Oil regained a bit of lost ground on Tuesday morning, but is now dangerously close to dipping below $30 per barrel.
We will then look at some of the key market movers early this week before providing you with the latest analysis of the top news events taking place in the global energy complex over the past few days. We hope you enjoy.
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Chart of the Week
• U.S. coal production has collapsed over the past decade. After hitting a high-water mark in 2008, coal production has steadily declined, with losses accelerating since 2012.
• Coal production is estimated to have hit 900 million short tons in 2015, a massive 10 percent decline from just one year earlier. That is also the lowest level since 1986.
• There are a variety of factors contributing to the decline. One of the most important reasons is plummeting international coal prices, which came because of too much supply.
• But there are contributing factors unique to the United States that has also gone a long way to killing coal: cheap shale gas and stricter environmental regulations.
• Central Appalachia is bearing the brunt of the losses due to higher operating costs relative to other regions, especially the Powder River Basin.
• Coal exports likely won’t be a savior for struggling mining companies. U.S. coal exports to China and Europe actually declined in 2015 because of weak demand. Related: Crashing Oil Prices And Dropping Rig Count Take Their Toll On U.S. Output
• Arch Coal (NYSE: ACI) filed for Chapter 11 bankruptcy on Monday. The company hopes to get rid of $4.5 billion in debt that it cannot pay. Over one-quarter of U.S. coal production is in bankruptcy at this point.
• BP (NYSE: BP) announced plans to slash another 4,000 jobs, or 5 percent of its payroll. That will take its upstream workforce down below 20,000 by the end of the year. It also plans on selling of an additional $3 to $5 billion in assets in 2016.
• Whiting Petroleum (NYSE: WLL) and Newfield Exploration (NYSE: NFX) received a credit upgrade from Wells Fargo on Monday. Wells Fargo says that the market is near a bottom, and that Newfield is “a best of breed defensive name, while Whiting is the higher risk/reward name that has more upside to a potential crude price recovery.”
Tuesday January 12, 2016
The extreme pessimism in crude oil markets continues. WTI and Brent have set new lows almost every day of 2016, now trading in the low $30s per barrel. Crude is down 15 percent on the year.
The same gloominess surrounding oversupply has not changed. What is different this time are new worries over the Chinese economy. The Shanghai Composite has crashed by more than 5 percent in a single day multiple times in the past week and a half, and is off by 20 percent since late December. Fortunately, the index stabilized on January 12, closing out the trading day pretty much flat. But the turmoil in China’s stock market is far from over.
At the same time, China’s currency is under pressure. The combined effect of a slowing economy with a weaker currency could do significant damage to China’s oil demand, which is why oil markets are so alarmed. China’s stock market is a fraction of the size of its western counterparts, but the Chinese economy is so intertwined with so many trading partners that when China sneezes, much of the world will catch a cold. The WSJ published a nice analysis of the far-reaching of effects that China’s current economic situation is having – pushing down currencies around the world, depressing commodity prices, and slowing global trade. In other words, China’s turmoil raises the possibility of economic contagion. Related: $20 Oil Is Now A Distinct Possibility As Chinese Demand Wanes
With that backdrop in mind, crude oil has declined rapidly, and a price with a 2-handle is no longer a remote possibility. Goldman Sachs made the largest splash last year when it predicted $20 oil, but now other investment banks – including Morgan Stanley and Citigroup – are jumping on board with the bearish predictions. Unlike some of its peers, Morgan Stanley pinned much of the decline in recent months on the strong U.S. dollar. According to Wolfe Research, around one-third of U.S. oil and gas producers could be forced into bankruptcy by mid-2017 if oil prices remain low.
The ruinous prices have opened up the possibility that OPEC might call an emergency meeting, as soon as the first quarter. OPEC President and Nigerian oil minister, Emmanuel Ibe Kachikwu, said on January 11 that two OPEC nations are pushing for such a meeting to take place. He declined to name the countries, but they can be surmised. OPEC is in two camps: Saudi Arabia and its Gulf State allies are satisfied with the group’s current course. Venezuela, which called for an emergency meeting last year, and other troubled members are pressing the stronger members to cut production.
Despite the push for an emergency meeting, it is unclear if it will take place. UAE’s oil minister, Suhail bin Mohammed al-Mazrouei, responded to the reports by saying there was no need for such an “artificial move” to rescue prices. “I think the strategy is working,” he added. Moreover, with tensions flaring between Saudi Arabia and Iran, is not obvious that the group can even work together. Finally, Iran has yet to ramp up production, as it is expected to do following the removal of sanctions, and OPEC won’t take any action until after that occurs. In short, no one should pin their hopes on OPEC to fix rock bottom prices. Related: How Low Oil Prices Are Transforming Global Politics In Startling Ways
Meanwhile, Saudi Arabia made news last week when its deputy crown prince suggested that Saudi Aramco could offer a limited IPO. The company’s Chairman Khalid al-Falih confirmed interest in the move on Monday, and even revealed that upstream assets could be part of a public offering. Aramco is by far the largest oil company in the world, accounting for 10 percent of global oil production and around 260 billion barrels of oil reserves under its control. The company could be worth trillions of dollars, so even a 5 percent listing would be massive. It is too early to really speculate whether an IPO will happen; Aramco says it does not have a concrete plan in place at this point. “It will take time,” Aramco’s Chairman said.
Libya is attempting to load crude oil at its major export terminal Ras Lanuf on the Mediterranean coast. The port has been shuttered since late 2014 and it has come under attacks from ISIS militants in recent weeks, with oil storage facilities set ablaze from machine gun fire. But a Greek tanker is hoping to load oil that is stored at the port, which if successful, would be the first oil exported from Ras Lanuf in over a year. Libya only produces around 400,000 barrels per day, down by over 1 mb/d since the Qaddafi era.
A suicide bomber killed at least 10 people in the heart of Istanbul today, injuring more than a dozen others. The explosion hit Istanbul’s tourist district. No one has yet claimed responsibility but Turkish President Recep Tayyip Erdogan said the bomber came from Syria.
In its January Drilling Productivity Report, the EIA expects oil production from the major U.S. shale regions to decline by 116,000 barrels per day in February, the same drop off that it projected for January. The losses will come largely from the Eagle Ford, which is expected to lose 72,000 barrels per day. The Marcellus Shale, the largest source of shale gas production, is also projected to see a decline of natural gas production by 225 million cubic feet per day.
By Evan Kelly of Oilprice.com
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