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Peak oil review - Dec 9

Published by ASPO-USA on 2013-12-09
Original article: by Tom Whipple

1. Oil and the Global Economy

New York oil futures had their best week since July, rising by some $5 a barrel to close Friday at $97.65. Several factors supported the move including: a drop in the US unemployment rate and jump in US GDP growth; the first decline in US crude supplies in 11 weeks; an increase in the demand for petroleum products in the US (how much is still going to export is an open question); and the announcement that the southern leg of the Keystone pipeline that will move 700,000 b/d of oil from Cushing, OK to Port Arthur, Texas will open in January.

Keeping a cap on all this euphoria is the possibility that the improving economy will move the Federal Reserve to cut back on its $85 billion a month bond purchase program that has kept interest rates low and supported oil prices for several years. The Fed’s Open Market Committee is to meet on December 17th, although surveys of Wall Street analysts say that most believe there will be no change until next March or later.

The rising US demand issue still needs some sorting out. The EIA reported that US “fuel demand” hit 20 million b/d at the end of November; however through September, 3.6-3.8 million b/d of that was going for export – up 500,000-600,000 b/d from last year. Whether exports remained strong into October and November is still an open question. It is likely that the steep drop in US retail gasoline prices seen this fall has helped drive demand, but whether the US economy has picked up to the point where we are burning 9 percent more fuel is an open question.

US crude production dropped a bit from 8.019 to 8.011 million b/d in the latest EIA report. There have been reports in the last week that the bad weather in the mid-west has slowed drilling and production in North Dakota and the Permian Basin.

Oil futures in London were volatile during the week, but closed at $111.61 which was about where they opened last Monday. The major issue for the London market is the reduced oil supply from Libya which is increasing the demand for US-refined distillates; and the OPEC meeting that decided to keep production steady at 30 million b/d. The highlight of the OPEC meeting was the announcement by Iran and Iraq that they plan to increase production and exports by a combined 2 million b/d next year. They also implied that the other members should cut their exports to accommodate this increase and prevent prices from falling.

US natural gas prices took a big jump on Thursday last week, and at one point on Friday touched $4.20 per million, as a big blast of arctic cold enveloped much of the US. This is the highest natural gas has been since last spring.

2. The Middle East and North Africa

Iran: The fallout from the interim nuclear agreement topped the news from Tehran last week. The agreement has brought a sense of hope to the Iranian people that they can join the world again after 30 years of revolutionary bombast which has done considerable damage to economic growth. Iran’s President defended the agreement while his Foreign Minister rushed around the region mending fences with Iran’s neighbors. International oil companies including American ones are being invited to talk about developing Iran’s oil industry after the sanctions are lifted. Despite the difficulties, Tehran’s current leadership is clearly optimistic that a final agreement that will remove oil, trade, and financial embargoes will be reached next year.

While the Israelis, hardline Revolutionary Guard leaders in Iran, the Saudis, and a few members of the US Congress continue to mutter about the pact, most seem relieved that decades of confrontation could be coming to an end.

If a final agreement is signed, there will be major consequences for the Middle East. Iranian oil and gas production that has been hampered for 30 years by various trade restrictions, could embark on a major increase at the expense of the Saudis. How Tehran’s relationship to the Syrian uprising is handled in any final agreement is still up in the air and is likely be a major stumbling block as is the increasing tensions between Sunnis and Shiites across the region. Despite the optimism, the negotiations have a long way to go and many forces are working to derail them.

Iraq: The bombings and summary executions continued across the country last week. The UN has the death toll for the year at 8,000 and counting. Most observers are saying the current spate of violence is nearly the equivalent of what the country went through seven years ago.

Baghdad says it continued to increase its oil exports in November by exporting 2.38 million b/d despite the construction going on at the Basra oil export terminal and the periodic stoppage of the northern export pipeline by terrorist attacks. The country is planning to increase exports by 1 million b/d next year to some 3.4 million, including 400,000 b/d exported from Kurdistan. With domestic consumption running at 700,000 b/d, Iraq’s total oil production by the end of next year could be close to 4 million b/d if these plans are realized.

The issue of the Kurds exporting oil to Turkey through their own pipeline remains murky. Two weeks ago the Turks announced that despite a new agreement to buy oil from the Kurds, shipments would not begin without the concurrence of Baghdad. A week ago, Turkey’s Energy Minister flew to Baghdad to work out an agreement. Later Iraq’s Oil Minister announced a new agreement under which Baghdad would control the amount and quality of the crude that the Kurds exported, as well as receiving and controlling the payment for the oil. So far this announcement has not been verified by Ankara or Erbil suggesting that a deal as not yet been made. It appears that the Kurds may start exporting through their own pipeline to Turkey without Baghdad’s permission further confusing the situation.

Libya: The chaos continues with little hope for increased oil exports on the horizon. The security situation has become so bad that the UN is sending a military force of 235 men to guard its representatives in the country. Libya’s Oil Minister says that output has fallen to less than 250,000 b/d from 1.4 million in July costing the country $9 billion in revenue. Only the offshore El-Feel field and fields belonging to the state oil company are still producing. The abrupt halt in production has caused damage to pipelines and production facilities suggesting that a political settlement will not restore production levels in the near future. Electricity shortages are becoming more frequent as a major gas line is being blocked by Berbers demanding more political rights.

Syria: The fighting continues with minor gains being made by the Hezbollah-backed government forces. Radical Islamist groups are making progress in driving the more moderate insurgent forces from some bases. A senior Hezbollah officer, allegedly responsible for Hezbollah’s intervention into the Syrian uprising, was assassinated in Beirut. Hezbollah now has accumulated so many enemies, ranging from the Israelis to any of the dozens of Sunni countries and insurgent groups opposing the intervention in Syria, that it is impossible to even guess at who was responsible for the assassination.

Talk of a Geneva peace conference continues; the refugee problem gets worse; and the threat that the insurgency will eventually destabilize several Middle Eastern countries continues.

3. China

Beijing’s oil imports in November were 5.7 million b/d, up 0.7 percent from November 2012. Its trade surplus, however, set a four-year high last month, with exports increasing by 12.7 percent and imports gaining by 5.3 percent. Shipments to the US were up by 17 percent from last year and those to Europe were up by 18.4 percent. Analysts say the new export numbers do not appear to be inflated as they have in the past. The gains were in categories that do not raise suspicions. The data suggests that China’s industrial production continues to grow and that demand for oil products could be strong next year.

Last week it was Shanghai’s turn to be engulfed in dangerous levels of pollution forcing reductions in traffic and the closing of businesses. Beijing is making a major effort to cut back on coal burning so that more than half of the new electrical generation capacity installed this year will not use coal. While a step in the right direction, this does little to reduce the 4 billion+ tons of coal the country consumes each year. If dangerous air becomes an endemic problem in China’s major cities it will soon harm foreign participation in China’s economy as nobody with a choice will risk living there.

Chevron’s $6 billion natural gas partnership with PetroChina has been slowed by disagreements over how to drill the technically difficult gas deposits. The first gas production is not expected until late in 2014, seven years after the agreement was signed.

4. Quote of the Week

The EIA/INTEK estimate of 15.4 billion barrels of recoverable oil from the Monterey shale is likely to be highly overstated. Certainly some additional oil will be recovered from the Monterey shale, but this is likely to be only modest incremental production—even using modern production techniques such as high volume hydraulic fracturing and acidization. This may help to temporarily offset California’s long-standing oil production decline, but it is not likely to create a statewide economic boom.” (12/4) -- David Hughes, geologist, author of “Drilling California: A Reality Check on the Monterey Shale”

5. The Briefs

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