Trump Oil Conspiracy

It will be very interesting to see what Trump and Tillerson decide to do to the oil market. Trump wants the US to pump more oil and be independent from the middle east. That would require massive amounts of new drilling from the US and Canada. Which requires a high price of oil. Tillerson has a large stake in arctic drilling, which requires the US to remove its sanction on Russia, and a higher price of oil. The sanctions will be lifted from Russia. With all of the Putin cronies surrounding Trump, that will happen almost immediately. The trick is then raising the price of oil to hold steadily over $70 a barrel. That will be harder. OPEC introduced their production cut, but it is too little and all of the countries involved will cheat and over produce. So while the price will slowly creep up, it could take years before the price gets to where those two men want it. The fastest way to reach their goals is to suddenly take a few million barrels per day off the market. And the easiest way to do that is the re sanction Iran. Trump has been laying the ground work for months now. And we now live in the Trump world where the right thing to do and the best thing for Trump to do are far apart. Screwing over Iran means nothing to Trump or his supporters. They are all dangerous terrorists. And of all the fights that the Democrats will need to make in the next few years, Iran is not worth the effort. And its an action that will win kudos at home. The surge in oil prices will be an immediate help to the US oil industry. And as much as they have plans in the country Russia will not stop the US. They benefit from high oil prices by just as much. So now we all wait for January 20th when Trump is officially sworn it and the anti Iran rhetoric starts.

Numbers In Perspective

Here is the thing about OPEC, Russia, and their proposed production cuts. Those numbers look well and good, but are quite misleading. Lets take Russia. They have said that they will join in the OPEC deal and cut production by 300K barrels per day. Great. That’s a lot, and should ease the glut. But it really doesn’t when you look at the big picture. Because the Ruble has been almost halved in value since 2014 and oil is all sold in good old American greenbacks, the price slide of the past few years has barely affected the big Russian oil companies. And they have spent the past few years ramping up production hard. In November they were able to output 11.2 million barrels per day. They now have production almost up to the peak levels of the old Soviet Union. And in November they were able to product almost a half million barrels more per day than they were in August of this year. So while yes they will cut production, they are still producing at almost record levels. And this cut is if anything, it is just a way to bring output down to sustainable levels while looking like heroes who are helping the entire industry. And to really put the scope of this con in perspective, Russia was only producing about 10.6 million barrels per day at the time of the price crash. So while OPEC and the US were pointing fingers and blaming each other for record outputs, it was actually Russia who has been quietly unbalancing the market.

Vienna

They done did it. OPEC actually reached a deal with significant production cuts. Now we will have to see if they will actually follow through with this. They say that they want to rest of the world to cut production by 600k BPD. And that will be a lot harder to enforce. If there is to be any hope of any other global reduction it will have to come from Russia. The US is made up of two many small operators, and Trump will be president. The man who wants to bring back coal. There is no way he would even consider a production cut.

And today Russia said that they will cut production by 300k BPD. Now what that actually means to Russia is a whole other matter. Does that mean 300k barrels less than they are producing now? Or 300k barrels less than what they budget their production to be in 2017. Or will they just do what they want, and say what the market wants to hear so that they can make a few extra dollars. Who knows. And as I have learned from following OPEC, words are wind and proof is in the pudding.

Summit

It is going to be really interesting to see if OPEC actually agrees on anything tomorrow. They Sauds have been positioning for a cut for a while. They are producing at record levels for over a year. Slashing a million barrels per day of production would be nothing for them. Iran and Iraq know this and are playing a game where they say that they will not cut production. So the Sauds came back on the weekend and said that they are willing to not cut production and wait for the market to balance itself in 2017. Considering OPEC is an organization that likes to think of itself as a cartel, there is a lot of public posturing and infighting going on. This is all happening while Argentina is rolling around on fire, begging for a shred of relief. And Nigeria like Hydra desperately hopes that the Avengers don’t show up again.

The odds of an OPEC production cut are slim to none. The best case scenario for the market is a production freeze. It would be meaningless and accomplish almost nothing, but would be held up by the group as an accomplishment while they blame the rest of the world (America) for the oil glut.

Trump And OPEC

It will be interesting to see what the Trump administration will do in regards to oil and OPEC. Trump is a hater of all things middle eastern, and all “bad deals”. Obama lifting the sanctions on Iran qualifies as both. Leading up to the election Trump was outspoken against that deal, as is the Republican party as a whole. So it would make sense for Trump to reverse it and put the sanctions back. It’s no skin off his nose, and he gets to both spite Obama and win praise from congress. It would also take millions of barrels of production per day out of the market which would significantly boost the price of oil and make a lot of US petroleum companies happy. It seems like a no brainer. The fallout of that deal would be interesting to see. The Sauds would be thrilled. It would both boost the price and oil and reduce Iran’s clout in the region. While also allowing OPEC to flatten their production numbers without Saudi Arabia or Iraq being forced to cut their production. It would mess with Russia and their aspirations in the region. Russia has been making large investments into the Iran. However it would push the Iranians further under Russia’s umbrella strengthening Russia’s alliances in the region. The Chinese would be put in an interesting position. They have been purchasing as much cheap oil as possible to build their reserves and offset the continuing decline of their domestic production. As the largest importer of oil and exporter of manufactured goods, this period of cheap oil is helping them immensely. However as much as they can threaten to cut off the US supply of iphones, they are terrified of getting on the wrong side of Trump. They know he can and will sanction the hell out of them, even if it will hurt the US more. So with renewed US sanctions they will have to avoid Iranian oil completely. We will have to wait and see when happens when Trump is finally able to put pen to legislation.

The Problems With Fracking

Over the weekend Oklahoma suffered a 5.0 magnitude earthquake. Normally something like this wouldn’t even be a blip in the news, except that it happened just a few miles from Cushing. The same Cushing where the US has a half trillion barrels of oil in storage. And that should be deeply troubling. Those tanks are not built to withstand earthquakes, and why should they be. They are in Oklahoma, not normally a hotspot of seismic activity. Except that in recent years it has become one. And all of it can be traced directly to the oil and gas industry. Oklahoma is the poster child of hydraulic fracturing, so it is no surprise that they are the first place to feel the negative effects of it. It has long been established that pumping fracking fluid into the ground will contaminate drinking water, but the earthquakes are a new phenomenon. It turns out that fracturing rock and then pumping waste water deep underground will mess with fault lines and create man made earth quakes. This has been going on for years, but the quakes have been mostly so small that they are only perceptible to seismometers. They are now ramping up. Multiple quakes have now happened over a 5.0, a strength where they can now be felt and cause damage. And as the state continues fracking this will not stop. Right now they are still in the slight denial/make it go away stage. Oil companies are being forced to stop injecting waste water near towns that are experiencing earth quakes. It will be interesting to see how far this continues and just how strong these man made quakes can become. This is all uncharted territory to geologists. Never before has human kind been able to create earth quakes. And we are now creating thousands with no sign of stopping.

Time For The Sauds To Nut Up

It was inevitable, but the tentative deal that OPEC struck to curb production is falling apart. Iran wants to keep increasing output to get back to their pre sanction levels, Libya seems to have it together enough that they can increase output, Venezuela has manipulated their bond market enough to keep the creditors off their backs for another year. Even Nigeria seems to have made enough peace with the Avengers that production is on the rise. But the death knell is Iraq. They are in the process of taking back Mosul from ISIS, and want to increase production to pay for this military action. So this deal looks doomed, and the price of oil will drop back under $50. Unless somehow Saudi Arabia unexpectedly decides to grow a pair and slash their production. There is precedent for them to do it. Shaving a few million barrels per day off of their output would bring the market into stability and would drive the price per barrel up to the $70 per barrel range. It would bring them some goodwill with a lot of countries and show that they are still a power in the market. And knowing that they legitimately have a few million barrels per day in reserve would give them a lot more clout when they threaten to flood the market. Even if they cut production, they would still be the largest producer in OPEC and the de facto power within that organization. And if the price of oil does come back up the rest of the member countries would have enough financial breathing room that they would be more amicable to production decreases of their own, and the orders of the Sauds. However it makes too much sense and the Sauds are too bitter and petty, so the deal next month will fall apart and the current status quo will remain.

Make OPEC Great Again

The seventies were a different time man. Back then the US had just hit peak oil, you could count your car’s MPG on your hands, Russia was just warming up, the Canadian oil sands were just a gooey sludge, and OPEC had all the power in the world. US oil demand was continually increasing and with their unexpected peak in production, quickly needed other sources of oil. The Sauds and OPEC took advantage and created the 1973 oil crisis. These Arab countries were flexing their newly discovered political and economic muscles, and had the US over a barrel (pun 100% intended). Never before and probably never again would such a militarily powerless group be able to pressure the US like that economically. With OPEC still producing a sizeable fraction of the world’s oil, why are they not still the economic power that they once were. And the reason is progress. Back in the seventies, the OPEC countries were mostly all poor and undeveloped with small tribal populations and few major cities. Back in the day exerting their influence on the global stage was far more important than profit margins. These countries had no one to answer to. The populaces were small and poor and the leaders barely had to answer to them. And after multiple world wars in their region and the meddling of foreign powers these countries were all eager to make a name for themselves. They had a chance to stick their thumbs in the eyes of the imperial powers and gladly took it. It is a different world these days. All of those countries have grown up and have booming populations that require ever increasing amounts of GDP. And through neglect and hubris most of their economies are completely controlled by their respective oil industries. So when the current oil crisis hit, they all were more concerned with market share and the bottom line than exerting influence. OPEC countries have all become to corporately minded. The fear of losing market share to a  rival is now far more important than wielding influence. They have all become so tied to oil profits that they are no longer able or willing to make large production swings to correct the market. So they all produce as much as they can in order to try and stay in the black while further depressing the price. The price of oil will no longer be corrected by any OPEC actions, but by the changes in production of the global market. The actions of the past year and especially the past month have shown that OPEC is no longer able to function as one entity and make changes to affect the market. OPEC is for all intents and purposes dead as a global political force.

Alaska And The Problem With Pipes

The US has long known that there were oil reserves in Alaska. In the early part of the century when the US Navy was transitioning from coal to oil, Alaska was marked as being of strategic importance due to its reserves. However due to its remoteness and inhospitable environment it was left untapped. That changed with the oil embargo in the seventies. The US needed more domestic oil and needed it quick. People started poking around in the north shore of Alaska and fully realized the potential of Prudhoe bay. The only problem was how to get the oil out. There was too much pack ice for traditional tankers. So what to do. Build a pipe and transport the oil further south to a clear harbor. And thus the Trans-Alaskan pipeline was born. This 4ft diameter pipe is designed to transport millions of barrels per day and has done so for over thirty years. However its future is not looking so bright. And for an unexpected reason. Alaska is no longer producing enough oil. Alaskan oil comes out of the ground warm and enters the pipe at around 45 degrees Celsius, it then enters the pipe and gets pumped along at around 4mph. The pipe is designed to handle over two million barrels per day, and in the early eighties that much was flowing through it. However due to the natural decline of the field, only around a half million barrels travel through the pipe now. And this is approaching the lower limit of what it can handle. Much less and the oil will start to cool too much and start separating, creating blockages and freezing in the pipe. There was a hope that arctic drilling would start and provide a fresh influx of oil through the pipe. All of those plans are shelved and Alaska is stuck with the ever decreasing amount that is coming out of Prudhoe bay. So now they have to start looking at other ways to keep it flowing. Either installing heaters or and insert to shrink its diameter. Or just hoping that global warming kicks in enough that the waters of northern Alaska remain ice free. It will be interesting to see what happens.

China To Keep On Keeping On

The amount of oil in the US petroleum reserve appears to have peaked and has actually been slowly been decreasing over the past few weeks. Despite a few new gulf rigs coming online, US oil production remains flat. But OPEC is still producing at record levels and there is still a global surplus, so where is all this extra oil going? To the same place it has been going for the past two years. China. It has long been known that China has spent the last two years using cheap oil prices to rapidly building their reserves from almost nothing, to several hundred million barrels. But there has always been secrecy about it. And a fear that they would declare themselves full and stop adding to it, creating an out of control glut. It was assumed that once they hit around 500 million barrels, they would be done. It now appears that they are far from it.
The tanks they have been using all have a floating roof design. Using satellite data and tracking the shadows in the tanks, the west has been able to figure out what China is actually up to. And its kind of surprising. They have way more oil than anyone gave them credit for. An estimated 600 million barrels in surface storage. Plus an unknown amount that is stores in caves underground. But that is not all. They are not anywhere near full capacity. From what was spotted, China has a current storage capacity of some 900 million barrels. Potentially double what the US keeps. They realized that oil is at a price far below what it should be, and have been using this deflated price to buy as much as possible for years. They have even cut domestic production way back. It is really impressive that they were able to buy this much yet not tip off the markets or cause the price to spike. It will be interesting to see what they do in the years ahead. If they will just draw on these stockpiles when the price spikes, or use it to make the market appear flooded while they gobble up cheap futures contracts. That is an absurd amount of oil, and if China has ever proved anything, it is that they will do what they can to make a buck.

Iran's New Deal

Well now it looks like Iran has finally caved. They issued a new oil contract for $2.4 billion. There are not really any details about it yet, but it sounds like they are now playing ball. If so, this is a big. Iran is one of the last bastions of cheap undeveloped crude. Even at $50 oil, they have a lot of profitable fields. Big petro companies will be giving them a look. It will be interesting to see what, or if the Saudi response is.

Iraq?

The tentative deal that OPEC cooked up this week was bound to fail, but not by the country that I assumed. It looks like it will be undone by Iraq of all countries. At the meeting OPEC rolled out their numbers showing how much all the member countries were producing. And will use those number to determine how much each country will need to cut production by. Well Iraq is now taking offense to those numbers, saying that their output was underestimated by some 200k to 400k barrels per day. Those are big numbers if true and if Iraq is told to roll back to where OPEC wants them to be, that could be almost a half million barrels a day of production that would need to be shelved. This has the secondary effect of other member countries saying that their numbers were low balled as well, starting a chain reaction that undoes everything. It will be interesting to see how this plays out. If a back door deal with Iraq will happen, or the whole deal falls apart like is expected. Either way, this shows that OPEC is nowhere near the cohesive force that it once was and the Sauds no longer have the control they once had.

OPEC Says Jump

OPEC agreed to a production cut. This is huge. This is game changing. This is probably not going to happen. What they did was an amazing head fake. They announced that they would cut production, but said they would not announce any details until the next meeting in November. What an amazing con. No one expected any production caps to be enacted, so then they go and surprise everyone with the announcement. No one looks at more than the surface of the announcement, and the price of oil spikes. All the OPEC countries make a few extra millions, and no one is the wiser. And the status quo gets to be maintained for a few more months. And once November rolls around the bickering can begin anew, the Sauds and Iranians can blame each other and this “deal” can fall apart.

OPEC Got Fucked

To the surprise of no one OPEC will not get a deal done on a production freeze. Was it due to some backdoor deal with Russia? Is it to keep kicking the US in the nuts? Is it because everyone hates Venezuela? Nope. It is because the Sauds hate the Iranians. The story is the Saudi Arabia will not just freeze production, but decrease it if Iran agrees to a production cap. Something that Iran will absolutely not do as they are trying to ramp back up to pre sanction levels. So now the Sauds can act all shocked that such a reasonable offer of theirs was rejected by the barbaric Iranians, and keep flooding the world in cheap oil. All the while shrugging and saying that there is nothing they can do, its all Iran’s fault. The question now is how much is that needless BS, and will the Sauds decrease production anyways. Saudi Arabia is currently producing at record levels, and has been for a few years now. But how long can they really sustain that. Its not like they have tapped into fresh new wells. Most of their production is coming from very old fields and from all indications all of them are producing at maximum. And despite what tricks are used, all oil fields decline. And the Sauds are running out of tricks. They have been injecting both water and CO2 into Ghawar for decades. The only way they were able to increase production and maintain those levels is to bring every well they have online and run them at full capacity. So the only question that remains is can they use their inevitable decline and drag down Iranian production, or will they just concede and roll production levels back and try to suck up a little good will.

OPEC = Fail

So it sounds like there with not be an OPEC deal at their meetings this month. And that is really not surprising. As much as the low price of oil sucks for them, it is not severly hurting Russia and the Sauds. Both are weathering this price deflation, and can easily continue to do so for the rest of the year. So what reason do they have to cave. The Sauds don’t wont Iran to receive foreign investment that will boost up their economy, and Russia would love to swoop in and low ball some Iranian contracts. As for the rest of OPEC, there is nothing they can do. They are all small fish to be led about by the Sauds. And Saudi Arabia still dangles the struggling US industry in front of them. And they have numbers. Aside from the Permian basin, all US shale fields are in major decline. And despite the “analysts” freaking out about insignificant weekly rig count changes, they will continue to do so. Even with the boost from the Permian and few new wells in the gulf of Mexico coming online, US production is holding flat. And once the cheap plays in the Permian are all tapped, US production will sharply decline. This is the end goal of the Sauds and has been since 2014. And as much as the rest of OPEC may want a deal, the Sauds are inevitable the only ones who can enact it.

Cash All Gone (Or Why The Petro's Have Cancelled All Megaprojects)

For all the talk about the US shale fields, their wildcat operators, and their impact on the global oil market, the present and future of oil is the large mega projects. Huge platforms and fields of wells over vast deposits. Where shale wells put out a few hundred barrels per day, the big fields produce hundreds of thousands. The latest one that might coming online is the Kashagan (cash all gone) field in Kazakhstan. However, it is the boogey man that has spooked the big petro’s away from big projects since the price crash.

First discovered in 2000, it sits offshore in the north end of the Caspian sea. But it is a big field, one of the largest ones found in the past decade with an estimate 13 billion barrels of crude. This had people drooling despite its risks. And this field is no walk in the park. It sits in the middle of the Caspian sea where the weather is about as inhospitable as it gets. Highs of 40C in the summer with lows of -40C in the winter. Temperatures so cold in the winter that sea ice becomes an issue that must be accounted for.  And the oil itself is laced with sodium hydroxide. But risks be damned that is a whole lot of oil. Some three hundred billion worth in 2001 oil prices. So in 2001 construction started, and went on, and on with innumerable delays and cost overruns. The companies in charge estimate the total cost of the project is currently just over $50 billion, CNN thinks that it is double that amount. Plus there are the fines. The sodium hydroxide is strong enough that it corroded the pipes planned for transport that lead to leaks and the excess gas being burned. That led to tens of millions in fines. But it appears now that most of the kinks have been worked out and production will start in earnest this fall. They claim that this will be producing 370k barrels per day. A lot of experts doubt that they will be able to hit that number for at least a decade due to ongoing issues. But lets look at what happens if they do. Not in terms of how it will affect the global market, but what it will do to the bottom line of everyone involved. 370K barrels per day at current prices is about $16 million dollars per day, almost six billion dollars per year. A lot of money, but not when it is paying down a fifty or hundred billion dollar investment. Until the price of oil skyrockets this project will run in the red. Even when oil gets back to $100 per barrel it will take decades before it breaks even. And that is why investment dollars have dried up. When a huge field like this one is such a money hole, why take a chance. A lot of the petro’s are barely skating by. The thought of investing so much money in something this risky makes no sense. They will keep biding their time, investing in smaller, sure things and wait until they are flush with cash again before embarking on projects like this.

Venezuela And China

It is starting to look like Venezuela is losing their last friend in the world. China seems to be done with them. This is not too surprising as Venezuela is such a disaster that they rate below Syria for safety. The bigger issue is of course money. Venezuela is fast running out of hard cash, and has almost none coming in. More than any other OPEC country, the Oil crash is hurting them the hardest. The drop in income is affecting their infrastructure and ability to keep producing oil. Production rates have steeply declined, and that is affecting their relationship with China.

The leader of Venezuela Nicolás Maduro is an idiot. One who desperately clings onto his belief in socialism. And when oil prices were high he could. Because he was flush with oil money, he could institute price caps for basic goods. This made the poor happy, but made it so that it was not profitable for anything to be produces domestically, be it goods or food. This was OK. He just took that pile of oil money and threw it at neighboring countries for food, and traded oil to China for cheap manufactured goods. Some 600K barrels per day. China loved this. They needed oil, and could get it for the price of some cheap electronics. They started throwing money at Venezuela, some sixty billion dollars worth of loans. They gained what they needed an ally with oil. A socialist friend. And a toe hold in Latin America where they could keep the US in check. Now with Venezuela struggling to produce any oil, they don’t have anywhere near the capacity required to trade oil for goods. They need to sell every drop they can just to keep creditors at bay. And of course China is the biggest creditor. They are owed some $40 billion dollars still, and it doesn’t look like they will be getting it any time soon. Maduro has been pleading with them for more loans so he can keep his country afloat. But it looks like China has finally had enough. No more money appears to be incoming. And there are rumblings that China is speaking to Maduro’s opposition about how they plan on addressing China’s loans when they finally take power. If that is they case, then there is absolutely no hope left for the current regime. They country is in a death spiral. And if China is now on the sidelines waiting for it to play out, then there is no hope of recovery until the government is overthrown. Maduro has no more friends, and no more lifelines.

The Futility Of The Sauds (Or How The US Is Getting Rich From Dead Shiite Muslims)

Because history loves to repeat itself, Saudi Arabia is again waging proxy wars against Iran. In the eighties they threw money at Sadaam to fight Iran. This worked out well, because the Soviets were supplying military hardware, and the US had the CIA meddling. Oil prices had surged and they easily had the capital to write some cheques and know that it was going towards furthering their causes. That war ended and Iran may have “won”, but it was a pyrrhic victory. Their economy and infrastructure was in shambles, and the western world had sanctioned the hell out of them. Short of their absolute destruction, this was pretty much a best case scenario for the Sauds. With Iran (and Iraq) in down and out, and the Soviet Union collapsing, they were then able to leverage their huge oil fields to become the global oil power. Then the Sauds spent the next two decades peddling their influence into all sorts nonsense and groups that the US now declares as terrorists. And no one could do anything except kiss ass, because they had the oil. Well, now we live in the era of the shale boom, and a resurgent Russia. Saudi Arabia by keeping the taps open, has lost enough global influence that he could unleash Iran without much backlash. So the Sauds are doing what they can to retain regional power. Fighting Shiites. With the war in Yemen and their meddling in Syria. However this time is different. Unlike the eighties, no one really cares about Iran. So the Sauds are alone in their wars. They are now both bankrolling and supplying the military hardware. And unlike the Russians make their own military hardware, the Sauds import everything and are paying markup prices. They are handing the US billions a year for arms and munitions. And while the US is normally super happy to sell guns to anyone, there are even a few rumblings that maybe congress shouldn’t sell weapons to a country that is using them to bomb schools and hospitals. So now the Sauds are waging multiple proxy wars with no one on their side against a country that now has the backing of Russia. While also depressing the price of oil. Waging an economic war against America, military one against Yemen, and ideological one against Iran is bleeding them dry. It will be really interesting to see what gives first over there. 

Oklahoma

Oklahoma, once the poster child for US hydraulic fracturing may be on the way out.
The state has long been one of the most important oil producers in the US. Despite peaking at over 700k barrels per day in the twenties, they were still producing over four hundred thousand BBD well into the late eighties. However like a lot of the US onshore fields, they rapidly aged and production dropped below 200k BPD. When hydraulic fracturing came to be in vogue the state benefitted immensely. Production more than doubled from numbers in the year 2000. Peaking at over 450k BPD in 2015. numbers not seen since the early eighties. Things are not looking so rosy these days though. Due to its higher cost per well, rig counts have plummeted. Most of the new shale drilling has moved to more profitable fields in Texas. And what happened this weekend may be the death knell. A 5.6 magnitude earthquake. We have known for a while that fracking causes little quakes. With the number in the state increasing from around five a year to hundreds. But this last one was big. Not an in perceptible tremor, but one with some force. It will be interesting to see if this causes enough of a public panic that a fracking ban or hiatus is instituted.

Apache

The Apache Corp just dropped a bombshell on the world. They claim to have found three billion barrels of oil and 75 trillion cubic feet worth of gas in west Texas. A tiny portion of the greater Permian formation, called the Delaware basin. The US estimates that they have 36 billion barrels of reserves left. So this find is of huge importance. It’s a game changer, and true paradigm shifter, and probably too good to be true.
The area has long been known to geologists and avoided. The rock is thought to be in too much of a jumble and the ground too permeated by clay. Both factors would severely limit the effectiveness of hydraulic fracturing. The area is also pockmarked with dry exploratory wells.
We will have to see if the geologists have been wrong all this time, and Apache did find a huge haul. We won’t know for sure until they start drilling in earnest or release some seismological data.