A Brief History of The Oil Crash

A Brief History
of The Oil Crash
Downloaded from Thomson Reuters Eikon

by nath2chris1988@gmail.com on 02/13/2015 06:59:54
On June 22 last year, two tankers loaded 1.3 million

barrels of crude at the port of Tobruk in eastern
Libya and signalled the end of a decade-long boom
in oil markets.
Just three days earlier, benchmark Brent peaked at almost $116 per barrel, the
highest level for 2014, before beginning a relentless slide that would see prices
sink by more than 60 percent over the next seven months.
The reopening of Libyas ports and oilfields, which had been closed for months by
unrest, marked the oil markets tipping point.
Libyas production, which had dropped to 250,000 barrels per day (bpd) in April,
May and June from around 1.8 million bpd before the countrys civil war in 2011,
rebounded to almost 900,000 bpd over the next three months.
The increase was significant, but not because of the volume. World production and
consumption of oil are around 93 million bpd so the extra 600,000 bpd amounted
to less than 1 percent of daily demand. The resumption of Libyan exports mattered
because it was so unexpected.
Libyas production,
which had dropped
to 250,000 bpd
rebounded to
almost 900,000
bpd over the next
three months.
Firefighters work to put out the fire of a storage oil tank at the port of Es Sider in Ras Lanuf December 29, 2014. Oil tanks at Es Sider
have been on fire for days after a rocket hit one of them, destroying more than two days of Libyan production, officials said on Sunday.
REUTERS
A brief history of the oil crash

HEDGE FUND POSITIONS AND OIL PRICES DURING THE COURSE OF 2014
Sources: CFTC, ICE Futures Europe, Thomson Reuters Eikon
700
140
600
120
500
100
400
80
300
60
200
40
100
20
0
0
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Hedge fund positions in Brent and WTI futures and options (million bbl) (left axis)
Brent oil price (1st month futures) (US$/bbl) (right axis)
WTI oil price (1st month futures) (US$/bbl) (right axis)
Two weeks earlier, Libyas crude exports had been seen potentially falling to zero
within days as the authorities struggled to contain a wave of protests paralysing
oilfields and ports across the country.
Expecting more unrest, hedge funds and other financial investors had amassed
a record long position in crude-linked futures and options positions equivalent to
650 million barrels of oil in order to bet on further price rises.
With Libya descending into chaos, Syria locked in a civil war of its own and
Islamist fighters racing across northern Iraq to threaten that countrys oilfields,
fund managers were anticipating a further loss of oil supplies, and it seemed the
nearest thing to a sure bet.
Instead, the Islamists failed to capture Iraqs key producing areas and Libyas
output began rising, catching investors long and wrong in the paper markets,
and scrambling to turn around their positions.
By the beginning of September, fund managers had slashed their net position
in Brent- and WTI-linked derivatives by 60 percent, the equivalent of more than
400 million barrels.
Amid this massive liquidation of positions, Brent fell more than $13 per barrel,
or 11 percent, to the lowest level seen in over a year.
Much more was to come. Brent dropped to $86 per barrel at the end of October,
$70 by the end of November, $57 by the end of December and less than $47 on
Jan. 13, 2015.
Brent dropped to
$86 per barrel at
the end of October,
$70 by the end of
November, $57 by
the end of December
and less than $47
on Jan. 13, 2015.

Smoke rises from an oil tank fire in Es Sider port December 26, 2014. A fire at an oil storage tank at Libyas Es Sider port has spread to two more
tanks after a rocket hit the countrys biggest terminal during clashes between forces allied to competing governments, officials said on Friday.
REUTERS
The spectacular slide in prices was comparable to previous slumps in 1985-86,

1997-98, 2000-01 and 2008-09.
The price drop has plunged the industry into crisis, with major international oil
companies and small independents cancelling billions of dollars worth of projects
planned for 2015 and 2016.
Among them, Schlumberger, the worlds leading oilfield services company, is axing
9,000 jobs (7 percent of its worldwide workforce) as exploration and production slow.
Seeking to conserve cash, the heavily indebted shale drillers at the heart of the
U.S. energy revolution have raced to idle rigs and lay off crews.
But if the resumption of Libyan oil exports served as the immediate trigger for the
price plunge, the seeds were sown years earlier at the height of the boom.
Two weeks earlier,

Libyas crude exports
had been seen
potentially falling to
zero within days as the
authorities struggled
to contain a wave of
protests paralysing
oilfields and ports
across the country.

Demand destruction
In 2005, spooked by a rise in oil prices to $55 per barrel, from less than $20 at the
end of the 20th century, U.S. legislators approved the Energy Policy Act.
The legislation, which passed with substantial support from both Republicans and
Democrats, instructed fuel distributors to begin blending increasing amounts of
ethanol into the gasoline supply.
In 2007, responding to a further increase in oil prices to around $70, Congress
passed the Energy Independence and Security Act, which stiffened the blending
targets even further and raised fuel-economy standards for vehicles sold in the
United States.
Those acts formed part of a raft of laws and government regulations introduced
in the United States and other advanced economies between 2004 and 2014
to promote energy conservation and reduce demand for increasingly expensive
imported oil.
In the meantime,
the soaring cost of
gasoline, diesel and
jet fuel encouraged
motorists, truck
operators and airlines
to do everything
possible to reduce
fuel consumption.
In the meantime, the soaring cost of gasoline, diesel and jet fuel encouraged
motorists, truck operators and airlines worldwide to reduce fuel consumption.
The number and length of discretionary car journeys began to fall, consumers
bought smaller and increasingly fuel-efficient vehicles, trucking companies
rationalised deliveries, airlines revamped their networks and removed excess
weight from aircraft.
Men work on the rig of an oil drilling pump site

in McKenzie County outside of Williston, North
Dakota March 12, 2013.
REUTERS/Shannon Stapleton

A tank truck exits from the main gate of the Zawiya refinery and oil port towards the local market, December 18, 2013. Libya is stepping up fuel imports, with four
tankers queuing at one port as the OPEC producers second-largest refinery is running at only half its capacity due to oilfield strikes, a senior official said.
REUTERS/Ismail Zitouny
Compressed or liquefied natural gas became increasingly popular as a cheaper

alternative fuel for transit buses, refuse trucks and some trucking fleets. North
American railroad operators revived long-dormant plans to convert locomotives to
run on a mix of natural gas and diesel, though none has yet made the change.
In retrospect, 2005 proved to be the peak year for oil consumption in the United
States and other advanced economies.
U.S. consumption of motor gasoline, diesel, jet fuel and other refined products
declined by more than 2 million barrels per day, almost 12 percent, between 2005
and 2013, even though the countrys population increased by more than 20 million
over the same period and real economic output grew by 10 percent.
It was the biggest drop in fuel demand in history and mirrored around the
industrialised world. On one estimate, the advanced economies fuel consumption
in 2013 was 8 million bpd below what would have been predicted had the pre2005 trend continued.
Since 2005, fuel conservation has saved the equivalent of the entire exports of
Saudi Arabia, the worlds largest oil exporter.
Since 2005, fuel

conservation has
saved the equivalent
of the entire exports
of Saudi Arabia,
the worlds largest
oil exporter.
Demand destruction in the United States, Europe and Japan provided room for
the rapidly developing economies of China, Southeast Asia, Latin America and the
Middle East to increase their own fuel consumption without pushing up prices.
But in Asia, too, there were signs in 2014 of lower consumption growth in response
to the pressure for greater efficiency and a general slowdown across the region.

Shale revolution
High prices did more than just restrain demand. They were the key catalyst for the
U.S. shale boom, which resulted in the fastest growth in oil production in history
during 2013 and 2014.
The shale revolution stems from the successful application of horizontal drilling
and hydraulic fracturing techniques to particularly dense, impermeable rock
formations that proved resistant to conventional, vertical drilling.
Neither technique was new to the oil industry the first horizontal well was drilled
in 1929 and the idea of fracturing rock formations to stimulate oil recovery has
been around since the 1860s.
In the 19th century, fracturing was carried out with dynamite, but the industry
switched to acid in the 1930s, napalm in the 1940s and water mixed with
chemicals in the 1950s and 1960s.
The problem has always been the relatively high cost of horizontal drilling and
fracturing. Both techniques were used extensively in North Dakotas Bakken shale
in the early 1990s but could not be made to work commercially, leading to their
abandonment by the end of the decade.
In 2005, fewer than

150 oil wells were
drilled in the state
of North Dakota.
The number soared to
850 by 2010 and more
than 2,000 in 2013.
An oil drilling rig is seen outside of Tioga, North Dakota, March 12, 2013.
REUTERS/Shannon Stapleton

DAILY OIL PRODUCTION FROM NORTH DAKOTAS BAKKEN SHALE (BARRELS)

Source: North Dakota Department of Mineral Resources
1200000
1000000
800000
600000
400000
200000
0
2005
2006
2007
2008
2009
However, a quadrupling of oil prices between 2002 and 2012

coupled with significant technological improvements in
steering equipment down wells and taking measurements
remotely created conditions for a second shale revolution,
and this time it did not stall.
In 2005, fewer than 150 oil wells were drilled in the state of
North Dakota. The number soared to 850 by 2010 and more
than 2,000 in 2013.
Almost all the new wells were drilled into the Bakken
formation - two layers of rich, black marine shale found
thousands of metres below the northwestern corner of the
state as well as beneath parts of neighbouring Montana and
Saskatchewan.
Bakken production surged from 2,500 bpd in 2005 to
250,000 bpd in 2010 and more than 750,000 bpd in 2013.
By the end of 2014, Bakken output had reached more than 1.1
million barrels per day.
Horizontal drilling and hydraulic fracturing to target crude
spread to Texas from around 2010, first to the Eagle Ford
formation in the southwest corner of the state, then to the
Permian Basin in the west, which already had a long history
of conventional oil production.
Smaller production increases have come from fracking in
Oklahoma, Colorado, Utah and New Mexico. Texas and
North Dakota, however, account for 95 percent of the rise in
U.S. oil output since 2008.
2010
2011
2012
2013
2014
The result has been an extraordinary renaissance in U.S. oil

production. Output surged from 5 million bpd in 2008 to
an average of more than 8.5 million bpd in 2014, and stood
above 9 million bpd at the start of 2015.
Production growth has been accelerating as shale drillers
become more efficient at locating wells and drilling
them faster.
Output increased by 160,000 bpd in 2011, 850,000 bpd
in 2012, 950,000 bpd in 2013 and 1.2 million bpd in 2014,
according to the U.S. Energy Information Administration.
Production increases were accelerating right through the
summer and early autumn of 2014 as shale firms drilled a
record number of super-productive wells into the Bakken,
Eagle Ford and Permian Basin.
Bakken production increased by an extraordinary 260,000
bpd by October 2014 compared with December 2013, while
combined output from the Eagle Ford and Permian Basin
was up by another 400,000 bpd.
Elsewhere in the world, high prices also stimulated record
investment in exploration and production in new, more
challenging areas, ranging from the Caspian Sea and deep
waters off the coasts of Latin America and West Africa to the
Arctic and East Africa.
So much extra crude has come from shale and other sources
that oil prices continued to fall throughout the last three
months of 2014 and into the first weeks of 2015 even as
Libyan supplies experienced new interruptions.

Supply disruptions
By 2012 or 2013 at the latest, the global oil market was on an unsustainable
trajectory with stagnating fuel demand meeting rapidly increasing supply.
The only solution was a sharp fall in prices, which had been above $100 per barrel,
to curb demand destruction and reduce investment in new sources of production.
But the need for lower prices was masked by two factors. First, many observers
doubted the shale revolution could last. Second, increased output from North
America was offset almost exactly by a loss of production across the Middle East and
Africa as a result of war, unrest and sanctions in Libya, Syria, South Sudan and Iran.
In its 2011 World Oil Outlook, the Organization of the Petroleum Exporting
Countries (OPEC) concluded that shale oil should not be viewed as anything other
than a source of marginal additions to crude oil supply.
OPEC was not alone

in being deeply
sceptical about shales
sustainability. Many
oil analysts and
non-shale producers
shared its stance.
The producer group went on: Significant constraints over the next ten years
include: the need for geological analysis of other shales; trained people to
perform hydraulic fracturing; and acquiring the horizontal drilling and fracturing
equipment. In the U.S. already, costs have accelerated sharply as the demand for
fracking equipment cannot be met.
Looking ahead, it is evident that output from new shale oil deposits will not grow
at a similar rate of 60,000 b/d per year as the Bakken basin is presently, OPEC
concluded, in what must be one of the most spectacularly inaccurate forecasts of
the shale boom.
OPEC was not alone in being deeply sceptical about shales sustainability. Many oil
analysts and non-shale producers shared its stance.
By 2013, however, that position was no longer tenable as shale production
continued to accelerate. OPECs 2012 World Oil Outlook acknowledged shale oil
represents a large change to the supply picture and the scale of that shift has
become more obvious over the last two years.
A camel rests at a fuel station in the Judean desert near the West Bank city of Jericho January 11, 2015.
REUTERS/Baz Ratner

U.S. OIL PRODUCTION SINCE 1920 (MILLIONS OF BARRELS PER DAY)

Source: US Energy Information Administration
10
0
1920
1925
1930
1935
1940
1945
1950
1955
1960
1965
1970
1975
1980
With so much new crude coming from U.S. shale, the preservation of balance
in the oil market required ever-increasing supply disruptions from conventional
producers in the Middle East, North Africa and other parts of the world, as well as
continued demand growth from China, Southeast Asia and the Middle East.
Until the middle of 2014, it seemed that unplanned outages might offset the
continued rise in shale production.
Growing turmoil in the wake of the Arab revolutions that started in 2011 had
almost eliminated Libyan oil exports.
With Islamist fighters surging across northern Iraq and capturing the city of Mosul
in June 2014, many oil experts became alarmed at the threat to the countrys
northern oilfields around Kirkuk and Kurdistan as well as potentially the much
larger fields in the south of the country.
Some even began to worry about external or internal threats to political stability
and oil production in the Gulf monarchies.
The perception of intensifying geopolitical risks to oil supplies encouraged hedge
funds and other speculators to amass a record bullish position in crude-linked
derivative contracts.
1985
1990
The perception
of intensifying
geopolitical risks
to oil supplies
encouraged hedge
funds and other
speculators to amass
a record bullish
position in crudelinked derivative
contracts.
But from late June, it became increasingly clear that geopolitics would not further
interrupt the supply of crude. Oil continued to flow from all parts of Iraq and
increase from Libya.
Robbed of the last remaining source of support, the incipient oversupply in the
market became increasingly obvious and a sharp price correction inevitable.
10
1995 2000 2005 2010

Price war begins

Senior policymakers in Saudi Arabia appear to have grasped
the inevitability of lower prices faster than many investors.
Throughout September, October and November 2014,
speculation intensified about possible production cuts by
OPEC members, led by Saudi Arabia.
The Saudis downplayed the prospect. In early October, senior
Saudi officials began to brief analysts and traders not to
expect output reductions and indicated the kingdom was
prepared to watch prices slide.
Cutting production to keep prices artificially high would
only sacrifice Saudi Arabias and OPECs market share and
allow shale production to continue expanding. Instead, the
kingdom determined to let prices decline enough to begin
curbing investment in new shale wells and formations.
Policymakers remembered bitter lessons from the early
1980s, when Saudi Arabia cut its production and exports
to prop up prices in the face of falling demand and rising
supplies from non-OPEC producers including the North Sea,
Mexico, China, the United States and the Soviet Union.
In the end, the kingdom suffered a double hit to its revenues
from lower prices and reduced output. Saudi policymakers
today are determined not to make the same mistake.
On Nov. 27, 2014, OPEC announced that it would maintain

its combined production at 30 million bpd. Brent, which
had already fallen to $77 per barrel by the time of the OPEC
meeting, dropped another quarter to $59 over the next
month as the market digested the fact that the group would
not come to the rescue.
The current price slump is often portrayed as a straight fight
between Saudi Arabia and the North American shale drillers,
but the real picture is more complicated. Shales impact on
the oil market has been so disruptive because it emerged
right in the middle of the cost curve.
Breakeven prices for shale wells range from as low as $30 per
barrel to $75 or above. Shale production is more expensive
than tapping conventional fields on the Arabian peninsula
but cheaper than some megaprojects such as Kashagan in
the Caspian Sea. Its breakeven range overlaps with highcost oil from stripper wells, oil sands, heavy oil projects,
ultra-deepwater and Arctic projects as well as aging fields
including those in the North Sea.
As a result, Canadas oil sands producers, North Sea firms,
ultra-deepwater drillers, heavy-oil promoters and shale drillers
outside North America have found themselves caught in the
crossfire between Saudi Arabia and its closest OPEC allies on
the one hand and U.S. shale entrepreneurs on the other.
Saudis Oil Minister Ali al-Naimi arrives at Emirates palace to attend the OPEC meeting in Abu Dhabi December 3, 2007.
REUTERS/Ahmed Jadallah
11

Painful adjustment
Oil prices must ultimately drop to a point at which the market rebalances - which
means eliminating some of the previously forecast production growth and slowing
or reversing the loss of demand.
There are signs the adjustment is well under way. U.S. motorists have begun to
buy bigger cars again as low prices reduce the emphasis on distance per gallon in
favour of space and performance.
Large and small oil companies have cut tens of billions of dollars from their
exploration and production budgets for 2015 and 2016.
In the shale patch, producers have slashed drilling programmes for 2015 and
started to idle rigs, conducting layoffs.
Large and small oil

companies have cut
tens of billions of
dollars from their
exploration and
production budgets
for 2015 and 2016.
Between early October 2014 and Jan. 9, 2015, almost 190 rigs previously drilling
for oil in the United States were idled around 12 percent of the total. In all, 550
rigs could be deactivated in the coming months.
It will take time for the slowdown in drilling to filter through to a slowdown in
supply growth because of a large backlog of shale wells drilled in 2014 that have
not yet been completed. As these enter production, supply will continue to grow
for a few months more.
But output from existing wells is not stable. After a burst of high production in the
first few months after a shale wells completion, output tapers rapidly as natural
underground pressure wanes. Production from Bakken wells declines as much as
two-thirds by the end of the first year.
Saudi Arabias King Salman is seen during U.S. President Barack Obamas visit to Erga Palace in Riyadh
January 27, 2015. Obama sought to cement ties with Saudi Arabia as he came to pay his respects on
Tuesday after the death of King Abdullah, a trip that underscores the importance of a U.S.-Saudi alliance
that extends beyond oil interests to regional security.
REUTERS/Jim Bourg
12

ESTIMATED OIL SUPPLY INTERRUPTIONS WORLDWIDE (EIA) (MILLIONS OF BARRELS PER DAY)
Source: US Energy Information Administration
3.5
3.0
2.5
2.0
1.5
1.0
0.5
2012
2013
Dec
Nov
Oct
Sep
Aug
Jul
Jun
May
Apr
Mar
Feb
Dec
Jan
Nov
Oct
Sep
Aug
Jul
Jun
May
Apr
Mar
Feb
Dec
Jan
Nov
Oct
Sep
Aug
Jul
Jun
May
Apr
Mar
Feb
Jan
0.0
2014
New wells must constantly be drilled and fractured to replace the falling output
from old ones. Unless oil prices are high enough to cover the associated costs,
drilling will stop, denting shale output.
Estimates of breakeven costs vary, but many sources suggest oil prices have fallen
beneath the threshold needed to maintain current output levels.
North Dakotas state oil regulator has forecast output to decline several hundred
thousand barrels per day by the middle of 2015, and even more in 2016, unless
prices recover.
The Energy Information Administration sees U.S. output growing by another
300,000 bpd to a peak of almost 9.5 million bpd in May 2015, then falling
between June and September on a lack of new drilling and as well rates decline.
Beyond September, the EIA expects U.S. oil output to start growing again but that
is based on an assumption that prices will recover to around $70 by the end of
2015 and edge up further in 2016.
Saudi Arabia and the United Arab Emirates have made clear they will not cut
production unless shale producers also restrain output, and perhaps not
even then.
The Gulf monarchies amassed large financial reserves during the boom and are
now indicating that they are prepared to run budget deficits for a year or two to
wait out the shale players.
What happens to production and prices in 2015 therefore largely depends on the
responses of the shale companies how far they cut drilling and production, how
far they can improve efficiency and cut costs to reduce the breakeven price for new
wells while sustaining production in an environment of lower prices.
Saudi Arabia and the

United Arab Emirates
have made clear they
will not cut production
unless shale producers
also restrain output,
and perhaps not
even then.
13

Country Profiles
Saudi Arabia
Saudi Arabia responded to the rise of U.S. shale oil and other non-OPEC oil sources,
which threatened to push it out of markets such as the United States, by abandoning
a decades-old policy: instead of cutting production to support prices, it allowed prices
to slide in order to eliminate higher-cost producers. This strategy has left it in a test
of wills it needs to withstand the pain of low oil prices longer than the high-cost
producers can stay in business. The battle could take several years, but the signs are
that Saudi Arabia can win.
The government relies on oil export revenues for about 90 percent of its income, so
low oil prices are doing serious damage to its budget. In December the government
projected a record budget deficit of $38.7 billion for 2015, over 5 percent of gross
domestic product; analysts estimate the budget assumed an average oil price of
about $60 per barrel, so if oil stays around $50, the deficit will be even bigger. Some
energy and petrochemical projects are being put on hold because they no longer look
economic. National oil giant Saudi Aramco said it would postpone a number of projects
and seek to renegotiate some contracts sources told Reuters that a $2 billion plan to
build a clean-fuels plant at Ras Tanura had been suspended.
But cheap oil will not necessarily mean a sharp economic slowdown, because the
government has the financial resources, built up over years of sky-high oil prices, to
keep spending. Finance Minister Ibrahim Alassaf has declared Saudi Arabia will run
a counter-cyclical fiscal policy, using its reserves to maintain heavy expenditure on
infrastructure and welfare projects in order to offset any negative impact from cheap
oil. As a result, gross domestic product is expected to grow by 3.2 percent this year, a
Reuters poll of analysts found in January, down only moderately from an estimated
3.95 percent last year.
Saudi Arabia is likely to liquidate tens of billions of dollars worth of foreign assets,
mainly U.S. securities and bank deposits, to fund its strategy this year. But the numbers
suggest it has the money to stay the course for at least several years; government
reserves at the central bank total $241 billion, while the central bank had the
equivalent of $732 billion of net foreign assets in November, including $545 billion of
securities and $131 billion of deposits with banks abroad. That excludes other assets
and the ability of the state, which has miniscule debt, to borrow.
14
National oil giant

Saudi Aramco said
it would postpone
a number of
projects and seek to
renegotiate some
contracts sources
told Reuters that a
$2 billion plan to build
a clean-fuels plant at
Ras Tanura had been
suspended.

Russia
The halving of global oil prices since last summer has thrown Russia into a full-blown
economic crisis. Long dubbed the lifeblood of the Russian economy, oil revenues are
critical both for export earnings and for funding government expenditures.
While President Vladimir Putin and his officials have long bemoaned their countrys
excessive reliance on natural resources, the 15 years of Putins rule have seen no export
diversification. Russias dependence on commodity prices has actually risen, reflected in
the rising oil price needed to balance the national budget.
Oil and gas account for around 70 percent of Russias exports, of which about four-fifths
come from crude oil or petroleum products and the rest from natural gas (the price of
which is linked to oil). A rough rule of thumb is that every $1 fall in the oil price reduces
Russias annual export earnings by $3 billion. This in turn means that if oil prices stay at
their present $50 per barrel for a year, Russia will earn around $150 billion less in 2015
than in 2014 equivalent to more than 10 percent of its gross domestic product.
Despite this slump in export earnings, forecasters expect the current-account surplus to
remain positive in 2015. The burden of adjustment is shouldered by the rouble, which has
lost almost half of its value against the dollar since the middle of last year. This devaluation
is expected to cut Russias imports in half, as pricey foreign goods deter buyers and
make consumers poorer. While this helps to keep the external accounts in balance, the
adjustment is far from painless.
A rough rule of
thumb is that every
$1 fall in the oil price
reduces Russias
annual export
earnings by
$3 billion.
Rising import prices mean inflation almost doubled last year to 11.4 percent, and it
continues to increase: forecasters expect it to exceed 15 percent by the spring, with some
predicting that it will still be in double digits by the year-end.
Adding to the economic problems is the effect of sinking oil prices on investor confidence.
Net capital outflows reached $150 billion in 2014 and are officially forecast to be around
$120 billion this year. While these massive net outflows largely reflect a freeze on Western
bank lending, caused by sanctions imposed because of Russias actions in Ukraine, the
outflows have accelerated as oil prices and the rouble plunged.
Faced with the sliding rouble, surging inflation and huge capital outflows, the central bank
has raised its main lending rate to 17 percent, including an emergency 6.5-point hike in
mid-December. The combination of tight money, slumping exports, rising inflation and
sinking investor confidence is pushing Russia into recession. The International Monetary
Fund forecasts the economy will contract by 3 percent this year, while credit-rating agency
Moodys forecasts a 5.5 percent slump. Many forecasters also expect the economy to
continue to shrink next year.
A separate set of worries concerns the governments budget, which relied on oil and gas
taxes for around half of revenues. Russia has steadily ramped up government spending
over recent years, and as a result the break-even oil price for the federal budget has risen
from below $40 per barrel in 2007 to over $100 per barrel last year.
The weaker rouble provides some compensation for the effect of lower oil prices on the
budget, reducing the break-even price to around $80 per barrel now. Even so, Finance
Minister Anton Siluanov has said that at $50 per barrel the budget would face a 3 trillion
rouble ($45 billion) shortfall this year. This may well be an underestimate, as Russia hastily
draws up emergency anti-crisis measures set to cost tens of billions of dollars.
Russia has some $90 billion in its Reserve Fund that could be used to plug budget holes
enough to cover the projected shortfall for about two years. The most critical question for
Russia is therefore not how low the oil price goes, but how long it stays there.
15

Canada
In Canada, plunging oil prices have cost jobs, hammered government finances, forced
its central bank to shock the market with a rate cut and sliced into the profitability of
Albertas oil-sands projects.
With oil prices hovering near break-even levels after falling by more than half from
their June peaks, Suncor Energy Inc in January fired 1,000 employees and contractors
and slashed capital spending for this year, just two months after releasing a more
optimistic budget. Royal Dutch Shell Plc removed 300 positions at its oil-sands mining
operations. One oil well-drilling association warned 3,400 direct jobs could be at risk
with the number of rigs working in the field expected to drop 41 percent. They also said
another 19,500 indirect jobs could be lost after nearly every Canadian oil company
slashed capital spending to focus on surviving the storm.
It has been the industrys worst predicament since the 2008 financial crisis. After years
of growth, which pushed Canadian oil exports above 3 million barrels per day (bpd) for
the first time last year, an industry that had long worried that it could not find enough
workers to support its ambitions began thinking it might have too many.
The impacts have been far reaching in Western Canada, where the resource sector is
the biggest contributor to government coffers. Jim Prentice, the premier of Alberta, the
province whose oil sands are the largest single source of U.S. oil imports, warned that
low prices would cost the government C$10 billion ($8 billion) and lead to three years
of deficit budgets.
Royal Dutch Shell Plc

removed 300 positions
at its oil-sands
mining operations.
One oil well-drilling
association warned
3,400 direct jobs could
be at risk with the
number of rigs working
in the field expected
to drop 41 percent.
Other regions are also feeling the pinch. Newfoundland, which takes royalties from
offshore production in its surrounding waters, expects a deficit of nearly C$1 billion,
while Saskatchewan has also warned that lower oil prices will cut into its finances.
But the biggest impact from the energy drop may have been on the countrys monetary
policy. Bank of Canada head Steven Poloz shocked markets on Jan. 21 with a rate cut
that drove the Canadian dollar to a near six-year low, a blessing for an oil industry
whose costs are in Canadian dollars but whose product is sold for U.S. currency.
The federal government is also taking a hit. Finance Minister Joe Oliver, a relentless
promoter of the oil industry during three years as the countrys natural resources
minister, warned in early January that he would not release a budget until April
instead of the usual February or March because of the uncertain oil market, though
he has pledged Canada will have its first balanced budget in 2015-16 since the
financial crisis.
To be sure, even as prices tank, some major oil-sands producers are planning for
growth. Though hemmed in by a lack of tidewater pipelines and discouraged by six
years of U.S. indecision on TransCanada Corps Keystone XL project, these producers
say planned expansions would be too costly to cancel or will pay off with an eventual
recovery in crude prices. Some producers also plan to boost output in the hope that
increased economies of scale will cut their cost per barrel.
Imperial Oil Ltd, the Canadian affiliate of ExxonMobil Corp, said on Jan. 19 that
operations had begun at a 40,000-bpd expansion of its Cold Lake oil-sands operations.
Imperial began pumping steam at its Nabiye project in early January, with full output
expected later this year, adding to the 145,000 bpd it already produces at the site.
16

Venezuela
Venezuela was already on the rocks in 2014: its economy was contracting, annual
inflation was running above 60 percent, and currency controls had triggered scarcity of
basic goods including food and medicine. The OPEC countrys economy was managing
to limp along thanks to oil, the source of 96 percent of Venezuelas export revenue.
So when oil prices started to tumble from the high-$90s, economists quickly forecast a
perfect storm for the South American nation.
Indeed, the fall of some 60 percent in oil prices since June comes at a disastrous
moment for the country, which sits on the worlds largest crude reserves. Venezuela is
flailing under the weight of economic controls, including distortionary exchange rates
and fixed prices for staple goods. The oil shock promises to worsen the crisis and foes
hope it will lead to the collapse of Venezuelas polarising socialist government.
For starters, it will crimp authorities ability to import food and goods, aggravating
chronic shortages. Long lines for food, now a common sight throughout Venezuela,
have already triggered isolated protests. They have also dragged down President
Nicolas Maduros popularity and set the stage for a ruling-party setback at this years
parliamentary elections. A popular local cartoonist depicted Maduro about to be
crushed by a barrel in free-fall. Indeed, the oil slump raises the spectre of social unrest
in the volatile post-Hugo Chavez era.
Indeed, the fall of some

60 percent in oil prices
since June comes at a
disastrous moment for
the country, which sits
on the worlds largest
crude reserves.
The rout has also heightened fears of a financial collapse in Venezuela. With the
country having to allocate close to $10 billion to service its foreign bonds each year for
the next two years, markets are now pricing the countrys debt at default levels on the
belief that Caracas will be unable to keep up with payments.
Maduro has rejected speculation of a default, but yields on the benchmark Global
2027 bond have spiked from around 11 percent in June to 28 percent in mid-January.
Weaker coffers also lessen Venezuelas ability to cover hefty arbitration awards for oil
nationalisations under Chavez. A decision is expected this year on the 2007 takeover of
ConocoPhillips assets, which could see the country forced to pay around $4 billion
or more.
The cash crunch will likely hinder investment in the countrys chronically underperforming
energy sector. Financially strapped state oil company PDVSA already subsidises
services as diverse as yoga classes in public parks and free health clinics. Investment
plans now may be watered down further to tend to pressing social and political needs.
That said, tight finances could also encourage PDVSA to be more pragmatic in its
operations and austere in its spending.
With Venezuelas self-styled socialist revolution experiencing its most challenging
times in 16 years, many are wondering whether oils tumble will prove the final nail in
the coffin. There will be no catastrophe or collapse here, Maduro vowed in October,
when oil prices had fallen to around $80 per barrel. But with prices having almost
halved since, a weak Maduro appears to lack the political clout to implement painful
austerity measures. Instead, he told parliament in January that God will provide
following the oil rout, striking a tone of resignation that echoed throughout Venezuela.
17

China
In December 2014, Chinas monthly imports of crude reached 7 million barrels per day
(bpd) for the first time, signalling that the worlds largest energy consumer is as hungry
as ever for oil.
The Chinese government is taking advantage of falling prices to stockpile crude for its
strategic reserves, analysts say.
Chinas crude supply imports plus domestic production exceeded demand
from domestic refineries by almost 900,000 bpd in December, part of an implied
90-million-barrel surplus China built up over 2014, much of which would be destined
for the strategic reserves.
China is secretive about its reserves, although the government said in November that
the first of three phases was holding 91 million barrels. Estimates put the stockpiles at
roughly 30 days of imports, still far short of the OECD-standard 90 days targeted
by China.
Stockpiles aside, crude runs in China have followed imports to new highs. The countrys
implied oil demand a combination of crude throughput and net imports of refined
products - continues to expand. The pace of growth is more modest than initially
forecast, however, amid an economic slowdown that saw growth last year at its slowest
since 1990. The International Energy Agency revised its estimate for oil demand growth
in 2014 from 3.6 percent down to 2.7, and from 4.2 percent to 2.5 in 2015.
Supported by a burgeoning car culture, implied demand in 2014 broke 10 million bpd,
even as diesel demand from industrial users has retrenched. State-run giant Sinopec
reported that its diesel production fell 4 percent, while gasoline production rose 12.5
percent in 2014. A roughly 50 percent increase in consumption taxes on fuel, though,
will temper demand growth.
Low prices have put pressure on Chinas three state oil giants, already under scrutiny
amid an anti-corruption campaign that has targeted, in particular, China National
Petroleum Corp (CNPC).
The campaign could dampen enthusiasm for overseas deals, like those in Canadas oil
sands, that could enhance Chinas long-term energy security. Unlike previous years,
when obviously acquisitions were seen as glamorous or something that you do to get a
promotion in the Communist Party, now people will look at you and say, why did you do
this? The first thing they think of is, because youre getting a kickback, one analyst said.
Domestic crude output from the worlds fourth-largest producer is a question mark,
with CNPC planning to cut output at Daqing by 11 million barrels in 2015, given high
oil-extraction costs at the aging field, Chinas most productive. Yet with slimmer profits
comes the incentive to produce more. December saw the highest levels of domestic
crude production since at least January 1999. Even so, domestic production stayed flat
in 2014, up just 0.5 percent.
At the pump, even the state oil giants are not shielded from the effects of lower global
prices; a regulatory scheme put into effect in 2013 links retail gasoline and diesel prices
with crude benchmarks, adjusted on a biweekly basis. But the bottom line has been
propped up by cuts to a windfall tax on crude oil, which will now kick in at $65 a barrel
instead of the previous $55.
18
Low prices have put

pressure on Chinas
three state oil giants,
already under scrutiny
amid an anti-corruption
campaign that has
targeted, in particular,
China National
Petroleum Corp
(CNPC).

A worker prepares to fill a car at a gas station close to Copacabana beach in Rio de Janeiro, January 12, 2015.
REUTERS/Ricardo Moraes
AUTHORS
Jason Bush
Henning Gloystein
Scott Haggett
Dale Hudson
John Kemp
Adam Rose
Andrew Torchia
Alexandra Ulmer
Email energy@thomsonreuters.com
Visit financial.thomsonreuters.com/energy
2015 Thomson Reuters. 1009375 02/15.
Thomson Reuters and the Kinesis logo are trademarks of Thomson Reuters.


A Brief History of The Oil Crash

Caricato da

Informazioni sul documento

Descrizione originale:

Titolo originale

Copyright

Formati disponibili

Condividi questo documento

Condividi o incorpora il documento

Opzioni di condivisione

Hai trovato utile questo documento?

Questo contenuto è inappropriato?

Copyright:

Formati disponibili

A Brief History of The Oil Crash

Caricato da

Copyright:

Formati disponibili

A Brief History

of The Oil Crash

Downloaded from Thomson Reuters Eikon

On June 22 last year, two tankers loaded 1.3 million