Category Archives: Energy

The Dangerous Economics of Shale Oil

Submitted by Dave Fairtex via Peak Prosperity.com,

For years, we’ve been warning here at PeakProsperity.com that the economics of the US ‘shale revolution’ were suspect. Namely, that they’ve only been made possible by the new era of ‘expensive’ oil (an average oil price of between $80-$100 per barrel). We’ve argued that many players in the shale industry simply wouldn’t be able to operate profitably at lower prices.

Well, with oil prices now suddenly sub-$60 per barrel, we’re about to find out.

Using the traditional corporate income statement, it is difficult to determine if shale drilling companies make money. There are a lot of moving parts, some deliberate obfuscation at some companies, and the massive decline rates make analysis difficult – since so much of reported profitability depends on assumptions made regarding depreciation and depletion.

So, can shale oil be profitable? If so, at what price? And under what conditions?

I try to deconstruct all this: here

Crashing crude may blow a $1.6 trillion hole in the global oil sector, annually

Dec 14, 2014 9:36 a.m. ET

NEW YORK (MarketWatch)—Talk about an oil spill. The spectacular unhinging of crude oil prices over the past six months is weighing mightily on the U.S. stock market.

And while it may be too early to abandon all hope that the market will stage a year-end Santa rally, it appears that if Father Christmas comes, there’s a good chance his sleigh will be driven by polar bears, instead of gift-laden reindeer.

Wall Street’s gift: a major stock correction.

Indeed, the Dow Jones Industrial Average DJIA, -1.79%  already endured a bludgeoning, registering its second-worst weekly loss in 2014, shedding 570 points, or 3.2%, on Friday. That’s just shy of the 579 points that the Dow lost during the week ending Jan. 24, earlier this year. It’s also the second worst week for the S&P 500 this year SPX, -1.62% which was down about 58 points, over the past five trading days, or 2.83%, compared to a cumulative weekly loss of 61.7 points, or 3.14%, during the week concluding Oct. 10.

But all that carnage is nothing compared to what may be in store for the oil sector as crude oil tumbles to new gut-wrenching lows on an almost daily basis. On the New York Mercantile exchange light, sweet crude oil for January delivery settled at $57.81 on Friday, its lowest settlement since May 15, 2009.

Moreover, the largest energy exchange traded fund, the energy SPDR XLE, -1.86% is off by 14% over the past month and has lost a quarter of its value since mid-June.

The real damage, however, is yet to come. By some estimates the wreckage, particularly for the oil-services companies, may add up to a stunning $1.6 trillion annual loss, at oil’s current $57 low, predicts Eric Lascelles, RBC Global Asset Management chief economist.

Since it’s a zero-sum game, that translates into a big windfall for everyone else outside of oil players.

In his calculation, Lascelles includes the cumulative decline in oil prices since July and current supply estimates of 93 million barrels a day. It’s a fairly simplistic tally, but it gets the point across that the energy sector is facing a serious oil leak. Here’s a look at a graphic illustrating the zero-sum, wealth redistribution playing out as oil craters: Source and more

Crude Crash Set To Continue After Arab Emirates Hint $40 Oil Coming Next

In space, no one can hear you scream… unless you happen to be Venezuela’s (soon to be former) leader Nicolas Maduro, who has been doing a lot of screaming this morning following news that UAE’s Energy Minister Suhail Al-Mazrouei said OPEC will stand by its decision not to cut crude output “even if oil prices fall as low as $40 a barrel” and will wait at least three months before considering an emergency meeting.

In doing so, OPEC not only confirms that the once mighty cartel is essentially non-existant and has been replaced by the veto vote of the lowest-cost exporters (again, sorry Maduro), but that all those energy hedge funds (and not only) who hoped that by allowing margin calls to go straight to voicemail on Friday afternoon, their troubles would go away because of some magical intervention by OPEC over the weekend, are about to have a very unpleasant Monday, now that the next oil price bogey has been set: $40 per barrell.

Luckily, this will be so “unambiguously good” for the US consumer, it should surely offset the epic capex destruction that is about to be unleashed on America’s shale patch, in junk bond hedge funds around the globe, and as millions of high-paying jobs created as a result of the shale miracle are pink slipped.

According to Bloomberg, OPEC won’t immediately change its Nov. 27 decision to keep the group’s collective output target unchanged at 30 million barrels a day, Suhail Al-Mazrouei said. Venezuela supports an OPEC meeting given the price slide, though the country hasn’t officially requested one, an official at Venezuela’s foreign ministry said Dec. 12. The group is due to meet again on June 5.

“We are not going to change our minds because the prices went to $60 or to $40,” Mazrouei told Bloomberg at a conference in Dubai. “We’re not targeting a price; the market will stabilize itself.” He said current conditions don’t justify an extraordinary OPEC meeting. “We need to wait for at least a quarter” to consider an urgent session, he said.

And with OPEC’s 12 members pumped 30.56 million barrels a day in November, exceeding their collective target for a sixth straight month, according to data compiled by Bloomberg. Saudi Arabia, Iraq and Kuwait this month deepened discounts on shipments to Asia, feeding speculation that they’re fighting for market share amid a glut fed by surging U.S. shale production.

The above only focuses on the (unchanged) supply side of the equation – and since the entire world is rolling over into yet another round of global recession, following not only a Chinese slowdown to a record low growth rate, but also a recession in both Japan and Europe, the just as important issue is where demand will be in the coming year. The answer: much lower.

OPEC’s unchanged production level, a lower demand growth forecast from the International Energy Agency further put the skids under oil on Friday, raising concerns of possible broader negative effects such as debt defaults by companies and countries heavily exposed to crude prices. There was also talk of the price trend adding to deflation pressures in Europe, increasing bets that the European Central Bank will be forced to resort to further stimulus early next year.

And while the bankruptcy advisors and “fondos buitre” as they are known in Buenos Aires, are circling Venezuela whose default is essentially just a matter of day, OPEC is – just in case its plan to crush higher cost production fails – doing a little of the “good cop” routing as a Plan B.

According to Reuters, OPEC secretary general tried to moderate the infighting within the oil exporters, saying “OPEC can ride out a slump in oil prices and keep output unchanged, arguing market weakness did not reflect supply and demand fundamentals and could have been driven by speculators.”

Ah yes, it had been a while since we heard the good old “evil speculators” excuse. Usually it appeared when crude prices soared. Now, it has re-emerged to explain the historic plunge of crude.

Speaking at a conference in Dubai, Abdullah al-Badri defended November’s decision by the Organization of the Petroleum Exporting Countries to not cut its output target of 30 million barrels per day (bdp) in the face of a drop in crude prices to multi-year lows.

“We agreed that it is important to continue with production (at current levels) for the … coming period. This decision was made by consensus by all ministers,” he said. “The decision has been made. Things will be left as is.”

Some say selling may continue as few participants are yet willing to call a bottom for markets.

There is some hope for the falling knife catchers: “Badri suggested the crude price fall had been overdone. “The fundamentals should not lead to this dramatic reduction (in price),” he said in Arabic through an English interpreter. He said only a small increase in supply had lead to a sharp drop in prices, adding: “I believe that speculation has entered strongly in deciding these prices.””

Unfortunately for the crude longs, Badri is lying, as can be gleaned from the following statement:

Badri said OPEC sought a price level that was suitable and satisfactory both for consumers and producers, but did not specify a figure. The OPEC chief also said November’s decision was not aimed at any other oil producer, rebutting suggestions it was intended to either undermine the economics of U.S. shale oil production or weaken rival powers closer to home.

Some people say this decision was directed at the United States and shale oil. All of this is incorrect. Some also say it was directed at Iran and Russia. This also is incorrect,” he said.

Well actually… “Saudi Arabia’s oil minister Ali al-Naimi had told last month’s OPEC meeting the organization must combat the U.S. shale oil boom, arguing for maintaining output to depress prices and undermine the profitability of North American producers, said a source who was briefed by a non-Gulf OPEC minister.”

And as Europe has shown repeatedly, not only is it serious when you have to lie, but it is even worse when you can’t remember what lies you have said in the past. That alone assures that the chaos within OPEC – if only for purely optical reasons – will only get worse and likely lead to least a few sovereign defaults as the petroleum exporting organization mutates to meet the far lower demand levels of the new normal.

In the meantime, the only question is how much longer can stocks ignore the bloodbath in energy (where there has been much interstellar screaming too) because as we showed on Friday, despite the worst week for stocks in 3 years, equities have a long way to go if and when they finally catch up, or rather down, with the crude reality…

Source and chart

Saudi Arabia Declares Oil War on US Fracking, hits Railroads, Tank-Car Makers, Canada, Russia; Sinks Venezuela

by Wolf Richter • December 1, 2014

When OPEC announced on Thanksgiving Day that it would maintain oil production at 30 million barrels per day, chaos broke out in the oil market, and the price of oil around the globe spiraled into a terrific plunge. The unity of OPEC, if there ever was such a thing, was in tatters with Saudi oil minister smiling victoriously, and with a steaming Venezuelan oil minister thinking of the turmoil his country is facing [OPEC Refuses to Cut Production, Oil Plunges off the Chart].

The bloodletting in the oil markets on Thursday led to some wobbly stability on Friday, and for a while it seemed oil had found a bottom, but then the US stock market closed early while crude continued trading, and suddenly all heck re-broke loose, and the US benchmark WTI plunged again and broke the $66-a-barrel mark before coming to a rest at $66.06. After a near 10% dive in two days, WTI is now down 37% since June!

This chart shows the Thanksgiving plunge following OPEC’s decision, the deceptive stability Friday, and the afterhours plunge:

Now more information has emerged, confirming prior “rumors” and “conspiracy theories.”

During the closed-door meetings in Vienna, Saudi oil minister Ali al-Naimi told OPEC members that OPEC had to combat the US fracking boom. If OPEC cut output to raise the price of oil, it would lose market share, he argued. The way to win would be to allow overproduction to depress prices to the point where they would destroy the profitability of North American producers. And they’d have to cut production, rather than OPEC.

With Saudi Arabia’s overwhelming power within OPEC, his argument won against objections from desperate members, such as Venezuela, Iran, and Algeria, which wanted a production cut to push prices back up.

“Naimi spoke about market share rivalry with the United States, and those who wanted a cut understood that there was no option to achieve it because the Saudis want a market share battle,” a source told Reuters to make sure the message got out.

Asked if this was a response to rising US production, OPEC Secretary General Abdullah al-Badri essentially confirmed OPEC had entered the oil war against the American shale revolution: “We answered,” he said. “We keep the same production. There is an answer here.”

The bloodletting is spreading.

While the US fracking boom is the official target, Canada’s tar-sands producers are getting hit the hardest. The process is expensive. Their production is largely land-locked and often has to be transported to distant refiners in Canada and the US by costly oil trains. Yet these high-cost producers are getting the least for their oil: The heavy-oil benchmark Western Canada Select (WCS) traded for $48.40 per barrel on Friday, down over 40% from June, the cheapest oil in the world.

Their shares got knocked down in sync: For example, Suncor Energy dropped 9% on Friday, down 27% since June; and Canadian Natural Resources dropped nearly 10% for the day, down 28% since June.

The US shale oil revolution is bleeding as well. Shares across the board are getting hit, many of them outright eviscerated. If the word “plunge” occurs a lot, it’s because that’s what these stocks did on Friday.

  • Goodrich Petroleum plunged 34% on Friday; down 80% from June.
  • Sanchez Energy plunged 29.5% on Friday, down 71% from June.
  • Clayton Williams Energy plunged 25.6% on Friday, down 61% from May.
  • Callon Petroleum plunged 18.6% on Friday, down 60% from June.
  • Laredo Petroleum plunged 33.5% on Friday, down 66.5% from June.
  • Oasis Petroleum plunged 27.2% on Friday, down 68% from July.
  • Stone Energy plunged 24.1% on Friday, down 68% from April.
  • Triangle Petroleum plunged 25.6% on Friday, down 62% from June.
  • EP Energy plunged 25.3% on Friday, down 54% from June.

The list goes on. Even large oil companies got clobbered:

  • Exxon Mobil down 4.2% for the day and 13% from July.
  • ConocoPhillips down 6.7% for the day and 24% from July.
  • Marathon Oil down 11% for the day and 31% from early September.
  • Occidental Petroleum down 7.4% for the day and 24% from June.
  • Anadarko Petroleum down 10.5% for the day and 30% since late August.
Then there is the Oil Service sector.

The Market Vectors Oil Services ETF dropped 8.9% for the day and has plummeted 34% from June. The current standout is its 10th-most heavily weighted component, Norway-based SeaDrill which had announced that it would cut its dividend to zero to deal with its mountain of debt, given the current environment. Its shares swooned on Thursday and Friday a total of 28% and are now down 70% from a year ago. The whole sector followed. This is what debt can do when the going gets tough.

Those are among the official targets of OPEC’s scorched-earth oil war. They’ve been hit, and they’re taking on water.

There is collateral damage.

With increasing amounts of oil being carried by oil trains, the railroads, which had been trading near their exuberant 52-week highs in large part due to the lucrative oil-train business, suddenly took a dive on Friday:

  • Union Pacific -4.9%
  • CSX -3.8%
  • Canadian Pacific -8.0%
  • Norfolk Southern -4.7%
  • Kansas City Southern -5.1%
  • Canadian National Railway -4.6%
  • Burlington Northern Santa Fe, which is owned by Warren Buffett’s Berkshire Hathaway, isn’t publicly traded. But if the oil-train business gets hit, so will Buffett’s “steal.”

But this pales compared to the carnage in tank-car builders. On Friday, they plunged:

  • Greenbrier -15% for the day, -28% from its September high.
  • American Railcar Industries -12.9% for the day, -28.3% since August.
  • FreightCar America -7.5% for the day, -21% since September.
  • Trinity Industries -11.3% for the day, -36% since September.

The oil price move is already cascading through American industry. Bondholders are next. The US fracking boom was built with debt, much of it junk rated. And this pile of debt is now at the confluence of the collapsing price of oil, high costs of production, and sharp decline rates of fracked wells that force drillers to continue drilling just to maintain their revenues. It’s a toxic mix.

And there are victims of friendly fire, so to speak.

Particularly OPEC member Venezuela, dogged by the world’s highest inflation and worst budget deficit, is running out of options. On November 18, President Nicolas Maduro ordered $4 billion in loan proceeds from China to be transferred from an off-budget fund to one counted in the international reserves. The sudden appearance of $4 billion in international reserves pumped up bondholder confidence: the next day in intraday trading, Venezuelan bonds jumped the most in six years.

But it didn’t last long. Within a week, its international reserves dropped by $1.3 billion to $22.2 billion, Bloomberg reported. Venezuela had burned through one third of the Chinese money in one week. Venezuela must have much higher oil prices. Unless a miracles happens, or unless China bails it out altogether – at a steep price – the country is headed for default.

Russia, third-largest oil producer in the world, after Saudi Arabia and the US, also got hit, as did Norway, and their currencies have been brutalized [Ruble Freefall: And the Ugliest Currencies Are?]

But this time it’s different.

This time, OPEC is trying to depress oil prices. In prior years, OPEC tried to push prices as high as possible, but without killing the global economy and demand for oil. The balancing act led to high oil prices that consumers struggled to pay but that allowed the US shale revolution to bloom. If oil had remained at $40 or $50 a barrel, fracking wouldn’t have taken off. OPEC was, ironically, one of the enablers of fracking (yield-desperate investors, driven to near insanity by the Fed’s zero-interest-rate policy, were the other one). And now fracking is threatening to make OPEC irrelevant.

Saudi Arabia, formerly the dominant oil producer in the world, the country whose mere words could shake up markets and manipulate US policies in the Middle East, and the master of an all-powerful OPEC, is reduced to struggling for simple market share, the hard way.

A lot of people believe that the plunge in the price of oil will be brief, and that it has gone pretty much as far as it can go, given production costs in the US and Canada. But the bloodletting in the US fracking revolution will go on until the money finally dries up. Read…   How Low Can the Price of Oil Plunge?

Source

Is The U.S. Headed For A Financial Collapse?

By Michael T. Snyder

Americans are going to spend more than 600 billion dollars this Christmas season, and on Friday we got to see our fellow citizens fight each other like rabid animals over foreign-made flat screen televisions and Barbie dolls.  As disgusting as this behavior is to many of us, there may soon come a time when we will all fondly remember these days.  Most Americans are completely unaware of what is currently happening in the financial world, but right now there are deeply troubling signs that we could be on the verge of another major global financial collapse.  If the next great economic downturn does strike in 2015, that could mean that we may have just witnessed the last great Black Friday celebration of American materialism.  As you read this, stock prices are approximately double the value that they should be, margin debt is hovering near all-time record highs, and the “too big to fail” banks are being far more reckless than they were just prior to the last major stock market implosion.  So many of the exact same patterns that we witnessed back in 2007 and 2008 are repeating right now, and as you will see below, this includes a horrifying crash in the price of oil.  Anyone with half a brain should be able to see the slow-motion financial train wreck that is unfolding right before our eyes.

Every year, it has been my tradition to write an article about the mini-riots that erupt in retail stores all around the country on Black Friday.  This year things were a bit calmer because so many stores opened up on Thanksgiving itself, but there was still plenty of chaos.

But instead of launching into another diatribe about how we are committing national economic suicide by buying hundreds of billions of dollars of foreign-made goods with money that we do not have, I want to focus on what is coming next.

You see, I believe that in the not too distant future many of us will be wishing for the days when the debt-fueled U.S. economy was healthy enough for people to be wrestling with one another on the floor over good deals in our retail establishments.

The next great financial crash (which many have been anticipating for years) is rapidly approaching.  So many of the same things that happened last time are happening again.  As I noted above, this includes a crash in the price of oil.

In the months prior to the last stock market collapse, the price of oil began plummeting dramatically in the summer of 2008.  This was an “early warning signal” that something was deeply amiss in the financial world…

Many people assume that a lower price for oil is good for the economy, but the exact opposite is actually true.  The oil industry has become absolutely critical to the U.S. and Canadian economies.  And in recent years, the “shale oil boom” has been one of the only bright spots for the United States.  If the shale oil industry starts to fail because of lower prices, a lot of the boom areas all over the nation are going to go bust really quickly and a lot of the financial institutions that were backing these projects are going to feel an immense amount of pain.

Unfortunately for us, the “shale oil revolution” simply does not work at 80 dollars a barrel.

And it certainly does not work at 70 dollars a barrel.

As I write this, U.S. crude is sitting at about 66 dollars a barrel due to OPEC’s recent decision to not cut output.

That is the lowest price for U.S. crude since September 2009.

So just like we saw during the summer of 2008, crude oil prices are collapsing once again.  The chart below comes from the Federal Reserve, but it is a few days out of date.  Now that the price of crude is down to about 66 dollars, you have to imagine the price actually going below the bottom of this chart…

Needless to say, this price collapse is having a huge impact on the stock prices of oil companies.  The following information about what happened in the markets on Friday comes from Business Insider

Here were some of the biggest losers on Friday:

  • BP Plc (NYSE:BP), down 5%
  • Royal Dutch Shell A (NYSE:RDSa), down 6%
  • Total SA (NYSE:TOT), down 5%
  • Statoil ASA (NYSE:STO), down 14%
  • Exxon Mobil Corporation (NYSE:XOM), down 5%
  • ConocoPhillips (COP), down 9%
  • Marathon Oil (NYSE:MRO), down 13%
  • Occidental Petroleum (NYSE:OXY), down 7%
  • Anadarko Petroleum (NYSE:APC), down 14%
  • Linn Energy (NASDAQ:LINE), down 13%
  • Whiting Petroleum (NYSE:WLL), down 28%
  • Oasis Petroleum (NYSE:OAS), down 32%
  • Kodiak Oil & Gas Corp (NYSE:KOG), down 28%

And this list goes on.

But this could just be the beginning of the oil price declines.

The most powerful oil official in Russia believes that the price of oil could fall below $60 next year…

Russia’s most powerful oil official Igor Sechin said in an interview with an Austrian newspaper that oil prices could fall below $60 by mid-way through next year.

Sechin, chief executive of Rosneft (MCX:ROSN), Russia’s largest oil producer, also said U.S. oil production would fall after 2025 and that an oil market council should be created to monitor prices, the same day the OPEC cartel met in Vienna and left its output targets unchanged.

“We expect that a fall in the price to $60 and below is possible, but only during the first half, or rather by the end of the first half (of next year),” Sechin told the Die Presse newspaper.

And one oil industry analyst just told CNBC that he believes that the price of oil could ultimately plunge as low as $35 a barrel…

“When you look at the second half of 2015, that’s when you see oil beginning to dwarf demand by about a million, a million and a half barrels a day,” he said. “Thirty-five dollars is a possibility if they don’t get an agreement next spring because that’s when the oil really starts to build and you can have a billion barrels of oil with really no place to put it.”

This comes at a time when there are already a whole host of signs that the global economy is slowing down.  Three of the ten largest economies on the planet have already slipped into recession, and the economic nightmare over in Europe just continues to get even worse.  In fact, we just learned that the unemployment rate in Italy has shot above 13 percent for the first time ever recorded.

In addition, it is important to remember that the “real economy” in the United States is in far worse shape than it was just prior to the last financial crash.  Just consider these numbers…

-In the United States today, the number of payday lending locations is greater than the number of McDonald’s (NYSE:MCD) and the number of Starbucks (NASDAQ:SBUX).

-One recent survey found that about 22 percent of all Americans have had to turn to a church food panty for assistance.

-This year, almost one out of every five households in the United States celebrated Thanksgiving on food stamps.

-The rate of government dependence in America is at an all-time high and approximately 60 percent of U.S. households get more in transfer payments from the government than they pay in taxes.

-According to a report that was just released by the National Center on Family Homelessness, the number of homeless children in the U.S. has soared to a new all-time record high of 2.5 million.

If things are this bad now, what are they going to look like after the next great financial crash?

And without a doubt, the next crash is coming.  Hopefully we have at least a couple more months of relative stability, but many experts are now urgently warning that time is quickly running out.

By this time next year, Black Friday may look a whole lot different than it does today.

Source

ISIL attacked Saudi Arabia

11.11.2014 Author: Viktor Titov

Saudi Arabia has recently witnessed the aggression that should have happened sooner or later due to its short-sighted policy in Syria, Iraq and Iran. As an old saying goes: “If you dig a hole for others, you’re sure to fall in it yourself.”

A few days ago the Saudi town of Dalva, situated in the oil-rich Eastern Province, suffered an attack of a group of armed Sunni terrorists, which resulted in seven civilian deaths. Most of the attackers were citizens of the Kingdom. The promt response of the local security forces allowed the servicemen to detain 20 members of an underground terrorist group, consisting mainly of those who had previously fought under the black banner of ISIL in Iraq and Syria. Law enforcement agencies of Saudi Arabia have managed to capture the head of the armed group, his name is kept secret. The only information that has become available to journalists is that this commander has recently returned from Syria where he was fighting against the pro-Assad forces.

Riyadh is now facing a harsh dilemma: on the one hand, the House of Saud is actively oppressing its Shia citizens, on the pretext of their disloyalty and their alleged attempts to undermine the national security of the kingdom due to the “evil Iranian influence.” On the other – Sunni terrorists, that Saudi Arabia is fighting today alongside with its closest ally – the US, have assaulted Shia civilians on the Saudi soil, and those were virtually enjoying the same rights as the rest of the population, including the right for protection. It is now official: Saudi citizens motivated by religious hatred are commiting manslaughter of their fellow citizens.

The only question is how Riyadh may react when the Sunni terrorists that it had trained and funded will unleash a wave of terror against the Shia population of KSA? A similar course of events has already taken place in the neighboring Bahrain back in 2011, but Saudi regular troops were fast to cross the border in an attempt to prevent the violence from spreading.

It is no coincidence that the events in the city of Dalva are completely ignored by the international media. Should this fact become widely known then the Saudi authorities will be forced to recognize the threat ISIL poses to Saudi Arabia along with acknowledging the underlying instability of Saudi society that can endanger the ruling Wahhabi regime.

Now that the Shia population of the Eastern Province is buzzing with discontent, the House of Saud has found itself in a tight corner. Should the authorities fail to prosecute the terrorists a violent unrest of the Shia population, similar the one that shook Saudi Arabia in 2011 -2012, in the wake of the above mentioned events in Bahrain, will be quick to follow. But if the terrorists are to be punished to the fullest extent of the Sharia law, then the Wahhabis and Salafis will accuse the royal family of “betrayal” of the Sunnis. This course of events will end no better, with a massive wave of violent terror attacks, carried out by ISIL militants all across Saudi Arabia. Now that ISIL thugs have faced harsh resistance in Syria and Iraq, they will be eager to move south to start a “sacred struggle against the corrupt pro-American reign of Al Saud family“. As for the Iraqi Shia population, they can only welcome this U-turn in their ongoing struggle against Islamists. Moreover, it is possible that the indignation of the Saudi Shia population of the Eastern Province will find some form of support in Tehran and Baghdad. This means that the fate of the kingdom’s territorial integrity will be put to the test. The nightmares of the Saudi ruling family seems to be coming true — Saudi Arabia can be split into several parts, which had been joined together to create the kingdom back in 1929. This trend can be accelerated by the fact that a couple of weeks ago the Shia Houthis rebels seized power in Yemen, on the south-western borders of the KSA.

When Riyadh joined the US “anti-terrorist” coalition back in October, along with a number of NATO and GCC countries, political predicted the imminent revenge of ISIL.

So the events of November 4 may only be the first steps. On top of all, Saudi authorities have yielded to the US demands of dumping oil prices in an attempt to undermine Russia’s economy. This led to the narrowing scope of social initiatives being implemented in the Kingdom, since money became scarce in the royal treasury.

By agreeing to support the US global ambitions, the House of Saud has clearly shot itself in the foot. Especially now, when Washington has displayed its willingness to sign an agreement on Iran’s nuclear program in two weeks time. This step will force Saudi Arabia to kiss it oil monopoly goodbye along with the role of the main strategic partner of the US in the region. At this point Riyadh couldn’t care less about the US military adventures in Iraq and Syria, it going to try to save its skin

It is clear that the coming days will put the Al-Saud dynasty’s survival skills to the test. Should the KSA authorities fail to keep the situation in the Eastern Province under control — the Kingdom is doomed. With each passing day the Shiite arc becomes more apparent on the political horizon of the Middle East, just like the US miscalculations.

As soon as Washington is trying to project its influence in the region, the Arab regimes are beginning to crumble and fall apart. One can recall the revolutions in Egypt, Libya, Yemen, along with the civil wars in Syria and Iraq to illustrate this statement.

It is now safe to say that Obama has screwed everything up again by putting its strategic partner in danger. It seems that the defeat in the US midterm elections was a failure all right, yet he never stops to surprise his followers. And it is unlikely that the Republicans will be fascinated by the sight of Saudi Arabia going down in flames.

Viktor Titov, Ph.D in Historical Sciences and political commentator on the Middle East, exclusively for the online magazine New Eastern Outlook

Source

How The Petrodollar Quietly Died, And Nobody Noticed

by Tyler Durden on 11/03/2014 23:42

Two years ago, in hushed tones at first, then ever louder, the financial world began discussing that which shall never be discussed in polite company – the end of the system that according to many has framed and facilitated the US Dollar’s reserve currency status: the Petrodollar, or the world in which oil export countries would recycle the dollars they received in exchange for their oil exports, by purchasing more USD-denominated assets, boosting the financial strength of the reserve currency, leading to even higher asset prices and even more USD-denominated purchases, and so forth, in a virtuous (especially if one held US-denominated assets and printed US currency) loop.

The main thrust for this shift away from the USD, if primarily in the non-mainstream media, was that with Russia and China, as well as the rest of the BRIC nations, increasingly seeking to distance themselves from the US-led, “developed world” status quo spearheaded by the IMF, global trade would increasingly take place through bilateral arrangements which bypass the (Petro)dollar entirely. And sure enough, this has certainly been taking place, as first Russia and China, together with Iran, and ever more developing nations, have transacted among each other, bypassing the USD entirely, instead engaging in bilateral trade arrangements, leading to, among other thing, such discussions as, in today’s FT, why China’s Renminbi offshore market has gone from nothing to billions in a short space of time.

And yet, few would have believed that the Petrodollar did indeed quietly die, although ironically, without much input from either Russia or China, and paradoxically, mostly as a result of the actions of none other than the Fed itself, with its strong dollar policy, and to a lesser extent Saudi Arabia too, which by glutting the world with crude, first intended to crush Putin, and subsequently, to take out the US crude cost-curve, may have Plaxico’ed both itself, and its closest Petrodollar trading partner, the US of A.

As Reuters reports, for the first time in almost two decades, energy-exporting countries are set to pull their “petrodollars” out of world markets this year, citing a study by BNP Paribas (more details below). Basically, the Petrodollar, long serving as the US leverage to encourage and facilitate USD recycling, and a steady reinvestment in US-denominated assets by the Oil exporting nations, and thus a means to steadily increase the nominal price of all USD-priced assets, just drove itself into irrelevance.

A consequence of this year’s dramatic drop in oil prices, the shift is likely to cause global market liquidity to fall, the study showed.

This decline follows years of windfalls for oil exporters such as Russia, Angola, Saudi Arabia and Nigeria. Much of that money found its way into financial markets, helping to boost asset prices and keep the cost of borrowing down, through so-called petrodollar recycling.

But no more: “this year the oil producers will effectively import capital amounting to $7.6 billion. By comparison, they exported $60 billion in 2013 and $248 billion in 2012, according to the following graphic based on BNP Paribas calculations.”

In short, the Petrodollar may not have died per se, at least not yet since the USD is still holding on to the reserve currency title if only for just a little longer, but it has managed to price itself into irrelevance, which from a USD-recycling standpoint, is essentially the same thing.

According to BNP, Petrodollar recycling peaked at $511 billion in 2006, or just about the time crude prices were preparing to go to $200, per Goldman Sachs. It is also the time when capital markets hit all time highs, only without the artificial crutches of every single central bank propping up the S&P ponzi house of cards on a daily basis. What happened after is known to all…

At its peak, about $500 billion a year was being recycled back into financial markets. This will be the first year in a long time that energy exporters will be sucking capital out,” said David Spegel, global head of emerging market sovereign and corporate Research at BNP.

Spegel acknowledged that the net withdrawal was small. But he added: “What is interesting is they are draining rather than providing capital that is moving global liquidity. If oil prices fall further in coming years, energy producers will need more capital even if just to repay bonds.”

In other words, oil exporters are now pulling liquidity out of financial markets rather than putting money in. That could result in higher borrowing costs for governments, companies, and ultimately, consumers as money becomes scarcer.

Which is hardly great news: because in a world in which central banks are actively soaking up high-quality collateral, at a pace that is unprecedented in history, and led to the world’s allegedly most liquid bond market to suffer a 10-sigma move on October 15, the last thing the market needs is even less liquidity, and even sharper moves on ever less volume, until finally the next big sell order crushes the entire market or at least force the [NYSE|Nasdaq|BATS|Sigma X] to shut down indefinitely until further notice.

So what happens next, now that the primary USD-recycling mechanism of the past 2 decades is no longer applicable? Well, nothing good.

Here are the highlights of David Spegel’s note Energy price shock scenarios: Impact on EM ratings, funding gaps, debt, inflation and fiscal risks.

Whatever the reason, whether a function of supply, demand or political risks, oil prices plummeted in Q3 2014 and remain volatile. Theories related to the price plunge vary widely: some argue it is an additional means for Western allies in the Middle East to punish Russia. Others state it is the result of a price war between Opec and new shale oil producers. In the end, it may just reflect the traditional inverted relationship between the international value of the dollar and the price of hard-currency-based commodities (Figure 6). In any event, the impact of the energy price drop will be wide-ranging (if sustained) and will have implications for debt service costs, inflation, fiscal accounts and GDP growth.

Have you noticed a reduction of financial markets liquidity?

Outside from the domestic economic impact within EMs due to the downward oil price shock, we believe that the implications for financial market liquidity via the reduced recycling of petrodollars should not be underestimated. Because energy exporters do not fully invest their export receipts and effectively ‘save’ a considerable portion of their income, these surplus funds find their way back into bank deposits (fuelling the loan market) as well as into financial markets and other assets. This capital has helped fund debt among importers, helping to boost overall growth as well as other financial markets liquidity conditions.

Last year, capital flows from energy exporting countries (see list in Figure 12) amounted to USD812bn (Figure 3), with USD109bn taking the form of financial portfolio capital and USD177bn in the form of direct equity investment and USD527bn of other capital over half of which we estimate made its way into bank deposits (ie and therefore mostly into loan markets).

More ( here )

And so on, but to summarize, here are the key points once more:

  • The stronger US dollar is having an inverse impact on dollar-denominated commodity prices, including oil. This will affect emerging market (EM) credit quality in various ways.
  • The implications of reduced recycled petrodollars has significant ramifications for financial markets, loan markets and Treasury yields. In fact, EM energy exporters will post their first net drain on global capital (USD8bn) in eighteen years.
  • Oil and gas exporting EMs account for 26% of total EM GDP and 21% of external bonds. For these economies, the impact will be on lost fiscal revenue, lost GDP growth and the contribution to reserves of oil and gas-related export receipts. Together, these will have a significant effect on sustainability and liquidity ratios and as a consequence are negative for dollar debt-servicing risks and credit ratings.

Source

How Long Can The Shale Revolution Last?

by Nick Cunningham via OilPrice.com,

A new study has cast serious doubt on whether the much-ballyhooed U.S. shale oil and gas revolution has long-term staying power.

The U.S. produced 8.5 million barrels of oil per day in July of this year — 60 percent more than just three years earlier. That is also the highest rate of production in three decades.

Put another way, since 2011, the U.S. has added 3 million barrels per day in additional capacity to global supplies. Had that volume not come online, oil prices would surely be much higher than they currently are.

That has “revolutionized” the energy industry and geopolitics, as scores of energy analysts have claimed. The Energy Information Administration (EIA) forecasts that U.S. oil production will hit 9.6 million barrels per day (bpd) in 2019, and gradually decline to 7.5 million bpd by 2040.

This would allow the U.S. to be one of the world’s top oil producers for an extended period of time. With such an achievement now at hand, many analysts are predicting an era of American dominance in geopolitics. For example, in an op-ed on Oct. 20, columnist Joe Nocera considered a “world without OPEC,” in which U.S. oil production soon kills off the oil cartel.

Or consider this rather triumphalist piece in Foreign Affairs from earlier this year, where two former National Security Council members who worked under President George W. Bush boasted that the recent surge in oil production “should help put to rest declinist thinking” and “sharpen the instruments of U.S. statecraft.” In the following issue, Ed Morse of Citibank went further. “Despite its doubters and haters, the shale revolution in oil and gas production is here to stay,” he declared.

But a new report throws cold water on the thinking that U.S. shale production will be around for the long haul. The Post Carbon Institute conducted an analysis of the top seven oil and top seven natural gas plays, which together account for 89 percent of current shale oil production and 88 percent of shale gas production.

The report found that both shale oil and shale gas production will peak before 2020. More importantly, the report’s author, David Hughes, says oil production will decline much more quickly than the EIA has predicted.

That’s largely because of high decline rates at shale wells across the country. Unlike conventional wells, which can produce relatively stable rates for a long period of time, shale oil and gas wells experience an initial burst of production in the first few years, followed by a precipitous decline thereafter.

Hughes estimates that the average shale oil well declines at a rate of between 60 and 91 percent over three years. Wells in the Bakken decline by 45 percent per year, which stands in stark contrast to the 5 percent annual decline for an average conventional well.

Or put another way, oil and gas companies will have to keep drilling at a feverish pace just to stand still. This means the industry is on a “drilling treadmill” that will be unsustainable over the long-term.

Predicting what oil production will be in 25 years is difficult, to say the least, but the Post Carbon report projects that oil production from the Bakken and Eagle Ford will be just one-tenth of the level that EIA is forecasting. The EIA predicts that the Bakken and the Eagle Ford will be producing a combined 1 million bpd in 2040. Hughes thinks it will be just a small fraction of that amount – a mere 73,000 bpd.

This is not the first time that David Hughes has taken aim at EIA data. In a December 2013 report, he skewered the high estimates for the potential of the Monterrey Shale in California, calling the EIA’s numbers “simplistic and highly overstated.” Several months later, the EIA was forced to back track on its figures, downgrading the recoverable oil estimates in the Monterrey by 96 percent.

Hughes says the implications of getting it wrong are “profound,” since so many companies are basing very large investments on incorrect projections. He says rosy estimates have cut into investment for renewables, while steering capital towards expensive oil and gas export terminals that should now be called into question.

An article in CleanTechnica points to the possibility of boom towns turning into “ghost towns” if the pace of drilling drops off. If David Hughes and The Post Carbon Institute are correct, there could be quite a few ghost towns popping up in the coming years as the shale revolution begins to fizzle.

Source and Full Report Here

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