Today in MetalCrawler, major oil exporters Saudi Arabia and the Russian Federation talked about possible cuts in production to combat low, low prices caused by a worldwide glut. Final figures for 2015 showed that US construction had a great year.
Russia and Saudi Arabia Talk Oil
Senior OPEC and Russian oil industry officials had vague talks, Reuters reported, about possible joint action to remedy one of the worst supply gluts in decades, while Saudi Arabia signaled its resolve to allow the market to balance itself.
The latest volley of comments highlighted the intensifying pressure of $30 a barrel oil prices on cash-strapped countries such as Russia, but did not appear to tilt the scales meaningfully towards any concerted action to reverse the price crash from the Saudis and their controlling bloc of votes in OPEC. The Saudis are said to have asked for more “cooperation” on any future production cuts.
US Construction Starts Up in 2015
Dodge Data and Analyticsreported that, for the full year of 2015, residential construction was up 14% to $265.4 billion, beating 2014’s increase by 4%, and non-building (mostly civil projects such as utility work) rose an impressive 23% to $176 billion, bouncing back from last year’s 8% decline.
The Shanghai Composite Index dived 6.9% to its lowest level in nearly three months. The drop led the Shanghai and Shenzhen stock markets to halt trading for the remainder of Monday to avert steeper falls, according to the state-run Xinhua News Agency.
The Dow Jones Industrial Average briefly fell more than 450 points in mid-morning trade, down more than 2.5%, on pace for its largest percent decline on the first trading day of the year since 1932. The Dow also fell below the psychologically key 17,000 level in intraday trading.
Saudi-Iranian Row a Threat to OPEC?
The fallout over Saudi Arabia’s execution of a Shiite cleric is spreading beyond a spat between the Saudis and Iranians, as other Middle East nations choose sides and world powers Russia and China weigh in.
Relations between Saudi Arabia and Iran — two Middle Eastern powerhouses who are both founding members of the Organization of Oil Exporting Countries (OPEC) despite the fact that global bans have, until recently, limited Iranian oil exports — have deteriorated following Riyadh’s execution of Shiite cleric Nimr al-Nimr on Saturday.
Protesters in Iran’s capital, Tehran, stormed the Saudi embassy hours after the execution. The Saudis cut off all diplomatic ties with Iran soon thereafter and have since been joined in breaking off ties with Iran by Bahrain, which cited Tehran’s “blatant and dangerous interference.”
The United Arab Emirates, meanwhile, announced it was “downgrading” its diplomatic relations with Iran. The UAE recalled its ambassador in Tehran and said it would also reduce the number of diplomats stationed in Iran.
Detailed in a Financial Times article, the rumor was that Saudi Arabia would have been willing to cut output to support oil prices if other OPEC, and some non-OPEC producers, matched its cutbacks. Crucially, the rumor went, that would require Iraq, Iran and non-member Russia to cut back along with Saudi Arabia for the “deal” to be acceptable to the Kingdom.
At the end of the day, the other OPEC nations, Russia and the Saudis all decided not to cut output. Or at least they couldn’t come to an agreement to do anything other than stand pat.
Without a doubt, all those countries would have liked to have seen higher prices. Iraq’s production may have roared back after the war there, but at $43/barrel the country is still bankrupt and, according to a Telegraph article quoting RBC Capital Markets, it can’t even pay the salaries of its security forces. Read more
Steel imports into the US were up in October and Saudi Arabia is under pressure to turn off its spigots from fellow OPEC nations.
Steel Imports Up
Based on preliminary Census Bureau data, the American Iron and Steel Institute reported today that the US imported a total of 2,987,000 net tons (nt) of steel in October 2015, including 2,258,000 nt of finished steel, up 5.4% and 1.4%, respectively, vs. September final data.
On the year-to-date, through ten months of 2015, total and finished steel imports are 33,889,000 and 27,438,000 nt, respectively, down 8% and 2% respectively, vs. the same period in 2014. Annualized total and finished steel imports in 2015 would be 40.7 and 32.9 million nt, down 8% and 2% respectively vs. 2014 if the same levels persisted in November and December.
Saudi Arabia Under Oil Pressure
OPEC members including Iran have decided Saudi Arabia’s effort to force out smaller US shale producers by overproducing and lowering global oil prices was a failure and are preparing to press the Saudis directly to pull back on production at the group’s meeting this week.
The big meeting is due in December, the eyes of the world will be upon the assembled dignitaries, will they be able to reach an agreement and what impact will that have on the world? Are we talking about the 2015 United Nations COP 21 Climate Change Conference in Paris?
No, we are talking about OPEC’s summit in Vienna on December 4. In the short- to medium-term the price of oil will have a bigger impact on the citizens of the world than anything agreed to in Paris. OPEC is facing a revolt the likes of which has not been seen since the 1970’s. Many members, indeed most members are at a breaking point and Saudi Arabia has been accused of running the cartel for its own ends against the wishes of the majority.
The club is coming apart at the seems. Algeria’s former energy minister, Nordine Aït-Laoussine, is quoted in the Telegraph as saying the time has come to consider suspending his country’s OPEC membership if the cartel is unwilling to defend oil prices and merely serves as the tool of a Saudi regime pursuing its own self-interest. “Why remain in an organization that no longer serves any purpose?” he is quoted as saying.
The International Energy Agency (IEA) estimates that the oil price crash has cut OPEC revenues from $1 trillion a year to $550 billion, setting off a fiscal crisis that has far-reaching consequences, particularly in the Middle East already riven with sectarian unrest and four civil wars.
The widely accepted aim of Saud Arabia, and a small band of Gulf partners, is to drive US shale producers to the wall and thereby choke off the threat to OPEC’s dominance. If that is the case the battle is proving much harder than was probably anticipated. So far US output has only dropped by 500,000 barrels per day but still stands at 9.1 million b/d, much as it did this time last year. True, there is only so long hedging can keep some producers in business or technology can reduce costs, but the US Energy Department expects a loss of only 600,000 b/d next year, far from a collapse and by then OPEC will have foregone another half trillion dollars.
As the Telegraph points out, the infrastructure and technology in the US remain in place even if some shale producers go to the wall. If oil price move back up to $60+ new firms will come into the market and production will rise again. The US shale industry has become the new swing producer whether Saudi Arabia likes it or not.
Another less well debated target could be to check solar and wind power the paper suggests, both of which are terribly price dependent. The oil price does not directly impact electricity prices but certainly has an indirect effect by its impact on natural gas prices often linked to the oil price and hence natural gas or LNG’s ability to compete with renewables. But the move to renewable is inexorable, driven in some quarters by politicians desire to “do the right thing” and in others, such as China, by the knowledge that more of the same would result in such a widespread health risk that civil unrest could be the end result.
Which brings us back to Paris, the two summits are not unrelated.
Attempts to limit carbon emission have already reduced oil demand. OPEC forecasts that oil demand will keep rising relentlessly, adding 21 million barrels of oil per day (b/d) to 111 million by 2040 as if nothing will change.
Yet, car producers the world over are not pouring billions into electric vehicles to be trendy, they know the internal combustion engine is, in the long term, a dead end. Paris will hasten that trend and as if in recognition the IEA says oil demand will be just 103 million b/d in 2040 even under modest carbon curbs. It would collapse to 83.4 million b/d if global leaders really grasp the nettle. Rather than try to drive other supply sources out of business, the Saudi’s would be better off maximizing their returns for as long as they can, it is after all a finite resource, both in terms of supply and in terms of demand.
The crunch though may be none of the above but the gradually collapsing geo-political state of the Middle East, as governments struggle to maintain budgets in the face of the oil-related revenue collapse.
Most petro economies have become used to huge government largesse, austerity in the form of salary reductions, a break on new hiring, reductions in subsidies or welfare payments could result in unrest in an area not noted for its calm debate in recent years.
Unhappy populations right across the Middle East are more likely to turn to extremism if there are no jobs or prospects. As the paper points out Saudi Arabia, itsel,f has suffered five Isil-linked terrorist acts on it’s soil since May, several of them targeted at oil installations, probably as the terrorist organization also has an eye on raising the oil price. Isil is largely funded by oil revenues and no doubt is also facing a drop in income as a result of Saudi Arabia’s stance. Saudi Arabia is playing a high stakes game, a game that if I were the halftime coach I’d be instructing the team requires a change of tactics in the second half.
Saudi Arabia is taking a massive gamble on the world oil markets. Their “pump at any price” policy has driven oil down to below $50 per barrel and, so far, appears to be having the desired effect of squeezing out marginal producers, particularly in the shale industry, unable to cover costs at that level.
Every spike above $50, as happened last week, is met by a wave of hedging from shale companies. Late last week, US producers locked in new production at north of $50 for 2016 and 2017 delivery. As prices reached about $53, any further rise was limited by sellers locking in prices. Even so only some 11% of expected 2016 production is forward sold according to HIS Energy, quoted in Reuters.
Source: Financial Times
The Saudis had hoped they could drive down the price enough to squeeze out higher cost upstarts like the US shale industry. Indeed, the US government is quoted in the FT reporting that after adding 1 million barrels per day per year of production in every year since 2012. Next year will see the first decline, from 9.3 million bpd to 8.9 million bpd. Read more
In a recent post we looked at the state of the crude oil market, how demand has been weak as a result of refinery maintenance closures in Europe and lower domestic consumption in China. Even though China is buying more crude, it has increased exports of refined oil products depressing prices in the Asian market and hurting regional refinery utilization rates.
The solution would be for crude oil producers to limit output, but with OPEC only controlling a third of world supply and no appetite among any of its member nations to reduce revenue streams, it seems voluntary reductions of any significance are unlikely. Saudi Arabia as the main swing producer is the most likely to adjust output and a report this week in the FT states output was reduced by 400,000 barrels per day in August from 10 million barrels per day to 9.6 m b/d, the fourth-largest one month drop on record.
Well, sure, when they are just stories – but if there is the possibility that they are a fair reflection of real events and that there is the possibility the consequences could affect us all, they become less curiosity and more a source of alarm.
So portends an article in the Telegraph this week, reporting a meeting said to have taken place between Russia’s Vladimir Putin and Saudi Prince Bandar bin Sultan, head of Saudi intelligence, three weeks ago in Mr. Putin’s dacha outside Moscow. The gist of the story is the Saudis are seeking support from Russia in pressuring Syria’s President Assad to stand down in return for a Saudi-Russian pact on the oil price and agreement on “managing” the European market for oil and natural gas/LNG.
A combination of factors has come together to depress not just the price of oil, but a wide swath of commodity prices this year. According to the FT, the benchmark Reuters-Jefferies CRB index, a basket of commodities from wheat to copper, fell to a 20-month low of 281.13 points.
The index is down 10 percent for the year to date and roughly 40 percent below the all-time high set in mid-2008. ICE July Brent, the global benchmark for oil prices, fell $2.76 a barrel last week to a 5-month low of $105.65 from a peak of $128 a barrel in early March, while US oil prices fell through the $90 key support level, with Nymex July West Texas Intermediate falling $2.14 to $89.71 a barrel.
So what has engineered such a fall? Is it just a reflection of a depressed global economy?
Never, it would seem, has the oil market been in such a state of disarray.
Brent crude, the global benchmark, hit US$117 per barrel this week for the first time since August. The spot price has been rising on concerns over where the showdown with Iran is leading. European consumers have begun to cut back on purchases ahead of an outright ban when sanctions are introduced.
Meanwhile the Chinese, usually buyers of some 20 percent of Iran’s output (or about 550,000 barrels a day) are said to have cut back by 285,000 barrels in January and February, and are now extending this to March. This has less to do with supporting the Western embargo and more to do with slowing domestic demand and possibly some gamesmanship in applying pressure on the Iranians for bargain-basement prices.
Likewise, while India, Iran’s second-largest customer at an average 341,000 barrels per day, continues to buy, they too are applying pressure for discounts. Saudi Arabia has increased production, as has Russia, and both Iraq and Libya are increasing output every month.
No Worries, We Still Got Texas Tea
In fact, the world is not short of oil yet, to the irritation of North American producers (and the delight of North American consumers.) West Texas intermediate crude prices are at a record discount to Brent.
For a number of reasons, including outages at Midwest refineries causing a drop in demand, tight pipeline and storage capacity and a rise in supply (notably from the Canadian oil sands and from the Bakken shale oil region of North Dakota), the US is awash with oil, forcing not only WTI to trade at a widening discount to Brent, but Canadian synthetic crude to trade at a discount to WTI. From a discount of $31.25 per barrel a month ago, Western Canadian select heavy crude is at a $31.25-per-barrel discount to WTI this week, about 50 percent of the spot Brent price, according to the FT.
Maybe the most interesting disconnect in the market is the forward spread curve for Brent crude. Throughout the boom period of 2004-08, Reuters reports the spot and forward oil prices moved in tandem, but now forward prices for 2015 are at a $19-per-barrel discount and have remained remarkably steady even as the spot price has risen in the wake of rising tensions with Iran.
While the forward price curve is not a prediction of the price of oil in the years ahead, it is often taken as an indication of where the market expects supply and demand to balance out. The paper postulates that the rise of oil shale fracking will have a similar (if less pronounced) impact on the oil market that gas fracking had on the natural gas market.
They also suggest rising conventional supplies from Libya, Iraq, Brazil and elsewhere will supplement current supplies, and point to Saudi Aramco’s decision to cancel investments planned to lift the kingdom’s production from 12.5 to 15.0 million barrels per day as evidence of that. Lastly, although much demand growth is predicated on the rise of an emerging market middle class, a combination of greater efficiency in the use of oil and falling Western demand will diminish the impact of that effect.
One element that does seem likely to persist (for the medium term, at least) is North America’s energy advantage globally. Neither lower natural gas nor lower oil prices are likely to equalize with the rest of the world anytime soon and while no one is suggesting it will lead to long-term energy-intensive investments like aluminum smelters, it will provide a welcome boost to more energy-dependent industries in North America relative to many other parts of the world for some time to come.