Putin Crowns Himself OPEC King

For more than half a century, Saudi Arabia’s oil minister could move markets with a few choice words about what OPEC may decide at its next meeting, generating millions if not billions of dollars of profit for insiders.

Not anymore. While OPEC’s gatherings still influence prices, it’s not Saudi Arabia’s voice that matters most, but the voice of a non-member: Russia, specifically Vladimir Putin.

Since engineering Russia’s pact with the Organization for Petroleum Exporting Countries to curb supplies a year ago, Putin has emerged as the group’s most influential player. As one senior OPEC official put it on condition of anonymity, the Russian leader is now “calling all the shots.”

The Kremlin’s growing sway within the cartel reflects a foreign policy that’s designed to counter U.S. influence across the globe through a wide mix of economic, diplomatic, military and intelligence measures. That strategy, which is undergirded by Russia’s vast natural-resource wealth, appears to be working.

“Putin is now the world’s energy czar,” said Helima Croft, a former Central Intelligence Agency analyst who directs global commodity strategy at RBC Capital Markets LLC in New York.

Putin Emerges as OPEC's Most Influential Player

Vienna Meeting

The strength of Putin’s position will be in the spotlight on Nov. 30, when OPEC’s 14 members, including Iran, Iraq, Nigeria and Venezuela, host nominally independent producers such as Russia and Mexico in Vienna to discuss whether to extend the cuts past March. At stake is the economic and political health of all states involved, including Kazakhstan and Azerbaijan, two former Soviet republics that Putin brought into the deal. Participants in the accord collectively pump 60 percent of the world’s oil.

Putin spurred a short-lived spike in prices on the eve of the first-ever visit by a Saudi king to Russia last month by suggesting the cuts be extended until the end of next year, though he stressed he hadn’t made a final decision. Putin’s remarks, though qualified, triggered a fresh rush of diplomacy by both OPEC and non-OPEC producers to try to hammer out a deal.

 

Russian Energy Ministry

To be sure, it’s an uneasy alliance. The Saudis, the world’s largest exporter and already unhappy about bearing the brunt of the cuts, complain that allied producers aren’t fully complying. They’re also growing frustrated with Russia’s reticence to prolong the curbs, according to a person briefed on the Saudi view.

Since Putin’s comments, the Kremlin has been sending mixed signals, in part to placate domestic oil barons like state-run Rosneft PJSC chief Igor Sechin and Lukoil PJSC billionaire Vagit Alekperov. But it’s also trying to keep oil prices from rising enough to spur shale companies to drill even more in the U.S., which expects domestic production to reach a record 10 million barrels a day next year, a level exceeded only Saudi Arabia and Russia.

Putin, who embarked on his unprecedented alliance with OPEC when prices were about $20 a barrel lower than today and the market looked far more oversupplied, has another reason not to want oil prices to rise sharply. Russia is currently benefiting from a weaker ruble, which benefits exporters, and becoming less dependent on energy sales to meet its spending commitments.

‘Mutually Beneficial’

For Russian producers, the cuts are getting increasingly painful. With Brent, the global benchmark, at about $63 a barrel, almost 30 percent higher than a year ago, they’re anxious to start cranking up production. Rosneft this month even said it needs to be ready to open the spigots in December — a surprising date since it’s three months before the current agreement expires.

"There are three scenarios we’re looking at, okay, that the OPEC cuts stop end of the year, end of March next year, or they continue throughout 2018," Eric Liron, Rosneft’s first vice president for upstream, said on a conference call.

Still, current prices — and geopolitical realities — suggest the accord will be rolled over, according to Edward C. Chow, a fellow at the Center for Strategic and International Studies in Washington and a former Chevron Corp. executive.

“It’s mutually beneficial,” Chow said. "The Saudis need a large oil-producing partner to effectively influence the market and the potential for a greater geopolitical and economic role in the Middle East for Russia makes compliance with production cuts an expedient move for Moscow."

ICE Futures Europe

Saudi Energy Minister Khalid Al-Falih has said he would like to announce an extension until the end of 2018 next week . Russian officials have hesitated on following the Saudi plan, but more recently agreed the outlines of a deal with Riyadh to prolong the cuts until the end of 2018, according to people familiar with the matter. Still, both sides have yet to agree to crucial details and Moscow wants to include language in the agreement that will make the cuts conditional to the health of the market, the same people said, asking not to be named discussing private talks.

For Saudi Arabia, having to share output decisions with Russia, an ally of its arch-enemy Iran in the Syrian civil war, is a bitter pill to swallow. In the past, the Saudis could impose their will on prices and punish rivals by flooding the market, as they did against other OPEC members in 1985-86, Venezuela in 1998-99 and the U.S. shale industry in 2014-15. Russia was an afterthought.

But now the Saudi economy is reeling and the kingdom needs higher crude prices as much as everyone else. By some measures, including its fiscal break-even point, Saudi Arabia needs even higher prices than Iran or Russia, which is basing its budget for next year on oil averaging $40 a barrel.

Crown Prince Mohammed bin Salman’s sweeping crackdown on corruption, including the sudden arrests of scores of royals and billionaires, appears to have only increased the kingdom’s newfound reliance on Russia. The purge upended the decades-old model that held the elite together and turned the success of his ambitious economic-reform program into a battle for survival, according to Amrita Sen, chief oil analyst at Energy Aspects Ltd. in London.

"Because of this vulnerability, we believe the kingdom, and more importantly Mohammed bin Salman, needs strong oil revenues — and hence higher oil prices — to ensure he stays in power," Sen said.

 

    Read more: http://www.bloomberg.com/news/articles/2017-11-24/putin-crowns-himself-opec-king

    U.S. Growth at Above-Forecast 3% on Consumers and Businesses

    The U.S. economy expanded at a faster pace than forecast in the third quarter, indicating resilient demand from consumers and businesses even with the hit from hurricanes Harvey and Irma, Commerce Department data showed Friday.

    Key Takeaways

    While GDP grew more than anticipated, analysts look to another key measure to assess the true health of the economy. Final sales to domestic purchasers, which strip out trade and inventories — the two most volatile components of the GDP calculation — climbed 1.8 percent, the slowest since early 2016, after rising 2.7 percent in prior quarter.

    The fallout from the hurricanes was mixed, probably depressing some figures while lifting others. The storms inflicted extensive damage on parts of Texas and Florida, though the effect is likely to be transitory as economic activity is expected to rebound amid rebuilding efforts.

    Consumer spending, which accounts for about 70 percent of the economy, added 1.6 percentage point to growth last quarter. That was driven by motor vehicles, as Americans replaced cars damaged by the storms, while services spending slowed to the weakest pace since 2013. Even so, a steady job market, contained inflation and low borrowing costs are expected to provide the wherewithal for households to sustain their spending.

    The first reading of GDP, the value of all goods and services produced, also showed continued strength in business investment, indicating growth is broadening out to more sources beyond household consumption. Companies are upbeat about the outlook and overseas markets are improving, which may help boost exports and contain the trade deficit.

    At the same time, the details of business investment showed a mixed picture. The decline in investment in structures probably reflects the hit from Hurricane Harvey, especially on oil and gas drilling.

    Residential investment remained a weak spot. Builders are up against a shortage of qualified labor and ready-to-build lots at the same time sales are being held back by a shortage of available properties that’s driving up prices.

    Price data in the GDP report showed inflation picked up while still lagging behind the Federal Reserve’s 2 percent goal. Excluding food and energy, the Fed’s preferred price index — which is tied to personal spending — rose at a 1.3 percent annualized rate last quarter, following a 0.9 percent gain.

    Fed policy makers can point to evidence that growth is steady enough to allow them to keep raising interest rates, with investors expecting a quarter-point increase in December.

    While the economy is probably on solid footing in the ninth year of this expansion, the central bank and many economists expect GDP growth to slow beyond 2018, moving closer to 2 percent rather than the sustained 3 percent pace that the Trump administration says will happen if its tax plan is enacted.

    Economist Views

    “It’s hard to confidently discern the hurricane effects in this report, but the economy seems to be on pretty solid ground,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York. “The details are reasonably solid. Consumers stepped down a little from the second quarter but their spending still expanded at a decent pace.”

    The gain in equipment investment shows “businesses may be getting a little more confident about the expansion, both here in the U.S. and abroad,” he said. Overall, the report “probably gives a little more confidence to the Fed to hike rates before year-end, but I don’t think it’s a game-changer.”

    Other Details

    • Nonresidential investment — which includes spending on equipment, structures and intellectual property — increased 3.9 percent and added 0.49 percentage point to growth
    • Equipment investment jumped 8.6 percent for a fourth quarter of growth, longest streak since 2014
    • Residential investment fell at a 6 percent rate after 7.3 percent drop, worst two-quarter performance since 2010
    • Net exports added 0.41 percentage point to growth as exports rose, imports fell; inventories added 0.73 point, most since 2016
    • Government spending fell at a 0.1 percent rate; the figures reflected 1.1 percent in federal spending, driven by defense, while state and local outlays dropped 0.9 percent
    • After-tax incomes adjusted for inflation increased at a 0.6 percent annual pace, down from the previous quarter’s 3.3 percent; saving rate fell to 3.4 percent from 3.8 percent
    • GDP report is the first of three estimates for the quarter; the other two are due in November and December as more data become available

      Highlights of Third-Quarter GDP (First Estimate)

      • Gross domestic product grew at a 3% annualized rate (est. 2.6%) following a 3.1% gain in 2Q, best back-to-back quarters since 2014
      • Consumer spending, biggest part of the economy, grew 2.4% (est. 2.1%) after 3.3% in 2Q
      • Business fixed investment rose 1.5%, adding 0.25 ppt to growth; spending on nonresidential structures fell, equipment and intellectual property gained, residential dropped
      • Trade, inventories added a combined 1.14 ppt to growth
      • Commerce Dept. said it can’t estimate hurricanes’ impact on GDP; disaster losses on fixed assets, private and public, totaled about $131.4b

      Read more: http://www.bloomberg.com/news/articles/2017-10-27/u-s-growth-at-above-forecast-3-on-consumer-business-spending

      These Suburbanites May Have No Fracking Choice

      When Bill Young peers out the window of his $700,000 home in Broomfield, Colo., he drinks in a panoramic view of the Rocky Mountains. Starting next year, he may also glimpse one of the 99 drilling rigs that Extraction Oil & Gas Inc. wants to use to get at the oil beneath his home.

      There’s little that Young and his neighbors can do about the horizontal drilling. Residents of the Wildgrass neighborhood own their patches of paradise, but they don’t control what’s under them. An obscure Colorado law allows whole neighborhoods to be forced into leasing the minerals beneath their properties as long as one person in the area consents. The practice, called forced pooling, has been instrumental in developing oil and gas resources in Denver’s rapidly growing suburbs. It’s law in other states, too, but Colorado’s is the most favorable to drilling.

      Now fracking is coming to an upscale suburb, and the prospect of the Wildgrass homeowners being made by state law to do something they don’t want to do has turned many of them into lawyered-up resisters. “It floors me that a private entity could take my property,” says Young, an information security director.

      Many states require 51 percent of owners in a drilling area to consent before the others have to join. Pennsylvania doesn’t allow forced pooling at all in the Marcellus, one of the most prolific shale gas regions in the country. Texas, the center of the nation’s oil production, has strict limits on the practice. Despite its founding cowboy ethos of rugged individualism, Colorado has one of the lowest thresholds. “There’s a tension in oil and gas law between allowing private property owners to develop their mineral estates on their own and the state’s desire to ensure that ultimate recovery of oil and gas is maximized,” says Bret Wells, a law professor at the University of Houston.

      The rise of horizontal drilling and hydraulic fracturing over the past decade has ushered in a modest oil boom on Colorado’s Front Range by enabling companies to wring crude more cheaply from the stubborn shale that runs beneath Denver’s northern suburbs. From 2010 to 2015, Colorado’s crude output almost quadrupled. This year the state is pumping more than 300,000 barrels a day, most of it from the Wattenberg oil field beneath Wildgrass and beyond.

      Colorado’s population is booming, too. As Denver’s suburbs bloom northward into oil and gas territory—Wildgrass is about 20 miles north of Denver, not far from Boulder—housing developments are erupting where once there were only drilling rigs and farmland. And because horizontal drilling can reach as far as 2 miles in all directions from a well, companies need underground access to more land to maximize production from each site. The Colorado Oil & Gas Conservation Commission issues hundreds of pooling orders every year. “It’s an entirely new issue,” says David Neslin, former director of the commission, now an attorney at Davis Graham & Stubbs in Denver. “That’s creating some understandable friction with local governments and local communities.”

      Denver-based Extraction Oil & Gas is at the epicenter of that friction. Although it has rural holdings, a substantial amount of its reserves are located in populated areas. So the company, like others in the region, has put a lot of energy—and cash—into making its operations more palatable to suburbanites who fear the prospect of a drilling rig sprouting up within sight of their kiddie pools. Extraction almost exclusively uses electric drills, which are quieter than diesel-powered, and a new generation of hydraulic fracturing equipment that cuts noise. “It’s incumbent upon us to learn to live with these communities,” says Extraction spokesman Brian Cain. “Where we can go the extra mile to minimize impacts, we wish to do so.”

      The company’s latest project involves drilling 99 horizontal wells in Broomfield. That means leasing mineral rights from Wildgrass residents. Letters went out to some of them last year offering a 15 percent royalty and a $500 signing bonus. Some signed, others demurred, and still others organized a campaign aimed at blocking the project. Extraction hasn’t applied for a forced pooling order, but Young and his neighbors have come to believe it’s inevitable.

      The suburb’s agitation prompted the city to create a special task force to evaluate Extraction’s proposal. The company responded by taking members of the task force on a tour of oil and gas country. It wanted to show how its operations are less disruptive than traditional drill sites.

      Ultimately, the company agreed to more stringent environmental standards than the state requires. It will move some wells 1,300 feet from neighborhoods, almost three times farther than the law mandates. It will reduce the number of wells per site, monitor air emissions as well as water and soil quality, and build pipelines to transport oil immediately off-site instead of storing it in the city. “I can see Broomfield turning out to be a new model for how large-scale development gets done,” says Matt Lepore, director of the state commission, which will rule on Extraction’s applications for siting the wells this month.

      Such concessions have smoothed the path for development in many communities. But for some Wildgrass residents, any leasing is unacceptable. They say they fear accidents, such as the April pipeline explosion that killed two people and destroyed a home in Firestone, 20 miles away. Some simply find the terms of the initial lease offer laughable.

      “The money is so negligible,” says Elizabeth Lario, a health coach who’s lived in Wildgrass since 2005. And then there are property values: Homes in Wildgrass range from $500,000 to more than $1 million. “The royalties won’t offset the drop in property value,” says Stephen Uhlhorn, an engineer who’s lived in Wildgrass for four years. Oil development “is now hitting affluent neighborhoods where people have assets and livelihoods that exceed the value of any royalty they’re offered.”

      The bedrock of Colorado’s oil and gas policy is a 1951 law that says responsible fossil fuel development is in the public interest. The state, the law says, must protect the public from “waste”—industry parlance for oil that’s left in the ground. While Colorado has some of the strictest environmental regulations of any oil-producing state, it gives companies latitude in choosing where to drill. The Colorado Supreme Court has repeatedly held that the state’s interest in developing mineral resources preempts any local law that would curb drilling.

      Efforts to change the statute have fizzled. State Representative Mike Foote, a Democrat whose district is adjacent to Broomfield’s, introduced a bill earlier this year to raise the pooling threshold to 51 percent. It passed the House by a slim margin but died in a Senate committee in a party-line vote, with Republicans opposed. “The oil and gas industry pretty much controls the capital, particularly in the Senate,” Foote says. “Operators can do whatever they want.” Lepore, the head of the state oil commission, concedes the pooling threshold is low compared with other states. “I have no philosophical objection to a 51 percent requirement,” he says. “There are intelligent changes that could be made to the forced pooling law.”

      Young, the Wildgrass resident, received a lease offer last year. Since then he’s been working with a lawyer to consider his options, and so far he doesn’t like them. “You couldn’t put a Walmart where they’re putting these wells—no one would approve that zoning,” he says. “But for some reason, the industry is completely exempt from everything.”

        BOTTOM LINE – In Colorado, whole neighborhoods may have to lease the minerals under their land if just one homeowner agrees.

        Read more: http://www.bloomberg.com/news/articles/2017-10-03/these-suburbanites-may-have-no-fracking-choice