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Peak oil review - February 11

Published by ASPO-USA on 2013-02-11
Original article: http://aspousa.org/wp-content/files/por130211.pdf by Tom Whipple

1. Oil and the Global Economy

Brent oil continued the climb that has been going on since early December, closing on Friday at $118.90. Prices are now up nearly $18 a barrel in the last two months. New York crude ended a couple of dollars lower for the week at $95.72 on weak US demand, the continuing glut at Cushing, and rising US stockpiles. A major refinery in Illinois which is scheduled to shut down for maintenance in late February added to fears of an increasing glut in the Midwest.

Inventories at Cushing actually dropped a bit last week as refiners increased rail shipments directly to refineries. It now appears that the Seaway pipeline from Cushing to the Gulf will not be able increase its capacity to 400,000 b/d until later this year when additional pipelines in the Houston area become operational. The gap between Brent and West Texas crudes narrowed to $16 in mid-January but has now widened to over $23 a barrel. More mid-western refineries will be closing for maintenance in the next few months raising expectations that the unusual price differentials will continue for most of the year.

Distillate inventories fell the week before last and the winter storm in New England pushed the price of heating oil to a four-month high. However, warmer weather is forecast for the Midwestern and northeastern US next week. This has sent natural gas prices slightly lower.

Behind the continuing strength of Brent crude is optimism about growth in the US and EU economies and strong demand from China. Beijing’s exports in January were up 25 percent from last January and crude imports climbed to 5.8 million b/d, the most since last year.

The EIA reported that US crude production increased the week before last by 4,000 b/d to 7 million barrels. Some analysts believe that the surge in US exports of petroleum products, mostly to Latin America, will eventually drain off the surplus in the Midwest. While most analysts are anticipating a drop in prices soon based on the rapid increase in recent weeks, some, however, such as Goldman Sachs are saying that prices may exceed forecasts this spring. They note that recent price increases are due to unexpected increases in Asian demand and recent reductions in Middle Eastern exports, not from any inordinate fears of hostilities in the region.

2. Middle East

Saudi production remained at 9 million b/d in January, roughly the same as in December. Supplies to domestic and export customers were around 9.26 million with the difference coming from inventories. OPEC production dropped 465,000 b/d in December. Lower Saudi, Iraqi, Syrian, Iranian, Sudanese, Yemenis, and likely Libyan production, coupled with increased Chinese demand, are likely behind the increasing price of Brent in the last two months.

Iran: There was a burst of optimism early last week on the possibility that Iran was ready to engage in talks on its nuclear programs directly with the US. On Thursday, however, Supreme Leader Khamenei dismissed such talks for as long as the US sanctions on Iran continue. Following Khamenei’s pronouncement, Tehran said it would no longer negotiate over its nuclear program while under pressure, but will agree to talks if other nations “stop pointing the gun.” If this means lifting the sanctions as a precondition for talks, Tehran is going to be waiting for a long time.

President Ahmadinejad visited Cairo for an Islamic summit last week -- the first visit to Egypt by an Iranian President in 30 years. He was warmly welcomed by Egyptian Morsi. Ahmadinejad even offered a loan to the nearly bankrupt Egyptians. As long as Iran continues its whole hearted support of the Assad government in Syria, however, the relationship is not likely to go anywhere.

US sanctions on Iran tightened last week. Under penalty of expulsion from the US banking system, importers of Iranian oil can no longer pay for the oil in dollars or euros. Although they can still pay in local currencies, this is getting close to barter and is not a good long term solution. Tehran’s retail shops are reported as filling with Chinese goods which have been bartered for oil. India, for example, is reported to be contemplating a 20 percent cut in its Iranian imports this year in order to maintain its waiver from the US. Iran has been very adept at finding alternative ways of selling its oil, but the sanctions continue to tighten. Washington believes that the new sanctions will have a significant impact on Iranian exports.

Iraq: Bombs continue to go off across Iraq. While the violence is still below the heights it reached in 2006-2007, it seems to be on the increase with one or more attacks coming every few days. On Saturday a group attacked a former US base housing Iranian refugees opposed to the Tehran government, killing six.

The demonstrations which began in the Sunni provinces following the arrest of the bodyguards of the Sunni Finance Minister in December continued last week. Baghdad has pulled back its troops from the demonstrations to avoid further bloodshed. Many observers believe the situation continues to deteriorate, and could easily deteriorate into a Sunni-Shiite civil war – possibly involving the Kurds. The prospects for increased oil exports from Iraq certainly are not getting any better. With provincial elections scheduled for April, many are wondering whether the situation will be stable enough for them to be held.

Syria: Some of the heaviest fighting in months around Damascus took place last week as rebel forces continued efforts to move on the center of the capitol. The rebels have blocked government access to parts of Aleppo. President Assad replaced his cabinet ministers dealing with the economy last week, but kept those involved in the uprising in place. The Syrian economy is in shambles with frequent power outages and long lines for food and gasoline. Assad continues to make proposals for talks with the rebels, but only if they lay down their arms.

As the Syrian armed forces continue to deteriorate, Israeli concerns are increasing about the possibilities of air defense, other missiles, and chemical weapons falling into the hands of Hezbollah forces in Lebanon.

Hezbollah likely realizes that this may be their last chance to restock and enhance their arsenals before the Assad government falls and supply routes to Iran are cut off.

The issue remains as to what Syria will look like after Assad goes and how far the chaos will spread into other countries.

Elsewhere: A key pipeline that carries oil from eastern Yemen to the export terminal on the Red Sea was blown up last week. Such attacks have happened before and damage is usually repaired quickly. Yemen exports about 300,000 b/d when the pipeline is functioning. In 2012 attacks on the pipeline reduced exports about 5 percent costing the country $1 billion in revenue.

The assassination of the opposition leader in Tunisia last week led to several days of turmoil as demonstrators took to the streets in protest while the Prime Minister resigned seeking to turn rule over to non-political technocrats. The ruling Islamist party rejected the government’s resignation. Tunisia was thought to have the best chance of success of the post Arab Spring governments, so the assassination and subsequent turmoil is seen as a setback for the future of the region.

Tunisia exports less than 100,000 barrels of oil a day, but as the birth place of Arab Spring holds a major symbolic significance for the future of the Arab world. As is the case with Egypt, the country is dividing into Islamists who seek a government based on religious principles and secularists who seek a more pragmatic approach.

Egypt’s economy continues to deteriorate with inflation rising and foreign reserves falling. There is no word on the IMF loan that would require Cairo to introduce unpopular austerity measures. The assassination of the secularist opposition leader in Tunisia has Egyptian opposition figures worried that radical Islamists may adopt similar tactics in Egypt. The country clearly has a rough year ahead. However, the major threat to the world oil market still would be disruptions of traffic through the Suez Canal which currently is in the hands of the Egyptian army.

3. US gasoline prices

Gasoline prices continue to rise last week, with the national average for regular increasing by seven cents a gallon. Prices normally increase in the spring due to the production of more expensive summer grades and increasing demand in the driving season. This year, however, there are some unusual aspects to the annual price increase. Prices are starting to climb earlier than normal and there is a bigger than usual geographical spread with the Rocky Mountain and some southern states still enjoying relatively moderate prices while parts of both coasts and the Chicago area are seeing unusually high prices.

Despite the increasing US crude production, high Brent crude prices and a combination of scheduled and unscheduled refinery outages are responsible for the high prices. We are just entering the normal refinery maintenance period so the problems are expected to continue for the next few months.

MasterCard reports that US gasoline consumption over the last four weeks is up 0.1 percent over the same period last year, the first such increase since last September. Consumption in the week ending February 1st was some 8.5 million b/d down from the 8.7 million b/d which the US averaged in 2012. At this time last year, consumption was dropping at a rate of 5-7 percent from 2011 consumption levels. EIA reports of larger deliveries of gasoline from refineries suggests that it is being exported rather than being consumed domestically.

Government data released last week says the average US household is paying $2,912 a year for gasoline which is nearly 4 percent of average household income. This is the highest rate in 30 years except for 2008 when oil reached $140 a barrel. The fuel delivery infrastructure in the NY area has not recovered from Superstorm Sandy and gasoline inventories in the region are still 15 percent below normal – a situation not helped by last weekend’s snowstorm. As NY is the delivery point for gasoline futures contracts, the benchmark for US prices, problems in Northeast drive up prices for the rest of the country.

EIA forecasts see US gasoline consumption holding around 8.5 million b/d for the next two years, unless, of course, prices go much higher and demand destruction sets in.

4. Chavez Unable to Return?

The Spanish radio service ABC.es is reporting that President Chavez is in very poor condition, has lost his voice completely as a result of complications from cancer operations, and will never again be able to serve as President. The news service says Caracas is aware of this and is expected to acknowledge the situation within the next few days. Even if this report does not pan out, Chavez is in serious condition and changes are coming soon. Venezuela is obviously facing some rough times ahead. Last week the government devalued its currency by 46 percent accompanied by cries from the opposition that the government was destroying the country. Refinery outages from lack of maintenance have forced the country to import a large portion of its motor fuels from the US which continues to import a million b/d of crude oil from Venezuela.

Given the passions that have built up during the years of Chavez’s rule, it is difficult to imagine that the transition to a new generation of leaders will be a peaceful one. Beijing is already having second thoughts about the money it has loaned to Caracas in hopes of gaining increased access to its oil and many of the left- leaning states that have benefited from Chavez’s largesse are worried. The worst case in the coming year is that disturbances stemming from the transition to a post-Chavez government halt or reduce the country’s oil exports which would almost certainly lead to much higher oil prices.

Quote of the week

"Some may see this as a choice between keeping American oil within U.S. borders for reasons of economic security and allowing the US to generate billions of dollars in new export revenues. But market realities suggest a far simpler decision ahead: either US crude is shipped abroad, or it stays in the ground." - IEA Executive Director, Maria van der Hoeven

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