Tag Archives: oil

Iraq Oil Output

Its no surprise that Iraq’s oil production slowed after the American invasion in 2003. And its not shocking that it took a while for oil production to regain strength. But as of February of this year Iraq is producing 50% more than it was four years ago. Iraq is now pumping out 3.6 Million barrels a day, up from 2.4 Million in February in 2010. One would expect Iraq’s economy to be booming with such an increase in oil production however it isn’t so easy. The past decade of sanctions, neglect, and war have lead to the oil fields being neglected.

Companies like BP, Royal Dutch Shell, and ExxonMobile have been investing in the oil fields to revive them after a decade. The investments have lead to a huge increase in production, there is however, still one problem. The infrastructure in the company still hasn’t been updated. To get the increased quantity from the wells to the tanker, the infrastructure would require an overhaul. So it seems that its time to updated it but it is unclear whose going to pay. The government is the likely source of funding for the overhaul, as it would likely lead to bolstering the overall economy. The seem to be slow when it comes to providing though, so it is possible that major companies could look to kick in funds, and get the oil to the tankers at a lower cost. Personally I think this is a better option.

The government is still not the most stable since the downfall of Saddam Hussein’s regime. There are bureaucracy issues between parties that lead to the slowing of getting funding provided. There is also a major problem with corruption and bribery. Problems like these don’t help expedite the process. With a young and unstable government it isn’t likely the infrastructure will see an update anytime soon.

The companies who own major oilfields in the area could offer to kick in funds. This would help get more oil from the fields to the tankers, leading to higher profits for the company. A cost benefit analysis would show whether providing funds for infrastructure is profitable. Currently, things as simple as high winds slow production. Iraq doesn’t have the storage space for excess fuel and the wells are shutdown all together. The pipes are routinely shutdown completely for maintenance, something that a modern system wouldn’t face. Providing money to improve the pipe system and increase storage facilities would create a constant flow of oil from the wells to the tankers. Something that would benefit the major oil companies in the long run.

Winter caused sand price increases in Wisconsin

 

Few years ago, the use of sand in US was focusing on the industrial consumption products, like glass for windows. But recently, more than half of the silica sold into energy companies who extracting oil and natural gas. According to WSJ, in the year of 2013, more than $245 million in sand sold to energy companies accounted for 62% of U.S. Silica’s sales, up from 53% during the same period in 2012 and 33% during the first nine months of 2011.

Through those numbers we can see an aggressive soaring trend of sand usage in energy industry, so why is that happening? The reason is that hydraulic fracturing has been becoming a very popular extraction technology in oil and natural gas extraction works, because it is efficiently and can be applied to complicated extracting environment. This fracturing process requires to pour a mix of sand, water and chemical down the wells so that oil can natural gas can be released from complex rock system to the surface.

The hydraulic fracturing process needs a lot of sand — but not ordinary sand, the kind of sand that meet the requirement is white sand, which is special and can only be provided in a limited places. According to WSJ, many fracking outfits prefer Wisconsin white sand, which is bigger and has rounder grains better suited for holding open larger pathways.

However, there is a bad news for those companies who are eager to acquire more white sand to increase their productions. It was reported that the Wisconsin winter holds up sand production, which indirectly puts a restriction on oil extraction. Currently the sand mine in Wisconsin has been developed in full capacity, but in the north of the state sand minding activities are affected by the winter weather. Not only some sand mines were affected, the shipment of sand has also been halted, caused some fracking wells idle.

According to Hi-Crush Chief Financial Officer Laura Fulton, addressed by WSJ, the overall shortage in the sand market has created a tight supply situation that could push up prices. In the year of 2012, demand for sand was so high that prices hit an average $75 per metric ton. And in 2013 the new mining boom in Wisconsin has helped push those prices back to about $50 at the mine. Now in 2014, PacWest anticipates an average price of sand for drilling to be $56 per ton at the mine, excluding the cost of transportation and storage.

We know that cost of sand will be transformed into the price of oil in the next stage, so it is readably to that this sand shortage could lead to a temporary increase in oil prices and oil future. If the capacity of oil and natural gas production keeps increasing over time in the future, I think it’s better to find something that can replace white sand. But personally, it’s hard to find such a thing at such a low price and high production.

Commodity currency Co-movement

It is financial common sense that oil price and US dollar exchange rate show negative correlation. However, both oil price shock and US dollar could be leading factor in this co-movement. On the one hand, depreciation of US dollar precedes increase of oil price because oil is priced in dollar. For examples, a depreciation of US dollar could encourage global demand for oil due to increasing purchasing power of import countries. It could also lead to oil producer rising oil price to counterbalance the reduced purchasing power of the oil revenue. On the other hand, oil price increase could lead to dollar appreciation. Specifically, to the extend that oil revenues are used to purchase goods and services disproportionately from U.S, or invest disproportionately in the U.S, this recycling of petrodollars could be associate with a stronger dollar.

From research paper of What Drives the Oil-Dollar Correlation? by Christian Grisse form Federal Reserve Bank of New York,  oil price shock is more likely to predict exchange rate within a month, because exchange rate respond more quickly, whereas oil price takes longer to fully adjust. In longer time horizon, say a quarter or a year, dollar exchange rate tend to predict oil price.

Not just for oil, other major commodities typically follow and inverse relationship with the value of the dollar. When the dollar strengthens against other major currencies, the prices of commodities typically drop. When the value of the dollar weakens against other major currencies, the prices of commodities generally move higher.

As you could predict, countries that are major importer of oil tend to have currency negatively correlated with oil price, whereas exporter tend to have currency positively correlated with oil prices. For example, the Canadian dollar and New Zealand dollar, along with some other currencies of nations that rely heavily on the export of raw goods, tend to strengthen with rising oil and natural-gas prices. Japanese yen tend to fall with oil price surge as Japan rely heavily on oil import.

There is a lot of theory regarding exchange rate determination. For high frequency data, exchange rate is affected by various amount of macro-economics news . Therefore when forecasting exchange rate in the short run, it is important to partial out all the aggregate of these effects before looking at the predictability of oil price on exchange rate. For longer term exchange rate determination, all the short term shock will not matter since efficient market will fully adjust exchange rate to long term equilibrium level. 

 

oil price and changes in currencies

The movements of some counties’ currencies are closely related to the prices of certain commodities. Canadian dollar can be considered as a barometer for the price of crude oil because they are highly correlated to each other.

At the end of February, an article in Wall Street Journal reported weaken in US dollar as investors sold greenbacks for Canadian, Australian and New Zealand dollars. The dollar fell 0.4% against the lonnie, 0.7% against the Aussie, 0.5% against the kiwi. It’s not hard to understand the reason behind such actions of investors. As weather-influenced demand for oil kept soaring in United States, oil prices have also been pushed up. Serve as one of the most important oil export country for US, Canada has a highly oil-prices-dependent currency. The increase in the demand in oil indicating more exporting needs as well as a better economy situation in Canada. So the demand for Canadian dollar also goes up.

Although this is only a temporary event, it revealed the truth that one currency could be impacted by the price of a single commodity when they are closely correlated. The same intuition can be applied to the relationship between Australian dollar and iron ore, but that is not what I’m going to discuss here.

We know that the ‘value’ of one currency is relative to that of other currencies. In the CAD/USD exchange rate, the strengthen in Canadian dollar could lead to a relative depreciation in US dollar, so if our logic above is correct, the exchange rates of other oil-dependent currencies against US dollar should be correlated with oil prices in a positive way. In the contrary, the exchange rates of US dollar against other oil-dependent currencies should be correlated with oil prices in a negative way.

Below is a graph given from investopedia.com. It is clearly showed that during the period from 2005 to 2009, oil price raised in the exchange rate of CAD/USD. In the first quarter of 2009, the significant decline in oil price followed by depreciation of Canadian dollar against US dollar.

The economy of US has been recovering over recent years, so presumably the value of US dollar will be going to appreciate against Canadian dollar. Another factor is, US is becoming more and more independent to crude oil import from Canada, which is suggesting that Canadian dollar is expected to have a downward trend in the future. We can keep tracking on whether this is correct.

The Economic Effects of Venezuela

Over the past few weeks there has been a lot of news regarding the unrest in Venezuela. For this week’s blog I wanted to look into what is happening in Venezuela and what economic effects this will have on the domestic market as well as the international market.

To understand the current situation in Venezuela it is helpful to look back on the previous presidency of Hugo Chavez. The former socialist leader of Venezuela turned Venezuela into the fastest growing economy in Latin America during his presidency. Through oil exportation, Venezuela’s GDP grew very quickly. The revenue from oil drilling was used for a country wide subsidy of basic goods for the poor in rural areas. The massive government subsidies caused price inflation throughout the country. Rather than letting inflation take its natural course, Chavez emplaced price ceilings on goods. Now enter Chavez’s handpicked predecessor, President Maduro. As price ceilings continue to get stressed, business owners are unable to purchase imported goods at a sustainable level. Rather than adjusting the international exchange rate, President Maduro sent the Venezuelan National Guard in to Curacao to enforce the price ceilings. This led to a shortage of common goods, such as toilet paper and food. Frustrated by the shortage of goods, the Venezuelan youth started protests in the city to voice their opposition to Maduro’s administration and controls. (WSJ – The Short Answer: Venezuela)

As inflation continues to exceed 56% (the current world’s highest yearly inflation rate), goods will inevitably become sparser and violence will increase. The increase in violence has led to support from some major political opponents in Venezuela, including the Presidential runner-up Mr. Capriles. With more domestic support the country could soon become engulfed in civil war and a coup could be imminent. Domestic unrest will likely hurt the growth of the country in the short term, but could lead to decreased regulation and a more business friendly administration. As far as the effect that Venezuela’s violence has on the global markets, Venezuela is one of the top five oil exporters to the United States and is a leading oil supplier to Latin America.

As unrest continues in Venezeula analysts will have to keep an eye on the oil supply from Venezuela. Since oil is the bloodline of Venezuela’s economy, it is possible that the United States may use an oil embargo against Venezuela as economic opposition against President Maduro. Such an embargo will inevitably rise the price of global oil. Another potential scenario is a strike by oil workers if the protests spread outside of Curacao. This scenario would also lead to a decrease in global oil supply and an increase in price. At this point, it is too early to determine the significance of the uprising in Venezuela, but it is likely that there will be one of two outcomes that take place. Either President Maduro is overthrown and a new leader is emplaced, or Maduros administration makes concessions to ease the price ceilings or provides cities with emergency relief of supplies and food. Both scenarios will likely create uncertainty with the Venezuelan oil supply and affect global oil prices.

The US to be No. 1 oil producer…still illegal to export it

Due to advances in technology, American companies have found ways to extract oil that was previously too expensive.  Due to these advances, it is predicted that the United States could become the world’s number one producer of oil by the year 2015.  However there is something holding back the US’s energy dominance, and that is an outdated law from a time when America was dependent on foreign oil and was desperately trying to conserve it.  This is no longer the case.  In order to encourage economic growth, employment, and stability the United States should reverse its policy on exporting petroleum.

There are three main reasons to remove the ban on exporting petroleum.   First, oil exports would increase net exports, raising the country’s GDP.  It translates into more of the money Americans (and the world) spend on gas coming to the US.  Second, the expansion in capacity would create jobs.  The most significant effects may be those on the price of oil.

There are two effects that lifting the ban could have.  One of those effects is to stabilize the price of oil.  The extraction shale oil on the United States oil imports has been evaluated in a recent report released by Fitch Ratings, reported by MarketWatch, as having a stabilizing effect on prices.  As stated in the report (taken from here):

“…all oil-consuming countries benefit from the stabilizing effect of increased U.S. output on world oil prices. This is the benefit of energy interdependence — the linkage of U.S. and world oil markets through reduced imports of crude and increased exports of products.”

This effect would only get stronger if the ban on exports is lifted.  It should be noted that the price most likely wouldn’t decrease significantly as a price of about $85-$90 a barrel is needed in order to make shale oil projects viable.  Price stability is still a welcome benefit for consumers.

There are those that are for keeping the ban in place however.  They believe that exporting oil harms America’s chance at energy independence, arguing that every barrel we export would have to some how have to be made up in imports.   This is not accurate, and it can be argued that exporting the oil is better then refining it ourselves since our refineries are not set up for the type of oil, and it would be better for our environment to have it refined else where.  The end result is still the same:  money flowing into America.  Who could be opposed to that?

The attacks on lifting the ban come from the refiners who currently make all the money from exporting the heavy oil that we have been importing.  While exporting petroleum is illegal, there is no such ban on the refined products.  Exporting oil cuts them out of the shale oil profits, but these are profits that they aren’t even prepared to take, since they aren’t set up to refine it anyway.  That is not a sufficient reason to continue to ban exports when America needs growth now.  The United States should lift the antiquated ban on oil exports in order to grow the economy and provide price stability to consumers and the world.

 

 

 

 

(revised) Big-bet Strategy of Oil Companies

Gorgon is the name of the sister of Medusa – the monster with snake hair and eyes that can turn man into stone. Representing both powerful and dangerous, the name Gorgon was also used by Chevron for its all-time largest project in Australia.

By far, Chevron has invested $18 billion into this gargantuan project in terms of its 50% stake (Exxon and Shell took 25% stake for each). But this big-bet of Chevron hasn’t provided any profit for its owners yet, and it is only 75% finished up to now. Sounds like a crazy risky plan, but this project is just one among the $120 billion investment plans operated in 2013 by the team made up of Exxon, Shell and Chevron for the purpose of spurring oil production in the future.

So what are the incentives behind such risky mega scale investment actions conducted by those three big international oil companies? It isn’t news that they arrived late to the shale boom in America so they have to watch the new market divided up by small companies. United States hold more than half of the shale oil reserve in the world, so companies lost the biggest opportunity to earn the huge amount of profit.

But there is still chances left in Asia, they seek opportunities in Australia to keep control in advance of the undeveloped shale gas resource. Gorgon is one of the projects in Asia, which is the key to the promise made by Chevron to boost gas production by 20% before 2017.

The next reason is the increasing demand from Asia markets. Japan, China and South Korea are becoming hungrier for natural gas over the last decades, so big oil firms still believe that the energy market is not going to fail on the demand side.

What’s more, oil giants are facing tremendous challenges now that is they have to find the next big gusher to replace their depleted fields. The golden age for companies has passed, the truth now is that they must stake big to bet their future. And if they don’t, then they are going to shrink for sure. Chevron produce less in the past few years, Shell also declines its earning from the $27.2 billion in 2012 to the $16.8 billion in 2013. Investing in the “elephant projects” like Gorgon is their only choice.

But just like the name of Gorgon – powerful and dangerous, big investment are always risky in several aspects. First, exploration of new oil fields are difficult and expansive nowadays: labor cost soars high, competition becomes fiercer and new oil fields’ extraction is more costly. Just like it is indicated in the article Big Oil Companies Struggle to Justify Soaring Project Costs:

The easiest-to-reach oil ran dry long ago, and the most prolific fields often are controlled by state-owned companies in places like Saudi Arabia and Venezuela.

Second, the investment surge will definitely reduce the liquidity of the companies, big projects may be profitable in the long run, but it also worse the current financial statements. Third, the profitability of the investments is still doubtful, from the article Chevron Bets Big on Australian Shale Given Asian Demand, we can read this kind of uncertainty:

The deal poses some risks as the country’s shale resources are very underdeveloped, and it will take years for Chevron to finish with exploration. It is still uncertain whether the gas can be extracted at commercially viable prices.

However, I believe those oil giants are not going to quit despite of those risks above, they would definitely loss the war if they quit right now. Let’s check if they can win on their expensive bets in the future.