Saudi Arabia and Iran may yet come to terms on some sort of production arrangement, but the outcome of the negotiations in Algeria this week may not do much to rescue oil prices. Following the media spectacle, the oil markets may have to shift their attention back to the supply and demand fundamentals, which are not reassuring.

Saudi Arabia and Iran may yet come to terms on some sort of production arrangement, but the outcome of the negotiations in Algeria this week may not do much to rescue oil prices. Following the media spectacle, the oil markets may have to shift their attention back to the supply and demand fundamentals, which are not reassuring.

Goldman Sachs revised down its estimate for oil prices for the end of this year, lowering its 4th quarter estimate from $50 to $43 per barrel. “Given upside surprises to (third-quarter) production and greater clarity on new project delivery into year-end. This leaves us expecting a global surplus of 400,000 (barrels per day) in (the fourth quarter) versus a 300,000 (barrels per day) draw previously,” the investment bank wrote, according to CNBC.

The downside risk could be even worse because Goldman did not factor in large volumes of oil coming online from Libya and Nigeria, a development that is certainly not inevitable, but possible. “[W]e reiterate our view that oil prices need to reflect near-term fundamentals – which are weaker – with a lower emphasis on the more uncertain longer-term fundamentals,” Goldman said.

Nigeria and Libya could bring hundreds of thousands of barrels of daily oil production back onto the market in the next few months, but there is yet one more downside risk to the market about which few people are talking.

S&P Global warned this week about the very large “wildcard” that is China’s oil demand, which could slow dramatically if China decides to throttle back the pace at which it is filling its strategic petroleum reserve. China does not release a lot of data regarding the specifics of its SPR, but oil imports have spiked over the past year – China has been taking advantage of cheap crude to build up its strategic stockpile. That elevated demand could prove to be temporary, however.

“Regardless of what happens on the supply side, there’s this wildcard factor of the strategic petroleum reserves,” Jodie Gunzberg, global head of commodities and real assets at S&P Dow Jones Indices, said at an S&P Global conference this week, according to CNBC. “Now that China has bought so much cheap oil to fill their SPR…if OPEC does freeze and tries to bring the price back up, China may push it back down because they might choose not to buy it at a higher price and just choose to use their SPR or start exporting it themselves – like they did with other commodities.”

The potential reduction in Chinese imports could lead to lower oil prices for much longer, Gunzberg says. China is undergoing multiple phases of stockpiling for the SPR, with the second phase’s 245 million barrels expected to be completed before the end of 2016. China has been the largest source of demand growth for much of the past decade – only to be recently surpassed by India – but we could be at a turning point with a large portion of the SPR filled. Imports are up 13.5 percent in the first eight months of this year compared to 2015, but could now stagnate.

Demand growth “has stalled and that represents a significant change in the environment for producers both in OPEC and outside it,” said Dave Ernsberger, global head of oil content at S&P Global Platts. “The successors to China who will pick up the slack in demand growth aren’t quite of a size yet to have the impact that Chinese growth has had. So the demand picture is fairly frightening from a producers’ point of view.”

A few months ago, JP Morgan estimated that China’s efforts at filling its SPR were nearing an end, which could lead to a 15 percent drop off in oil imports as soon as September. It may take some time to see if this prediction plays out.

That would come as bad news to a global oil market that is already seeing suddenly weak demand. The IEA’s Executive Director said on Tuesday that there is little reason to be bullish. “Demand is weak, weaker than many of us thought…less than 1 million barrels per day,” Birol said in Algeria. “Supply is coming strongly, especially from Middle East countries. In addition, the stocks are huge. As a result of that, we have lower oil prices with huge implications for the next few years.”

Where Will Oil Prices Go After Algiers? is republished with permission from Oilprice.com

The post Could the Outcome of the Algiers Talks Move Oil Prices? appeared first on Economy Watch.

The late-2014, Saudi-initiated oil-price war may have taken the ‘boom’ out of the US shale industry as it seriously threatened OPEC market share, but Saudi victory has been elusive: US shale has proven amazingly resilient. The industry has adapted quickly to the new playing field, and the unsung hero of a new uptick in drilling and investment isn’t just true grit—it’s sand.

The late-2014, Saudi-initiated oil-price war may have taken the ‘boom’ out of the US shale industry as it seriously threatened OPEC market share, but Saudi victory has been elusive: US shale has proven amazingly resilient. The industry has adapted quickly to the new playing field, and the unsung hero of a new uptick in drilling and investment isn’t just true grit—it’s sand.

The Saudi victory is equally dulled by the fact that it was not a decline in US shale production that rebalanced supply and demand; rather, it was chaos in Libya, militant attacks in Nigeria, massive fires in Canada and the destabilization of OPEC’s own Venezuela.

US shale made good use of the downtime to regroup and innovate. And now, with the drilling rig count consistently rising, drilling activity coming back on track and new investment surfacing in our favorite shale patches, it is perhaps ironic that the dessert Kingdom should find sand its new enemy in the next phase of this battle for market share.

Sand has been the most significant innovation on the US shale playing field.

“North American producers are rapidly increasing efficiency and reducing production costs, and we’re just at the beginning of this innovation curve,” says Select Sands Corp. CEO Rasool Mohammad.

“Right now, it’s all about the frack sand. The story of US shale resilience is now about huge quantities of high-quality frack sand. This is the backbone of the comeback.”

Welcome to the Mega-Frack

Hydraulic fracturing involves injecting highly pressurized water into a well and then pouring sand into it in order to keep the tiny fractures created by the water blast open, and then widening them so that more crude oozes from the shale rock.

The US response to the oil price war has been the ‘mega frack‘, which means that producers are creating more fractures in rock because the more source rock that is fracked, the more oil and gas they’ll get out of it.

The well completion intensity “is driving increasing sand use per well/stage, as higher sand volumes generate higher production volumes and returns for oil companies,” according to Credit Suisse analysts.

In other words, producers are using more sand, or proppants, per well than anyone ever imagined, bringing the frack sand sub-sector to the forefront of oil and gas investing in a very urgent and dramatic way.

Whiting Petroleum’s (NYSE:WLL) process of fracking has evolved extensively under oil price pressure.

IMG URL: http://cdn.oilprice.com//images/tinymce/Sands1909A_-_Copy.jpg

So has EOG Resources (NYSE:EOG), which is now making 700 percent more fractures than it did with its wells in 2010.

All of this means more wells per section—and massive volumes of sand to fill them.

Representing just a drop in the US shale well bucket in terms of frack sand, Chesapeake (NYSE:CHK) put more than 30 million pounds of sand into its Haynesville shale, even referring to the new situation as “proppant-geddon” and a “new era in completion technology”.

In addition, 30 million pounds is not the limit, either. Chesapeake plans to test a load of 50 million pounds later this year.

Then we have Devon Energy (NYSE:DVN), which recently < href=”https://oilandgas-investments.com/2016/stock-market/the-1-efficiency-gains-in-energy-come-fromsand/“>told analysts in a call that the company is consistently increasing its sand loads, and enjoying increasing success because of it.

Enter Sandman

In a very detailed 7 September equity research report duly titled “Enter Sandman”, Credit Suisse analysts say that even with less than half the rig count, they expect sand volumes to surpass 2014 boom-year levels by 2018.

“Sand will be the fastest-growing sub-segment” of the oilfield services and equipment market, the report notes.

Likewise, a recent report from Tudor Pickering notes that the amount of sand used per horizontal well will go from 8 million pounds today to 11 million pounds in 2017—on average—with further breaking that record in 2018 and beyond.

Frac sand stocks are soaring. US Silica (NYSE:SLCA) spiked from $16 this year to $40, and according to Credit Suisse, these stocks “have taken the mantle from land drilling contractors as the most leveraged to an activity recovery.”

“Like the land drillers of old, price and volume improvements drive the strongest margin expansion in the group. We think the move is far from over,” the report notes.

Acquisitions speak volumes. US Silica recently acquired a sand mine in Tyler, Texas, and a proppant logistics company called SandBox. In addition, while these high-profile investments in sand have sparked voracious investor interest, smaller sand miners are also moving into the spotlight.

And while there are only a handful of public frac sand companies out there, including US Silica and Hi-Crush Partners (NYSE:HCLP), there’s only one small-cap company, Select Sands Corp. (TSV-V:SNS), that is geographically positioned in the right place here.

Select Sands is developing a silica sand quarry in Arkansas to sell into the oil and gas market, and the geography here is important: This is far closer to the major shale plays than the traditional sand mines in Wisconsin, and as frac sand demand soars, keeping transportation costs down will be top priority.

US Silica’s recent acquisitions are also strategically positioned around Texas, where there is a strong focus on future frac sand demand coming out of the prolific Permian basin, the most active light oil basin in North America.

IMG: http://cdn.oilprice.com//images/tinymce/Sands1909B_-_Copy.jpg

And the shift is about more than transportation: It’s about the industry’s cost-cutting desires to replace the more expensive sand mined in Wisconsin and Minnesota with regional sands of Texas and Arkansas.

Shifting Sands

Credit Suisse estimates that frac sand demand will increase by an amazing 48.6% in 2017, to 49.4 million tons. In 2018, the Credit Suisse analysts estimate that demand will be at 62.8 million tons, up another 27.1% year on year.

Analysts quoted by Bloomberg, project that if oil prices manage to pass $60 a barrel, sand demand will jump above its current record of 64 million tons (booked in 2014) inside two years.

As the US shale industry continues to stand fast and strong in the face of the OPEC squeeze, all eyes are on simple sand—the key element keeping US oil and gas alive. Fracking is back, and it has sand to thank.

Frack Sand: The Unsung Hero Of The OPEC Oil War is republished with permission from Oilprice.com

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Oilfield services, shipbuilders and other industries that rose with the pre-2014 oil price boom have had it hard. Since barrel rates fell, their previous patrons have become uninterested in doling out major purchase orders, leaving oil and gas equipment manufacturers without revenues.

Oilfield services, shipbuilders and other industries that rose with the pre-2014 oil price boom have had it hard. Since barrel rates fell, their previous patrons have become uninterested in doling out major purchase orders, leaving oil and gas equipment manufacturers without revenues.

A recent report by Arkansas Online says the energy industry’s support sector could feel the effects of low oil prices for up to two years after the current bear market recovers.

“When oil gets good again we will be the last to get back to work” because half the fleet available is not currently in use, Vance Breaux Jr., a boat manufacturer from Louisiana, said.

Louisiana’s rig count has shrunk to 35 active sites as of last week – down 40 from the same time last year, according to Baker Hughes latest report on the matter.

Currently, Breaux and his industry compatriots lack diversification in their client profile. Production sites with easy-to-reach oil and gas deposits are running out in Louisiana, but the weak investment climate prevents energy firms from starting new projects, making it difficult for equipment manufacturers to generate revenues.

In other parts of the country, bargain hunters are snagging expensive oil and gas equipment at auctions for a fraction of their original cost.

“Everyone says we’re crazy, but we’re hoping to capitalize on the downstroke,” Shawn Kluver, a buyer in the market for a hydro excavator truck, told USA Today last year.

Kluver flew to Colorado from North Dakota to compete with more than 3,000 bidders for a rock-bottom price on backhoes, bulldozers, trucks and other heavy equipment.

As hundreds of oil and gas rigs shut down across the United States, falling bottom lines force oil and gas majors to abandon future exploration projects and reduce the scope of ongoing ventures, causing thousands of drilling workers to lose their jobs and the equipment they once used to sit idle.

If a company begins liquidating its assets, some of the idle equipment may find itself in the hands of industry resellers, such as the Vancouver-based Ritchie Bros, which claims to be the world’s largest auctioneer of heavy equipment.

The company says it has seen a peak interest in its events this year, driven in large part by contractors looking to repurpose drilling equipment for construction projects.

Oil and gas firms have been hemorrhaging workers and physical assets essential to drilling operations, which means bringing oil and gas companies back into peak production will not happen overnight when prices do recover.

In June, The Wall Street Journal, used data from HIS Energy to estimate that roughly 70 percent of the fracking equipment across the shale industry had been idled due to financial constraints. In addition, about 60 percent of U.S. field workers needed to frack shale wells have been handed pink slips since the pricing crisis began two years ago. Many of those workers have moved on to jobs in other industries over the past two years, clearing the job market of experienced hires.

“It’s scary to think what a drag and what a headwind finding experienced labor is going to be this time around,” Roe Patterson, CEO of Basic Energy Services, a Texas-based well completion company, told the WSJ.

Patterson also emphasized that the state of equipment deteriorates due to wear and tear over time, even when it’s not in use.

“Pop the hood on your car and let it sit for a year,” he suggested. “I guarantee the car won’t be in the same condition.”

As Hordes of heavy drilling equipment exit the energy industry to be repurposed, the woes of oil and gas equipment manufacturers will continue as the industry finds its footing in a recovered market. Once profits from existing drilling projects begin to show in oil and gas companies’ books, new sites will be brought into production, spurring further equipment purchases.

Though the energy equipment industry may see a delayed boom as idled equipment stored in warehouses slowly returns to duty, firms will have to turn to their old sources to replace their now-sold assets. Better late than never.

The Next Sector to Recover from the Oil Price Crash is republished with permission from Oilprice.com

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The collapse of oil prices has ground shale drilling to a halt, but the one region where drilling is still active, and even increasing, is in West Texas.

The collapse of oil prices has ground shale drilling to a halt, but the one region where drilling is still active, and even increasing, is in West Texas.

The Permian Basin is one of the last profitable areas to still drill with sub-$50 oil, and as other regions fall by the wayside, an increasing portion of drilling activity and spare investment dollars are flowing into the Permian. The rebound in the rig count in the U.S. is largely concentrated in the Permian. The West Texas shale basin has captured two-thirds of the 90 oil rigs that have been added since hitting a nadir in May.

On August 25, Blackstone Group announced its decision to inject $1 billion into Permian assets in a partnership with a Fort Worth-based affiliate of Jetta Operating Co. The companies are essentially creating a pure play company to target the Delaware Basin in the Permian, the latest vote of confidence for a region that is undergoing a resurgence.

The move comes after a handful of other billion-dollar deals targeting the Permian in just the past few weeks.

SM Energy announced in early August that it would pay just shy of $1 billion to add nearly 25,000 acres in the Permian, doubling its holdings there. A week later Parsley Energy said it would acquire more than 11,000 acres for $400 million. In addition, Concho Resources announced its decision to pay $1.6 billion for 40,000 acres in the Midland Basin in the Permian. Parsley and Concho both issued new equity to pay for the acquisitions and investors appeared enthusiastic about the move – The Wall Street Journal reported that Parsley received orders for more than four times the number of shares it was issuing for the Permian acquisitions.

Discussing his company’s plans for the region, Concho’s CEO Tim Leach said that the Permian has some of “the hottest zip codes in the industry.” As Bloomberg noted in an Aug. 8 article, QEP Resources paid $60,000 an acre to an undisclosed owner in June. In late August, PDC Energy paid an investment firm $1.5 billion for Permian assets. In a July research note to clients, Eli Kantor of Iberia Capital Partners LLC said that deals in the Permian are at an all-time high.

The rash of deals exemplify the latest trend as the oil markets slowly move towards balance and oil prices continue to languish below $50 per barrel. Other shale regions such as the Bakken, the Eagle Ford and the Niobrara – not to mention major shale gas plays such as the Marcellus – have fallen out of favor with both the oil industry and Wall Street. Pioneer Natural Resources, for example, announced its decision in June to allocate 90 percent of its capex to the Permian, or about $1.8 billion. Other firms have also announced their decisions to step up drilling in the Permian this year, including companies like Apache Corp., Cimarex Energy and Occidental Petroleum.

Some see the flood of cash into the Permian as a sign that the oil market is rebounding strongly. “It looks like we’ve come out of the trough portion of the cycle for the oil-and-gas sector and are on the road to recovery, though the road will likely be winding and it will take some time to get there,” Angelo Acconcia, who oversees Blackstone’s oil and gas investing, told The Wall Street Journal.

However, the flood of investment is also jacking up land prices in West Texas as more and more companies compete for prime acreage. “Some are starting to feel like this is a bubble,” said Charles Robertson II, an analyst at Cowen Group Inc., told the WSJ.

Oil analyst Art Berman goes further than that, arguing that the Permian is merely the “best of the bad lot.” Many places in the Permian still lose money with oil prices below $50 per barrel, he says, but because so much capital is hunting for yield in a low-yield environment, there is a lot of available money from Wall Street that is flowing out of other places like the Eagle Ford and the Bakken and into the Permian. However, just because money is pouring into the Permian, it does mean that things will end well for Permian drillers.

Berman calls it a “race to the bottom,” as huge volumes of cash inflate a specific shale basin for a period of time, but the resulting production pushes oil prices back down. Companies post losses and some even go bankrupt. Investors grow wary of that particular geographic area and move on to another, repeating the process.

It is unclear if that is what will happen in the Permian, but for now, things appear to be back on the upswing as shale drillers increasingly concentrate their efforts in West Texas.

Why Wall Street Is Throwing Billions At The Permian is republished with permission from Oilprice.com

The post The Permian Basin Bucks the Trend for Now appeared first on Economy Watch.

We have gone electric, and there is no going back at this point. Lithium is our new fuel, but like fossil fuels, the reserves we are currently tapping into are finite—and that is what investors can take to the bank.

You may think lithium got too popular too fast. You may suspect electric vehicles are too much buzz and not enough real future. You may, in short, be a lithium skeptic, one of many. Yet, despite this skepticism, lithium demand is rising steadily and sharply, and indications that a shortage may be looming are very real.

We have gone electric, and there is no going back at this point. Lithium is our new fuel, but like fossil fuels, the reserves we are currently tapping into are finite—and that is what investors can take to the bank.

You may think lithium got too popular too fast. You may suspect electric vehicles are too much buzz and not enough real future. You may, in short, be a lithium skeptic, one of many. Yet, despite this skepticism, lithium demand is rising steadily and sharply, and indications that a shortage may be looming are very real.

It won’t be a shortage in terms of ‘peak lithium’; rather, it will be a game of catch-up with the electric car boom, with miners hustling to explore and tap into new reserves.

Consider the number of battery gigafactories that are being built around the world. We have all heard about Tesla’s (NYSE: TSLA) Nevada facility that will at full capacity produce enough batteries to power 500,000 electric cars per year by 2020.

This, as the carmaker proudly notes, is more than the global total lithium ion battery production for 2013. That’s a pretty impressive rate of demand growth over just three years—but this growth also represents the culmination of a sea change in the way we think.

Lithium is powering pretty much everything upon which our present depends on and our future is being built. It’s a viable alternative to petrol and in consumer electronics market segment alone, there is no sign of contraction—only expansion. Think the Internet of things, or smart houses, or smart cities, eventually. All these fascinating ideas are powered in some way by lithium.

However, the real and present coup has been launched by electric vehicles. Forecasts from market research firms seem to be unanimous: EVs are on the rise, EVs are hot, and EVs will be increasingly in demand as people all over the world are eagerly encouraged to cut their carbon footprint. According to Lux Research, the EV market will grow to $10 billion within the next four years. Navigant Research forecasts EV sales will rise from 2.6 million last year to more than 6 million in 2024. Therefore, whether we like it or not, EVs are coming—and in force.

Indeed, says Nevada Energy Metals (TSX-V:BFF) executive Malcolm Bell, “It may be time to start worrying about a shortage, but it’s not a question of whether we have enough lithium—it’s a question of tapping into new reserves. Those who don’t see the supply wall looming, will hit with a resounding thud. Those who start tapping into new reserves will be extremely well-positioned for the future.”

From where everyone is standing right now, it may seem that the world has a fair amount of lithium. According to global estimates by the U.S. Geological Survey, there is enough lithium in the world – 13.5 million metric tons of it – to last us over 350 years in batteries.

What’s missing from this prediction, however, is … the future, and indeed, the present. This calculation takes into account only the current rate of lithium ion battery usage. It does not account for the entrance of EVs into the mainstream. It does not account for Tesla, not to mention the growing ranks of Tesla rivals. In addition, it most certainly doesn’t account for what is a pending energy revolution that sees lithium as its leader.

Already, the present is clear: Demand is growing fast, faster than production, and for now, this new demand is coming increasingly from the electric vehicle industry.

Tesla’s is by no means the only battery gigafactory out there. There are others being built around the world (at least 12, according to Benchmark Mineral Intelligence) and these gigafactories will raise the global demand for lithium batteries to some 122 GWh by 2020. That’s up from 35 GWh currently. It’s a phenomenal rise over a very short period of time.

In the U.S., there is already one gigafactory—Tesla’s, in Nevada—operating. A second gigafactory is in the works, courtesy of LG Chem. Brine-based lithium production in the country is concentrated in one place only, at least for now, and this place is Nevada. That’s because it is the only confirmed place with lithium deposits. The biggest actively mined area is the Clayton Valley, with presence from both mining majors like Albermarle (NYSE: ALB) and smaller, pure-play lithium miners such as Nevada Energy Metals. This makes Clayton Valley ground zero for the U.S. lithium rush and everyone wants to be there, but it’s the pure play miners who are set to explode onto this scene from an investors’ perspective.

Clayton Valley can hardly contain the lithium rush, and it is already time to look in the surrounding areas to secure future supply for soaring demand predictions. Those with enough foresight are diversifying their Nevada holdings and banking on geological clues that suggest there’s plenty more lithium in Tesla’s backyard and whoever gets to it first will be far ahead of the game.

“When everyone starts paying attention to Nevada’s geology, we’ll see a land rush that makes the current one pale by comparison,” says Bell, who heads of acquisitions for Nevada Energy Metals, one of the pure play movers in this playing field that sees the wider lithium potential in Nevada.

“Nevada’s geothermal footprints are large and extend well beyond the Clayton Valley. If you put a mirror up to Clayton Valley, there is endless opportunity here. The real race here is to create the next U.S. lithium powerhouse,” says Bell.

How to Play Lithium

Look everywhere, and then look again. Securing an investment in Clayton Valley is a good place to start—but it’s also potentially only a flash in the pan. The best way to secure a foothold in lithium right now is to think outside the box and look for those companies who see the bigger picture but are also smart enough to keep one foot in the proven lithium hunting grounds.

However, you also have to understand the supply and demand picture here.

Macquarie Research estimates that in 2015 demand for lithium already exceeded supply, while this year, lithium output will again fall short of demand.

In 2017, thanks to so much new production capacity the metal’s fundamentals will near an equilibrium, which will last for about a year before deficit rears its head once again—but this time the deficit will stick. Despite new efforts to ramp up supply, it will take a while before supply corresponds to the demand.

The future is pretty clear: We’re looking at a period of shortage, and shortage is where the savvy investors make real money. The lithium feeding frenzy has only just begun. Consumer electronics keeps it safe and steady, as always; the electric vehicle boom skews the demand picture dramatically, and the future’s energy storage and powerwall evolutions take it over the edge.

The reserves are there, and there’s geologists estimate there’s plenty of unproven reserves out there as well—it’s just a matter of who finds them first, and who starts extracting first.

Lithium has the purest of fundamentals of any ‘commodity’ out there, and the next oil barons look set to actually be lithium barons. In fact, in this respect, electric vehicles will likely be the cause of the next oil crisis. Demand and supply are simple and shockingly visible, and that means there’s a lot of new money floating around for lithium exploration. If you’re not a believer, the immediate future will sweep you off your feet.

Could A Lithium Shortage De-Rail The Electric Car Boom? is republished with permission from Oilprice.com

The post Are You a ‘Lithium Skeptic’? appeared first on Economy Watch.

It’s possible that OPEC is crying wolf with hints of an output freeze next month in Algiers; but it’s also possible that they are ramping up production to take the sting out of a freeze. This is a delicate balancing act that the Saudis need to play very carefully.

The official chatter is that the OPEC meeting in Algeria from September 26 to 28 could conclude with an agreement to freeze production by the member nations, with even Russia joining forces in a freeze that may prevent further oil price erosion.

It’s possible that OPEC is crying wolf with hints of an output freeze next month in Algiers; but it’s also possible that they are ramping up production to take the sting out of a freeze. This is a delicate balancing act that the Saudis need to play very carefully.

The official chatter is that the OPEC meeting in Algeria from September 26 to 28 could conclude with an agreement to freeze production by the member nations, with even Russia joining forces in a freeze that may prevent further oil price erosion.

But everyone’s a bit gun-shy after the false hopes of the last round in Doha—even if a freeze at levels that existed then wouldn’t have meant much either—and it’s hard to blame them. The question is, how many times can the Saudis cry wolf without forever losing the ability to leverage this chatter to affect a rise in oil prices?

However, let’s rewind a bit to the nature of the recent chatter. The Saudi Energy Minister has indicated that Saudi Arabia, OPEC’s largest producer, is willing to proceed with a production freeze.

“We are, in Saudi Arabia, watching the market closely, and if there is a need to take any action to help the market rebalance, then we would, of course in cooperation with OPEC and major non-OPEC exporters,” said Saudi Energy Minister Khalid Al-Falih, reports Reuters.

“We are going to have a ministerial meeting of the International Energy Forum in Algeria next month, and there is an opportunity for OPEC and major exporting non-OPEC ministers to meet and discuss the market situation, including any possible action that may be required to stabilize the market.”

The hopes of reaching an agreement in Doha were scuttled by Saudi Arabia, because it wanted its archrival, Iran, to participate in the freeze. Unfortunately, for oil prices, Iran had made it clear that it would not join any such discussion until they reached pre-sanction levels of oil production.

What has changed from Doha to Algeria?

Iran

Iran’s oil production is close to its pre-sanction levels, meaning that its first cited prerequisite for any discussion has now been met—a criteria that was not met at the time of the Doha meeting. In addition, increasing oil production further by Iran is a big ask—it would need billions of dollars’ worth of investments in both upstream and downstream facilities to make this happen. With oil prices languishing below $50 a barrel, major oil companies are reluctant to commit huge sums of money for new oil projects.

Iran’s oilfields are mature, and more than half of its wells have an annual decline rate of 9 percent to 11 percent, according to Michael Cohen, an analyst at Barclays in New York. Therefore, at their existing production levels, they need an additional 200,000 to 300,000 barrels a day annually to replace the shortfall from their aging wells.

Iran needs more money and investment to continue pumping at the current rate, making it more likely for Iran to agree to some kind of an arrangement where they continue to pump oil at a rate close to their target of 4 million barrels a day.

That said, the last thing that Iran wants is to be sidelined, so Tehran is bound to make its presence felt at the meeting with strong statements. However, at the end of the day, it is unlikely that Iran will scuttle an agreement where it has everything to gain and nothing to lose.

“There may be a little bit more to it this time. I’m still very skeptical, but it’s just with Iran being where they are production-wise, they’ll be more inclined to eventually go along with a deal,” said Again Capital’s John Kilduff, reports CNBC.

Saudi Arabia

The oil-rich nation underestimated the resilience of the U.S. shale oil drillers when they declared war on them in 2014. American oil has not only kept flowing—the shale producers have managed to bring down production costs considerably. This ability was not anticipated by Saudi Arabia.

Meanwhile, Saudi Arabia has burned more than $175 billion in reserves since August 2014. The Saudis have introduced austerity measures and plans to monetize their crown jewel Saudi Aramco to survive the oil downturn. Nevertheless, things are not going well for this nation, which youth is struggling to find jobs as shown in the chart below.

A large population of unemployed youths who cannot take care of their families can sow seeds of frustration, and the Arab Spring will still be fresh in the memory of the rulers.

Saudi Arabia is struggling to grow in this oil downturn. Barring the 2009 dip, the current growth rate of 1.5 percent is the worst in a decade, according to data compiled by Bloomberg.

If oil prices remain low, the Saudi plan to sell shares in Saudi Aramco might not fetch them the valuations they expect, and a nation that cannot provide the most basic of amenities—food for its foreign workers—says a lot about their financial condition.

Saudi Arabia has seen the recent slide in crude oil prices towards the $40/barrel mark, which could have gone deeper without the chatter of a production freeze. And since they have already cried wolf once in Doha, doing so again in Algiers decrease the importance of any ‘chatter’ leverage they have in the future.

Rest of the nations already onboard

Barring Iran and Saudi Arabia, the rest of the nations agreed about the need to freeze production during the Doha meeting.

From OPEC to Russia, everyone is at record production levels

The oil-producing nations want to ensure that even if there are talks of a production freeze, they should not feel the pinch. Hence, even before the meeting, they will try to produce more, rather than less. The recent ramping up may very well be an indication that a freeze—although at a level higher than what would have likely come out of the Doha meeting—may be on the horizon.

The oil markets are so sensitive that even a statement of agreement by OPEC at the end of the meeting is enough to send oil prices flying above the resistance level of $51 a barrel.

What about the shale oil producers?

Though U.S. production is declining and experiencing a flurry of bankruptcies, the remaining companies are much better positioned to continue pumping at lower levels to survive the downturn.

Though the risk remains that the shale oil drillers will come back in full force when oil prices recover, the risk is worth taking. OPEC and Russia have realized that any new world order will have to include the shale oil companies. They are a large enough force not to be neglected or defeated.

With all of this in mind, an agreement between OPEC and Russia is more feasible in Algiers than it was in Doha. It might not mean much though, with output levels soaring ahead of the meeting. A freeze at current levels—or levels reached by the time of the meeting—won’t do much to change the fundamentals, nor is there any indication that a freeze would have long legs.

OPEC’s Output Freeze: What Has Changed Since Doha?  is republished with permission from Oilprice.com

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Saudi Arabia suggests it may be increasing its August crude output to a new all-time high as it could give it more leverage to influence the September informal talks on a possible production freeze, Reuters reported on Wednesday, citing industry sources.

Saudi Arabia suggests it may be increasing its August crude output to a new all-time high as it could give it more leverage to influence the September informal talks on a possible production freeze, Reuters reported on Wednesday, citing industry sources.

Saudi Arabia – OPEC’s biggest producer — pumped a record 10.67 million barrels per day in July, up by some 120,000 bpd compared to June. The Saudis are usually ramping up production in the summer with the higher demand for crude, but what was unusual was that production hit a record high, above last summer’s peak.

After holding output steady in the first half, the Saudis started pumping more from June onwards, and further increases in production would mean attempting to out-produce the world’s top oil producer, Russia, which is not an OPEC member. Higher output would also give the Saudis a few more bargaining chips at the September meeting, according to Reuters’ sources.

The Saudis are “quietly telling the market” that production may increase in August to 10.8 million-10.9 million bpd, a non-OPEC source told Reuters.

It seems that Saudi Arabia is mastering the art of tipping the oil prices with a carefully uttered word, and just last week, its oil minister Khalid al-Falih proved that by saying that the Saudis would “take any action to help the market rebalance”. Oil jumped, and investors hurried to cover large bets against the oil prices.

Saudi Arabia will surely be the primary negotiator of any production freeze talks in September. It killed the Doha talks in April, the previous such attempt to reach an agreement, after it insisted that any deal must include Iran, which of course, Iran never agreed to, just having been relieved of several years of oil sanctions.

The September informal meeting between OPEC and non-OPEC partners is largely expected not to reach a production cap deal either.

Today’s reports of increased Saudi output come as former OPEC chief, Chakib Khelil, told Bloomberg that the heavyweight OPEC members Saudi Arabia, Iran and Iraq, as well as non-OPEC Russia, may be willing to agree on a production freeze because they have already grabbed all market shares up for grabs.

Following a downbeat early trade on Wednesday, oil prices began climbing shortly after the Energy Information Administration (EIA) published its weekly inventory report, which showed that crude oil inventories last week fell by 2.5 million barrels in the week to August 12, standing at 521.1 million barrels.

Saudis Ramping Up Oil Output to Gain Leverage in OPEC Talks is republished with permission from Oilprice.com

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The U.S. electric power sector burned through a record amount of natural gas in recent weeks, a sign of the shifting power generation mix and also a signal that natural gas supplies could get tighter than many analysts had previously expected.

The U.S. electric power sector burned through a record amount of natural gas in recent weeks, a sign of the shifting power generation mix and also a signal that natural gas supplies could get tighter than many analysts had previously expected.

The EIA reported a surprise drawdown in natural gas inventories for the week ending on August 3. The reduction of 6 billion cubic feet (Bcf) was the first summertime drawdown since 2006. Natural gas spot prices shot up following the data release on August 4, although they fell back again shortly after.

Natural gas consumption patterns are much more seasonal than for oil. Demand tends to spike in the winter due to heating needs, and then drops substantially in the intervening months, particularly in the spring and fall. Between March/April and October/November, natural gas inventories build up as people need less heating, and that stockpiled gas is then used in the next winter.

Therefore, it comes as a surprise that after a record buildup in inventories this past winter, the summer has seen a much lower-than-expected buildup in storage. Last week’s drawdown, the first in over a decade during summertime, says quite a bit about the shifting energy landscape. The EIA says this is the result of two factors: higher consumption from electric power plants, and a drop off in production.

The U.S. is and has been in the midst of an epochal transition from coal-fired electricity to natural gas and renewables, a switch that will take many more years to play out. However, the effects are already showing up in the power generation mix. Utilities have rushed to build more natural gas power plants over the past decade, and now with so many online, demand for gas has climbed to new levels.

Just a few weeks ago, on July 21, the U.S. burned through 40.9 billion cubic feet, the highest volume on record, according to the EIA. In addition, in late July, the power burn exceeded 40 Bcf/d three times due to a hot weather. Nine of the ten highest power burn days on record took place last month, with the other one occurring in July 2015. Average consumption of 36.1 Bcf/d in July of this year was 2.7 Bcf/d higher than a year earlier, and 1.5 Bcf/d higher than the previous high reached in July 2012.

IMG URL: http://cdn.oilprice.com/images/tinymce/2016/Nick0508A.png

The high rates of consumption from the electric power sector are contributing to tepid growth in inventories this summer. This comes on the heels of a massive buildup in inventories last winter, and heading into summer the expectation was that huge storage levels would keep natural gas prices at rock bottom levels, perhaps for years. However, that doesn’t look like it will come to pass.

While high demand is keeping natural gas from being diverted into storage in large amounts, the other main reason that natural gas inventories are not building up as much as previously thought is because of a supply-side issue: natural gas production is actually falling after years of steady increases. Natural gas prices have traded below $3 per million Btu since the beginning of 2015.

U.S. gas drillers continued to ratchet up production through 2015, however, creating this past winter’s inventory glut. However, the resulting downturn in prices has now made drilling unprofitable in many areas. On top of that, the oil price crash has ground oil drilling to a halt, which means that the natural gas produced in association with oil has also come to a standstill. The upshot is that natural gas production is now falling in the United States. The Marcellus Shale, the most prolific shale gas basin in the country, saw production peak in February at 18.5 Bcf/d. Since then output has declined 3 percent. In August, the EIA expects gas production from the Marcellus to fall by another 26 million cubic feet per day.

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Of course, this stuff is cyclical. The first summer drawdown in inventories in a decade means that natural gas markets are now tighter than many analysts thought only a few months ago. Falling production and rising demand could lead to steeper drawdowns in inventories this coming winter. The effect of that will be to push up spot prices, which could induce more drilling once again.

Surprise Natural Gas Drawdown Signals Higher Prices Ahead is republished with permission from Oilprice.com

The post Are Conditions Setting the Stage for Higher Natural Gas Prices? appeared first on Economy Watch.

Another oil price downturn threatens to deepen the plunging levels of investment in upstream oil and gas production, which could create a more acute price spike in the years ahead.

Oil and gas companies have gutted their capex budgets, necessary moves as drillers went deep into the red following the crash in oil prices. However, the sharp cutback in investment means that huge volumes of oil that would have otherwise come online in five or ten years now will remain on the sidelines.

Another oil price downturn threatens to deepen the plunging levels of investment in upstream oil and gas production, which could create a more acute price spike in the years ahead.

Oil and gas companies have gutted their capex budgets, necessary moves as drillers went deep into the red following the crash in oil prices. However, the sharp cutback in investment means that huge volumes of oil that would have otherwise come online in five or ten years now will remain on the sidelines.

The industry will cut spending by $1 trillion through 2020, according to Wood Mackenzie. Those reductions are creating a “ticking time bomb” for oil supply. The consultancy projects that the market will see 5 million barrels of oil equivalent per day (mboe/d) less this year, compared to expectations before the collapse of oil prices. Next year, the industry will produce 6 mboe/d less than it otherwise would have had the spending cuts not been made.

This is creating the conditions for a supply crunch and a price spike. The reason is simple: demand continues to rise by some 1.2 million barrels per day each year, but supplies are no longer growing because of the spending cuts. That is not a problem today as production still slightly exceeds demand and high levels of crude oil and refined products sit in storage.

However, by as early as the end of 2016 the oil market could tip into a supply deficit. In addition, because the industry has scaled back so intensely on capex, global supplies could fall short of demand for quite a while. The result could be a dramatic price spike.

This scenario has been described before by Wood Mackenzie, which published an estimate earlier this year that put the total value of cancelled projects over the past two years at $380 billion, projects that would have yielded 27 billion barrels of oil and gas.

So far, the markets are not pricing in the brewing supply crunch. Oil prices continue to fall, and speculators have taken the most pessimistic position in months, selling off long bets and buying up shorts.

Oil analysts and forecasters do not see a rapid rise in prices either. A Bloomberg survey of 20 analysts revealed a median price forecast of just $57 per barrel in 2017. No doubt, that record levels of inventories are on their minds – even if oil production itself flips into a supply/demand deficit, it could take years to work through storage levels.

“We’re looking at a market that’s still in a very slow process of rebalancing and we don’t think that you’ll get a sustainable deficit until the second quarter of 2017,” Michael Hsueh, a strategist at Deutsche Bank AG, told Bloomberg. “Those deficits are necessary to draw down global inventories, but that will still take until the end of 2018, it appears.”

However, the swing from surplus to deficit could be more dramatic than many think. Now that oil is once again entering a bear market, with WTI and Brent dropping to $40 per barrel, the industry could be forced to slash spending even deeper than it already has, leaving even more oil reserves undeveloped.

And in any case, it is possible that high storage levels and the two-year production surplus is leading to a myopic view of the future – just because the markets are oversupplied today does not meant that they will in several years’ time.

Wood Mackenzie says that while U.S. shale has been the hardest hit by the steep fall in investment, the shale industry will be the first to bounce back because of the short-cycle nature of shale drilling. The price spike will lead to a resurgence in shale, and Wood Mackenzie is predicting that shale production doubles from the 2015 high-watermark of 4.5 million barrels per day to 8.5 mb/d by the mid-2020s.

That is a long way off for oil executives dealing with deteriorating balance sheets and rising debt levels.

Today’s Downturn Sets Markets Up For A Dramatic Oil Price Spike is republished with permission from Oilprice.com

The post Conditions now Could Set Up Higher Oil Prices Later appeared first on Economy Watch.

What killed the dinosaurs? It’s a question as old as – well the dinosaurs themselves, and one that everyone from schoolchildren to scientists have been asking for decades. Movies like Jurassic Park and the Land Before Time only heighten that sense of wonder and raise the stakes behind that question. Now according to a new scientific study, it seems that black gold may have been the source of the dinos’ demise. 

What killed the dinosaurs? It’s a question as old as – well the dinosaurs themselves, and one that everyone from schoolchildren to scientists have been asking for decades. Movies like Jurassic Park and the Land Before Time only heighten that sense of wonder and raise the stakes behind that question. Now according to a new scientific study, it seems that black gold may have been the source of the dinos’ demise. 

Japanese researchers at Tohuku University and the Meteorological Research Institute authored a recent study in the research journal Scientific Reports suggesting that a meteor impact 66 million years ago on an oil rich region of Yucatan Peninsula led to the death of the dinosaurs. When the asteroid hit the vast oil deposits of Mexico, it sent thick black smoke into the atmosphere, changing the climate around the world. That soot blocked out the sun leading to a significant cooling of the planet. Equally importantly, it also led to a substantial drought around the world. 

The asteroid in question was roughly 6 miles wide and its impacted created the 110 mile wide crater that exists in the Yucatan today – the third largest crater on Earth. The impact was the equivalent of roughly 1 billion atomic bombs of the equivalent power to what struck Hiroshima at the end of World War 2. 
The researchers calculate that the amount of soot released would have lowered sunlight exposure by 85 percent and reduced rainfall by 80 percent. That would have had a significant

impact on plant growth, which in turn would have limited food options for most dinosaurs. In addition, the soot cooled the Earth by 16 degrees Celsius (about 28.8 degrees Fahrenheit) over the course of just 3 years. Think of the event as the reverse of global warming – and on steroids. 

Against this backdrop, it is not surprising that dinosaurs all died out. Only smaller mammals that could live underground would have survived. In fact, the fossil record suggests that only 12 percent of the pre-asteroid life was able to survive after the impact. It was not just dinosaurs that died either, contrary to myths about the Ice Age – around 93 percent of mammal species were killed off as well, according to a separate research study by scientists at the University of Bath. The largest animals that would have survived the extinction event were about the size of a house cat. 

Still, life bounced back “fairly quickly” researchers say, with about twice as many species existing 300,000 years after the event versus before it. Of course, given that the course of human history only goes back around 25,000 years, three-hundred thousand years is still a long period of time. It reflects the reality that the asteroid strike had a significant enough impact that its effects took tens of thousands of years to dissipate. It was the adaptability of mammals after the strike versus various reptiles that led the mammals to ultimately come to dominate the planet. Dinosaurs were in decline for millions of years before the asteroid strike, but that event aided by the oil rich soil of the Yucatan finished them off. 

It’s ironic that oil, so fundamental for modern human life was ultimately the catalyst that wiped out the dinosaurs. Had the asteroid stuck in a less oil rich region, back of the envelope calculations suggest its impact would have only been around one-third as devastating. It’s impossible to say if that would have allowed any of the dinosaurs to live or not, but it is at least a possibility. Perhaps if not for the existence of oil, none of us would have cars, but maybe we would all have a pet brontosaurus.

Did Oil Kill The Dinosaurs? is republished with permission from Oilprice.com

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