Turbulent geopolitics will dominate the 2015 price rebalancing
What has made the current oil status quo so dangerous is that Saudi Arabia, Russia, Iran and Venezuela have built their economic budgets on $100-per-barrel oil pricing.
As the pundits, analysts, financial experts and self-styled business meteorologists gaze into their 2015 economic crystal balls, all seem to realize the 50% drop in oil prices has opened the door to dire consequences, whose fate has yet to be determined.
It’s easy to blame the fact that while world demand expanded 600,000 barrels a day, America’s 1.6 million barrel increase over that time period had turned a moderate oil shortage into a glut.
What has made the current oil status quo so dangerous is that Saudi Arabia, Russia, Iran and Venezuela have built their economic budgets on $100-per-barrel oil pricing. They were expecting no more than a 10% deviation from this mark, give or take relevant global consequences.
With no major recessions or major military adversities as an excuse, these four oil-based economies are now in a calamitous position. All are at the center of confrontations, from which a tinder box of fiery, martial outbursts could ensue. All four of these crude-oil giants are not only in crisis mode, perpetuated by external extremism well beyond their borders, but could easily become the victims of restive public or external influences that have become the objects of these nations’ ambitions:
· Saudi Arabia, which is well aware of the “peak oil” summit provided by five peaking mammoth oil fields, is paying off the indigenous Wahabi extremists in order to avoid internal uprisings.
· Iranhas to meet the payrolls of Hezbollah, Hamas, Syria’s Assad, and now the Shiite Iraqi government in addition to supporting its internal military and nuclear development capability, which it is in the process of building.
· Russiais facing severe ruble inflation as its currency needs far more support than can be gained from its underpriced oil and natural gas exports. It’s also
cutting short the expectant future expansion of its borders as it has eyed the rebuilding of at least part of the once world-feared superpower.
· Even the Maduro-dominated Venezuelan government is sending out signals of potential government bond defaults if oil prices don’t recoup much of last year’s price losses.
Unquestionably, a price recovery, probably reaching $75 to $80 per barrel, at best, will not find its way back until mid-year at the earliest and may not be enough to allow those four oil-dependent militant national powers to meet their minimum objectives.
With the U.S. likely slowing its fracking expansion pace, as well as curtailed offshore drilling by Petrobas in Brazil or costly Gulf of Mexico Pemex drilling not to mention Canada’s oil sands activities, none of these factors will prevent unanticipated global disruptions. These will manifest themselves as 2015 events emerge unexpectedly.
Reverse the commodities crunch
In analyzing the global fourth-quarter crash of the commodity markets, it has become quite obvious that the bulk of the unnatural depth of the slump was caused by a desperate attempt by Saudi Arabia to undercut the incredible growth of America’s hydraulic fracturing, which had added a million barrels a day throughout 2014.
While $100 per barrel had become a stable target for most of 2013 and the first six months of 2014, the sudden crash right after Labor Day was no coincidence. Although a $30 per barrel low of crude oil for both foreign Brent crude and domestic West Texas Intermediate had been expected in the depths of the great financial recession in March 2009, this was a far cry from the relatively moderate supply/demand imbalance that ostensibly caused the “halving” of oil prices in 2014's last four months.
While non-energy commodities such as agriculture, gold, silver, copper and steel experienced rational price letdowns due to demand/supply ratios, the frontal attack against America’s assumption of the world’s No. 1 oil producer engendered not only Saudi-instigated price cuts; but ignited “full steam ahead” at OPEC’s meeting this past November, which was prepared to cut production to secure price stability.
This has proven partially successful, as the U.S. experienced incomprehensible price drops not consonant with global supply and demand in the last quarter. It was purely a case of the Saudis, who had seen their American business drop from 6 million barrels daily six years ago. This occurred as American conventional production, including Gulf of Mexico deep-sea drilling, was peaking.
But Riyadh also became aware America was on the verge of production that could make the U.S. the world’s top exporter. This perception is based on the reality that America’s fast-increasing shale production has only unearthed 10% of our nation’s potential of oil and natural gas.
While the Saudis are grappling with the depletion of its five monumentally massive crude oil excavation fields, their defense of market share has become a matter of protecting its previous huge world percentage; and the incomparable influence that has provided them in the role of leading “influence factor” in the Middle East.
It is our prediction that this will fail, as most of America’s major shale developments are now in various stages of progress, which should finally make the U.S. oil and natural gas development totally independent from any imports within the next few years.
Although the Keystone XL oil pipeline approval is a close call, needing an override of a presidential veto, the U.S. powers that be realize the country’s “energy power” will certify the U.S. as the world’s leading nation in natural resources, as well as finished goods conversion and exports.
A side issue of Saudi Arabia’s full steam ahead strategy, in addition to selective price cuts, could cause adverse reactions in Iran, Russia, and such second-tier developers as Iraq, Nigeria and Libya, as well additional OPEC members whose budgets have suffered bitterly under the Saudis’ attempt to protect its market share against the accelerating “fracking” of America’s superior technological capability.
U.S. refineries reach peak capacity
With ever-increasing capacity utilization onsite and estimated at 25% expansion in the past decade reaching more than 20 million barrels per day, America’s 140-plus refineries, the most expansive in the world, are intensively generating additional revenues through their wide range of oil derivatives and condensate exports not restricted by the 1974 oil export embargo.
This allows shipment of gasoline, jet fuel, diesel, and light oil condensates for outward- bound shipments and resulted in a major increase in total volume in 2014, exceeding that of any previous year.
While net imports of Brent crude foreign imports, which have fallen by 2.3 million barrels a day, have largely been replaced by domestically produced “light, tight oil,” domestic refiners are hopeful the projected U.S. 2015 average of 9.3 million barrels a day (700,000 above the 2014 level) will be attained.
Their concern is a combination of a presidential veto of the XL oil pipeline and a cutback of U.S. fracking production due to the unexpected oil price crash will leave them short of 2015 crude oil input to make up for the cutback in imports.
Current plans to restructure the antiquated U.S. oil and natural gas piping system, which has not been updated for decades both in structural material and in geographic relocation to tie-in with major U.S. shale expansion sites, will eventually go full-steam ahead. But the impact on access to accelerate shipments is now in doubt due to potential fracking cutbacks.
Be that as it may, the increasingly sophisticated refining techniques for all types of oil derivatives, domestic and increasing export commitments will be proceeding at full speed.