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Peak Oil Review - Feb 3

Published by ASPO-USA on 2014-02-03
Original article: http://peak-oil.org/ by Tom Whipple

1.  Oil and the Global Economy
 
Last week oil prices were moved upwards by the polar vortex which engulfed much of the central and eastern US sending the demand for heating fuels to record levels. Contributing to price volatility was the growing concern about the economic outlook for the emerging nations including China. During the week, NY futures touched the highest level of 2014 as the demand for heating oil in the northeast surged. On Thursday NY oil was trading above $98.50 a barrel, but then slipped on Friday to close out the week at $97.49. London oil traded around $108 for most of the week but also slipped on Friday to close at $106.40. The week ended with the premium of London over WTI down to $8.91.
 
The cut in US Federal Reserve bond buying is hurting the emerging economies as Washington’s bond-buying program has sent considerable capital flowing to emerging economies in search of higher interest rates. Deflation in Europe remains a concern as the inflation rate in the EU remains at less than half of the Central Bank’s target.
 
US natural gas futures soared to a four-year high on Wednesday of 5.50 per million BTUs. On Thursday, however, revised weather forecasts of above normal temperatures across the northeastern US for the next two weeks sent prices plunging to $4.94. There is still concern about the longer term prospects for the US natural gas supply, however. Extremely cold weather has been interfering with production and transportation of the gas as well as slowing the drilling of new wells which are necessary to keep production level. Last week’s EIA report showed that natural gas inventories have fallen by 40 percent since November and are now 17 percent below the five-year average for the date.  Given the increased use of natural gas by electric utilities, the prospects for increased exports, and lack of profitability for much of the gas industry, higher prices and possibly shortages may be ahead.
 
The major news of the week was lower production and falling earnings reported by several of the major international oil companies. Chevron says that its fourth-quarter earnings were down 32 percent from last year. Production for the quarter was 2.58 million b/d, down from 2.67 in the forth-quarter of 2012.  Shell’s quarterly profit was down 48 percent from last year and its production of oil and gas fell by 2 percent to about 3.2 million b/d. Exxon’s profit was down by 16 percent from the fourth-quarter of 2012. The companies cited lower oil prices, declining production, and rapidly increasing costs of production as the reasons for the decline.
 
Exxon, however, still expressed optimism for it future, citing major new projects in Tanzania, Argentina, Iraq, Canada, and Russia, as well as increased shale drilling in the US.  Shell, on the other hand, seemed more uncertain about its future and announced a program to sell off some $15 billion in assets in order to improve profitability and finance investments. Among the major curtailments which Shell announced last week was the suspension of drilling off the north coast of Alaska for an indefinite period.
 
The long-awaited report on the environmental impact that the Keystone XL pipeline would have on the global climate was released last week. The report echoed an early draft which said that the pipeline would have little impact on the pace at which the Alberta Tar Sands would be developed as Canada would simply find other outlets for its oil either by rail or new pipelines to the west coast. The report is widely considered a serious blow to environmentalists’ hopes that the Obama administration would block the pipeline. While the report does not explicitly recommend approval of the pipeline it will make it very difficult for the President to veto the plan in the face of drumbeat calls from Congressional Republicans, the Canadian government, and oil interests to approve it.
 
2.  The Middle East & North Africa
 
There was little progress in the numerous confrontations going on across this region of the world last week and if anything, several situations seem to be getting slowly worse. The Syrian peace talks have gotten nowhere as have efforts to get food supplies to civilians surrounded by government forces. Damascus is starting to miss deadlines for sending its chemical weapon stocks out of the country. The Lebanese are trying to form a new government. One of the key issues is control of the Energy Ministry which will oversee the development of the country’s offshore gas deposits. In Libya, the administrator of Cyrenaica says oil will not flow from his province until Tripoli meets all of its demands.
 
Egypt: Defense Minister Sisi, with the new title of Field Marshal, took the first step towards running for President, despite earlier pledges to keep the army out of politics. Sisi insisted he was yielding to the “free choice of the masses” and “the call of duty.” The news was accompanied by an increase in terrorist activity including a major bombing of a security headquarters in Cairo and the downing of a military helicopter in the Sinai. The helicopter was downed by a missile, confirming that some of the vast stocks of advanced weapons left behind by the Gadhafi regime in Libya are likely making their way into Egypt and will play a part in troubles to come. The government is back to dictating the themes of weekly sermons at mosques, locking up journalists, and trying former President Morsi.
 
The British oil company, BG Group, which is a major producer of natural gas in Egypt, issued a Force Majure last week, saying that the government was forcing it to divert gas to domestic use that had been slated for export.  The possibility that increased insurgent activity in the Sinai may eventually lead to some sort of blockage of the Suez Canal or damage to the Su-Med pipeline is growing stronger.
 
Iran:  The nuclear talks, which resume in New York on February 18th, seem to be going well.  A new round of talks with the IAEA on implementing the agreement is set for this week. Washington continues to warn Tehran not get too far ahead of the negotiations in claiming that the sanctions are about to be lifted and unrestricted Western investment is now possible. Iran’s official news agency reports that senior Iranian clerics have given their blessing to Rouhani government’s position in the talks. There is still major opposition to the general thrust of the talks by the Israelis and their supporters who insist that Iran halt all nuclear enrichment activities. Likewise, hardline clerics and their allies in the Revolutionary Guard are loath to see the 35-year standoff with the West come to an end as it provides the basis for their power and influence in Tehran.
 
At least one Western analyst, from FACTS Global Energy, says that although Tehran could increase its exports by 200,000-300,000 b/d rather easily, it will take several years to increase exports by 1.2 million b/d to the pre-sanction level.  Some of the delay will be from what are expected to be lengthy negotiations to settle all the issues surrounding Iran’s nuclear programs and its involvement in the region in behalf of Shiite causes.
 
Iraq:  The pace of violence continues about the same; however a government push in Anbar will likely result in heavy fighting. The UN says some 700, mostly civilians, were killed during January without counting whatever happened in Anbar province which has seen major fighting as portions of the two major towns have been taken over by al Qaeda. The government puts the death toll at 1,000. There are reports that the government and loyal Sunni tribesmen have launched an offensive to clear al Qaeda from the province. More than 140,000 residents of Anbar have fled the province in the last month.
 
The Kurds seem to have stopped exporting oil to Turkey in the midst of the 2014 budget negotiations. The central government has halted all payments to the province in retaliation for the oil shipments. The Kurds may have figured out that they still need Baghdad and its oil money for the time being.
 
In a wide-ranging review of what is happening in the country, Deputy Prime Minister for Energy, al Shahristani, said that the spill over from the Syrian uprising is having a serious effect on Iraq’s oil exports. The vast desert areas between Iraq and Syria have become bases for al Qaeda in the Levant (ISIL) which are attacking energy infrastructure to weaken the government. The northern export pipeline was blown up 54 times during 2013, but still managed to move an average of 250,000 barrels of crude per day. So far the troubles have been confined to the north with little effect on the southern oil fields.
 
Despite the violence al Shahristani insists that Iraq is on its way to much higher production which should reach 4.7 million b/d by 2015 and 9 million by 2020 making the country one of the largest oil producers in the world. Many are skeptical of these claims given the increasing pace of the violence
 
3.  China
 
Manufacturing in January slipped to the lowest level in six months. Various indices point to a slowing economy in the next six months.  New government projections show that Beijing hopes to increase energy efficiency in the coming year so that total energy consumption will only increase by 3.2 percent. Coal consumption is to increase by 1.6 percent in 2014 to 3.8 billion tons while oil demand will increase by 1.8 percent. In contrast with the dirtier fuels, natural gas consumption is to increase by 14.5 percent in 2014. In December, China’s apparent consumption of natural gas increased by 14 percent.
 
Premier Li Keqiang said last week the China’s governments should take the lead in using alternative-energy cars. China plans to have 5 million such vehicles in operation by 2020 in an effort to curb rampant air pollution.  China’s auto sales hit 20 million last year, up 14 percent over 2012. China still has only 100 cars per 1000 people on the road as compared to 800 for the US, so there is still a ways to go.  The 20 million new cars will not do much for air quality, but should increase the demand for gasoline.
 
4.  Quote of the Week

--   The Wall Street Journal, January 29
 
5.  The Briefs
 


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