Tuesday, June 10, 2014

Musings On The Global Oil (And Natural Gas) Situation

Late in the evening on June 9, 2014, I was checking oil and natural gas futures. After the recent run-up in prices, I was surprised to see that WTI crude oil was holding its own, after a big day, and was even "in the green" for further gains. I was convinced that we would start see profit-taking.

To the best of my knowledge there is no impending "shooting war" in the Mideast that would result in this screen shot (the time for these futures, 23:33:34 EDT, June 9, 2014):



I never talk about where the price of oil is headed (or at least I try not to; I assume I have violated that rule on occasion); I've learned that it's impossible to predict oil prices except perhaps under extreme conditions. If Saudi Arabia were to announce a full export embargo, for example, I could safely predict the price of oil would go up.

What surprised me was that oil was holding unto its gains. According to some analyst some time ago, this is the longest period in history of sustained "high prices." I assume by "high prices" he meant greater than $90/bbl. I can't find the link for that story, and maybe there is no story; perhaps I dreamt it.

But I'm pretty sure I'm correct. This is the longest period in history where oil has held above $90/bbl for months on end. No volatility.

The price of oil is less a problem than volatility. Producers, consumers, governments can adjust to high prices; they can adjust to low prices; what is difficult is adjusting to volatility.

What interests me is the stories that come from this sustained period of high-priced oil. What follows will be true even if oil drops to new lows, back into the $60-bbl range.

For me, these are the "big stories" which I follow elsewhere.

In the "old days," there was really just one, maybe two, centers of gravity when it came to oil: OPEC, and maybe, Russia.

Today, there are four centers of gravity: OPEC, Russia, Asia, and North America. One could add Europe but the EU will be a side-story based on what happens in the other areas; one could separate the North American story into the US and Canada, and in one of the links I do just that.

I often use "tectonic plates" as a metaphor for activity in the four centers of importance in today's oil and gas industry. But "tectonic plates" suggest slow, ponderous, glacial movement.

When I saw the $104/bbl price holding for futures and then noted some stories appearing at the same time (see below) and other stories playing out since the Sochi 2014 Paralympic Winter Games, I felt that "tectonic plates" as a metaphor was inappropriate. Things are moving a lot more quickly behind the scenes in the oil and gas industry than the average person-on-the-street realizes. It's almost like a hurricane, rather than a tornado. The latter strikes fast with little warning. The former, on the other hand, build up for weeks before they arrive. It's the "calm before the storm."

The best analogy I can come up with right now for what I'm seeing in the global oil and gas industry is the "Scramble for Africa" from 1880 to 1900.

I cannot articulate well what I am thinking, so for now, the stories and the data points that intrigue me will have to stand on their own. None of the points (except my "personal observations" at the bottom, perhaps) are new or unique. They are the views and data points provided by others. So here goes, the stories behind the "calm before the storm":

The Immigrant Song, Karen O with Trent Reznor
 
Looking at some of the points above in more depth:

The US-Canadian race to export oil to Asia. (An example of Obama-Reid-Schumer-Pelosi missing the big story. This is similar to the "Scramble for Africa" - 1880 - 1900.). Rigzone is reporting:
Within the energy sphere, Canada and its southern neighbor are engaged in a different type of competition: the race to gain first-mover advantage for exporting crude oil to markets throughout the Atlantic and Pacific basins. According to the U.K.-based research and consulting firm GlobalData, Canada is outperforming the United States in this rivalry by advancing three critical pipeline projects.
  • TransCanada's Energy East Pipeline, which would carry 1.1 million barrels per day (bpd) of crude from Alberta and Saskatchewan to refineries and terminals in Eastern Canada
  • Enbridge's Northern Gateway Pipeline, a twin pipeline that would carry up to 525,000 bpd of crude oil westbound from Northern Alberta to the Pacific port of Kitimat, British Columbia, and 193,000 bpd of condensate on the eastbound leg 
How the Russian-Chinese deal benefits Japan. And also Japan's energy crunch. Rigzone is reporting:
The China-Russia agreement, the biggest gas deal ever, unlocks new gas supplies and could bring down gas prices across Asia, a development that would pay the biggest dividends for Japan, the world's top buyer of liquefied natural gas.
China's insatiable appetite for oil. There may be month-to-month variability, but the overall trend is up, and an increase of 11% y/y the first five months of 2014, I would think, is significant. If I read this correctly, China is importing (more than) 6 million bopd, about two-thirds the total amount the US produces on a daily basis ([less than] 9 million bopd). Numbers are rounded in the story below:
China's crude oil imports rose 9 percent in May from a year earlier to 6 million barrels a day (bopd), latest government data showed.
But imports fell 6.5 percent from a daily record high of 6.8 million logged in April, according to data released by the General Administration of Customs. Crude oil imports in January-May period went up 11 percent from the same period of 2013 to 6.25 million bpd.
China is the world's No. 2 oil consumer after the US. Earlier this year, the US Energy Information Administration (EIA) said it projects China is likely to surpass the US in net oil imports on an annual basis by 2014 as US oil production and Chinese oil demand "increase simultaneously." The Middle East remains China's largest source of crude oil imports, according to the EIA.
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 Personal Observations

I follow the oil and gas industry fairly closely. Some things jump out at me. I am unaware of President Obama being involved in any anticipatory (rather than reactive) position with regard to the global energy situation. The four centers of gravity come together in four locations: a) the Arctic; b) Russia-EU; b) Russia-China (Asia); and, North America-OPEC.

T. Boone Pickens has talked at length about the relationship between North America and OPEC, and the relative advantages North America has, so I won't go into that. Suffice it to say, there is no indication that the US government has an anticipatory stance with regard to OPEC.

The US has pretty much ceded the Arctic to the rest of the world with regard to oil and gas exploration. I have linked any number of stories along that line over the past several years. The US, compared even to Norway, appears uninterested in the Arctic when it comes to oil and gas exploration.

The US is minimally involved in the other two locations (Russia-EU and Russia-China) and, in any event, appears to be in a reactive stance, rather than an anticipatory stance. For example, I am unaware of any coherent national (US) policy to "help" China with its energy needs.   

The screen shot of oil futures with the price of WTI oil at $104/bbl doesn't really have a direct connection with any of the meandering in these notes, but the $104/bbl got me to thinking about the bigger picture.

So, when things are going pretty well in the world (i.e., no major "shooting war" in the Mideast or a major terrorist event in Saudi Arabia) oil remains at the highest price in years. It looks like WTI oil will close slightly above $104/bbl today.

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Updates

June 11, 2014: Iraq is spiraling out of control. President Obama refused to come to Maliki's aid (Maliki is the leader of Iraq, capital is Baghdad) a few days ago, and now the Iranian/Syrian Sunni insurgents have taken Mosul, Tikrit, and are "sweeping" towards Baghdad. It appears to be fait accompli that we will have a new government in Iraq by the weekend. Oil speculators are confused; afraid to go over $105.30 and yet common sense says Iraq may not be shipping much oil in the near term. IEA has asked Saudi to maximize production; OPEC refuses to increase production, coming out of their Vienna meeting last week.

Later, 10:27 CDT: OPEC signals it will NOT increase production

Later, 7:31 CDT: from a message board regarding the Mosul-Kurdistan pipeline --
The original Kirkuk to Ceyhan pipeline with capacity of 1.6 million bopd, the one constantly being blown up, goes right past Mosul.So good luck with that.

The new Kurdistan to Ceyhan pipeline which goes thro' Kurdistan controlled territory & then links in with the Kirkuk to Ceyhan pipeline inside Turkey should still be okay.

Maliki has threatened legal action re two shipments that have left Ceyhan that originated in Kurdistan & hasn't reached agreement with Erbil.

Baghdad itself ( & Maliki ) must now be at risk with Isis coming down from Mosul & in from Fallujah.

So entire Iraq exports of 2.6 million bopd must be questionable in medium term.

Will Iran act? Will Turkey act?

U.S. can hardly continue to arm (good )rebels in Syria when these arms are just going to end up with Al Qaeda/ISIS. For that matter do they continue to send arms into Iraq?
Later, 6:20 pm CDT: I am so cynical about the whole Mideast, I was not even aware that al Qaeda had taken back Mosul. The White House calls this serious, but that's as much as we'll hear from President Obama on this. He knew that once the US left Iraq, the country would implode, but there's no way he would go back in. On so many levels, he could never go back into Iraq. Al Qaeda knew that.

If this is accurate, that al Qaeda has taken Mosul, the capital of Kurdistan, this is bad, bad news for several oil companies operating in northern Iraq; bad news for Iraq; and, bad news for consumers. Iraq was already limping with regard to oil exports; Kurdistan was actually somewhat successful. But if this news story is accurate, this is bad, bad news. It will be interesting to see how this affects oil futures. If there is little change, it tells me the movers and shakers (and the speculators) had already baked "the loss of Iraqi oil" into their equations.

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