Seven months ago the giant tanks in Cushing, Okla., the largest crude oil storage hub in North America, were three-quarters empty. After spending the last few years brimming with light, sweet crude unlocked by the shale drilling revolution, the tanks held just less than 18 million barrels by late July, down from a high of 52 million in early 2013. New pipelines to refineries along the Gulf Coast had drained Cushing of more than 30 million barrels in less than a year.

As quickly as it emptied out, Cushing has filled back up again. Since October, the amount of oil stored there has almost tripled, to more than 51 million barrels. As oil prices have crashed, from more than $100 a barrel last summer to below $50 now, big trading companies are storing their crude in hopes of selling it for higher prices down the road. With U.S. production continuing to expand, that’s led to the fastest increase in U.S. oil inventories on record. For most of this year, the U.S. has added almost 1 million barrels a day to its stash of crude supplies. As of March 11, nationwide stocks were at 449 million barrels, by far the most ever.

Not only are the tanks at Cushing filling up, so are those across much of the U.S. Facilities in the Midwest are about 70 percent full, while the East Coast is at about 85 percent capacity. This has some analysts beginning to wonder if the U.S. has enough room to store all its oil. Ed Morse, the global head of commodities research at Citigroup, raised that concern on Feb. 23 at an oil symposium hosted by the Council on Foreign Relations in New York. “The fact of the matter is, we’re running out of storage capacity in the U.S.,” he said.

 

If oil supplies do overwhelm the ability to store them, the U.S. will likely cut back on imports and finally slow down the pace of its own production, since there won’t be anywhere to put excess supply. Prices could also fall, perhaps by a lot. Morse and his team of analysts at Citigroup have predicted that sometime this spring, as tanks reach their limits, oil prices will again nosedive, potentially all the way to $20 a barrel. With no place to store crude, producers and trading companies would likely have to sell their oil to refineries at discounted prices, which could finally persuade producers to stop pumping.

Oil investors appear to be coming around to the notion that a lack of storage capacity could lead to another price crash.

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2) Oil Price May Fall Further As US Shale Shows No Sign Of Slowing Down
AFP, 13 March 2015

US shale production shows “precious little sign of slowing down” says Paris-based institute

A recent rebound in oil prices is built on flimsy foundations, the International Energy Agency warned Friday, with another sharp fall possible and few signs that cheap fuel was giving growth a real boost.

Oil prices plummeted by 60pc between June and January, but have since come off six-year lows and stabilised somewhat, with London’s benchmark Brent trading around $60 per barrel and WTI in the United States fluctuating around $50 per barrel.

“Behind the facade of stability, the rebalancing triggered by the price collapse has yet to run its course, and it might be overly optimistic to expect it to proceed smoothly,” said the Paris-based IEA, which advises energy consuming nations.

It noted that a key driver in the recovery in oil prices, with Brent being up by 30pc from the lows it touched in January, has been drops in the number of rigs drilling for shale oil in the United States.

“Yet US supply so far shows precious little sign of slowing down. Quite to the contrary, it continues to defy expectations,” said the IEA in its monthly Oil Market Report, which sharply revised up its output estimates for the end of last year and forecasts for the begging of 2015.

With US crude stocks striking all-time records, it noted storage capacity limits may soon be tested.

While this would encourage the supply cuts that have so far remained elusive, the IEA warned “…it might also prove more abrupt.”

The IEA said global supply rose by an estimated 180,000 barrels per day in February to 94.0 million barrels per day (mbd) due to expanding production in countries outside the OPEC oil cartel.

Non-OPEC supply is still expected to grow this year, by 750,000 bd, but this is much lower than the 2.1 mbd gain in 2014.

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3) Greenest Government Ever: UK Shale Gas Industry On Brink Of Extinction
Interfax Natural Gas Daily, 13 March 2015

Ineos’s decision to take a stake in shale assets owned by UK onshore specialist Igas looks to be a lifeline for the London-based company, but it remains an open question how long such businesses will continue to burn cash in the hope of aping the shale industry in the United States.

Jim Ratcliffe, Ineos’s chairman, has spoken at length of his belief that shale can tackle high energy prices and revive the UK’s manufacturing sector, but patience elsewhere appears to be growing thin.

It is now nearly four years since Cuadrilla – the first company to invest substantial sums in UK unconventionals – drilled three exploration wells in Lancashire and claimed the UK had significantly more gas in place than previously thought, triggering hopes of a US-style shale bonanza. But headaches surrounding the permitting process mean Cuadrilla has not fracked a well since 2011, and is unlikely to do so again until later this year at the earliest.

This represents painfully slow progress for a company that is desperate to get drilling, and makes the UK government’s ’all-out‘ approach to shale seem somewhat over-hyped.

Of course, it takes more than central government support – local government, communities and the environmental permitting process must be negotiated before drilling can progress. However, one key question presents itself: can the industry survive any further setbacks?

Perhaps the most obvious potential hurdle looms just two months away: the UK general election. A change in administration at such a delicate stage in the industry’s development could conceivably cause irreparable damage.

While not against shale development per se, the Labour Party has pledged to overhaul the UK’s onshore regulatory regime if it gains power – a process that would undoubtedly delay drilling even more, placing operators under greater financial stress. Assuming the Conservative Party wins the election, government support for shale is unlikely to waver, but public opposition – if the protests at Balcombe in 2013 are anything to go by – seems set to grow and grow.

Even if Labour fails to oust the Conservatives this time around, few would bet against them doing so in five years’ time – so what happens then? Cuadrilla has earmarked 2018 for commercial production, but given the obstacles it has faced to date it would be fair to assume ramp-up will not come much before 2020 – so a change in government at that point could prove similarly ruinous.

However, it is not just uncertainty over policy that is casting a shadow over UK shale – explorers must also contend with the grim reality of the European gas market. Demand across the continent has fallen to levels not seen since the 1990s, sending prices in February – traditionally the coldest month of the year – to record lows. Therefore, even if companies succeed in getting gas out of the ground in significant quantities, will anyone be prepared to pay the price needed to make the process commercial?

Ratcliffe clearly knows what he is doing – he founded Ineos in 1998 and turned it into a company with sales of more than $50 billion. However, it takes a healthy dose of positive thinking to envisage a UK shale industry existing a decade from now – much less one that would revolutionise UK manufacturing.

4) Reality Check: Japan’s Coal Boom Continues
The Wall Street Journal, 12 March 2015

Mari Iwata

Japan is continuing to re-embrace coal to make up for its lack of nuclear energy, with plans for another power station released Thursday bringing the number of new coal-fired plants announced this year to seven.

Utilities in Japan are eager to take advantage of coal’s relative cheapness to give them a competitive edge at a time when other countries are seeking to reduce their greenhouse-gas emissions by moving away from a fuel source seen as dirty.

The liberalization of Japan’s power industry by 2020 will pit power companies against each other as rivals for the first time. In addition, with a relaxation of restrictions on coal power and no new emissions targets on the horizon, utilities are increasingly seeing coal as an important part of their business plans.

Kansai Electric Power Co. and Marubeni Corp. informed Akita prefecture on Thursday of their plans to build a new, 1.3-gigawatt coal-fired power station in the northern prefecture of Japan, the two companies said.

If all seven projects including the plant in Akita materialize, they will increase the nation’s coal-power generation by up to 7.26 gigawatts by around 2025. That is equivalent to seven medium-size nuclear reactors. […]

The relative cheapness of coal was indicated in a 2011 government report that estimated the cost of coal power in Japan at ¥7.5, or about 6 cents, per kilowatt-hour including construction and operation. The same report put the cost of nuclear power at ¥9 per kwh, gas power at ¥10 per kwh and oil power at ¥19 per kwh.

The moves by the power companies are “understandable” in light of the prolonged nuclear outage that has forced power utilities to rely on old, inefficient oil- and gas-power stations, said Hidetoshi Shioda, energy-industry analyst of SMBC Nikko Securities.

All of Japan’s 48 reactors are offline over safety concerns following the Fukushima nuclear accident, though four of them are expected to come back online later this year.

Before the nuclear accident in March 2011, the environment ministry had essentially blocked the building of new coal-power stations through tighter environmental assessments as Japan sought to meet ambitious greenhouse-gas reduction goals that have since been scrapped.

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5) IEA: Global CO2 Emissions Have Stopped Rising
Financial Times, 13 March 2015

Pilita Clark

Global emissions of climate-warming carbon dioxide did not rise last year for the first time in 40 years without the presence of an economic crisis.

In a sign that efforts to tackle climate change may have been more effective than thought, the International Energy Agency found global emissions of carbon dioxide, the leading greenhouse gas, did not rise in 2014.

“This is a real surprise. We have never seen this before,” said IEA chief economist, Fatih Birol, named recently as the agency’s next executive director.

Energy consumption shifts in China, the world’s biggest carbon polluter, were among the reasons emissions stalled last year, according to the IEA, which monitors energy trends.

There have only been three times in four decades when emissions fell or stopped rising, the agency said: after the oil price shock and US recession in the early 1980s; in 1992 after the collapse of the former Soviet Union; and in 2009 during the global financial crisis.

But last year, the global economy grew 3 per cent, while the amount of CO2 pumped out remained at the 2013 level of 32.3bn tonnes.

China has cut its use of coal, one of the biggest sources of carbon emissions, and installed more hydroelectricity, wind and solar power.

At the same time, electricity consumption, which had been growing at 10 per cent a year, has fallen to about 3-4 per cent as China imposes energy efficiency standards for industry, shuts older factories and shifts away from the heavy manufacturing that has powered its economic growth.

Another reason for the halt in emissions is that wealthy countries in the OECD group of nations that aims to promote sustainable growth have started to “decouple” economic expansion from emissions increases, as they install more renewable energy plants and set stricter standards for everything from car fuel economy to home appliance energy use.

In the past five years, OECD countries’ economies grew nearly 7 per cent while their emissions fell 4 per cent, the IEA has found.

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6) And Finally: Five Reasons To Be Wary Of Green Energy Investments
The Daily Telegraph, 12 March 2015

Kate Palmer

Many investors are attracted to “green” investments by the promise of good returns allied with care for the environment. But there are growing fears that some are being sucked into unsuitable schemes. Here are five reasons to be wary.

1. GREEN FUNDS ARE UNDERPERFORMERS

Approach renewable energy projects with a “large degree of caution”, said Patrick Connolly, a chartered financial planner at Chase de Vere. “While seemingly a good story, they have not yet demonstrated that they make reliable investment opportunities.”

2. YOUR INVESTMENTS COULD VANISH

Other green schemes are downright dangerous. Telegraph Money has previously highlighted the plight of investors in a doomed “mini bond”, issued by a solar energy firm and offering annual interest of 6.5pc for three years. But interest payments ceased when the firm, Secured Energy bonds, went bust.

Remember that such bonds are not covered by the Financial Services Compensation Scheme.

3. YOUR INVESTMENTS CAN BE HARD TO SELL

Energy investments can be difficult to sell because they involve funding projects that can last several years.

Some energy funds are structured as “venture capital trusts”, or VCTs, which offer generous tax breaks to those who invest at the beginning (they are also traded on the stock market).

VCTs are designed to wind up after a specific period and return capital to investors, says Richard Troue, of the fund shop Hargreaves Lansdown.

Because the investments are primarily with small and emerging companies, anyone who sells the shares before the VCT is wound up probably won’t get a price that reflects the value of the underlying assets.

4. THE PRICE OF OIL IS TUMBLING

As oil gets cheaper, it becomes harder for green energy to compete.

Clive Hall, who runs an investment network called Cleantech Cluster, said he was “relaxed” about the falling oil price. “A lower oil price means exploration becomes less economic, reducing supply. This means renewable projects are still viable.”

Financial advisers disagree. Mr Connolly said: “Advocates of green energy predict very little impact, but it is difficult to envisage that an oil price that stays lower for longer can be anything but bad news for renewable energy projects.”

Brian Dennehy, of FundExpert.co.uk, the fund tipper, said: “No one should be in any doubt that green energy is a volatile sector, being a subset of the oil and gas sector.”

Consider a fund that invests in all types of energy. These will not be eligible for the special tax breaks that apply to some green energy funds but will be less risky.
The Fidelity Multi Asset Balanced Income fund, for example, invests in renewables such as Greencoat Wind as part of a wider exposure. iShares’ Global Clean Energy fund yielded 9.4pc in 2014, and tracks the 30 biggest clean energy businesses.

Oil prices have consistently fallen over the past 6 months

5. TAX BREAKS ARE ABOUT TO DISAPPEAR

Renewable energy funds will no longer be eligible for “Enterprise Investment Scheme” or VCT tax relief, which lets investors reclaim 30pc on the cost of the shares they buy.

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