Here are three reasons why oil prices will be a roller coaster next year.

First, oil has lost its central bank. Saudi Arabia has long served as the ‘central bank of oil’. It has used its enormous surplus production capacity to keep the petroleum market stable. It used to pursue a Goldilocks formula knowing that oil too dear collapses demand, while oil too cheap undermines the investments that keep black gold flowing.

But Riyadh’s central bank’s role is being trumped by the geopolitical uncertainty being generated by the United States shale revolution. Saudi Arabia has long sought to hold onto a minimum of 10% of the US oil market — what it believed was needed to keep Washington geopolitically interested in the Persian Gulf. That is now under threat as is the US need for Persian Gulf crude at all. The Saudis have been buying up US oil refineries, forcing them to buy Gulf oil and thus artificially upholding US imports from their region.

When oil prices tumbled, Saudi Arabia asked itself what would happen if it didn’t cut production. The answer: It would blunt shale production in the US, break the bank of archenemy Iran, and drive out high-price oil producers arresting a supply glut. As the Saudi oil minister, Ali Al-Naimi, asked earlier this month, “Why should I cut production?”

That oil prices fell was not a surprise. Many energy analysts had been predicting this simply because supply was outstripping demand. The surprise was the Saudi’s decision to do nothing about it.

Second, the shale insurgency will survive. Oil prices can never fall low enough and long enough to put the US shale industry out of business. Shale formations differ too widely to be all affected by a single price signal. Some rigs produce oil at 99 cents a barrel, some at $70; some last six months, some last five years. Analysis by ITG Investment Research shows 88% of US shale oil output is profitable even if global oil prices fall to $25.

It is not that keeping low prices won’t have an impact. Already, new shale oil drills have fallen dramatically. As shale wells tend to tap out quickly, a half-year of low prices would hurt. But technology keeps driving down the price of shale extraction and the industry has an efficient futures market that has kept funds flowing. The possibility of the US central bank raising interest rates in the coming months — and throttling the cheap capital that greases the shale industry — may do more damage to shale oil production than Saudi machinations.

The real revolutionary aspect of shale oil is that production can be turned on and off with unprecedented speed. Traditionally, oil prices can take as much as a year to respond to market developments. With shale, this will be reduced to just a few weeks.

This, in turn, means oil prices will have a tendency to gyrate even more than usual. The shale spigot can be turned on or off in response to price signals of only one or two months. Thus oil prices may rise to $80 next summer as global supply tanks. If so, it will fall within months as shale oil starts to gush again.

Third, political fallout has just begun. Petrodollars sustain a lot of regimes, mostly nasty, around the world. Some of these are now looking down a very black hole. Regime change is most likely in Venezuela, a government that amazingly ran up a fiscal deficit of 16% of GDP even when oil prices were $110. Look out for a Caracas meltdown next year.

Iran, Russia, Algeria, Angola and Nigeria are countries that will suffer if oil prices stay below $100 a barrel. Expect social unrest in these countries all through next year, some may become more belligerent overseas to compensate.

Those affected include terrorist groups. The Islamic State (ISIS) will get less revenue from the oilfields it captured in north Iraq. Boko Haram may benefit as the Nigerian army struggles for funds. So add a lot of political risk to the oil mix.
Riyadh won’t suffer. Saudi Arabia needs billions for its welfare programmes, but it also has $740 billion in reserve assets that will last it years. In theory, China should lose interest in the South China Sea as offshore oil and gas become largely unviable. But don’t count on it.

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3) US Opens Flood Gates For Shale Oil Exports
The Observer, 4 January 2015

The decision by president Barack Obama to open the door to US oil exports seeped out of Washington in a low-key manner last week, but the impact could be as explosive as a New Year’s Eve firework display.

The ban – imposed after the Middle East oil embargoes in the 1970s – has made it close to impossible to ship abroad the fruits of America’s shale bonanza. It also long looked wrong-headed in the home of free trade.

The US department of commerce quietly overturned the four-decade-old policy by saying it had started to approve a backlog of requests to sell processed light oil to foreign buyers. The issue is tremendously sensitive, which is possibly why the announcement came out at a time of year when most policymakers were still at home enjoying the Christmas holidays with their families.

Many manufacturers and many domestic consumers are totally opposed to domestic oil or gas production being exported, on the grounds that it could bring an end to cheaper local energy supplies and competitive advantages. But prospectors from the shales in Eagle Ford, Texas and Marcellus, Pennsylvania have been campaigning in Washington for a change in the law for some time, their calls growing more urgent now that some face potential financial trouble as the price of oil plunges from $115 per barrel down to $56.

Meanwhile American oil sometimes sells at $15 per barrel less on the local market as supply exceeds demand: not good for the frackers already burdened by their relatively high-cost operations.

But by opening the door to exports – of slightly refined products – Washington has struck a more serious blow to its export rivals in Saudi Arabia, Russia and elsewhere. Ed Morse, global head of commodities research at Citigroup bank, had no trouble predicting that the move would “open up the floodgates to substantial increases in [US] exports by end 2015”.

The enormous growth in American production – alongside lower-than-expected world economic activity – has been a key trigger for the international crude price collapse. The planned issue of new US export licences is seen by many as another stake in the heart of the Opec organisation, which has been struggling to find a consensus among its members about what to do. The cartel has watched with concern as the value of oil has fallen over the last six months, but has so far refused to cut its own production targets in a bid to force an upturn.

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4) Shale Gas Heating American Homes This Winter
The American Interest, 5 January 2015

Last year’s bitter winter wreaked havoc on American natural gas stocks, sending prices soaring and producers scrambling to refill stores ahead of this year’s cooler months. Thanks to the shale revolution, we seem to have pulled off what looked to be an impossible task, a feat that will be borne out in lower heating bills this winter. The FT reports:

Henry hub gas futures traded on the New York Mercantile Exchange, a broader gauge of the US market, are down 13 per cent since the official start of winter to $3 per million British thermal units, the lowest level in more than two years.
Natural gas is used to heat half of American households yet month after month, US gas output has hit record levels despite moderating prices.

After last winter’s heavy natural gas consumption, it took most of 2014 to refill those stocks, but, surprisingly, they have been nearly refilled to average levels for this time of year. A recovered supply is helping to keep prices down, which is good news for homeowners keeping an eye on their heating bills this winter.

This kind of quick turnaround is unprecedented, and comes to us all thanks to the shale boom. Not only are more wells being drilled and more gas produced, but the infrastructure to bring these new gas sources to market has been beefed up over the past year. There’s still room for improvement there as America’s pipeline network adapts to new nodes of energy production, but this issue of abundance is the kind of problem most countries would love to have. While more than one million English families with children will live in fuel poverty this winter, here in the U.S., shale is proving to be a timely gift for households looking to keep the heat on.

5) UK Oil Industry Close To Collapse
Yahoo Finance News, 6 January 2015

The UK’s oil industry is “close to collapse” but the falling oil price could have a net benefit to the nation’s economy.

Robin Allan, chairman of the independent explorers’ association Brindex, says it is “almost impossible to make money” with the oil price below $US60 a barrel and there will be no new investments.

But accountants PricewaterhouseCoopers (PwC) says the falling oil price “should be a net benefit to our economy as a whole, even if there is some losers in the UK oil and gas sector and in particular places like Aberdeen”.

While the oil price has plummeted, gas prices remain “relatively favourable” and provide “great opportunities” for investment, North Sea-focused company Independent Oil and Gas Plc said as it announced it is increasing its gas resources off the east coast of England.

Allan, who is also a director at Premier Oil, told the BBC: “It’s almost impossible to make money at these oil prices.

“It’s a huge crisis. This has happened before, and the industry adapts, but the adaptation is one of slashing people, slashing projects and reducing costs wherever possible, and that’s painful for our staff, painful for companies and painful for the country.

“It’s close to collapse. In terms of new investments – there will be none. Everyone is retreating, people are being laid off at most companies.

“Budgets for 2015 are being cut by everyone.”

PwC chief economist John Hawksworth said: “In essence, an oil price fall acts like a tax cut for the economy, but a particularly favourable one in the sense that the burden of lost revenue is primarily borne by the major oil producers such as the Opec member countries and Russia.

“Of course, the UK is still a significant oil producer, but we are now a net oil importer, so there should be a net benefit to our economy as a whole, even if there are some losers in the UK oil and gas sector (and in particular places like Aberdeen).

“As an illustration, in our shale oil report from February 2013, we estimated that a $US50 fall in the oil price, if sustained, could lead to the level of UK GDP (gross domestic product) being around three per cent higher in the long run.”

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6) Obama’s Green Agenda Faces Challenge As Republicans Take Over US Congress
Associated Press, 6 January 2015

Josh Lederman

WASHINGTON (AP) — President Barack Obama’s determined efforts to combat global warming face their biggest trial yet as Republicans take full control of Congress this week. The GOP vows to move fast and forcefully to roll back his environmental rules and force his hand on energy development.