oil prices

The newly opened section at the oil refinery of Zubair, southwest of Basra in southern Iraq, last month

The newly opened section at the oil refinery of Zubair, southwest of Basra in southern Iraq, last month  © Getty Images

Does it matter for the oil market that three of Opec’s 13 member states can now be classed as failed or failing? The general definition of a failed state refers to a nation in which the government has lost political authority and control. On this definition Libya already qualifies, with large areas of the country beyond government authority and under the control of competing local militia. Venezuela is clearly failing and close to defaulting on its debts. Algeria is struggling under the weight of President Abdelaziz Bouteflika’s weak administration and mounting economic problems.

Failure clearly matters for the 75m citizens within these countries. Venezuela has inflation of something like 700 per cent, if you believe the International Monetary Fund’s analysis — around a mere 170 per cent if you believe the government. Caracas is the murder capital of the world. Algeria has not yet seen open violence but the prospect of civil unrest is high and the fear that this could lead to another migrant crisis with boat people fleeing across the Mediterranean is already a source of concern in Paris. Read more

George Osborne Visits North Sea oil in Scotland

George Osborne on the Montrose Platform in the North Sea  © Getty Images

On Wednesday, George Osborne will present the UK budget to the House of Commons. At a moment of deep uncertainty for the country’s energy industry — which is discouraging investment and creating quite unnecessary risks for the future. From the North Sea to Hinkley Point and shale there is confusion and doubt. Mr Osborne should come forward with a package of messages to restore confidence. Here are four obvious steps the chancellor should take.

First, the North Sea is now on the verge of a serious cutback in activity that will reduce energy supply and lead to lost jobs as well as much lower tax revenues. The hopes expressed in Sir Ian Wood’s report two years ago for an renaissance in the North Sea and the development of the billions of barrels of remaining resources will be lost. Read more

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The Saudi oil minister, Ali al-Naimi   © Getty Images

The kingdom’s not for turning. There will be no production cuts. Oil will continue to be produced at unwanted levels until other suppliers are forced out of the market.

That was the unequivocal message delivered at the IHS Cera conference in Houston two weeks ago by the Saudi oil minister, the 81-year-old Ali al-Naimi. Mr al-Naimi tried to claim that the US shale industry was not his particular target but that did not seem to convince those involved in a sector which is beginning to feel the real pain of $30 oil.

For the Saudis such pain, along with the even greater suffering being felt by their former allies such as Algeria and Venezuela, may appear to be a necessary cost in securing the kingdom’s goal — a secure oil market share for itself whatever happens to anyone else. On this view, all the others just have to learn the harsh realities of life. Think of it as the application of sharia law to the oil industry. Read more

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Saudi oil minister Ali al-Naimi holds a press conference in Doha after meeting energy ministers from Russia, Qatar and Venezuela  © Getty Images

The Saudis blinked. The latest deal — an agreement with Russia to freeze oil output at January levels if they are joined by other large producers — won’t rebalance the oil market immediately and the early surge in prices last week was rather premature. But they blinked and that is all important. The myth of Saudi power is broken.

The real steps necessary to rebalance the market have yet to come. Saudi production must come down. Others may join in the process but an overall cut of 3m barrels a day is now necessary and most of that will have to come from Saudi Arabia. Stocks must be run off. That will take time. Iran must be welcomed back into the market. That process will be slow and even estimates of another 400,000 barrels a day during 2016 now look high. But they will come back and have to be accommodated. The interests of other Opec member states — such as Venezuela and Algeria — must be taken into account. The Saudi’s lack of respect for their fellow producers over the last year has shaken many traditional alliances. The kingdom does not have that many allies. Read more

Hungarian engineer Miklos Sziva checks t

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Markets are inherently prone to volatility. Prices and valuations do not proceed in an orderly and linear fashion. Most important of all, they do not proceed in one direction for very long. The aim of any serious investment strategy should be to call the turning points and buy or sell accordingly. The energy market is at such a turning point and it will be fascinating to see who has the nerve and confidence to invest.

To say that this is a time to buy may sound odd following the criticism of Shell’s purchase of BG Group, which was reluctantly nodded through by fund managers last week. The issue is that the BG deal was based on prices roughly two and a half times above the current level and depends on an incredible forecast of future price trends. The result: a pyrrhic victory for Shell. That mistake, however, does not mean that other potential buyers of energy assets should be put off. At current prices, the time to buy is now. That applies to oil and gas but in different ways the same conclusion can be drawn for almost every part of the energy sector. Read more

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President Vladimir Putin  © Getty Images

Of all those damaged by the oil price collapse, few are in a more difficult position than Russia. High prices have sustained the Russian economy since Vladimir Putin came to power in 1999. Hydrocarbons provide the overwhelming proportion of export revenue. Now something radical may be needed to avert economic collapse and political dissent.

Privatisation is back on the agenda of the international oil industry. Although the prospect of the Saudis selling a share in Aramco has been tantalisingly floated by the Saudi deputy crown prince Mohammed bin Salman in his interview with the Economist two weeks ago, there are other potential sales that are likely to be completed sooner. The most intriguing is the possibility that the Russian government will sell off another slice of its 69.5 per cent holding in Rosneft. Read more

IRAQ-OIL

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Oil is now $30 a barrel. For investors and those dependent on investment income the question is whether the pain being suffered by the oil and gas producers is about to spread to the wider economy. Over the next month most of the companies involved in the sector will produce their annual results and announce their dividends. Investors will be watching anxiously for cuts. But the stark and rather shocking truth is that most companies in the oil and gas business are being forced to borrow to meet their payout commitments and that is a dangerous thing to do.

After a fall in prices of 70 per cent over the last 18 months there is a strong prima facie case for dividends to be reduced. That would painful for investors — not least the institutions that are relying on big oil for more than 23 per cent of total market yield. (Another 8.9 per cent of yield should have come from the mining sector if Glencore and Anglo hadn’t already cut their dividends.) But will it actually happen? Read more

Ben van Beurden, Shell CEO  © Getty Images

Of course the answer is obvious. How could anyone be so foolish as to think that a company with earnings of $19bn in 2014, with reserves of 13bn barrels of oil and gas and with daily production of 3m barrels of oil and gas could possibly fail ? How could anyone think of bracketing Royal Dutch Shell with GEC, or ICI or Lehman Brothers — each in their time great companies but now reduced to dust. Perhaps it is impertinent to even ask the question. Surely Shell has survived for a century and more getting through wars, expropriation, an entanglement with Nazi Germany, the horrors of Nigeria and numerous other “crises”?

All true. Shell is undoubtedly one of the world’s great companies — decent, honest, civilised and a world leader in energy technology. But even those attributes do not provide complete protection in a world where the past is no guarantee of the future. Companies can have too much history and too great a sense of their own institutional importance. In a very competitive world no one is ever totally safe. Read more

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Iran's President Hassan Rouhani   © Getty Images

Step by step, month by month, the agreement between Iran and the international powers to control nuclear development in the country is moving forward. Beyond the rhetoric about whether the deal will be effective or not — a debate that will surely continue — the prospect of an end to some of the sanctions on Iran comes closer. What could that mean for the oil market?

The question has to be answered in two parts. First, the short term up to the end of 2016. Second, the longer term stretching to 2020 and beyond. On the first there is a clear consensus across the industry. Iran can produce and export perhaps another 400,000 barrels a day by the end of next year. The limit is set by the condition of existing fields and infrastructure. In the latest of a series of excellent and detailed papers, the US Energy Information Administration suggests the number could be a little higher but also cautions that the amount of condensate available may not be exportable because the market is saturated. That number of barrels a day would add a further dampener to the world price and might force producers in the US to shut in some more tight oil. It is not enough to change the game. Read more

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Iranians protest against Saudi Arabia after the hajj stampede  © Getty Images

Oil prices are now 50 per cent lower than they were a year ago, and less than 40 per cent of their peak in 2012. Worldwide, there is a continuing surplus of supply over demand of around 2.5m to 3m barrels a day. This is despite the loss of exports from Libya and two bloody wars – the first against the Islamic State of Iraq and the Levant (Isis) in Syria and Iraq, the another against the Houthi rebels in Yemen. Those two wars, which do not directly affect any significant oil producing areas, are proxy conflicts for the rivalry between Saudi Arabia and Iran. Now, however, there is a growing risk of open war between Riyadh and Tehran. Oil facilities and exports would inevitably be primary targets and in those circumstances a price spike would be unavoidable. The question is whether such an escalation can be prevented.

Relations between the Kingdom of Saudi Arabia and the Islamic Republic of Iran have never been close. The conflict is partly religious, partly economic and territorial. Both want to be the clear regional leader. In recent months relations have deteriorated. The latest trigger is the death of 767 Islamic pilgrims at the annual hajj in Mecca. The dead included an estimated 169 Iranians. Since the tragedy – caused by a stampede at a bottleneck as about 2m took part in the journey – Iran’s leaders have used the event as a stick to beat the Saudi authorities in general and the royal family in Riyadh in particular. The failure of the Saudis to return the dead Iranians to their own country has provoked an unspecific commitment of “retaliation” from Iran’s supreme leader Ayatollah Khamenei.

The heightened language indicates the tension that pervades the region. The situation is comparable to Europe in the months before the first world war, and equally dangerous. Read more

Protesters Take To Kayaks To Demonstrate Against Shell's Plans To Drill In Arctic

Protesters approach Shell's Polar Pioneer oil drilling rig in May  © Getty Images

Shell’s decision to abandon exploration in the Arctic is an acknowledgment of reality, although that makes it no more comfortable for those involved. Some $7bn (more, according to some estimates) has been lost in its Chukchi Sea campaign — the unsuccessful Burger J well must be the most expensive ever drilled, anywhere in the world. But, financially, Shell can afford it, and many in the oil company will be relieved that the issue is out of the way.

The exploration effort was a PR disaster for a company that prides itself on its environmental record. The prospect of success, followed by years of conflict over the next steps — the development of permanent facilities for actual production — worried some senior executives more than the prospect of failure. The possibility of facing up to a new US president in the person of Hillary Clinton who is on record as opposing Arctic drilling was hardly welcome for a company that believes itself distinct from companies such as ExxonMobil that take a more challenging line on climate change and other issues. These reputational issues were no doubt very important elements in the decision to pull out. Read more

IRAQ-OIL

Oil sprays from a well at Tuba oil field in Iraq  © Getty Images

Oil is now clearly a cyclical commodity that is in a period of over-supply. According to recent commentaries from the International Energy Agency, the excess of production over consumption was as much as 3m barrels a day in the second quarter of this year, which is why prices have fallen. The question for producers, consumers and investors is: how long will it be before the cycle turns back up?

The initial caveat, of course, is that the “normal” oil market could be overturned by political decisions at any time. The Saudis, instead of greedily trying to maximise their market share and imposing huge losses on others, could decide that the stability of the region, and of their own kingdom, would be better served by cutting production and settling for a new equilibrium. There is a chance of that, as I wrote a couple of weeks ago, and the Saudis are under huge pressure from other Opec members but there is a mood of rigid arrogance in Riyadh which suggests that the necessary climb down will not come easily. What follows assumes that King Salman bin Abdulaziz al-Saud and his son the deputy crown prince stick to their current policy.

What then drives the cycle ? Read more

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For investors who thought the situation in the oil sector could not get worse, the last few weeks have come as a bad surprise. In the US, West Texas Intermediate prices have slipped below $40 a barrel and on Monday Brent crude fell below $44. There is no obvious sign yet that the bottom of the cycle has been reached and the latest negative data from China adds further downward pressure. The next casualty of the falling price will be corporate dividends.

Much attention has been paid to the implications of lower oil prices on countries such as Russia, Venezuela and Nigeria which depend for the bulk of their national income on oil. For them, the economic and political implications are serious. As we saw at the end of the 1980s, not just in the former Soviet Union but also in Opec states such as Algeria, a heavy fall in prices undermines the social contract between governing elites and the wider population. Both those countries look vulnerable now, as do a range of others including Angola, Brazil and Nigeria. In all those cases the impact of a price fall compounds existing problems. It is hard to avoid the conclusion that one or more of these nations will see a regime change before the end of the year. Read more

Deputy Crown Prince Mohammed bin Salman Of Saudi Arabia Visits Jordan

Deputy Crown Prince Mohammed bin Salman visiting Jordan this month  © Getty Images

With the latest analysis from the International Energy Agency showing that oil production capacity continues to rise despite the sharp fall in prices, is Saudi Arabia ready to admit that its strategy of over-production designed to force other producers out of the market has failed?

Over the last year, Saudi Arabia has been pursuing what Frank Gardner, the BBC’s security correspondent, described last week as a policy of flexing its muscles – both in the region and in the oil market. The policy is obviously failing. The question now is whether the kingdom will keep going, doubling down on its current approach, or will step back and change course. The second option would involve a significant loss of face for the new king and his favourite son. The costs of simply ploughing on, however, could be much worse. The outcome will shape the future of the region and of the international oil market. Read more

Last week’s Opec meeting in Vienna confirmed that power has drifted away from the cartel that shaped the oil market for so long. The organisation was unable, as some wanted, to cut production which across Opec is running at about 1.4m barrels a day in excess of the official target. Equally, it was unable to increase production, as others favoured, in order to drive US producers of so-called “tight oil” – that is oil from shale rocks extracted through fracking – out of the market. The conclusion of the meeting was to do nothing. This means that prices will continue to be set by supply and demand. Over the last few weeks prices which had sunk in the spring appeared to be stabilising at around $ 65 a barrel for Brent with WTI five or 6 dollars lower. But such prices were not secure and now, short of a very dramatic development such as an attack by Islamic State of Iraq and the Levant on Saudi Arabia, all the odds are that prices will now fall back again.

Brent Crude Oil Future twelve month chart Read more

Downturn In Oil Prices Rattles Texas Oil Economy

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Almost all the major oil and gas companies I know are undertaking substantial reviews of their policies on climate change. That is true in Europe and in the US. Why now, and what will be the outcome ?

First, it is important to stress that the rethinking is not being driven by the recent attacks on the companies. Describing Shell and its chief executive Ben van Beurden as “narcissistic, paranoid and psychopathic” is just childish and reduces what should be a serious debate to playground abuse. The reviews began before the latest media campaigns and are driven by corporate strategic concerns. Read more

 

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The provisional agreement to control Iran’s nuclear ambitions led to another fall in oil prices on Friday as the market anticipated the lifting of sanctions and the resumption of full scale Iranian exports. The fall is now overdone and for a series of reasons we are likely to see prices rise — modestly — before the summer.

First, the Iranian agreement is provisional and depends on negotiation of crucial details before the next deadline in June. A number of concerned parties — from the Revolutionary Guards in Tehran, who do not want to see the lucrative business interests they have built on the back of sanctions eliminated, to the Israeli government in Jerusalem, which does not believe that any promises from Iran can be trusted —have no interest in seeing the deal completed. Read more

Wind turbines in Peitz, Germany.

Wind turbines in Peitz, Germany © Sean Gallup/Getty Images

Forget Opec. If cartels can’t control output, they can’t control prices and in due course they fall apart, usually with a great deal of ill will in the process. The evidence of the last six months is that Opec can’t control the market — ask yourself how many Opec members want to see a price of $60 a barrel for their oil. Some in Saudi Arabia think a low price can squeeze out competing suppliers, but that feels like a justification after the fact of a fall which they can’t control. The question now is how the process of adjustment to the new price level will work. Read more

  © Samuel Kubani/AFP/Getty Images

There were two contenders for this year’s award. The most obvious, and certainly the man who has won the most coverage in this (and every other) publication, is Vladimir Putin. Mr Putin has certainly been highly visible, but he has actually changed very little in the energy market. Russian gas still flows to Europe and to Ukraine, helped by western payments of outstanding debts. Europe may be rethinking its energy mix and opening new and more diverse sources of supply, but any change will be very gradual. Russia will trade more with China and India, but that was coming anyway and is a natural and logical balancing of supply and demand. Read more

As Martin Wolf has noted in the Financial Times, world oil prices have fallen 38 per cent since the end of June. A Martian listening to George Osborne’s Autumn Statement would have no idea of this. For consumers lower oil prices can have positive effects but for mature producing provinces they are very damaging and could be fatal.

Mr Osborne proposed a cut in the supplementary charge on oil company profits by 2 percentage points from 32 per cent to 30 per cent. There is to be a “cluster” area allowance to help the development of small fields which sit next to each other. The ringfence expenditure supplement is to extended from six years to 10. Wow! That will really keep the investment flowing. Read more