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Peak oil review - Jan 20

Published by ASPO-USA on 2014-01-20
Original article: by Tom Whipple

1.  Oil and the Global Economy
Oil prices closed out last week a dollar or two higher than the previous week with NY at $94.37 a barrel and London at $106.48. In the US prices were up due to concerns that the dramatic drop in US crude inventories in the last two months are due to more than just bad weather and year-end tax avoidance. Although recent reports on the prognosis for the US economy have been mixed, oil traders have been cherry-picking the more bullish ones as a reason oil prices went a bit higher last week. In London, uncertainties relating to Libya, Sudan, Iraq, and the Iranian negotiations have kept prices around $106 since the beginning of the year.
Next week the southern leg of the Keystone XL pipeline is due to begin moving 700,000 barrels of crude per day from Cushing, Okla. to Gulf Coast refineries. Many observers believe that this pipeline will shrink the price differential between WTI and Brent crudes that has existed since the glut of fracked shale oil built up at Cushing several years ago.
The controversy over whether Congress should lift the ban on exporting US crude continues to grow with oil producers in favor of the higher prices they could get for their oil on the world market, and refiners favoring the cheap crudes they can get in the US. Given that he US is still importing about 7 million barrels of crude a day most see no benefit in lifting the ban.  The more sophisticated arguments in favor of lifting, however, center on the grades of crude being produced in the US and the relative costs of transportation. Most start with the assumption that US shale oil production will continue to grow by 2 million b/d in the next few years and that there will be a surfeit of light, sweet crudes. Such crudes are more suitable for refineries along the US East Coast and Europe than the Gulf Coast refineries which are designed for heavier, sourer crudes. The argument is that it is more economical to get the lighter crudes to the refineries that can use them more efficiently rather than refining them in existing refineries along the US Gulf Coast.
The return of the polar vortex to the northern and eastern US pushed natural gas prices up to a close of $4.32 per million BTU’s last week as the EIA reported another record drawdown of natural gas inventories. Stockpiles have now fallen by 34 percent since early November and are 15 percent below the five-year average for this time of year. At least two or three rounds of unusually cold air are expected in the next month which will likely move natural gas prices still higher.
Some analysts say the shale gas boom has a long ways to go and that inventories will quickly be refilled no matter how cold the weather gets. They see the higher gas prices resulting from the cold weather as encouraging more drilling.  Others are noting the annual increases in natural gas production the US has seen for nearly a decade now seems to be easing so that smaller annual increases and higher prices may be ahead. Even at current prices many doubt that drilling for natural gas is yet profitable unless large amounts of natural gas liquids can be produced with the gas.
The UN warned again that the world’s nations are failing to control carbon emissions and, despite the emphasis on green fuels, growing use of coal and petroleum products continue to make the situation worse. Europe which was once a leader in carbon control now has a weakening economy that is forcing it to reconsider the importance it had placed on climate change.
Last week Shell Oil issued a profit warning for the first time in ten years. The major oil companies have been hurt by rapidly increasing costs of finding and producing more oil, while prices have remained generally level. In addition, Shell has suffered several major setbacks in recent years, including a $2 billion write-down on its Texas shale oil venture, the grounding of its Arctic drilling platform, and the competition from cheap US gasoline for its European refining operations.
2.  The Middle East & North Africa
Iran:  The interim agreement between Tehran and the 6 major powers comes into effect on Monday, January 20th. The West will release some $7 billion in blocked Iranian assets and Tehran has promised to stop enriching uranium to 20 percent which is only useful for further enrichment into weapons grade uranium -- a highly provocative program. The current deal seems to have wide acceptance in Tehran, even by hardliners who have come to appreciate the damage the various embargoes are doing to the Iranian economy. Moscow injected itself in the fray last week by offering to barter goods for Iranian oil at the rate of $1.5 billion a month – thereby reducing the effectiveness of the embargo.
The interim deal will last for six months, after which a permanent and more far reaching agreement is to be signed. Many believe that such a deal which would include the lifting of the oil sanctions will be impossible to conclude.  The West wants to restrict Iran’s capability to quickly and secretly acquire a nuclear weapons’ capability by limiting the number of nuclear centrifuges, releasing the true story of its efforts to build nuclear weapons, and subjecting it to rigorous inspections. Many, particularly the Israelis and their close friends, say even this is not enough and Tehran must refrain from conducting any uranium enrichment or production of plutonium. Both of these demands will be hard or impossible for Tehran to accept, so the prospects for a lifting of the oil embargo and wide open trade with Iran may not be as good as many are saying. The odds seem to be that we will still have an Iranian oil embargo for the foreseeable future.  The issues involved simply run too deep, especially Tehran’s involvement in the Syrian uprising and the various Sunni-Shiite confrontations taking place in the Middle East.
Syria:  There was little movement last week, as the rebels seem to be more involved in fighting the al Qaeda wing of the uprising than the government. Nobody is winning at the minute.
Moscow says it will take over the exploration for natural gas from the Syrian portion of the Mediterranean basin and will develop it on Syria’s behalf.
The “Geneva II” peace conference is to open in Switzerland this week with representatives of 35 countries, under the aegis of Russia and the US, to assemble. Damascus will be there with the provision that the continuation of the Assad government is non-negotiable as will representatives of some of the insurgent groups. Tehran will not attend the meeting as the Iranians refuse to discuss any alternative to Shiite dominance of the country. There is no end to this uprising anywhere in sight. The fighting among the various insurgent groups simply adds another layer of complexity to the situation. The danger of an endless insurgency is that its impact on neighboring states is increasing and it is only a matter of time before oil exports from the region are affected.
Iraq: Bombings and violence continued across Iraq last week as local tribesmen supported by government forces attempted to take control of Ramadi in Anbar province from al Qaeda. The US is sending more arms and ammunition to Iraq to help with the Anbar situation and there is talk about sending a US training mission too. The UN reported that 2013 was the deadliest year since 2008 with nearly 8,000 killed. There is little good that can be said about the situation in Iraq. Sectarian lines continue to harden and a cross between an insurgency and a civil war seems to be underway. Someday it likely will get to the oil exports.
The disagreement between Iraqi Kurdistan and Baghdad came to a head last week when Erbil began exporting oil through a new 300,000 b/d pipeline to Turkey without permission or sending remittances to the central government.  Erbil says that the oil revenues it receives will go first to pay the contractors, then for reparations due from the “atrocities” during the Saddam Hussein era, and finally be shared with Baghdad. It will likely be quite a while before the “atrocities” are paid off. Kurdistan has been receiving 17 percent of Baghdad’s oil revenues, but this payment was terminated in retaliation for the opening of the new pipeline. In addition to cutting payments to Erbil, Baghdad has embarked on a widespread program of lawsuits and blacklisting of Turkish firms doing business with Iraq in an effort to stop the exports.
Baghdad can barely deal with the Sunnis in Anbar much less take on the Kurds with military force. If the Kurds can continue to export large amounts of oil indefinitely, they should have no trouble doing without Baghdad.
Libya:  The government says oil production is now in the vicinity of 600,000 b/d after the restart of the Sharara field on January 4th.  The local militias controlling the Sharara field have extended for another week the deadline for the government to satisfy their demands or they will close the oil field again.
In the meantime, new troubles have broken out in the south with an eruption of tribal and ethnic fighting that prompted the government to declare a state of emergency and start troops towards the region. Tribal discontent and occasional violence in the south between Arabs and the Tebu and Tuarg tribesmen has been going on for decades, but has been on rise since the overthrow of Qaddafi allowed everybody to arm themselves from the former government’s vast weapons stockpiles. There seem to be some Qaddafi loyalists involved in the troubles. An airbase near Sebha was briefly held by insurgents who were driven off by government planes.
Unrest in the south, where most of Libya’s oil reserves are located, is always of concern. Over the weekend, there was fighting in Sebha as well as at Jalu near the oil fields at Kufrah.
3.  China
China’s electric power consumption increased by 7.5 percent last year which is in line with reported GDP growth. As nearly 80 percent of the country’s electricity is generated with fossil fuels, Beijing is still pumping a lot of carbon and heavy metals into the atmosphere. The government announced last week that it intends to increase its synthetic coal to gas production to some 50 billion cubic meters by the end of the decade. It would then constitute about 12.5 percent of the gas supply.
New numbers released last week show that Beijing tripled its money supply since the end of 2006. This flood of money has fueled the rapid economic growth in recent years, but has also fueled massive inflation with asset prices, especially housing, soaring into the stratosphere. Consumer prices have held relatively stable due to falling commodity prices and widespread over-production of manufactured goods.
Instead of purchasing bonds as the does the US Federal Reserve, China’s central bank buys up dollars which keeps China’s currency low against the dollar and fosters exports. The cost of apartments is now so high that recent college graduates will never be able to afford one and only those who bought in early are doing well. 
The debt of China’s local authorities has increased by 70 percent in the last few years as local governments spent heavily on infrastructure that does not have much of an immediate return such as roads, airports and railways. The key question is whether the government can contain this asset inflation without causing a major economic slump. Many are worried that Beijing is on the verge of a slowdown that could easily reduce its ever-growing demand for oil.
4.  Quote of the Week

“The prospect of a severe oil price drop can only happen as the outcome of another economic collapse. On the other hand, an upward spike in oil prices is far more credible given the military tensions across the world that could disrupt oil supplies and the limited elasticity in supplies. Dysfunctional governments and failed states are now a pervasive syndrome across the world. There is little evidence that the collective global leadership is able to contain or to stabilize these many crises.”
--   Sadad Al-Husseini, Husseini Energy, former Saudi Aramco VP of E&P (see Commentary at the end of this issue)
5.  The Briefs


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