Low Oil Price Guts Another OPEC Oil Exporter

By SRSrocco – Re-Blogged From http://www.Silver-Phoenix500.com

The low oil price is negatively impacting another OPEC oil exporter as it continues to liquidate its foreign exchange reserves.  Algeria, like Saudi Arabia, has seen its international reserves plummet by more than 40% as the oil price fell in half since 2014.

Algeria joined OPEC back in 1969 and is currently producing 1.1 million barrels of oil per day (mbd).  While Algeria is not one of the larger OPEC members, it still exports roughly 670,000 barrels of oil per day.  At $50 a barrel, the country receives $33.5 million a day in oil revenues.  However, Algeria’s oil revenues have taken a nose-dive as the oil price declined from over $100 in 2014 to below $50 currently:

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Fill the US Strategic Petroleum Reserve

cropped-bob-shapiro.jpg   By Bob Shapiro

The US created a Strategic Petroleum Reserve in 1975, after the arab oil embargo (and a stupid US rationing scheme) caused supply disruptions. Today, this reserve holds a little over 1 month’s worth of oil.

Assuming that there is a real need for this Reserve, I would hope that it would be run using some basic economic and market principles. Right up at the top of the list of Market Principles is the Commandment: “But Low, and Sell High.”

The Price of Oil today is on the low side over the last 40 years, on an inflation adjusted basis. Back in ’73-’74, the Price of Oil went from under $10 a barrel to the mid-$30s. While the nominal Price today is in the low $40s, adjusted for the CPI, oil is under $8 a barrel in 1975 Dollars. (The CPI is a low-ball number, so maybe $5 is closer.)

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More Pressure Builds Against Oil Prices

By David Haggith – Re-Blogged From The Great Recession Blog

Saudi Arabia has moved beyond its original statement that it will only support a production freeze if “other major producing nations” sign on to the agreement. It has now clarified what I believed to be intended by its initial caveat all along, stating that it will only sign on to a production freeze if ALL nations sign on to such a freeze. So, “other” means “every.”

To which, Iran says, “Never!”

The Saudi Deputy Crown Prince went even further than that by stating if ANY nation does not sign on to a production freeze, “then we will not reject any opportunity that knocks on our door,” by which he means any opportunity to ramp up crude oil production and sell more oil.

And here is what that means for the OPEC meeting in Doha this month that has raised hopes that I believed to be absurd in the first place:

OilBarrels-500x375

The actions and intentions of Saudi Arabia and Russia—the two largest oil-producing nations attending the Doha meeting on 17 April—have dashed all hopes of any fruitful outcome. The most important meeting of the last three decades, which has promised to forge new friendships and a new cartel, is turning out to be the biggest farce, even before the curtain is raised.

The recent announcements from Saudi Arabia outlining the plan to create a $2 trillion fund to reduce dependency on oil and reports of austerity plans indicate that the Kingdom is not taking the Doha meeting seriously. It also seems to be sending a message to the others that it will not buckle under any sort of pressure, and it is readying its Plan B.

The Doha meeting will turn out to be a total disaster and the sentiment will be further damaged if the participating members don’t release a common statement. Forget about the production freeze. Listen carefully, Bears can be heard sharpening their claws ahead of the meeting. (OilPrice.com)

Meanwhile, what do Russia’s actions (the other key player in this agreement to talk about an agreement) say about the likelihood of success? Russia’s production has worked its way up since talk about having a talk began to a new thirty-year high!

Oil production in Iraq has also picked up so much that there is standing room only in the Persian Gulf:

Oil tankers are caught in a traffic jam near the Iraqi port of Basra, causing delays in loading. According to Reuters, around 30 very large crude carriers (VLCCs) are sitting in the Persian Gulf, and the backlog could cost ship owners more than $75,000 per day. Some could be waiting for weeks to reach the port…. The culprit is high oil production in Iraq. The port at Basra is struggling to load up all the oil tankers fast enough, forcing some to sit and wait…. And the line of tankers appears to be growing. The gridlock is forcing up the cost of renting an oil tanker. That, combined with the shrinking capacity of available storage in China is pushing up tanker rates in Asia as well. (OilPrice.com)

While oil tankers are stacking up because of increased Iraqi production, they are also stacking up because, once loaded, they have nowhere to go! So, it’s a pile-up at sea.

As storage becomes less available on land and sea, the price of storage goes up (supply and demand again). As ships has become backlogged, the price of shipping has nearly doubled. Increases in the cost of moving and storing crude oil, put additional downward pressure on how much people are willing to pay for crude oil. So, while supply (production) is still rising in many parts of the world, demand for more crude is going to fall, as it gets pricy to have it just sitting around.

In spite of ramping up it’s production, Iraq is one of five OPEC nations on the brink of financial disaster, due in large part to the current low oil prices — the others being Venezuela, Nigeria, Libya, and Algeria. So, these smaller nations talk of hope for the Doha meeting, while the larger nations give no rational basis for hope.

One has to wonder how long it will be before some architect of human chaos decides the way to resolve this crisis for the oil and banking industries is with a Middle-East war that crushes supply lines and knocks out production. Let’s hope not, but history has its example wars that look like they had such motivation.

So far, there is a growing storm of reasons to stay with my prediction that the price of oil is going to go back down. As I published my article yesterday to that effect, the price of oil was going up rapidly; but I look at the fundamentals and see a lot more downside … and stay with that.

Oil, oil everywhere, and almost nowhere left to put it.

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Perfect Storm For Oil Started On Schedule And Continues To Build

By David Haggitg – Re-Blogged From http://www.Gold-Eagle.com

The perfect storm I predicted against the price of oil in the Ides of March has not fully developed, but all the forces I spoke of are continuing to build. The balmy days that prevailed for oil prices in early March have gone away, replaced by a downdraft that is once again suppressing prices more and more since their peak in mid-March. The storm’s breezes can now be felt in prices that have relinquished 40% of their earlier gains, and the clouds are becoming more apparent to all.

Prices had one of their worst days of the year on Friday of last week and drifted marginally lower again on Monday of this week, stabilizing some on Tuesday. Friday’s pounding came because Saudi Arabia announced it would not participate in the oil supply freeze that it negotiated with Russia since Iran is not going to join the freeze.

That is one of the major storm fronts that I said would come into prominence as part of the perfect storm against the price of oil. I pointed out a few times that market enthusiasm over talk of a deal (still not completed) between Saudi Arabia and Russia to merely freeze production was ludicrous because the Saudis always said the deal was contingent upon other producers joining and that “other producers” most certainly included Iran, and that Iran most certainly would not join the deal.

Don’t expect Saudi Arabia to flinch and start backing down now that Iran has made clear it will not join the deal by freezing its production. Deputy Crown Prince …

Bin Salman nevertheless said Saudi Arabia was ready to face a prolonged period of low oil prices that have dropped sharply since mid-2014 as a result of higher global production. “I don’t believe that the decline in oil prices poses a threat to us,” he said. (Arab Times Online)

Even if a production freeze is formalized, it’s a bad thing, not a good thing. That makes it all the more silly that talk of the deal pushed down prices for a while. The deal, if it happens, promises to freeze production at January’s extremely high levels, which absolutely guarantees continued oversupply (unless there is a huge increase in demand, which so far has evaded the oil industry). A freeze is far from being a production cut, which is the only thing that can solve the oil industry’s problems on the supply side. Far too much has been made of the deal by a market full of unrealistic optimists for that reason.

Freezing production at January levels is “looking more and more pointless”, according to analysts…. What is becoming very clear is that Saudi Arabia is serious about moving away from the traditional play of adjusting prices by cutting or freezing supplies by itself. (The Week)

The dividing line between Saudi Arabia and Iran has hardened, and a deal would only freeze production at a level of continuous oversupply. All what I said a month ago. It’s a deal that is not likely to happen, and if it does, it is pointless anyway. I’ve just been waiting for this one part of the storm to organize into clear formation so that everyone can see it before writing more, and it now has. You can see those swirling storm clouds from that particular direction quite clearly now in the daily news, and you can see that they have started bringing down oil prices.

That was Friday’s big blow. Monday’s downdraft came in part because the National Iranian Oil Co. stated that it just authorized sales of crude to Dutch Royal Shell after the company settled a debt dispute with Iran. Iran repeated that it will continue to expand its oil production and sales until they reach the levels they were before Iran’s nuclear dispute with the West, hardening its stance against the Saudi-Russian deal.

Demand for oil products may be receding, not rising

Compounding matters, government data was released on Monday that showed the first small drop in gasoline demand in fourteen months. Until now, gasoline demand has remained a pillar that helped support the US oil industry through the supply glut. Drop in demand for products derived from oil is being noted in other parts of the world, too:

The oil price “can easily revisit the lows seen earlier this year,” French bank BNP Paribas said in a note to clients, as bearish demand data added to concern over a deal to freeze excess supply…. This comes ahead of a second quarter period that typically sees a dip in demand as refinery maintenance peaks. (The Week)

That’s right. The refinery shut-down period for maintenance that I said would be the second front that comes in to form the perfect storm has just begun. It’s a couple of weeks later than I expected, but wind from that direction is picking up velocity now. It will become an additional force against the price of oil so long as refineries stay in maintenance mode, which reduces their demand for crude.

The third front in the perfect storm — tanks starting to fill the brim

…This all coincides with figures showing buying of crude derivative products slipping in key Asian markets, “as onshore storage facilities in Singapore and Malaysia are filled to the rims”

The third front is just starting to happen. It will very slowly gain strength, but it certain to be the worst front of all over time. As tank farms around the world fill to capacity along with ships at sea, storage becomes more problematic. Oil has fewer and fewer places to go, and demand for crude will fall off a cliff.

As it stands right now, there is nothing that will prevent that from happening. A production freeze means we keep moving toward that end at the current rate of production. Lack of a freeze means production continues to expand so that the world has to make the necessary supply adjustments out sooner.

On Tuesday, Brent crude briefly touched down on a one-month low of $37.27 then floated back up slightly when Kuwait claimed that a production freeze is still possible without Iran.

Asked if anything is likely to come from the April 17th meeting of OPEC where the possible production freeze will be discussed, Lord John Brown, executive chair of L1 Energy, told CNBC

I’d be very surprised at this time. Production is high. People are scrambling to maintain markets that they have and to gain markets from other people. So, it’s not a time for reconciliation yet.

I would be surprised, too, because Kuwait doesn’t have a lot to say about it and, in fact, is doing its part to make things worse, while Saudi Arabia has made its position clear, exactly where I said it would stand. In fact, Kuwait may just be trying to take pressure off its own announcement that it will be ramping up more production soon:

The Middle East sour crude complex is likely to come under bearish pressure on news of Kuwait and Saudi Arabia agreeing to restart production from the 300,000 b/d offshore Khafji oil field…. “Even the idea of a freeze [in oil production] may be tested by [the] announcement that Saudi Arabia and Kuwait are preparing to restart the 300,000 b/d Khafji oil field … Citi analyst Timothy Evans said in a note to clients. (Platts)

Iraq’s oil production also increased through the month of March.

The impact on the US oil industry, seen in broad terms, is that the US now has fewer oil rigs in production than at any time in the past sixty years following fifteen weeks of continual decline. Nevertheless, oversupply continues to rule the market. As many as sixty small and a couple of large oil companies have gone out of business or declared bankruptcy.

Numerous bonds and other forms of loans to the oil industry are in default but are being ignored by banks because the banks don’t wish to compound the problem for themselves by creating a situation where they have to write down the value of the securities on that debt and have to write off debts. So, everyone is trying to sit it out. The scale of the problem for banks is largely masked because the Dallas Fed has told banks to sit tight as much as possible.

It’s believed data later this week will show that crude stock in the US has continued to grow over the past week to a higher record high. That will be the eighth week of setting new records in total US oil storage. If that data turns out as expected, that will offset news of a drawdown in Oklahoma the week before, showing it that to be nothing more than a brief eddy in the winds.

We are relentlessly getting closer to a point of total market saturation, which happens when all tanks are full.

Conclusion: The perfect storm for oil is arriving onshore now

The winds and clouds that are bringing the perfect storm against oil prices from three fronts are all growing stronger. I can now easily find many conservative market analysts starting to agree with what I predicted a month ago:

Commodities including oil and copper are at risk of steep declines as recent advances aren’t fully grounded in improved fundamentals, according to Barclays Plc, which warned that prices may tumble as investors rush for the exits…. “Given that recent price appreciation does not seem to be very well founded in improving fundamentals, and that upward trends may prove difficult to sustain, the risk is growing that any setback will result in a rush for the exits that could again lead commodity prices to overshoot to the downside.” (NewsMax)

“Overshooting” is just another way of saying “the perfect storm.”

Barclays also notes that positioning in the oil market has reached “bullish extremes” because the bullish rise in crude oil prices is not based on sound fundamentals. That’s right. It’s based on wishful thinking that is based on vague hopes that, if properly worded, would say Saudi Arabia will continue its production full speed ahead if Iran does cooperate and will otherwise increase production beyond its current levels. (That’s all a production freeze offers.)

Barclays says the rush for the exits could bring a price drop of 25%.

Even Goldman Sachs agrees with me now:

Energy needs lower prices to maintain financial stress to finish the rebalancing process; otherwise, an oil price rally will prove self-defeating as it did last spring. (Zero Hedge)

In other words, this problem is NOT going away until lower prices finish the job of flushing away the weakest competitors as a way of reducing supply to match current demand. So, if the energy production deal does finally go through in mid-April, we will still have to fill our waterbeds with oil to find places to store the overproduction. It will just take longer to get to the point. (The greater truth is that Saudi Arabia and Russia cannot really ramp up oil production much more anyway. So, talk of a deal not to increase production is really the most meaningless babble on the planet right now.)

Whether a deal happens or not, more oil companies, more related service businesses, and some of their bankers will be flushed away. The only thing that could change that is either a big increase in demand (not seen as likely by anyone that I’ve come across) or a big reduction in supply (not being talked about by anyone anywhere).

Barring a war or huge natural catastrophe that forcibly cuts off large amounts of production, the only reductions in supply that will happen are the hard ones that come from businesses closing shop. Those who continue to hope for an easier answer in the form of prices that stabilize the market at its present production levels are nothing but rosy-eyed dreamers, living in economic denial.

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Lower Oil Prices

cropped-bob-shapiro.jpg   By Bob Shapiro

Oil prices have been falling recently. As with so many things, this creates winners and losers. Consumers of oil & oil products, consumers of oil substitutes, and consumers of goods produced using oil all benefit. The steeper the drop (30% off the most recent high) the greater these consumers benefit.

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