Cal on January 29th, 2015

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As the world price of crude oil continues to bound around in the $45 to $48 per barrel range, it was a big topic of discussion at the annual Davos economic summit in Switzerland last week.  The Executive Director of the International Energy Agency sees no quick recovery for the global economy or for oil demand.  The Secretary-General of OPEC says oil will rebound shortly because of supply and demand, and prices will not fall into the $20s.  Saudi Arabian Prince Alwaleed said oil prices will not return to the $100/barrel level and that his country will not cut crude production because of the glut caused by the US shale oil industry.

A survey of US investment professionals by ConvergEx Group found that 62% of respondents think there will be a severe global recession if the price of crude oil dips to $30 to $35 per barrel.

Energy analyst Wood Mackenzie said that the number of US oil wells would decline from 37,000 in 2014 to an estimated 27,000 in 2015. Last year North American drilling and well completion expenditures exceeded $140 billion, but will likely fall to some $90 billion this year. Cuts of this size are expected to have a considerable impact throughout the oil industry and its suppliers.

Energy market observer Tom Whipple thinks there will be a considerable decline in US shale oil production in the second half of 2015; that OPEC will maintain its production of some 30 million barrels per day unless there is some major geopolitical upheaval; and that oil importing countries will be getting a significant economic boost from low natural gas and crude oil prices throughout much of this year. On the other hand, countries relying on crude oil exports for the bulk of their income are in a lot of trouble with several of them including Venezuela and possibly even Russia heading for default.

The Canadian Association of Petroleum Producers said it expects Canada’s oil production to decline by 65,000 barrel per day this year and 120,000 b/d in 2016 due to the sharp drop in oil prices.

If gasoline prices continue to stay low, US consumers could save some $125 billion in heating and transportation fuel costs this year. In addition, increasing mileage in recent automobiles will tend to dampen the demand for gasoline leading to more savings.

World airlines are also benefiting greatly from low oil prices. Fuel is the biggest variable cost for airlines, often representing a third or more of total operating expenses.

Saudi Arabia has a reported $750 billion in foreign reserves, which appears sufficient to enable the desert kingdom to weather  many years of low crude oil prices. The country can cope with low oil prices for at least eight years, according to the former senior advisor to Saudi Arabia’s minister of petroleum.

Iraq is one of the last places on the globe where it is still easy and relatively cheap to produce conventional crude oil. Despite the internal political turmoil and armed battles, the country is working hard to develop and export oil from its southern, northern, and Kurdish oil fields.

China purchased only 16% of its crude oil from the Saudi Arabia last year as compared with 19% in 2013. It is this decline that is part of the Saudis’ concern about market share loss and the need to maintain crude oil production in the wake of declining prices.

China’s oil imports from Russia increased by 36% last year to about 665,000 barrels per day. China is seeking diversify its sources of crude oil away from the turbulent Middle East.

French oil and gas company Total SA announced plans to reduce its capital spending by 10% this year under an accelerated cost-cutting plan.

Oilfield services provider Baker Hughes said it expects to lay off about 7,000 employees, days after Schlumberger Ltd said it would cut jobs as drilling activity slows due to a steep fall in crude oil prices. The job cuts illustrate the abrupt slowdown in drilling activity seen in the past few weeks.

Africa is also being hurt by the lower world oil prices. The dash for oil and gas resources that saw explorers invest billions of dollars in promising oil fields from Ghana on the west coast to Tanzania on the east is stalling as the global drop in crude oil prices forces drillers to reconsider the high costs of exploration on the African continent. For many drillers, 2014 was already failing to reach the promise seen in 2013 when half of the world’s 10 largest oil and gas finds were made in Africa

In an effort to become less dependent on Russia, Ukrainian’s  Prime Minister Arseniy Yatsenyuk announced an agreement to build a pipeline with neighboring Poland that diversifies the Ukraine energy sector with better access to liquefied natural gas (LNG) hubs. This would include access to natural gas from the LNG terminals that have already been built in Lithuania and Poland.

Declining crude oil prices are expected to hit electric cars and biofuels harder than other parts of the renewable energy industry, the head of the world’s leading renewable energy agency has warned. That is because they compete directly with rivals such as petroleum-fueled cars that are becoming cheaper to run as oil prices fall. But wind farms, solar plants and other renewable electricity generators should not be affected by the price plunge because they do not face the same level of competition.

The Panama Canal expansion project is now 85% complete. The project involves the addition of a third shipping lane to the canal and will ultimately allow larger 14,000 twenty foot equivalent container sized vessels to transit the canal between the Atlantic and Pacific Oceans. It is scheduled to be completed in December 2015 and be operational in early 2016.

Pakistan was plunged into darkness after a key power transmission line broke down early on Sunday in an incident blamed on a rebel attack. The power failure, one of the worst Pakistan has experienced, caused electricity to be cut in major cities throughout the country, including the capital Islamabad. A senior official at the National Grid station in Islamabad said around 80% of the country was affected by power breakdown.

 

 

With h/t Tom Whipple

 

 

 

 

 

 

 

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