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Peak oil review - December 23

Published by ASPO-USA on 2013-12-23
Original article: by Tom Whipple

1.  Oil and the Global Economy

New York oil futures climbed steadily last week to settle at $99.32 – up about $2.50 a barrel for the week. An unexpected upward revision in the 3rd quarter US GDP numbers, coupled with higher demand for gasoline in the US and lower US crude stocks, was behind the increase. The Federal Reserve’s announcement that it will gradually slow bond purchases contributed to the optimism that an economic rebound and higher oil consumption is coming soon.  In London, oil closed at $111.77 on Friday on concerns that Libyan oil production will not resume in the foreseeable future. London oil is now trading within a few dollars of the highs it has reached in the last five years.
There was a surge in gasoline futures last week with the January contract closing at $2.78 a gallon on Friday, up 15 cents during the week and up 28 cents since early November. The weekly increase was the largest since early July. The EIA reported that US fuel consumption climbed 13 percent to 21 million barrels a day last week, the highest since the spring of 2008.
US exports of oil products to Europe are at record levels. Sixteen European refineries have closed or downsized in the last five years which has more than offset the reduction in the demand for oil products in Europe. The difference is being made up by US refineries which have the capacity, can use US crude which is cheaper than Brent, and are fired with cheap US natural gas. Taken together these factors are enough to offset the costs of shipment.
Natural gas prices rose last week reaching their highest in nearly two-a-half years as unusually cold weather engulfed the northern US. Prices eased slightly on Friday to close at $4.41 per million BTU’s after a warming trend set in.  The US gas inventory fell by 285 million cubic feet the week before last which was more than expected. Stockpiles are now 7.4 percent below average for this time of year which is the largest deficit since record keeping began 20 years ago.
2.  The Middle East & North Africa
Iran: The nuclear weapon talks which came to a halt the week before last after Washington released a new sanctions blacklist, resumed last Thursday. Diplomats say there is a real political will to reach an agreement especially on the Iranian side. Tehran realizes that its economy is being torn to pieces by the sanctions and that with the surge in US oil production and the lack of any significant price increases, its customers can hold out longer than it can.
Most of the news came from Washington last week where a group of US senators are threatening harsh new sanctions which might threaten final agreement. The new sanctions would be imposed if Iran violates the interim agreement or fails to reach a permanent settlement in a timely manner. Some believe the new bill would strengthen Washington’s hand in the agreement, while others see it as an effort to torpedo the rapprochement with Tehran and settle the issue with military force. The White House strongly opposes the new bill.
Tehran is telling Islamabad to find a third party to finance the Iran-Pakistan natural gas pipeline. The Iranians backed out of the project the week before last, citing the sanctions for their inability to raise the necessary $500 million they had promised to build the line across Pakistani territory.
Libya: The slide into chaos continues, lessening the chances that there will be any increase in Tripoli’s oil shipments in the near future.  As best as can be made out, Libya is producing about 200,000 b/d; is consuming about 100,000 b/d in its own refineries; and exporting the rest.  Last week the ubiquitous militias that have been parading around waving guns since the uprising fled the cities from a combination of civilian protests and armed groups. What little security they provided is gone leading to increased anarchy. Over the weekend a mob, with obscure demands, occupied the offices of Libya’s internet provider shutting down services for a while. On Sunday a suicide bomber killed at least six and wounded 15 in an attack on a military base outside of Benghazi. Most countries have closed their consulates in Benghazi and several foreign airlines have stopped flying to the city.
Iraq: The usual bombings and killings continued last week. At least 18 Iraqi soldiers including the commander and other senior officers who supervised the crackdown on Sunni protestors earlier the year were killed in a multiple suicide bomber ambush in Anbar province. Many of last week’s attacks were directed at Shiite pilgrims making their way to shrines in Iraq during the 40-day mourning period for the Prophet Muhammad’s grandson. A busload of pilgrims coming from Pakistan was shot up, killing three.
The death toll for the year is now double what it has been in the last five years but is still below that of 2007 which was the height of the post-invasion violence.
A test of the new pipeline that will carry oil from Kurdistan to Turkey is continuing as negotiations between the Turks and Kurds on one side and the Iraqi government continue. Baghdad fears that once the Kurds gain a steady revenue stream from selling oil, they will declare independence. This could easily be followed by the southern provinces, leaving Baghdad with little oil revenue.
South Sudan: The already unstable political situation took a turn for the worse last week as a clash between army factions spiraled into a nationwide rampage with hundreds killed and forced tens of thousands to seek refuge in UN camps. Despite government claims that oil production has not been harmed, foreign oil workers including many Chinese are being evacuated and the capital of the main oil producing province has been captured by rebel forces.  Most foreign governments advised their citizens to leave the country and four US military personnel were wounded as three US evacuation aircraft were fired on while picking up refugees.
On Sunday troops loyal to the former Vice President took control of the capital of the country’s key oil producing state. Most observes are saying the country is on the verge of an ethnic civil war with the prospects for oil exports in the near future very much in doubt.
3.  The EIA’s Annual Energy Outlook
The release last week of the early overview of next year’s Annual Energy Outlook has created quite a stir in the media and peak oil circles. In its release the EIA “projects or suggests” (they say the don’t forecast) that US production of shale oil (the term coming into vogue is “light tight oil,” LTO) will continue to increase by 800,000 b/d for the next three years so that total US oil production will hit 9.5 million b/d, just below the all-time high hit in 1970.  After 2016 production is to suddenly level off for four years and then gradually decline until by 2040 it has only fallen to only 7.5 million b/d.  This new projection is about 2 million b/d higher than last year’s US peak of 7.5 million b/d which was projected to be reached about the same time.
The reason for this new evaluation is undoubtedly the rapid jump in US shale oil production which now has taken total US oil production to just above 8 million b/d – some 500,000 b/d higher than the EIA was projecting just last year for 2015.  Needless to say the media was ecstatic – claiming that the new estimate will make the US energy independent before we know it.  The key question is whether we are seeing an over-reaction on the part of the EIA or is it realistic to assume that that US tight oil production will double to 4.5 million b/d in the next three years and then hold level for another five years.
Many are of course skeptical of the EIA’s assertion, citing the rapid decline rates that have been reported for wells that have been drilled and fracked in shale fields. For the past three months, the EIA has been producing a “Drilling Productivity Report” on tight oil production in the US.  The numbers given in this report seem to say that it will be very difficult to grow production in the coming years as most of the oil coming from newly drilled wells will simply offset the decline in production from currently producing wells. Many experienced analysts see US tight oil production peaking in the next one to three years and declining rapidly thereafter.
In the last year or so, drilling for tight oil has been concentrating on a limited number of productive “sweet spots” both in Texas and North Dakota. The extent of these sweet spots and how densely they can be drilled in the next year or so will likely determine whether the EIA or its critics are right.
4. Quote of the Week

            -- Collin Eaton, The Houston Chronicle (12/16/13)
5. The Briefs

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