Opec pleads for Russian alliance to smash oil speculators

www.telegraph.co.uk

The Opec oil cartel has issued its strongest plea to date for a pact with Russia and rival producers to cut crude output and halt the collapse in prices, warning that the deepening investment slump is storing up serious trouble for the future.

Abdullah al-Badri, Opec’s secretary-general, said the cartel is ready to embrace rivals and thrash out a compromise following the 72pc crash in prices since mid-2014.

"Tough times requires tough choices. It is crucial that all major producers sit down and come up with a solution," he told a Chatham House conference in London.

Mr al-Badri said the world needs an investment blitz of $10 trillion to replace depleting oil fields and to meet extra demand of 17m barrels per day (b/d) by 2040, yet projects are being shelved at an alarming rate. A study by IHS found that investment for the years from 2015 to 2020 has been slashed by $1.8 trillion, compared to what was planned in 2014.

Abdalla El-Badri, OPEC secretary-general, speaks at Chatham House in London

Mr al-Badri warned that the current glut is setting the stage for a future supply shock, with prices lurching from one extreme to another in a deranged market that is in the interests of nobody but speculators. "It is vital that the market addresses the stock overhang,” he said.

Leonid Fedun, vice-president of Russia’s oil group Lukoil, said Opec policy had set off a stampede, comparing it to a “herd of animals rushing to escape a fire”. He called on the Kremlin to craft a political deal with the cartel to overcome the glut. “It is better to sell a barrel of oil at $50 than two barrels at $30,” he told Tass.

This is a significant shift in thinking. It has long been argued that Russian companies cannot join forces with Opec since the Siberian weather makes it hard to switch output on and off, and because these listed firms are supposedly answerable to shareholders, not the Kremlin.

Mr Fedun said Opec will be forced to cut output anyway. “This could happen in May or in the summer. After that we will see a rapid recovery,” he said.

• Oil price crash: rout reaches $27 as Opec warns US shale will be forced to relent

He accused the cartel of incompetence. “When Opec launched the price war, they expected US companies to go under very quickly. They discovered that 50pc of the US production was hedged,” he said.

Mr Fedun said these contracts acted as a subsidy worth $150m a day for the industry though the course of 2015.

“With this support shale producers were able to avoid collapse,” he said.

The hedges are now expiring fast, and will cover just 11pc of output this year. Iraq’s premier, Haider al-Abadi, was overheard in Davos asking US oil experts exactly when the contracts would run out, a sign of how large this issue now looms in the mind of Opec leaders.

Mr Fedun said 500 US shale companies face a “meat-grinder” over coming months, leaving two or three dozen “professionals”.

Claudio Descalzi, head of Italy’s oil group Eni, said Opec has stopped playing the role of “regulator” for crude, leaving markets in the grip of financial forces trading “paper barrels” that outnumber actual barrels of oil by a ratio of 80:1.

The paradox of the current slump is that global spare capacity is at wafer-thin levels of 2pc as Saudi Arabia pumps at will, leaving the market acutely vulnerable to any future supply-shock. “In the 1980s it was around 30pc; 10 years ago it was 8pc,” said Mr Descalzi.

Barclays said the capitulation over recent weeks is much like the mood in early 1999, the last time leading analysts said the world was “drowning in oil”. It proved to be exact bottom of the cycle. Prices jumped 50pc over the next twenty days, the start of a 12-year bull market.

Mr Norrish said excess output peaked in the last quarter of 2015 at 2.1m b/d. The over-supply will narrow to 1.2m b/d in the first quarter as of this year as a string of Opec and non-Opec reach “pain points”, despite the return of Iranian crude after the lifting of sanctions.

By the end of this year there may be a “small deficit”. By then the world will need all of Opec’s 32m b/d supply to meet growing demand, although it will take a long time to whittle down record stocks.

Mr Norrish said the oil market faces powerful headwinds. US shale has emerged as a swing producer and will crank up output “quite quickly” once prices rebound.

Global climate accords have changed the rules of the game and electric vehicles are breaking onto the scene.

Unhedged short positions are huge so there is certainly the potential for a steep move up in prices at some point Barclays

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Saudis 'will not destroy the US shale industry'

www.telegraph.co.uk

Hedge funds and private equity groups armed with $60bn of ready cash are ready to snap up the assets of bankrupt US shale drillers, almost guaranteeing that America’s tight oil production will rebound once prices start to recover.

Daniel Yergin, founder of IHS Cambridge Energy Research Associates, said it is impossible for OPEC to knock out the US shale industry though a war of attrition even if it wants to, and even if large numbers of frackers fall by the wayside over coming months.

Mr Yergin said groups with deep pockets such as Blackstone and Carlyle will take over the infrastructure when the distressed assets are cheap enough, and bide their time until the oil cycle turns.

“The management may change and the companies may change but the resources will still be there,” he told the Daily Telegraph. The great unknown is how quickly the industry can revive once the global glut starts to clear - perhaps in the second half of the year - but it will clearly be much faster than for the conventional oil.

“It takes $10bn and five to ten years to launch a deep-water project. It takes $10m and just 20 days to drill for shale,” he said, speaking at the World Economic Forum in Davos.

Shale has proven much more resilient than people thought Daniel Yergin

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We’ve defeated the shale revolution, claims Opec | The Times

www.thetimes.co.uk

Low oil prices finally damage US production

Opec was on the verge of claiming victory over its North American rivals last night after its strategy of squeezing out the shale industry by flooding the markets with oil appeared to be vindicated.

The oil producers’ cartel said that falling prices would force lower production from its rivals by the end of this year, with American and Canadian producers particularly affected.

Opec, led by Saudi Arabia, has maintained production levels even as crude prices have collapsed 70 per cent from their level in 2014. In its first monthly report of the year, Opec said that its policy was starting

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Gas wars: A gallon is just 46 cents here

www.cnbc.com

While gas prices are low nationwide, some stations are slashing the fuel's price to rock-bottom levels to the tune of less than 50 cents a gallon.

The drastic price cuts are part of a gas price war at three Houghton Lake, Mich., stations.

Athit Perawongmetha | Reuters

During the last three days, the prices dropped below a buck per gallon, falling as low as 46 cents at Sunrise Marathon. Meanwhile, the Beacon & Bridge gas station was as low as 47 cents, said employees of each station in interviews with CNBC.

A nearby Citgo says its prices slumped to 95 cents a gallon.

Read MoreThe coming bull market for oil, but not for stocks

There have been long lines at the stations for most of the weekend, according to the three stations, with police officers directing traffic in the area due to the congestion.

Local stations first reported this news.

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The North Dakota Crude Oil That's Worth Less Than Nothing

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 iHeart.SmythRadio.com

www.bloomberg.com

Oil is so plentiful and cheap in the U.S. that at least one buyer says it would need to be paid to take a certain type of low-quality crude.

Flint Hills Resources LLC, the refining arm of billionaire brothers Charles and David Koch’s industrial empire, said it would pay-$0.50 a barrel Friday for North Dakota Sour, a high-sulfur grade of crude, according to a list price posted on its website. That’s down from $13.50 a barrel a year ago and $47.60 in January 2014.

While the negative price is due to the lack of pipeline capacity for a particular variety of ultra low quality crude, it underscores how dire things are in the U.S. oil patch. U.S. benchmark oil prices have collapsed more than 70 percent in the past 18 months and fell below $30 a barrel for the first time in 12 years last week. West Texas Intermediate traded at $29.03 as of 11:13 a.m. in New York.

“Telling producers that they have to pay you to take away their oil certainly gives the producers a whole bunch of incentive to shut in their wells,” said Andy Lipow, president of Lipow Oil Associates LLC in Houston.

Flint Hills spokesman Jake Reint didn’t respond to a phone call and e-mail outside of work hours on Sunday to comment on the bulletin. The prices posted by Flint Hills Resources and rivals such as Plains All American Pipeline LP are used as benchmarks, setting reference prices for dozens of different crudes produced in the U.S.

Plains All American quoted two other varieties of American low quality crude at very low prices: South Texas Sour at $13.25 a barrel and Oklahoma Sour at $13.50 a barrel. 

Canadian Bitumen

High-sulfur crude in North Dakota is a small portion of the state’s production, with less than 15,000 barrels a day coming out of the ground, said John Auers, executive vice president at Turner Mason & Co. in Dallas. The output has been dwarfed by low-sulfur crude from the Bakken shale formation in the western part of the state, which has grown to 1.1 million barrels a day in the past 10 years.

Different grades of oil are priced based on their quality and transport costs to refineries. High-sulfur crudes are generally priced lower because they can only be processed at plants that have specific equipment to remove sulfur. Producers and refiners often mix grades to achieve specific blends, and prices for each component can rise or fall to reflect current economics.

Enbridge Inc. stopped allowing high-sulfur crudes on its pipeline out of North Dakota in 2011, forcing North Dakota Sour producers to rely on more expensive transport such as trucks and trains, according to Auers.

Producers outside the U.S. are also feeling pain. The price for Canadian bitumen -- the thick, sticky substance at the center of the heated debate over TransCanada Corp.’s Keystone XL pipeline -- fell to $8.35 last week, down from as much as $80 less than two years ago.

Negative energy prices are rare but not unprecedented. Propane traded at a negative value in Edmonton, a key pipeline hub in oil-rich Alberta, for about three months last year. Oil refineries sometimes pay people to take away low-demand products such as sulfur or petroleum coke to free up space. However, those are both processing byproducts, while oil is a raw material, according to Auers.

“You don’t produce stuff that’s a negative number,” Auers said. “You shut in the well.”

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