China Housing Bubble Blues

At least for one Chinese real estate developer, Zhejiang Xingrun Real Estate, the party is over.  I'm not sure what to make of the company's demise but I think this might be a bigger issue than the Chaori bankruptcy.  The Chinese real-estate market is surely larger than the solar energy market, with greater asset values and greater liabilities.  From the Sydney Morning Herald:

A Chinese real estate developer with more than half a billion dollars in debt has collapsed and its largest shareholder detained in what could be a further sign of financial stress in the world's second largest economy. 

The Zhejiang Xingrun Real Estate Co, which is based in wealthier eastern China, did not have sufficient cash to repay 3.5 billion yuan ($625 million) of debt to creditors, including more than 15 banks, Chinese officials reportedly told local and international media. 

The collapse of the company, based in the eastern town of Fenghua, has put investors on edge as it adds to concern of strains in the nation's real estate sector and comes less than two weeks after the first bond default by a Chinese company.

Oil Industry Austerity

Despite a projected record year for capex spending in 2014, oil majors are doing their best to reign in their spending (see ExxonMobil for a specific case).  This fiscal restraint will likely hit off-shore rig manufacturers who have no-contract new builds, service companies, and the employees of the various respective oil companies.

Non-majors have been experiencing the pinch from rising labor and completions costs.  EnCana late last year announced a 20% reductions in its workforce; UK firm BG Group may be reducing its workforce by more than 5%; Chesapeake late last year announced that the punch bowl would be taken away under new CEO Doug Lawler.

The money quote came at IHS CERAWeek 2014 from Chevron's CEO, John Watson:

$100 oil is becoming the new $20 oil.

China: Top Net Oil and Petroleum Products Importer

From the EIA:

In September 2013, China's net imports of petroleum and other liquids exceeded those of the United States on a monthly basis, making it the largest net importer of crude oil and other liquids in the world. The rise in China's net imports of petroleum and other liquids is driven by steady economic growth, with rapidly rising Chinese petroleum demand outpacing production growth.

Buy, Sell and Trade: Repo

The Federal Reserve tapering has included a substantial increase in reverse repo activity.  The Fede really needs the cash, right?

Reverse repos held by the Federal Reserve.

Reverse repurchase agreements are transactions in which securities are sold to primary dealers or foreign central banks under an agreement to buy them back from the same party on a specified date at the same price plus interest. Reverse repurchase agreements absorb reserve balances from the banking system for the length of the agreement. They are typically collateralized using Treasury bills. As with repurchase agreements, the naming convention used here reflects the transaction from the dealers' perspective; the Federal Reserve receives cash in a reverse repurchase agreement and provides collateral to the dealers.

Ticker-Taper Parade

For the third time in four months, the Federal Reserve has trimmed $10 billion in asset purchases: 12/18/14, 1/29/14, and 3/19/14.  And here is the rise in short-term interest rate:

1-year treasury (blue) and the Fed Funds (red) rate.

Percent change from year ago in Federal Reserve holdings.

2014 Global Oil Exploration and Production Spending

Global oil exploration and production (E&P) spending is expected to reach $723 billion in 2014, according a Barclays report published in December 2013.  Putting the 2013 number ($682 billion)  in perspective of gross world product (GWP) means it would have accounted for 0.95% of gross world product (CIA data) for 2013.

Taking it one step further, using the IMF's estimated 2014 GWP growth rate of 3.7%, the estimated $723 billion in spending would account for 0.97% of 2014's GWP.  The quick and dirty method may not be the best way to come to such a conclusion.

Asset-Back Commercial Paper

Talk about a decline.

China: Iron and Coal

From Bloomberg:

Iron ore extended its decline into a bear market, slumping by the most since August 2009, amid concern that demand in China is slowing just as rising output signals a global glut. 

Ore with 62 percent content delivered to Tianjin fell 8.3 percent to $104.70 a dry ton, the lowest since October 2012 and the biggest drop in more than four years, according to data from The Steel Index Ltd. yesterday. The benchmark price lost 27 percent since Aug. 14, when it reached a five-month high of $142.80. The raw material dropped into a bear market on March 7. 

BHP Billiton Ltd. (BHP) and Rio Tinto Group predict lower prices this year after producers in Australia and Brazil spent billions of dollars to expand output. Banks from Citigroup Inc. to UBS AG predict a global surplus, and Goldman Sachs Group Inc. listed iron ore among its least-preferred commodities for 2014. A surge in stockpiles at China’s ports spurred speculation that the inventory overhang threatens imports.

The Chinese Yuan to the US Dollar:

Coal's golden age may be at an end:

The council represents the largest, primarily state-owned power generators, and Liu issued his warning at the annual Coaltrans China conference. 

Competition from clean energy, including hydro, nuclear, wind, solar and biomass power, will keep the annual growth of coal-fired power - and thus demand for coal - well below 5 per cent in the coming decade, compared to 11 per cent in the previous one, he said. 

"In the next three to five years, power-station coal demand will be weak. The years of long-term tight coal supply will not reappear," he said. "We will have a structural over-supply of coal-fired power. The main driver for coal demand and price will no longer be total power demand, but rather natural gas development policy and rainfall patterns for hydro power."

Coal will still be largest energy source in China for the remaining decade and will also be a dominant driver of energy production elsewhere in the world.  However, natural gas projects in Central Asia will provide China with the first steps in achieving clean energy production.  And there is a 9,000 km pipeline to bring it to residents of Hong Kong:

The project cost 142 billion yuan (HK$178.8 billion) and is operated by the China National Petroleum Corporation. From this summer, it will provide a new source of gas to Hong Kong, replacing the supply the city has been drawing from Yacheng near Hainan Island since 1996 and which is now nearly exhausted. Work on the gigantic project began in 2008. A little over three years later, the main trunk went into operation across the mainland and in August last year the Guangzhou to Shenzhen stretch went live. Now, after a huge engineering effort, Hong Kong is about to join the network.

Chinese Refinery Overcapacity

South China Post has an article about capital spending cutbacks by China's two largest oil majors - PetroChina and Sinopec.  Cutbacks are attributed to apparent overcapacity in the refining and midstream sectors.  From the SCMP:

PetroChina, which leads the world's companies in capital expenditure, and fellow oil and gas producer China Petroleum & Chemical (Sinopec) are expected to trim spending in the next few years. 

Contributing factors are flat oil prices, rising debt, slowing growth in demand and excess capacity in oil refining and chemicals.

According to this Reuters article, 2013 was China's lowest oil demand growth in 22 years - according IEA data.  I found references (from an unnamed source) about three delayed refinery projects in this Reuters article.

"China's oil consumption growth is slowing down and overcapacity in the oil industry is looming. Rapid expansion in refining capacity will result in a glut and increasing net fuel exports," said the PetroChina official who declined to be identified because he is not authorized to talk to media. 

... 

PetroChina will now start up its 200,000-bpd Kunming refinery in the Yunnan province in 2016, two years behind the original schedule, the official said. 

Operation of a 400,000-bpd joint venture refinery in Jieyang of Guangdong province will be delayed to 2017, versus the original plan of 2013, he said.

Shifting to parallels in the other hemisphere, oil majors saw impacts from their own refining overcapacity.  Some majors and independents have begun spinning-off their upstream and downstream units from one another.  Some majors even saw their revenues impacted, from FT:

Squeezed margins in the global refining industry are hurting the world’s largest oil companies, as Royal Dutch Shell, Total and ExxonMobil all blamed poor quarterly earnings on a decline in their downstream businesses. 

Results from Shell were the most disappointing Thursday, as its profit dropped almost a third to $4.5bn. ExxonMobil’s profit fell 18 per cent to $7.87bn, while Total’s declined almost a fifth to €2.72bn. 

All the majors have been hit by refinery overcapacity and weak demand for petrol and diesel in slowing western economies, which has hit earnings in their downstream – refining and marketing – divisions. 

The problem is most striking in Europe, despite refinery closures that have taken some 1.7m barrels a day of capacity out of the system since 2008. Figures from the International Energy Agency show European demand for refined products will average 13.5m b/d, almost 2m b/d less than in 2008.

If China is in a period of oil refining overcapacity, what does that mean for future oil prices?

PIIGS Unemployment

And the US, too.

The First Hydraulically Fractured Horizontal Well

Completed in the North Sea in 1987.  From Schlumberger's Oilfield Review:

By 1986, though, Maersk Oil decided that cementing would work and that it was time to attempt the industry's first horizontal, hydraulically fractured well.

Production rate comparison of horizontal wells (MFBs) to a conventional well.

If All Debts Were Paid At The Current 1-Year Treasury Rate

Less than one percent of GDP.

Unlikely

Russian Pipeline Politics

I have yet to post anything about the Ukraine.  So I figured I would talk about Russia - the world's largest producer and exporter of oil.  Russia is also the second largest producer and the largest exporter of natural gas.  The following video is five years old, so a little out-dated, but still informative.

Updates to the information in the video:

• The Nord Stream pipeline has been completed and is delivering natural gas
• The South Stream is in the construction phase and expected to deliver natural gas by 2015
• The Nabucco pipeline has been sidelined in favor of the Trans-Adriatic (below)
• The Tran-Adriatic pipeline has received much support but no construction has taken place
• The White Stream pipeline has received some fanfare but no construction has taken place

Other significant natural gas exporters to Europe include: Qatar - the world's largest LNG supplier with major exports to South Korea, Japan, Spain and the UK; Norway - a large exporter to UK, Germany, France and other western European nations; Algeria - a major supplier for Italy and Spain; Netherlands - an exporter to the UK, Germany and Belgium.

The YouTube page also had a link to an interesting video about Turkmenistan - a potential supplier of natural gas for various Turkey-crossing pipeline projects.  This video might help represent the nature of Russian pipeline politics.

One event which may give further strength to Russian dominance in the energy markets is Saudi Arabia's increasing rate of oil consumption.  Saudi Arabia consumes about 3 million barrels of oil per day and has a population of about 30 million.  This makes it one of the largest consumers of oil per-capita in the world.

Extrapolate out Saudi Arabia's current oil consumption and production rates over the next 20 years and you just might find that the country will become a net oil importer.  Citigroup in 2012 made such an extrapolation.  From Bloomberg:

“If Saudi Arabian oil consumption grows in line with peak power demand, the country could be a net oil importer by 2030,” Heidy Rehman, an analyst at the bank, wrote. The country already consumes all its natural-gas production and plans to develop nuclear power, which pose execution risk amid a lack of available experts, safety issues and cost overruns, Rehman said.
...
Saudi Arabia’s per capita consumption in 2011 is higher than most industrialized nations, including the U.S., according to the report. The nation’s 10-year historical consumption compound annual growth rate may increase 6 percent, double its projected population growth, Rehman wrote. Saudi Arabia’s population was 28 million as of the end of 2011, International Monetary Fund data compiled by Bloomberg show.

Part of Saudi Arabia's oil consumption goes towards electricity production.  Though the country has plans to replace oil with natural gas, nuclear and solar for electricity production, the rising increase in oil consumption is also coming from transportation fuel demand - gasoline.

Saudi oil consumption (1980-2012)

So What Exactly Is Going On In Venezuela?

As part of my political correspondence:

Four Years of NIRP

NIRP - Negative (Real) Interest Rate Policy

From Wikipedia:

A liquidity trap is a situation described in Keynesian economics in which injections of cash into the private banking system by a central bank fail to lower interest rates and hence fail to stimulate economic growth. A liquidity trap is caused when people hoard cash because they expect an adverse event such as deflation, insufficient aggregate demand, or war. Signature characteristics of a liquidity trap are short-term interest rates that are near zero and fluctuations in the monetary base that fail to translate into fluctuations in general price levels.