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Oil Collapses To Four-Year Low On OPEC Decision

Oil Collapses To Four-Year Low On OPEC Decision

London (AFP) – Global oil prices plunged Friday to yet another four-year low after the OPEC oil producing cartel decided to maintain crude output in an oversupplied market, dealers said.

London Brent oil for January delivery sank in early deals to $71.12 per barrel — the lowest level since July 7, 2010.

U.S. benchmark West Texas Intermediate for January sank to $69.29 a barrel in opening trade on the New York Mercantile Exchange, down $4.40 from Wednesday’s closing price.

The NYMEX was closed Thursday for a holiday, but in electronic trading WTI had slumped as low as $67.75.

The 12-nation Organization of Petroleum Exporting Countries (OPEC) opted Thursday to maintain its collective output ceiling at 30 million barrels per day, where it has stood for three years, sending prices plunging.

OPEC refused to cut production despite oversupply that has sent prices tumbling by more than a third since June, with analysts warning of further falls to come.

“As expected, OPEC confirmed what many market participants had expected by leaving their official production quota unchanged,” said Sucden analyst Kash Kamal.

“Many investors had hoped for some positive steps forward as the global supply glut continues to exert considerable downward pressure on futures prices,” he added.

At Thursday’s OPEC gathering in Vienna, the cartel came under pressure from its poorer members, including Venezuela and Ecuador, to trim production as tumbling prices were eating into revenues and raising fears over their economies.

However, the group’s powerful Gulf members led by kingpin Saudi Arabia resisted the calls to turn down the taps unless they are guaranteed market share, particularly in the United States, where cheap shale gas has contributed to the global supply glut.

Another member, Kuwait, supported the move with the country’s oil minister Ali Omair saying: “We decided that price will adjust itself based on supply and demand and that OPEC is supposed to safeguard its market share in order not to lose its clients.”

He suggested the United States should also bear responsibility and lower its own output of shale oil.

Venezuelan President Nicolas Maduro declared Thursday that he would keep pushing OPEC to slash output.

The oil market has plunged in recent months, depressed by plentiful supplies, the stronger dollar and demand fears in a weakening global economy.

“OPEC’s decision to keep output is the main reason for prices to drop quite rapidly,” said Daniel Ang, an investment analyst with Phillip Futures in Singapore.

“Prices are likely to be going down for the rest of the year,” he told AFP.

Ang, who closely tracks the oil market, said he expects WTI to end 2014 in the “low 60s” and Brent in the “mid-60s”.

This week’s OPEC decision was meanwhile perceived by some analysts as an attack on the booming U.S. shale energy sector.

“OPEC is dominated by Saudi Arabia and Kuwait, who also have the highest tolerance for low oil prices due to the economies of scale generated by their huge super fields,” said analyst Nick Campbell at consultancy Inspired Energy.

“Therefore, in order to combat low demand and a new supply threat — both mainly in the United States — the trick is to drop your price.”

Technological innovations have unlocked shale resources in North America and raised daily U.S. oil output by more than 40 percent since 2006, but at a production cost which can be three or four times that of extracting Middle Eastern oil.

“U.S. shale producers costs are estimated to be much higher than most OPEC producers and, therefore, by pushing the oil price lower they are hoping to drive the higher cost current producing wells to the margin and, more importantly, stop new sites developing,” added Campbell.

U.S. oil output is soaring thanks to shale energy, which involves blasting a high-pressure blend of water, sand and chemicals deep underground in order to release hydrocarbons trapped between layers of rock.

AFP Photo/Karen Bleier

A Look At Who Loses As Oil Prices Keep Plunging

A Look At Who Loses As Oil Prices Keep Plunging

By Kevin G. Hall, McClatchy Washington Bureau (TNS)

WASHINGTON — The rapid plunge in oil and gasoline prices means huge savings for American consumers, but the steep downward swing may ultimately prove dangerously disruptive to energy-producing countries and companies.

If prices remain low for a protracted period, which seems likely, it’ll send shock waves across the energy sector. For oil-producing countries, that could mean budget shortfalls. For energy companies, the lower profits may force mergers and consolidation that will cost thousands of jobs.

Oil prices have tumbled in recent months from their peak at about $105 a barrel in June to their current lows, below $75 on Wednesday. The Energy Information Administration projected last week that gasoline prices would stay under $3 a gallon throughout next year. A gallon of regular unleaded averages $2.86, the motor club AAA said Wednesday, about 25 cents lower than a month ago.

For American consumers, who used 135.4 billion gallons of gasoline last year, that’s a big savings — nearly $34 billion on an annualized basis.

But for companies and countries that depend on oil prices for their income, it’s a trend that makes them nervous.

Already, the oilfield services giant Halliburton, anticipating lower prices, has announced it will buy rival Baker Hughes in a cash and stock deal worth $34.6 billion.

Venezuela, heavily dependent on oil revenue, is looking for a buyer for its U.S. refining operations that run under the Citgo brand. Global giant BP, whose stock has yet to recover after the disastrous Gulf of Mexico oil spill in 2010, is widely viewed as in play. In fact, veteran energy analyst Fadel Gheit thinks that every private oil company except Exxon Mobil Corp., which is twice as large as its competitors, is now potentially a merger target.

“If oil prices remain sub-$80 for a long period of time, we’re going to see a lot of mergers and acquisitions,” said Gheit, who works for the investment bank Oppenheimer & Co. Inc. When Exxon Corp. and Mobil Corp. merged in 1999, the combined company was able to eliminate 50,000 jobs. “Companies are drawing short lists of targets: plan A, plan B and plan C.”

In the past, when oil was too abundant, producers simply left it in the ground. The curtailed production tightened supplies and drove up prices. That’s going to be tougher to do now, analysts say, which explains why oil ministers from nations that belong to the Organization of the Petroleum Exporting Countries have been deep in consultation before OPEC next meets on Nov. 27.

OPEC’s biggest producer and exporter, Saudi Arabia, doesn’t appear keen to cut production, in part because history has shown that most other OPEC members, who depend on oil to fund their governments, won’t reduce production even after they’ve agreed to.

“For those kinds of countries this is a huge shock, and they’re desperate … but Saudi Arabia has made it pretty clear it doesn’t want to cut back to give market share to Iraq and Iran,” said Daniel Yergin, a noted oil historian. “If prices fall further, you’re going to see panic.”

Among the shakiest of OPEC members is Venezuela, grappling with inflation above 60 percent and its government bonds at six-year lows. It’s sure to suffer financial and political fallout if prices drop another $10 or $20 a barrel.

“They can continue at $75 or $80 … anything much lower I don’t see them able to sustain,” said Risa Grais-Targow, a senior analyst who specializes in Venezuela for the Eurasia Group, a political-risk consultant for global corporations. “They’re working with a pretty narrow margin.”

That’s what pushed the government of President Nicolas Maduro to look for a buyer for Citgo, which operates refineries in Illinois, Louisiana and Texas. The asking price reportedly is $7 billion. “The issue is going to be whether there are interested buyers,” Grais-Targow said.

The lost oil revenue is also likely to sting Africa’s largest producer, Nigeria, which is grappling with the Islamist insurgent group Boko Haram in the northeast.

Nigeria didn’t create a rainy-day fund when prices soared, and now it must reduce government spending by a pledged 6 percent to offset the 30 percent decline in oil prices. But it has national elections on Feb. 14, and many Nigerians question whether the ruling party will really cut spending before the elections, meaning the country’s already messy finances could get messier.

Even countries that better manage their oil revenue will feel the pinch. Colombia’s balanced-budget requirement might trigger higher taxes as oil revenue slumps, Andre Loes, global bank HSBC’s chief economist for Latin America, said in a note to investors.

The projected 4.7 percent growth rate for next year, Loes cautioned, “would be under threat in the case of continued weakness in oil prices.”

Less clear is how neighbors Iraq and Iran will fare with slumping oil revenues.

Iraq’s exports have reached levels not seen since before the invasion led by the United States in 2003, but the country needs higher oil prices to fund its many needs.

More complicated is how the falling prices will affect Iran. A temporary arrangement lifting international sanctions that had cut its oil exports will expire Monday, and it’s not clear whether that relief will continue.

If talks with Iran over its nuclear program fail and sanctions are reimposed, that will take more Iranian oil off the global market, which might help keep prices from falling further. But if the nuclear talks are extended, prices might dip even lower.

“Markets will interpret this as Iran will be able to increase its exports,” said Simon Henderson, an expert on energy and the Middle East for the Washington Institute for Near East Policy, a research center. “That will contribute to a further weakening of prices.”

With the United States producing 9 million barrels a day and no sign that the lower price has affected that production yet, the oil market is finding new financial targets.

“Prices will continue lower, bottom out in the low $50s between the first quarter and second quarter next year,” predicted John Kilduff, a veteran energy analyst at investment manager Again Capital in New York. At that point, he said, there could be unrest in some oil-producing nations and a related drop in production. “That should get prices back up to $70,” he said.

Kilduff’s suggestion of $50-a-barrel oil is striking, considering that just a few years ago energy analysts were debating whether the price might reach $150 a barrel.

“The market is really recalibrating,” said Yergin, who wrote an award-winning history of oil, The Prize.

An abundance of oil isn’t the only factor that’s pushing prices lower. Demand also is flagging. Japan, the world’s third-largest economy, was officially classified this week as in recession. Latin America’s biggest economy, Brazil, was already there. The European Union saw its quarterly growth rate register just a blip — 0.2 percent — from July through September.

That’s likely to subvert what’s been the traditional cycle, in which low oil prices boosted consumer spending, raising demand for oil, leading to higher prices. For now, the dynamic appears likely to keep pushing prices down.

AFP Photo/Karen Bleier

Mexico Plan To Expand Energy Sector Passes Final Hurdle

Mexico Plan To Expand Energy Sector Passes Final Hurdle

By Alfredo Corchado and James Osborne, The Dallas Morning News

MEXICO CITY — Mexico’s plan to radically expand its energy sector passed its final legislative hurdle Wednesday, leaving behind 76 years of state monopoly for an uncertain future driven by competition.

The Mexican Senate voted 90-27 to pass the so-called secondary rules outlining the framework under which foreign companies will drill for oil and natural gas in Mexico. A cornerstone of President Enrique Pena Nieto’s ambitious economic overhaul, the law is expected to open the door to what some believe could be more than $1 trillion in investment and create a new energy paradigm for North America.

“Mexico will now join the energy revolution that is taking place in North America by opening the industry to national and international private investment under strict and transparent regulation,” said Javier Trevino, a congressman from the northern state of Nuevo Leon who played a key role in negotiating the legislation. “Energy reform and its secondary laws represent a historic leap forward for Mexico.”

The approval came amid scattered protests. About 500 people chanted outside Wednesday as the Senate voted, stopping traffic along Mexico City’s main thoroughfare, Reforma Avenue. Outside the Senate’s towering ivory-colored building, a handwritten sign was displayed by critics led by the leftist Party of the Democratic Revolution, or PRD: “Mexico Will Not Forgive You.” The sign was quickly taken down.

A block away, Enrique Garcia Garcia, 26, a gas attendant for the past six years, lamented: “This is the end for us gas attendants. In a few years you’ll have gringos owning gas stations operated by credit cards. Yes, that’s more efficient, but we’ll be without jobs.”

Beyond the pessimism and nationalistic sentiment that reign within segments of society, a sobering and desperate reality lies: Over the last decade, oil production by Pemex, the national oil company, has dropped more than 20 percent, to 2.4 million barrels a day. Mexico’s failure to keep pace with technological advances and its history of corruption have hampered the company’s chances of developing oil and gas in the deep-water Gulf of Mexico and shale formations.

With the law, experts see a dramatic change looming. Within five years, North America could surpass the Middle East as the largest oil and gas producer in the world, said Bernard Weinstein, associate director of the Maguire Energy Institute at Southern Methodist University.

“When we add Canada, United States, and Mexico, we’ll be so much bigger than OPEC,” Weinstein said. “We’ll be an energy colossus.”

The center of the U.S. energy industry, Texas, which shares history and a 1,200-mile border with Mexico, is expected to play an outsize role in that development.

So far, the terms of the reforms have been largely embraced by energy companies in Houston and Dallas. Companies will share their profit with the government on terms similar to those in other countries. And they can count Mexican reserves as their own, a critical point for Wall Street.

“At a high level, they’ve presented an economic reform that should stimulate interest and attract foreign investment,” said Carlos Sole, an energy attorney with Baker Botts.

But there is a long way to go until the likes of Exxon Mobil and Chevron are drilling in Mexico.

Pemex, the state oil company, has asked to retain control over more than 80 percent of Mexico’s proven oil and natural gas reserves. The government is to decide how much the company will keep in September.

And then there is the matter of how quickly the government can expand its regulatory agency to handle what could be an influx of hundreds of companies.

“Mexico is starting from scratch on regulation. …,” said Jose Valera, an attorney with Mayer Brown in Houston. “That is going to be a natural limitation to how fast they can ramp up.”

But few doubt the foreign oil companies will eventually come.

In the Gulf of Mexico, oil deposits thousands of feet below the surface are being heavily drilled on the U.S. side of the international boundary but remain virtually untouched in Mexican waters.

“I’m certain Texas companies and investors know the stakes,” said Antonio Garza, former U.S. ambassador to Mexico and now counsel in the Mexico City office of White and Case. “What they’re seeing is an enormous, perhaps once-in-a-generation opportunity — and in a neighboring country, with the potential for partnerships with people they know. They’ll be smart, but they also know that the biggest risk may just be in not being here.”

Pena Nieto, whose terms ends in a little more than four years, faces significant political challenges.

Mexico enters midterm elections next summer, just as the bidding process for foreign oil companies is expected to begin. The government has promised that the overhaul will lower the cost of electricity and natural gas, but many Mexicans expect the energy law will save them money on gasoline.

There has been persistent criticism that the changes will benefit only foreign oil companies and Mexico’s elite.

“The government says oil belongs to the Mexicans,” said Gerardo Moreno Jose, 16, who shines shoes outside the Senate building. “That’s a lie. I hope this reform brings down the price of gasoline.”

In fact, over the next few years, gas prices are expected to keep rising, according to Finance Minister Luis Videgaray.

The result could be a backlash against Pena Nieto’s governing Institutional Revolutionary Party, or PRI, which nationalized the country’s oil in 1938 to great fanfare.

The outcome could benefit leftist parties such as the PRD, which opposed the energy reforms.

And there is the matter of whether their claims on the country’s oil and gas resources hold true.

The Mexican government is hoping to attract drillers to its shale fields in the north, just as the Eagle Ford Shale in Texas has. But a lack of geological data and continuing violence along the border has dampened enthusiasm.

“Everyone says it’s the same as the Eagle Ford, but there has not been much there in terms of exploration,” said Caldwell Bailey, senior consultant with PacWest Consulting Partners in Houston.

In Mexico, landowners don’t own what’s underground. The government does. In order to foster local cooperation, the secondary laws contain economic incentives for those whose property sits atop the oil and natural gas.

AFP Photo/Karen Bleier

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