Wednesday, March 29, 2017

Oil Prices - A Russian Vulnerability?

Recent days have seen the reports of new discoveries of oil and gas, including off-shore UK:
Explorer Hurricane Energy has declared the “largest undeveloped
discovery” of oil on the UK Continental Shelf.

The Godalming-based group said well tests had confirmed its view that the Lancaster and Halifax reservoirs west of Shetland are actually a single resource.

Analysts have previously speculated that a single reservoir could hold more than one billion barrels of oil equivalent, although Hurricane did not make such a claim when announcing the discovery.
In Alaska, reports of a huge find, Massive Oil Discovery in Alaska Is Biggest Onshore Find in U.S. in 30 years:
Some 1.2 billion barrels of oil have been discovered in Alaska, marking the biggest onshore discovery in the U.S. in three decades.

The massive find of conventional oil on state land could bring relief to budget pains in Alaska brought on by slumping production in the state and the crash in oil prices.

The new discovery was made in just the past few days in Alaska’s North Slope, which was previously viewed as an aging oil basin.

Spanish oil giant Repsol and its privately-held U.S. partner Armstrong Energy announced the find on Thursday, predicting production could begin as soon as 2021 and lead to as much as 120,000 barrels of output per day.

The oil resources lie in a well, called Horseshoe, that’s 75% owned by Denver-based Armstrong. Repsol owns the rest of this well.
The existing U.S, oil wells have created a surplus of oil, forcing prices lower:
U.S. commercial crude supplies have risen for nine straight weeks, reaching a record 528.4 million barrels last week, according to the U.S. Energy Information Administration. That was an increase of 8.2 million barrels from a week earlier.

“The rising crude inventory levels in the US to new all-time highs has been the No. 1 reason why prices have been unable to move further higher,” Fawad Razaqzada, market analyst at Forex.com, wrote to investors Wednesday.
Recent price show crude trading at about $47 barrel and decreasing in price.

All of which suggests continuing trouble for countries whose economies are -um- very dependent on high oil prices to do all the things they want to do to, say, regain their empires.

As in Russia, which last year was having some issues, as Bloomberg noted in January, 2016, "How Cheap Oil Is Squeezing Russia's Economy"
Russia, which relies on oil and natural gas for almost half its fiscal revenue, ran a budget deficit of 2.6 percent in 2015, the highest in five years. It's now at risk of topping that level as prices drop even further, Finance Minister Anton Siluanov warned the government.

This year's budget was initially planned around oil averaging $50 a barrel and a deficit of 3 percent of gross domestic product. Belt-tightening measures totaling 1.5 trillion rubles ($18.9 billion) are needed to avoid a shortfall of over 6 percent of output this year, Siluanov said.
As cheap oil weakens the Russian economy, it also causes its national currency, the ruble, to depreciate. That means Russian consumers have to shell out more rubles if they want to maintain their consumption levels.

Geopolitical tensions have added to the ruble's weakness. The currency has nearly halved in value since Putin's annexation of Crimea in March 2014 and the U.S. and the European Union imposed sanctions against Russia.
Now, there are reports that Russia is preparing its economy for $40/barrel oil, as in this Bloomberg report from 4 days ago, OPEC Be Warned: Russia Prepares for Oil at $40:
As the Organization of Petroleum Exporting Countries and its allies prepare to meet for a review of their production cuts this weekend, the central bank of the world’s biggest energy exporter is hunkering down for years of oil near $40 a barrel.
Policy makers in Moscow said on Friday they see Urals at an average of $50 a barrel this year, but falling to $40 at end-2017 and then staying near that level in 2018-2019. As the central bank honed its forecasts, it also gingerly resumed monetary easing, pointing to the “uncertainty” in the oil market as a factor for its “conservative” forecasts.

Russia’s Finance Ministry similarly highlighted the $40 level in January when it announced that the central bank will start buying foreign currency on its behalf when crude exceeds that level in order to insulate the exchange rate from oil volatility. The price of $40 is additionally being used to calculate the country’s budget in 2017-2019.
Forecasting oil is no game for the Bank of Russia. Its 65 percent plunge in 2014 and 2015 battered the nation’s currency, forced an emergency rate increase in the middle of the night and pushed Russia into recession. The share of oil and gas revenue was at 36 percent of budget income in 2016.
Now, there's another little bit of information that the Russians might find discomforting - with the U.S. having a excess inventory of crude, it's exporting more oil to new places, as set out here:
In 2016, U.S. crude oil exports averaged 520,000 barrels per day (b/d), 55,000 b/d (12%) above the 2015 level, despite a year-over-year decline in domestic crude oil production. Even though oil exports have increased, growth in U.S. crude oil exports has slowed significantly from its pace from 2013 to 2015, when annual U.S. crude oil production grew rapidly.
Following the removal of restrictions on U.S. crude oil exports in December 2015, the United States exported crude oil to 26 different countries in 2016, compared with 10 countries the previous year. In 2015, 92% of U.S. crude oil exports went to Canada, which was exempt from U.S. crude oil export restrictions. After restrictions were lifted, Canada remained the top destination but received only 58% of U.S. crude exports in 2016.
Aside from Canada, European destinations such as the Netherlands, Italy, United Kingdom, and France rank high on the list of U.S. crude oil export destinations. The second-largest regional destination is Asia, including China, Korea, Singapore, and Japan. In 2016, the United States exported to eight different Central and South American destinations, including Curacao, Colombia, and Peru.(emphasis added)
Is the U.S. liberating market share from the Russians? What impact does this have on the Russian economy?

Which country can ride out a "price war" without crippling 36 or 40% of its economy? The oil and gas industry in the U.S. is below 4% of its GDP.


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