |