American Shale Oil In High Demand

The narrative a while back was that the world would face a shortage of heavy crude because sanctions on Iran and Venezuela had reduced production and exports. Some also implied that shale oil would fill up U.S. storage because American refiners were designed to process the heavy, high sulfur crudes from Venezuela, Saudi Arabia, and the like.

But the light, sweet crude is in high demand for export, and that appetite is likely to continue to grow with the implementation of IMO 2020 around the corner, going into effect January 1st. Freight rates from the U.S. Gulf to Europe have surged to record highs.

Equinor ASA and Unipec, the trading arm of China's top refiner Sinopec, have provisionally chartered Aframax tankers for $60,700 per day, an increase of almost 30 percent in a week, a new record high, according to shipbroker Poten & Partners. Aframax tankers are the “workhorse” of the U.S.-Europe oil trade, which has risen more than 60 percent in 2019 compared to 2018.

The EPIC pipeline began service in August. It has the capacity to deliver 400,000 b/d from the Permian Basin to terminals on the Gulf Coast. The new Cactus II pipeline system also started shipping crude oil in August. It has the capacity to deliver 670,000 b/d of crude oil from the Permian.

And the Gray Oak pipeline began service in November and will be capable of delivering 900,000 b/d at capacity. This new takeaway capacity will effectively reduce the production breakeven costs of substantial Permian crude oil because the pipeline charges are significantly lower than trucking costs.

This should provide stimulus to shale oil production growth, which had slowed due to takeaway pipeline capacity constraints.

Exports Rising
U.S. crude oil exports averaged 3.412 million barrels per day for the weeks ending December 13, 2019. Crude oil exports were 33 percent higher than the same weeks last year. But in the year-to-date, exports are over 50 percent higher.

Exports of crude oil and petroleum products have surged to almost 9 million barrels per day. This makes the United States the largest petroleum exporting country in the world.

Net oil imports have recently dropped below zero, making the U.S. a net oil exporter for the first time in modern history. As a result, the U.S. economy is no longer vulnerable overall to a spike in oil prices, though such a development would hurt consumers while helping domestic oil producers.

The U.S. balance of payments and trade would not be adversely impacted. This is a positive tailwind for the value of the U.S. dollar.

It also has political and defense spending implications. For example, following the attacks on Saudi Arabia in September, President Trump did not put the U.S. military at risk to defend KSA. He also did not counter-attack Iran on behalf of Saudi Arabia. The Crown Prince of Saudi Arabia reportedly began talks with Iran to defuse the situation, something the Kingdom did not have to try when the U.S. felt obligated to protect its oil supply for economic reasons.

Conclusions
The U.S. shale revolution is being re-booted by the opening up of new pipes in the second half of 2019. Given strong foreign demand and lower effective breakeven costs, a new surge may be in the works. Market observers who saw growth slowing may be in for a wake-up call over the coming six months when the new economic conditions take hold.

Check back to see my next post!

Best,
Robert Boslego
INO.com Contributor - Energies

This Giant Welfare State Is Running Out of Time

By Justin Spittler

The Saudis are begging Trump to stop pumping so much oil. Saudi Arabia made the plea earlier this month in its monthly oil report. The report said “the collective efforts of all oil producers” would be needed to restore order to the global oil market. It added that this should be "not only for the benefit of the individual countries, but also for the general prosperity of the world economy."

It’s a bizarre request, to say the least. You’re probably even wondering why they would do such a thing. As I'll show you in today's essay, it's a clear act of desperation. One that tells me the country is doomed beyond repair. I’ll get to that in a minute. But first, let me tell you a few things about Saudi Arabia.

It’s the world’s second largest oil producing country after the United States.…
It’s also the largest producer in the Organization of the Petroleum Exporting Countries (OPEC), a cartel of 13 oil producing countries. Like other OPEC countries, Saudi Arabia lives and dies by oil. The commodity makes up 87% of the country’s revenues. This was a great thing when the price of oil was high. Saudi Arabia was basically printing money.

But that hasn’t been the case for years. You see, the price of oil peaked back in June 2014 at over $105 a barrel. It went on to plunge 75% before bottoming in February 2016. Today, it trades under $50.

Low oil prices are wreaking havoc on Saudi Arabia’s finances.…
But not for the reason you might think. You see, Saudi Arabia is the world’s lowest-cost oil producer. Its oil companies can turn a profit at as low as $10 per barrel. That’s one fifth of what oil trades for today.

So what’s the problem? The problem is that Saudi Arabia is one giant welfare state.

Nick Giambruno, editor of Crisis Investing, explains:

Saudi Arabia has a very simple social contract. The royal family gives Saudi citizens cradle-to-grave welfare without taxation. The Saudi government spends a fortune on these welfare programs, which effectively keep its citizens politically sedated. In exchange, the average Saudi citizen forfeits any political power he would otherwise have.

Not only that, about 70% of Saudi nationals work for the government. These “public servants” earn 1.7 times more than their counterparts in the private sector.

In short, Saudi Arabia uses oil money to keep its citizens in line.…
But this scheme isn’t cheap. According to the International Monetary Fund (IMF), Saudi Arabia needs oil to trade north of $86 a barrel to balance its budget. That’s nearly double the current oil price. This is creating big problems for the Saudi kingdom. In 2015, the Saudis posted a record $98 billion deficit. That was equal to about 15% of the country’s annual economic output. Last year, it ran another $79 billion deficit.

Saudi Arabia is now desperately trying to restore its finances.…
It’s slashed its government subsidies. It’s borrowed billions of dollars. It’s even trying to reinvent its oil addicted economy. In fact, it plans to increase non oil revenues sixfold by 2030. It’s also trying to spin off part of the national oil company, Saudi Aramco, on the stock market. And it wants to create a $1.9 trillion public fund to invest at home and abroad.

The Saudis have even tried to rig the global oil market.…
It’s why they met with non OPEC members like Russia at the December meeting. At this meeting, OPEC and non OPEC members agreed to cut production. It was the first deal like this since 2001. OPEC hoped this historic pact would lift oil prices. There’s just one big problem.

U.S. oil producers aren’t playing ball.…
Instead of cutting output, they’ve rapidly increased production. You can see this in the chart below. U.S. oil production has jumped 10% since last July.

U.S. oil production is now approaching the record level set back in 2015. There’s good reason to think production will blow past that high, too. To understand why, look at the chart below. It shows the total number of U.S. rigs actively looking for oil. You can see that the total number of rigs plummeted in November 2015 before bottoming a year ago.

The total U.S. oil rig count has now risen 28 weeks in a row. There are now 396, or 125%, more rigs looking for oil in the United States than there were a year ago.

If this continues, the price of oil will slide lower.…
Saudi Arabia isn’t used to feeling this helpless. After all, the Saudis had a firm grip on the global oil market for decades. If it wanted, it could raise the price of oil by slashing production. It also had the ability to drive the oil price lower by flooding the market with excess oil. Those days are over. The United States now rules the global oil market, and it’s showing no mercy.

Unless this changes soon, Saudi Arabia is doomed.

After all, the country is already in a race against time. According to the IMF, Saudi Arabia is on pace to burn through all of its cash within five years. In other words, we’re witnessing a seismic power shift in the global energy markets, one that could cause oil prices to plunge even lower. That would be bad news for many oil companies in the short term. But it should also lead to one of the best buying opportunities we’ve seen in years. I’ll be sure to let you know when it’s time to pull the trigger. Until then, stay on the sidelines. This one could get nasty.

P.S. Crisis Investing editor Nick Giambruno predicted that Saudi Arabia’s oil addicted economy would implode back in March 2016. Not only that, he told his readers how to profit from this crisis by recommending a world class U.S. oil company.

Nick’s readers are up more than 20% on this investment. But it should head much higher once the U.S. puts Saudi Arabia out of its misery. You can learn all about Nick’s top oil stock by signing up for Crisis Investing. Click here to begin your risk free trial.

The article This Giant Welfare State Is Running Out of Time was originally published at caseyresearch.com.

Crude Oil Seasonality, Inventory Rebalancing and Production Cuts

The historical stock build from December 2014 through July 2016, and subsequent decline from August through December has led some to conclude that global stocks had started to rebalance. Instead, the normal seasonality in stocks had been masked by the high overproduction of OPEC, but then normal seasonality kicked in.

Global OECD inventories from past years demonstrate the normal seasonal patterns, with some variability. As shown in this graph, stocks normal build early in the year and peak around August. Stocks normally drop from September through December. But in 2015, the oversupply was so excessive that stock just kept building through the year. They finally peaked in July 2016, then dropped off due to normal seasonal demand. This normal pattern led to a false conclusion that the rebalancing of stocks had begun.

But according to Energy Department data, OECD stocks in March 2017 are 13 million barrels higher than December. And it projects that stocks are likely to peak in May this year, earlier than normal, but to end 2017 with stocks just 14 million lower than a year ago. This is based on the Energy Information Administration ((EIA)) assumption that OPEC does not hold production to its March level. Furthermore, the EIA projects global stocks to set new record highs in 2018, after the OPEC non OPEC cuts presumably end.

Effect of Production Cuts

Some argue that the 285 million barrel excess above the 5 year average as of the end of December should disappear in five to six months by dividing 285 million by 1.8 million barrels per day, the agreed upon size of the daily cut. But that math first assumes that supply was in balance with demand, makes no allowance for rising supplies, such as in the U.S., and it does not take into account the seasonality.

According to OPEC’s figures, global OECD stocks are likely to build both in the first and second quarters, and then decline in the second half of the year, assuming OPEC production remains at the March level.

There was one development last week, if true, did shift the inventory trend lower. The EIA revised its December estimate of OECD stocks down 105 million barrels, a major revision. That reduced the size of the glut to 201 million above its five year average.

Conclusions

The market dropped sharply in early March as a result of the continued rise in stocks. The market has falsely expected to see inventories to soon decline as a result of the production cuts. But seasonal factors need to be taken into account. We should see global stocks decline in the second half of 2017, assuming OPEC extends its cuts. And the decline may start earlier than normal because U.S. refinery utilization is ramping up faster and earlier than usual, thereby requiring more crude oil.

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Best,
Robert Boslego
INO.com Contributor - Energies

Will Your Favorite Oil Company Go Bankrupt?

By Justin Spittler

Oil companies are getting desperate. If you’ve been reading the Dispatch, you know oil is in a horrible bear market. The price of oil has crashed 69% since June 2014. Last month, oil hit its lowest price since 2003.

The world has too much oil..…
For years, many folks thought the world was running out of oil. The price of oil soared more than 1,200% from 1998 to 2008. The “Peak Oil” crowd saw this as proof that oil production was in terminal decline. They were very wrong. “Peak Oil” believers failed to understand that high prices would create huge incentives to develop new ways to produce oil. Oil companies developed new methods like “fracking” to unlock billions of barrels of oil that were once impossible to reach. U.S. oil production has nearly doubled over the last decade. Last year, it hit its highest level since the 1970s. World oil production levels are also near record highs.

The world isn’t consuming oil fast enough..…
The global economy produces about 1.7 million more barrels a day than it needs. With U.S. oil reserves at their highest level since the Great Depression, companies are running out of places to store the extra oil. To deal with the surplus, companies have started storing oil on tankers floating at sea and in empty railcars. Other companies are selling barrels at huge discounts just to get rid of them.

Low oil prices have hammered major oil companies..…
The world’s five biggest oil companies—Exxon (XOM), Chevron (CVX), Total S.A. (TOT), BP (BP), and Royal Dutch Shell (RDS.A)—have fallen an average 34% since June 2014. Oil services companies, which supply “picks and shovels” to the oil industry, have crashed, too. Schlumberger (SLB), the world’s largest oil services company, has plunged 36% since 2014. Halliburton (HAL), the world’s second biggest, has plunged 53%.

Oil companies have cut spending to the bone..…
Companies have walked away from billion dollar projects. They’ve sold pieces of their businesses. As Dispatch readers know, some have even cut their prized dividends. The industry has laid off more than 250,000 workers since oil prices peaked. Last year, oil and gas companies cut spending by 22%. Reuters reports that the industry could cut spending another 12% this year.

On Thursday, Halliburton laid off 5,000 workers..…
It’s now laid off 29,000 workers, more than a quarter of its workforce, since 2014. Like most companies in the oil business, Halliburton is struggling. Its sales have fallen four straight quarters. Last year, the company lost $671 million, its first annual loss since 2004. The latest round of layoffs suggests Halliburton doesn’t expect business to pick up anytime soon.

The oil market is cyclical..…
It goes through big booms and busts. Right now, it’s going through its worst bust in decades. Eventually, the oil market will boom again. After all, the world needs oil. Companies that survive this bust should deliver huge gains during the next boom. If you can buy great oil companies near the bottom, you could set yourself up for huge gains when the next boom comes. So…is this the bottom?

According to The Wall Street Journal, one third of U.S. oil producers could go bankrupt this year. To be profitable, many companies would need the price of oil to get back up $50. With oil at $32.84 a barrel on Friday, those companies are in trouble. We expect a wave of bankruptcies to rip across the oil industry. This would likely trigger another leg down in oil stocks. So we’re not ready to buy oil stocks yet.

Instead, we recommend “stalking” your favorite oil companies..…
Nick Giambruno, editor of Crisis Investing, just added a world-class oil company to his watch list.
If you don’t know Nick, his specialty is buying beaten-down assets during a crisis. Most investors run away from crisis. But if you can keep your head and buy when everyone else is panicking, you can often pick up a dollar’s worth of assets for a dime or less.

Shale oil stocks are in crisis today. Even the largest shale companies have been obliterated. Major shale oil producer Apache (APA) has plunged 51% since June 2014. Anadarko (APC), another larger shale company, has plummeted 65%. Shale oil is more expensive to extract than conventional oil. And at today’s prices, most shale oil projects can’t make money.

Many shale companies borrowed too much money during oil’s boom times. Now that oil is in a bust, they can’t generate the cash flow to pay back their debts. Last month, investment bank Oppenheimer & Co. Inc. warned that half of all U.S. shale oil producers could go bankrupt before oil prices recover. To survive, these companies would need the price of oil to more than double.

Nick has found a shale company unaffected by these problems. It’s a world-class shale oil company that has virtually no risk of going bankrupt. However, its stock has gotten extremely cheap along with all other shale oil stocks. Nick says this company has “trophy assets in the major U.S. shale basins. It has a solid balance sheet.

And, unlike many of its peers, it didn’t over leverage itself during the last boom.” The company also has the industry’s highest profit margins. Nick plans to buy this company at once in a generation prices. He will tell Crisis Investing readers when it’s time to pull the trigger.

In the meantime, Nick is investing in Cuba..…
As you may know, the U.S. has had a trade embargo against Cuba since 1962. The embargo bans all trade, making it illegal for Americans to invest in Cuba. But that could soon change. About a year ago, Cuba and the U.S. announced they were working to repair diplomatic and economic relations. In August, the two countries reopened their embassies in each other’s capitals. President Obama is going to Cuba next month. He will be the first sitting president to visit Cuba since Calvin Coolidge in 1928.

Nick thinks the embargo could soon “become a page in the history books”..…
The end of the embargo will create the “potential for enormous profits,” as Nick explained in Crisis Investing.

When the embargo goes away, American tourism to Cuba will explode. The International Monetary Fund estimates there could be up to 10 million visits from Americans every year as soon as the embargo comes down.

Today, it’s still illegal to invest in Cuba. But Nick has a “back door” way to profit from the opening up of Cuba’s economy. Nick’s investment in Cuba legally trades on the NASDAQ stock exchange. It should deliver huge gains when the embargo is lifted…which may happen very soon. You can get in on Nick’s Cuba investment by signing up for Crisis Investing. You’ll also learn about the world class shale oil company on Nick’s watch list. Click here to begin your risk-free trial.

Chart of the Day

Shale oil stocks have been decimated. Today’s chart shows the performance of the Market Vectors Unconventional Oil & Gas ETF (FRAK). This fund tracks 50 companies involved in the shale oil and gas industries. FRAK has crashed 65% since June 2014. Last month, it hit an all-time low. As we mentioned, most shale oil companies simply can’t make money right now.

The article Will Your Favorite Oil Company Go Bankrupt? was originally published at caseyresearch.com.

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How Saudi Arabia and OPEC are Manipulating Oil Prices

About eighteen months ago the international price of WTI Crude Oil, at the close of June 2014, was $105.93 per barrel. Flash forward to today; the price of WTI Crude Oil was just holding above $38.00 per barrel, a drastic fall of more than 65% since June 2014. I will point out several reasons behind this sharp, sudden, and what now seems to be prolonged slump.

The Big Push

Despite a combination of factors triggering the fall in prices, the biggest push came from the U.S. Shale producers. From 2010 to 2014, oil production in the U.S. increased from 5,482,000 bpd to 8,663,000 (a 58% increase), making the U.S. the third largest oil-producing country in the world. The next big push came from Iraq whose production increased from 2,358,000 bpd in 2010 to 3,111,000 bpd in 2014 (a 32% increase), mostly resulting from the revival of its post war oil industry.

The country-wide financial crunch, and the need for the government to increasingly export more to pay foreign companies for their production contracts and continue the fight against militants in the country took production levels to the full of its current capacity. In addition; global demand remained flat, growing at just 1.1% and even declining for some regions during 2014. Demand for oil in the U.S. grew just 0.6% against production growth of 16% during 2014.

Europe registered extremely slow growth in demand, and Asia was plagued by a slowdown in China which registered the lowest growth in its demand for oil in the last five years. Consequently, a global surplus was created courtesy of excess supply and lack of demand, with the U.S. and Iraq contributing to it the most.

The Response

In response to the falling prices, OPEC members met in the November of 2014, in Vienna, to discuss the strategy forward. Advocated by Saudi Arabia, the most influential member of the cartel, along with support from other GCC countries in the OPEC, the cartel reluctantly agreed to maintain its current production levels. This sent WTI Crude Oil and Brent Oil prices below $70, much to the annoyance of Russia (non-OPEC), Nigeria and Venezuela, who desperately needed oil close to $90 to meet their then economic goals.

For Saudi Arabia, the strategy was to leverage their low cost of production advantage in the market and send prices falling beyond such levels so that high cost competitors (U.S. Shale producers are the highest cost producers in the market) are driven out and the market defines a higher equilibrium price from the resulting correction. The GCC region, with a combined $2.5 trillion in exchange reserves, braced itself for lower prices, even to the levels of $20per barrel.

The Knockout Punch

By the end of September 2014, according to data from Baker Hughes, U.S. Shale rigs registered their highest number in as many years at 1,931. However, they also registered their very first decline to 1,917 at the end of November 2014, following OPEC’s first meeting after price falls and its decision to maintain production levels. By June 2015, in time for the next OPEC meeting, U.S. Shale rigs had already declined to just 875 by the end of May; a 54% decline.

The Saudi Arabia strategy was spot on; a classic real-life example of predatory price tactics being used by a market leader, showing its dominant power in the form of deep foreign-exchange pockets and the low costs of production. Furthermore, on the week ending on the date of the most recent OPEC meeting held on December 4th, 2015, the U.S. rig count was down even more to only 737; a 62% decline. Despite increased pressure from the likes of Venezuela, the GCC lobby was able to ensure that production levels were maintained for the foreseeable future.

Now What?

Moving forward; the U.S. production will decline by 600,000 bpd, according to a forecast by the International Energy Agency. Furthermore, news from Iraq is that its production will also decline in 2016 as the battle with militants gets more expensive and foreign companies like British Petroleum have already cut operational budgets for next year, hinting production slowdowns. A few companies in the Kurdish region have even shut down all production, owing to outstanding dues on their contracts with the government.

Hence, for the coming year, global oil supply is very much likely to be curtailed. However, Iran’s recent disclosure of ambitions to double its output once sanctions are lifted next year, and call for $30 billion in investment in its oil and gas industry, is very much likely to spoil any case for a significant price rebound.

The same also led Saudi Arabia and its GCC partners to turn down any requests from other less-economically strong members of OPEC to cut production, in their December 2015, meeting. Under the current scenarios members like Venezuela, Algeria and Nigeria, given their dependence on oil revenues to run their economies, cannot afford to cut their own production but, as members of the cartel, can plea to cut its production share to make room for price improvements, which they can benefit from i.e. forego its market share.

It’s Not Over Until I’ve Won

With news coming from Iran, and the successful delivery of a knockout punch to a six-year shale boom in the U.S., Saudi Arabia feared it would lose share to Iran if it cut its own production. Oil prices will be influenced increasingly by the political scuffles between Saudi Arabia and its allies and Iran. The deadlock and increased uncertainty over Saudi Arabia and Iran’s ties have sent prices plunging further. The Global Hedge Fund industry is increasing its short position for the short-term, which stood at 154 million barrels on November 17th, 2015, when prices hit $40 per barrel; all of this indicating a prolonged bear market for oil.

One important factor that needs to be discussed is the $1+ trillions of junk bonds holding up the shale and other marginal producers. As you know, that has been teetering and looked like a crash not long ago. The pressure is still there. As the shale becomes more impaired, the probability of a high yield market crash looks very high. If that market crashes, what happens to oil?  Wouldn’t there be feedback effects between the oil and the crashing junk market, with a final sudden shutdown of marginal production? Could this be the catalyst for a quick reversal of oil price?

The strategic interests, primarily of the U.S. and Saudi Arabia; the Saudis have strategically decided to go all in to maintain their market share by maximizing oil production, even though the effect on prices is to drive them down even further. In the near term, they have substantial reserves to cover any budget shortfalls due to low prices. More importantly, in the intermediate term, they want to force marginal producers out of business and damage Iran’s hopes of reaping a windfall due to the lifting of sanctions. This is something they have in common with the strategic interests of the U.S. which also include damaging the capabilities of Russia and ISIS. It’s certainly complicated sorting out the projected knock-on effects, but no doubt they are there and very important.    

I’ll Show You How Great I Am

Moreover, despite a more than 50% decline in its oil revenues, the International Monetary Fund has maintained Saudi Arabia’s economy to grow at 3.5% for 2015, buoyed by increasing government spending and oil production. According to data by Deutsche Bank and IMF; in order to balance its fiscal books, Saudi Arabia needs an oil price of$105. But the petroleum sector only accounts for 45% of its GDP, and as of June 2015, according to the Saudi Arabian Monetary Agency, the country had combined foreign reserves of $650 billion. The only challenge for Saudi Arabia is to introduce slight taxes to balance its fiscal books. As for the balance of payments deficit; the country has asserted its will to depend on its reserves for the foreseeable future.

Conclusion

The above are some of the advantages which only Saudi Arabia and a couple of other GCC members in the OPEC enjoy, which will help them sustain their strategy even beyond 2016 if required. But I believe it won’t take that long. International pressure from other OPEC members, and even the global oil corporations’ lobby will push leaders on both sides to negotiate a deal to streamline prices.

With the U.S. players more or less out by the end of 2016, the OPEC will be in more control of price fluctuations and, therefore, in light of any deal between Iran and Saudi Arabia (both OPEC members) and even Russia (non-OPEC), will alter global supply for prices to rebound, thus controlling prices again.

What we see now in oil price manipulation is just the mid-way point. Lots of opportunity in oil and oil related companies will slowly start to present themselves over the next year which I will share my trades and long term investment pays with subscribers of my newsletter at The Gold & Oil Guy.com

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Chris Vermeulen

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The “Bloodbath” in Canada Is Far From Over

By Justin Spittler

The oil price crash continues to claim victims…and many of them are in Canada.The price of oil hovered around $100 for most of last summer. Today, it’s trading for less than $45. Weak oil prices have pummeled huge oil companies. The SPDR S&P Oil & Gas Exploration & Production ETF (XOP), which tracks the performance of major U.S. oil producers, has declined 36% over the past year. The Market Vectors Oil Services ETF (OIH), which tracks U.S. oil services companies, has declined 30% since last November. Weak oil prices have even pushed entire countries to the brink. Saudi Arabia, which produces more oil than any country in the world, is on track to post its first budget deficit since 2009 this year. If oil prices stay low, the country could burn through its massive $650 million pile of foreign reserves within five years.

Oil’s collapse is also creating big problems for Canada’s economy.....

Canada is the world’s sixth largest oil producer. Oil makes up 25% of its exports. Last month, The Conference Board of Canada said it expects sales for Canada’s energy sector to fall 22% this year. It also expects the industry to record a net loss of about C$2.1 billion ($1.6 billion) in 2015. That’s a drastic change from last year, when the industry booked a C$6 billion ($4.5 billion) profit.

Major oil firms are slashing spending to cope with low prices. Last month, oil giant Royal Dutch Shell plc (RDS.A) said it would stop construction on an 80,000 barrels per day (bpd) project in western Canada. The company had already abandoned another 200,000 bpd project in northern Canada earlier this year. The Canadian Association of Petroleum Producers estimates that Canadian oil and gas companies have laid off 36,000 workers since last summer. Most of these layoffs happened in the province of Alberta.

For the past decade, Alberta was Canada’s fastest growing province.....

Its economy exploded, thanks to the booming market for Canadian tar sands. Tar sand is a gooey sand and oil mixture that melts down with heat from burning natural gas. More than half of Canada’s oil production comes from tar sands. In Alberta, they account for 75% of oil production.

Tar sand is generally more expensive to produce than conventional crude oil. Canadian tar sand projects made sense when oil hovered around $100. But many of these projects can’t make money when oil trades for $45/barrel. Last year, Scotiabank (BNS) said the average breakeven point for new Canadian oil sand projects was around $65/barrel. This is why giant oil companies are walking away from projects they’ve spent years and billions of dollars developing.

All these cancelled oil projects are making Alberta’s economy unravel.....

Alberta lost 63,500 jobs from the start of year through August. It hasn’t lost that many jobs during the first eight months of the year since the Great Recession. The decline in oil production is also draining government resources. Last month, Reuters reported that Alberta was on track to post a $4.6 billion budget deficit this year. Economists say it could be another five years before Alberta runs a budget surplus. The crisis isn’t confined to the oil patches either.

A real estate crisis is unfolding in Calgary.....

Calgary is home to 1.2 million people. It’s the largest city in Alberta and the third largest in Canada. On Tuesday, Bloomberg Business reported that Calgary’s property market is starting to crack:

Vacancy is already at a five-year high in Calgary and rents are the lowest since 2006 after thousands of office jobs were cut. In downtown Calgary, the vacancy rate jumped to 14 percent in the third quarter, the highest since 2010 and compared with 5 percent for downtown Toronto, according to CBRE Group Inc. .... That doesn’t include as much as 2 million square feet of so-called "shadow vacancy" or space leased but sitting empty, which would push vacancy to 16 percent, the most since the mid-1980s.

Demand for office space is falling because of massive layoffs in the oil industry. That’s because oil companies didn’t just lay off roughnecks. They also laid off oil traders and middle managers, which means they need a lot less office space. According to Bloomberg Business, a principal at one Calgary real estate office called the situation “a bloodbath” and said “we’re at the highest point of fear and uncertainty now.”

Casey readers know the time to buy is when there’s blood in the streets.....

But it looks like Calgary’s property crisis is just getting started. Bloomberg Business reports that the city has five new office towers in the works. These projects will add about 3.8 million square feet to Calgary’s office market over the next three years. More office space will only put more pressure on rents and occupancy rates. Real estate developers likely planned these projects because they thought Canada’s oil boom would last. It’s that same thinking that made oil companies invest billions of dollars in projects that can’t make money when oil trades for less than $100/barrel.

Doug Casey saw this coming.....

In September, Doug went to Alberta to assess the damage first-hand. E.B. Tucker, editor of The Casey Report, joined Doug on the trip. Doug and E.B. spoke with the locals. They even tried to buy a Ferrari. They shared their experience in the October issue of The Casey Report.

E.B. went on record saying Canada was in for “a major wakeup call.” He still thinks that’s the case. In fact, he thinks the situation is going to get a lot worse.

When we were in Alberta, we heard over and over again "It'll come right back...it always does." It's not coming back. I expect the situation to get worse. And I see the Canadian dollar going much lower.

When that happens, E.B. thinks Canada’s central bank might do something it’s never done before:

Vacancy rates are rising in Canada’s heartland cities. Jobs in Alberta are disappearing. Unemployment is climbing. And there’s still a global oversupply in oil. None of this bodes well for Canada’s economy. Canada’s economy is in a midair stall. The locals certainly didn’t grasp this when we visited Alberta last month. That's usually the case when things are going from bad to a lot worse. If you’re a central banker in Canada looking at the data, there’s only one decision: print.

E.B. says Canada’s central bank will launch its own quantitative easing (QE) program.....

QE is when a central bank creates money and pumps it into the financial system. It’s basically another term for money printing. Since 2008, the Fed has used QE to inject $3.5 trillion into the U.S. financial system. If the Fed’s experience with QE is any indication, money printing wouldn’t help Canada’s “real” economy much. But it would inflate asset prices. That, in turn, would only make Canada’s economy even more fragile. E.B. is confident the situation in Canada will get worse. And he can’t wait to go back to Canada to collect on bets he made during his last visit:

Doug and I made a lot of side bets with business owners during our visit. One of them promised to sell us a Ferrari if things got worse...that's how sure he was that we were wrong. Looks like we'll be headed back to collect on that one.

You can read all about Doug and E.B.’s visit to Alberta by signing up for a risk free trial of The Casey Report. You’ll even discover how to make money off the oil industry, despite the collapse in the price of oil. Click here to learn more.

The article The “Bloodbath” in Canada Is Far From Over was originally published at caseyresearch.com.

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Tomorrow’s Oil from Yesterday’s Wells with Glori Energy’s Michael Pavia

Senior Analyst Phil Flynn discusses resurrecting old oil wells to bring them back to production life using AERO(TM) Technology with Michael Pavia, PhD of Glori Energy (GloriEnergy.com)

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The New Normal for Crude Oil?

By Marin Katusa, Chief Energy Investment Strategist

You may have come across the word “contango” in an oil related news report or article recently and wondered, “What’s contango?”

It isn’t the Chinese version of the tango.

Contango is a condition in a commodity market where the futures price for the commodity is higher than the current spot price. Essentially, the future price of oil is higher than what oil is worth today.

The above forward curve on oil is what contango looks like. There’s more value placed on a barrel of oil tomorrow and in the future than over a barrel today because of the increased value of storage.

I personally believe our resource portfolios are in portfolio contango—but that’s an entirely separate discussion that I’ll get to later. In today’s missive, I want to focus entirely on oil contango.

Crude oil under $50 per barrel may seem to put most of the producers out of business, but many oil and gas exploring and producing (E&P) companies are sheltered from falling prices in the form of hedges.

Often, companies will lock in a price for their future production in form of a futures commodity contract. This provides the company with price stability, as it’s sure to realize the price it locked in at some future date when it must deliver its oil.

But the market will always figure out a way to make money—and here’s one opportunity: the current oil contango leads to plenty of demand for storage of that extra oil production.

With US shale being one of the main culprits of excess crude oil production, storage of crude in US markets have risen above seasonally adjusted highs in the last year. This abundance of stored crude has pushed the current spot price of crude oil toward five year lows, as current demand is just not there to take on more crude production.

When in contango, a guaranteed result is an increase in demand for cheap storage of the commodity, in order to clip the profit between the higher commodity price in the future versus what’s being paid for the commodity at present. This is precisely what’ playing out in oil today.

Contago, Five Years Later

Looking back at the similarities of the 2009 dramatic free fall in oil prices to $35 per barrel, after a five year hiatus, crude has returned to a similar price point, and the futures market has returned to contango (green shows oil in contango).

Floating Storage Is Back in Vogue

Oil traders are now taking advantage of the contango curve through floating storage in the form of waterborne oil tankers.

This is what a big oil tanker looks like:

I’m personally reminded of contango whenever I look out my living room window:

Here’s a photo taken out my living room window—and this is non-busy part of the harbor. At times when I do my runs along the seawall, there have been up to 30 large oil tankers just sitting in the harbor. (On a side note, Olivier and I went for a run in July along the Vancouver seawall, and we counted 26 oil tankers.) All that pricey Vancouver waterfront will have an incredible view of even more oil tankers in the years to come when the pipelines are eventually built. I can only imagine what the major import harbors of China and the US look like… never mind the number of oil tankers sitting in the export nations’ harbors and the Strait of Hormuz. Multiply the above by at least 50 red circles.

As the spread between future delivery of oil and the spot price widened, traders looking to profit from the spread would purchase crude at spot prices and store it on oil tanker ships out at sea. The difference between the spread and the cost to store the crude per barrel is referred to as the arbitrage profit taken by traders. Scale is a very important factor in crude storage at sea: therefore, traders used very large crude carriers (VLCC) and Suezmax ships that hold between 1-2 million barrels of crude oil.

In the late summer of 2014, rates charged for crude tankers began to climb to yearly highs because of the lower price that spurred hoarding of crude oil. This encouraged VLCCs to lock in one year time charter rates close to and above their breakeven costs to operate the ship.

Time charter rates share similarities to the oil futures market, as ships are able to lock in a daily rate for the use of their ships over a fairly long period of time. VLCC spot rates have reached around $51,000 per day; however, these rates tend to be booked for a shorter period of around three months. These higher spot rates tend to reflect the higher cost paid to crew a VLCC currently against locking in crew and operating costs over a longer-term charter that could last a year. Crude oil is often stored on floating VLCCs for periods of six months to a year depending, on the contango spread.

Floating Storage: Economics

Many VLCCs are locking in yearlong time charter rates at or above $30,000-$33,000 per day, as that tends to be the breakeven rate to operate the vessel. If we assume that a VLCCs charge their breakeven charter rate and we include insurance, fuel, and financing costs that would be paid by the charterer, storage on most VLCCs in the 1-2 million barrel ranges are barely economic at best.

However, they’ll soon become profitable across the board once the oil futures and spot price spread widens above $6-$7 per barrel.

The red star depicts the current spread between the six-month futures contract from the futures price in February 2015. Currently companies are losing just under $0.20 per barrel storing crude for delivery in six months. However, once that $6-$7 hurdle spread is achieved, most VLCCs carrying 2 million barrels of crude will be economic to take advantage of the arbitrage in the contango futures curve.

The VLCC and ULCC Market

VLCC= Very Large Crude Carrier
ULCC=Ultra-Large Crude Carrier

VLCCs store 1.25-2 million barrels of oil for each cargo. Globally, there are 634 VLCCs with around 1.2 billion barrels of storage capacity, or over one-third of the US’s total oil production. The VLCC market is fairly fractioned, and the largest fleet of VLCCs by a publicly traded company belongs to Frontline Ltd. with 25 VLCCs. The largest private company VLCC fleet belongs to Tankers International with 37 VLCCs. In early December, Frontline and Tankers International created a joint venture to control around 10% of the VLCC market. Other smaller VLCC fleets belong to DHT with 16 VLCCS, and Navios Maritime with 8 VLCCs.

The lowest time charter breakeven costs of $24,000 per day are associated with the largest VLCC fleet from Frontline Ltd. and Tankers International. This is followed by the smaller fleets that have time charter breakeven costs of around $29,000 per day. Of course, on average the breakeven costs associated with most VLCCs is around $30,000 per day, and current time charter rates are around $33,000.

Investing in companies with VLCC fleets as the contango trade develops can generate great potential for further profits for investors. The focus of these investments would be between the publicly traded companies DHT Holdings, Frontline Ltd., and Navios Maritime.

But one must consider that investing in these companies can be very volatile because of the forward curve’s ability to quickly change. It isn’t for the faint of heart.

However, if current oil prices stay low, there will be an increase in tanker storage and thus a sustained increase in the spot price of VLCCs. However, eventually low prices cure low prices, and the market goes from contango to backwardation. It always does and always will.

Shipping companies have been burdened by unprofitable spot and charter pricing since the financial crisis, and these rates have only recently started to increase.

Warning!

As I sit here on a Saturday morning writing this missive, I want to remind all investors now betting on this play that they’re actually speculating, not investing.

There’s a lot of risk for one to think playing the tankers is a sure bet. I have a pretty large network of professional traders and resource investors, and I do not want to see the retail crowd get caught on the wrong side of the contango situation.

In the past, spot rates for the VLCCs usually decline into February and have dropped to as low as under $20,000 per day. It is entirely possible that if the day rates of VLCCs go back to 2012-2013 levels, operators will lose money.

Conclusion: this speculation on tankers is entirely dependent on the spot price and the forward curve.
The risk of this short term trade is that these companies are heavily levered, and some are just hanging on by a thread. Although this seasonal boost to spot rates has been a positive for VLCCs and other crude carriers, the levered nature of these companies could spell financial disaster or bankruptcy if spot rates return to 2012-2013 levels.

What should be stressed are the similarities to the short-lived gas rally in the winter of 2013-‘14, and the effect these prices have had on North American natural gas companies. A specific event similar to the polar vortex has occurred in the oil market, which has spurred a seasonal increase in the spot price tankers charge to move and store oil.

However, much like the North American natural gas market, the VLCC market is oversupplied; a temporary increase in spot prices that have led to increased transport and storage of oil will not be enough to lift these carriers from choppy waters ahead. Future VLCC supplies are expected to rise, with 20 net VLCCs being built and delivered in 2015 and 33 in 2016. This is much more than the 17 net VLCCs added in 2013 and 9 in 2014.

Another looming and very possible threat to these companies is the same debt threat that affected energy debt markets as global oil prices plummeted. If VLCC and other crude carriers experience a fall in spot prices, these companies’ junk debt could be downgraded to some of the lowest debt grades that border a default rating. This will increase financing costs and in turn increase the operating breakeven costs to operate these crude carrying vessels. The supply factor, high debt, and potentially short-lived seasonally high spot market could all affect the long-term appreciation of these VLCC stock prices. Investing in these companies is very risky over the long run, but a possible trade exists if storage and transport of oil continues to increase for these crude carriers.

Portfolio Contango—An Opportunity Not Seen in Decades

If you talk to resource industry titans—the ones who’ve made hundreds of millions of dollars and been in the sector for 40 years—they’re now saying that they’ve never seen the resource share prices this bad. Brokerage firms focused on the resource sector have not just laid off most of their staffs, but many have shut their doors.

The young talent is the first group to be laid off, and there’s a serious crisis developing in the sector, as many of the smart young guns have left the sector to claim their fortunes in other sectors.
There’s blood in the streets in the resource sector.

Now if you believe that, as I do, to be successful in the resource sector one must be a contrarian to be rich, now is the time to act.

I have invested more money in the junior resource sector in the last six months than I have in the last five years. I believe we’re in contango for resource stocks, meaning that the future price of the best juniors will be worth much more than they are currently.

I have my rules in speculating, and you’ll learn from my experience—and more important, my network of the smartest and most successful resource mentors whom I have shadowed for many years.

So how can we profit from the blood in these markets? Easy.

Take on my “Katusa Challenge.” You’ll get access to every Casey Energy Report newsletter I’ve written in the last decade, and my current recommendations with specific price and timing guidance. There’s no risk to you: if you don’t like the Casey Energy Report or don’t make any money over your first three months, just cancel within that time for a full, prompt refund, no questions asked. Even if you miss the three month cutoff, cancel anytime for a prorated refund on the unused part of your subscription.

As a subscriber, you’ll receive instant access to our current issue, which details how to protect yourself from falling oil prices, plus our current top recommendations in the oil patch. Do your portfolio a favor and have me on your side to increase your chances of success. I can’t make the trade for you, but I can help you help yourself.

I’m making big bets—are you ready to step up and join me?

The article The New Normal for Oil? was originally published at caseyresearch.com

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Make No Mistake, the Oil Slump Is Going to Hurt the US Too

By Marin Katusa, Chief Energy Investment Strategist

If you only paid attention to the mainstream media, you’d be forgiven for thinking that the US is going to get away from the collapse in oil prices scott free. According to popular belief, America is even going to be a net winner from cheaper oil prices, because they will act like a tax cut for US consumers. Or so we are told. In reality, though, many of the jobs the U.S. energy boom has created in the last few years are now at risk, and their loss could drag the economy into a recession.

The view that cheaper oil automatically boosts U.S. GDP is overly simplistic. It assumes that US consumers will spend the money they save at the pump on U.S. made goods rather than imports. And it assumes consumers won’t save some of this windfall rather than spending it. Those are shaky enough. But the story that cheap fuel for our cars is good for us is also based on an even more dangerous assumption: that the price of oil won’t fall far enough to wipe out the US shale sector, or at least seriously impact the volume of US oil production.

The nightmare for the US oil industry is that the only way that the market mechanism can eliminate the global oil glut—without a formal agreement between OPEC, Russia, and other producers to cut production—is if the price of oil falls below the “cash cost” of production, i.e., it reaches the price at which oil companies lose money on every single barrel they produce.

If oil doesn’t sink below the cash cost of production, then we’ll have more of what we’re seeing now. US shale producers, like oil companies the world over, are only going to continue to add to the global oil glut—now running at 2-4 million barrels per day—by keeping their existing wells going full tilt.

True, oil would have to fall even further if it’s going to rebalance the oil market by bankrupting the world’s most marginal producers. But that’s what’s bound to happen if the oversupply continues. And because North American shale producers have relatively high cash costs (in the $30 range), the Saudis could very well succeed in making a big portion of US and Canadian oil production disappear, if they are determined to.

In this scenario, the US is clearly headed for a recession, because the US owes nearly all the jobs that have been created in the last few years to the shale boom. All those related jobs in equipment, manufacturing, and transportation are also at stake. It’s no accident that all new jobs created since June 2009 have been in the five shale states, with Texas home to 40% of them.

Even if oil were to recover to $70, $1 trillion of global oil sector capital expenditure—in fields representing up to 7.5 million bbl/d of production—would be at risk, according to Goldman Sachs. And that doesn’t even include the US shale sector! Unless the price of oil miraculously recovers, tens of billions of dollars worth of oil and gas related capital expenditure in the U.S. is going to dry up next year. While US oil and gas capex only represents about 1% of GDP, it still amounts to 10% of total US capex.

We’re not lost quite yet. Producers can hang on for a while, since there has been a lot of forward hedging at higher prices. But eventually hedges run out—and if the price of oil stays down sufficiently long, then the US is facing a massive amount of capital destruction in the energy industry.

There will be spillover into the financial arena, as well. Energy junk bonds may only account for 15% of the US junk bond market, or $200 billion, but the banks are also exposed to $300 billion in leveraged loans to the energy sector. Some of these lenders are local and regional banks, like Oklahoma based BOK Financial, which has to be nervously eyeing the 19% of its portfolio that’s made up of energy loans.

If oil prices stay at $55 a barrel, a third of companies rated B or CCC may be unable to meet their obligations, according to Deutsche Bank. But that looks like a conservative estimate, considering that many North American shale oil fields don’t make money below $55. And fully 50% are uneconomic at $50.

So if oil falls to $40 a barrel, a cascading 2008-style financial collapse, at least in the junk bond market, is in the cards. No wonder the "too big to fail banks" slipped a measure into the recently passed budget bill that put the US taxpayer back on the hook to insure any ill advised derivatives trades!

We know what happened the last time a bubble in financial assets popped in the US. There was a banking crisis, a serious recession, and a big spike in unemployment. It’s hard to see why it should be different this time. It’s a crying shame. The US has come so close to becoming energy independent. But it’s going to have to get its head around the idea that it could become a big oil importer again. In the end, the US energy boom may add up to nothing more than an illusion dependent upon the artificially cheap debt environment created by the Federal Reserve’s easy money policy.

However, there are a handful of domestic producers with high operating margins that are positioned to profit right through this slump in oil prices. To find out their names, sign up for Marin Katusa’s just launched advisory, The Colder War Letter.

You’ll also receive monthly updates on the latest geopolitical moves in this struggle to control the world’s oil pricing and the energy sector at large and what it means for your personal wealth. Plus, you’ll get a free hardback copy of Marin’s New York Times bestselling book, The Colder War, just for signing up today. Click here for all the details.

The article Make No Mistake, the Oil Slump Is Going to Hurt the US Too was originally published at casey research

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