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Peak oil review - Jan 27

Published by ASPO-USA on 2014-01-27
Original article: by Tom Whipple

1.  Oil and the Global Economy
The frigid weather which engulfed much of the US last week sent heating oil, natural gas, and propane prices spiraling upwards – taking crude along with them.  At week’s end, crude was trading at $96.64 after having been close to $98 earlier on Friday; NY heating oil touched $3.17 a gallon before closing at $3.14; and natural gas climbed to $5.24 per million before closing at $5.18. The surge in heating fuel prices was tempered on Friday by concerns that the world’s emerging economies, particularly that of China, are not doing as well as expected. These concerns led to drops in the equities markets as well as commodities.
The weekly stocks report showed refining down to 86.5 percent of capacity which resulted in a 1 million barrel increase in crude inventories. Refinery utilization normally drops in January as units are changed over from making heating oil to summer products. As could be expected, distillate inventories fell by 3.2 million barrels, considerably more than analysts had been expecting and are now down to 121 million which is 10 percent below this time last year. The cold snap has now lasted for another week following the period of the report so inventories will be still lower in the next few weekly reports.
With the opening of the Keystone pipeline from Cushing, Okla. to the Gulf more light sweet crude is arriving at Gulf refineries. As this oil cannot be exported, the new pipeline may be partially moving the Cushing oil glut to storage facilities along the Gulf where it will exert pressure on US crude prices. Many US refineries along the coast were designed to use heavier grades of imported crudes efficiently -- not the lighter crudes coming from domestic shale.
Last week’s increase in natural gas prices brought them above $5 per million for the first time since 2010. The cold weather has quickly reduced the glut in natural gas stocks which now stand 13 percent below the five-year average for the week. About half of US households heat with natural gas. A slight warming is expected early this week which is forecast to be followed by another Arctic Blast that will keep temperatures low for at least another week or two.
A propane shortage is developing across the upper Midwest where many rural homes use the fuel for heating – some 5.5 million US homes are heated with propane.  Although US propane production has increased by 27 percent in the last five years to 1.3 million b/d, unusually large quantities of propane were used to dry last fall’s grain crops. Moreover, US exports of LPG have doubled in recent years, hitting 400,000 b/d in October. Shortages have developed in many regions. In some cases retailers are only delivering 100 gallons at a time to prevent customers from filling large tanks while others are left without heat. In some areas the cost of propane has doubled to well over $4 a gallon. Although prices subsided a bit last week, some are using the shortages as an example of why the US should not be exporting crude.
In addition to increasing the demand for heating fuel, the frigid weather is slowing natural gas and shale oil production. The EIA reported that US crude output was down by 100,000 b/d the week before last. Output is likely to be still lower in next week’s report as the cold weather not only affected North Dakota, it also brought unusual ice and freezing rain down to the Texas oilfields.
The EIA’s monthly Oil Market Report forecasts that global oil demand increased by 135,000 b/d in the 4th quarter of 2013. Global oil consumption is estimated to have increased by 1.2 million b/d in 2013 and is expected to increase by 1.3 million b/d in 2014. The Agency is also concerned about the rapid increase in US crude production which increased by 15 percent last year. The EIA says that the US will soon have all the light sweet crude that its refineries can handle and if the ban on exporting crude continues production of shale oil will have to slow as there will be no market or storage for the additional millions of barrels per day that the shale fields are expected to produce.
2.  The Middle East & North Africa
Iran:  President Rouhani is on a charm offensive across Europe trying to convince foreign companies that the nuclear standoff is nearly over and that they should begin investing in Iran. The US is warning that only a small part of the sanctions have been lifted and there are still months of negotiating to go before there is any possibility of normalizing relations between Tehran and the world. The US says Tehran has been exaggerating the size of its oil exports by claiming they are now 1.5 million b/d down from a pre sanction 2.5 million. The US and the IEA say the true size of Iran’s current exports is closer to 1 million b/d.
Although the first phase of the agreement with Iran seems to be holding, many are skeptical that the numerous stumbling blocks ahead can be overcome. Iran’s wholehearted support for the Assad regime is just one example of the many complicated problems to be overcome.
Syria: The peace talks in Switzerland are underway. The first task is to get the agreement of the Assad government to allow humanitarian supplies to be delivered to areas it has surrounded and where it is attempting to starve out the rebel forces and their civilian supporters. If nothing else the government is at least talking with representatives of some of the rebel groups fighting the government. There is still a long ways to go in this uprising.
Iraq: Problems continue to mount in Baghdad. In addition to the nearly continuous bombings and attacks on security forces, and the occupation of parts of Anbar province by al Qaeda, a revolt in brewing among the provincial governors where most of Iraq’s oil is being produced. The governor of Basra is threatening to file suits, drum up dissent, and even stop oil production over Baghdad’s refusal in increase revenue sharing with the provincial governments. Baghdad has established two new oil companies in provinces that may soon be producing increasing quantities of oil. These new companies are intended to give local officials some degree of autonomy in matters of oil production.
The struggle between Iraqi Kurdistan and Baghdad over Erbil’s direct export of local oil production into Turkey for sale on the world markets continues. As Baghdad does not have the military strength to force a solution, it has cut off all payments to Kurdistan, black listed Turkish companies and filed law suits. All this is likely to make the Kurds more defiant and to redouble efforts to gain independence from Baghdad. There is already concern about what the loss of revenues from the Kurdistan oil fields will do to Baghdad’s budget. The IEA reported last week that Iraq’s oil exports fell in 2013 from the previous year. Some of this is due to reconstruction of export facilities at Basra, but a lot is due to the Kurdish situation and frequent attacks on the northern export pipeline.
Libya: It was a relatively quiet week, although tribal fighting continues in the southern parts of the country. Libyan oil production was reported to be holding at about 580,000 b/d and there were no new threats by local tribes to turn off the taps again.
Four Egyptian diplomats were kidnapped by Libyan insurgents demanding that Egypt return a Libyan sheik they are holding. In response, Cairo withdrew its diplomatic missions from the country.  The anarchy across the country continues to mount, and it seems only a matter of time before oil exports take another dive.
Egypt: The security situation deteriorated in Egypt last week as supporters of the Islamist movement intensified attacks and protests. At least nine were killed and 300 arrested during clashes between security forces and pro- and anti-government demonstrators. A wave of bombings has begun targeting police and security installations. The immediate concern is that the insurgents are going to find a way to block the Suez canal/pipeline thereby upsetting oil flows from the Middle East to Europe and the North Atlantic.
Natural Gas: Moscow is injecting itself into the Mediterranean natural gas game by offering to develop Syria’s and Gaza’s shares of the newly discovered natural gas fields. In December, Moscow signed a 25-year deal with Syria that gives Gazprom exclusive rights to exploit 850 sq. miles of Syrian waters. Palestinian Authority President Abbas is in Moscow seeking a $1 billion deal for Russia to develop a natural gas field off the Gaza strip.  The Gaza field was discovered by a British company 14 years ago but was never exploited because of the conflict with Israel. Given that Gaza is now controlled by Hamas and not the Palestinian Authority, it is problematic that anything will come of this initiative.
3.  China
New GDP figures show that China’s economic growth last year came in at 7.7 percent just missing a 14-year low.  Many analysts are saying the China’s economy will continue to slow further this year in the midst of major economic reforms. All this raises questions as to how long Beijing will be able to keep its economy growing at spectacular rates and increasing oil imports.
Beijing is continuing efforts to diversify its sources of oil to reduce dependence on the volatile Middle East. Imports from Kazakhstan increased 14 percent last year to 140,000 b/d. Imports of Russian crude from Siberia are also on the rise. The Chinese are also piping in more natural gas which increased by 20 percent in December 2013 over December 2012.  Increased use of natural gas is one of the few “quick fixes” China has to improve air quality while maintaining rapid economic growth.
Although China has not had an air quality disaster recently, complaints are increasing about pollution from other parts of the country blowing into the country’s financial capital, Shanghai and other southern cities. Among the suggested solutions is issuing 23 million protective masks to Shanghai’s inhabitants. A new study suggests that polluted air from China is starting to make its way to the west coast of the US. While the shift in manufacturing from the US to China in the last 30 years has led to cleaner air in the US’s eastern cities, China is creating more pollution along the west coast.
4.  Quote of the Week

              -- Jeremy Leggett, CEO Solar Century, co-convenor of TransAtlantic Energy Security Dialogue
 5.  The Briefs

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