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This Week In Energy: “A Real Wake-Up Call” For The Oil Markets

This Week In Energy: “A Real Wake-Up Call” For The Oil Markets

Iran announced a decision to push back a key oil conference where it had planned to reveal new contracts for doing business in Iranian oil fields. The London conference, originally scheduled for December 2015, will instead be held in February 2016. The conference has already been postponed several times, but the decision to push it back another 2 months is intended to ensure that there is some clarity regarding western sanctions before the conference is held. For now, there is a decent chance that December will be a pivotal month for the removal of sanctions. The details of the new oil contracts will go a long way in determining how attractive Iran becomes as a new oil frontier for international companies. Iran has historically been a tough place to do business for foreign companies, but with Iranian oil production down more than 1 million barrels per day from its pre-sanctions level, the government has suggested that an overhaul of contracts would make investment much more attractive. Mark your calendars for February 2016.

U.S. President Barack Obama and Russian President Vladimir Putin have agreed to meet on the sidelines of the annual UN meeting in New York next week. Top on their list of things to discuss will be Syria, following Russia’s decision to send troops to the war-torn country. Obama wants some sort of resolution to the nearly five-year old war in Syria, including the removal of Syrian President Bashar al-Assad, something that will be difficult to pull off without Russian help. For that matter, Obama will likely need help from Tehran as well, but the White House has so far been unable to parlay its success from the nuclear deal into building a broader strategic relationship with Iran in the region. U.S. Secretary of State John Kerry is planning to meet with foreign minister Javad Zarif, his Iranian counterpart, this weekend. But for now, it doesn’t appear likely that the leaders of the two countries will meet in New York. Related: How Russia’s Oil Companies Are Defying Sanctions and Low Oil Prices

Meanwhile, on September 25, China announced efforts to address climate change, as President Xi Jingping wraps up his trip to the U.S. this week. The initiative comes after the U.S. and China announced climate initiatives in November 2014, following months of backroom negotiations. The U.S. pledged to slash emissions by 26 to 28 percent by 2025, and China will see its emissions peak by 2030.

The announcement this week will put some meat on the bones for those targets. China unveiled a plan to launch a cap-and-trade program in 2017 in order to reduce greenhouse gas emissions from an array of industries. China has already put in place cap-and-trade plans at the regional level in several parts of the country, but the 2017 plan will cap emissions nation-wide. The announcement is seen as an effort to build momentum heading into the international climate negotiations in Paris this December, and it also helps undermine the argument by those opposed to policies to address climate change within the U.S. Congress – that the U.S. shouldn’t act until other countries do.

Crude oil capped off a volatile week, trading roughly where it started. WTI and Brent have narrowed to just a $3 per barrel spread. The EIA reported mixed results from its weekly survey, with oil inventories down slightly, but production ticking up. Related: Goldman Sachs: “Peak Coal” Is Here

There is a growing sense that oil prices could be turning a corner, but so far the price gains have been sparse. The EIA says that persistently low oil prices could lead to a long-term decline in investment in the upstream oil and gas sector. Dollars spent on exploration and development are highly sensitive to the price of crude, and the EIA argues that it is becoming increasingly likely that the period between 2015-2020 will see “substantially lower annual oil and natural gas investment” than the “annual average of $122 billion spent during the 2005-2014 investment cycle crest period.” Of course, with long lead times for most oil and gas fields, the current bust is planting the seeds for a tighter market in the years ahead.

Low oil prices continue to take their toll on the energy industry. Halliburton (NYSE: HAL) says that the several rounds of job cuts at the oilfield services firm could amount to the loss of 20,000 positions worldwide when all is said and done. TransCanada (NYSE: TRP) says that it will slash 20 percent of its senior management positions, with more cuts potentially in the works. The company was dealt an additional blow this week when Democratic Presidential candidate Hillary Clinton came out against the Keystone XL Pipeline.

Governments that depend on oil revenue are also not doing well. North Dakota revealed that its tax revenues in July and August fell more than $40 million short of its projection, prompting calls for a new budget forecast. “This is a real wake-up call, I think,” House Majority Leader Al Carlson, said. Related: Oil Prices - What Does “Lower For Longer” Actually Mean?

Brazil is reeling from low oil prices too (among many other oil-producing countries), although the South American nation is also dealing with a range of other problems. Brazil’s currency, the real, dropped to a record low this week. The real has lost more than 35 percent of its value in 2015, and the central bank could be forced to sell foreign reserves to stop the descent. Brazil, of course, is emblematic of the commodity-producer that became rich over the past decade due to the voracious demand from China for all sorts of raw materials. Now with the commodity “super-cycle” over, Brazil’s economy is falling apart.

Finally, Santos (ASX: STO), a major Australian energy company, announced that it is starting up its Gladstone LNG (GLNG) project. GLNG will send out its first shipment of LNG from Curtis Island, Queensland, and the project was on time and within budget. Australia has several very large LNG export facilities under construction, many of which will be completed between 2015 and 2017. 

By Evan Kelly of Oilprice.com

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