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Peak Oil Review - Feb 17

Published by ASPO-USA on 2014-02-17
Original article: by Tom Whipple

1.  Oil and the Global Economy
After rising by nearly $10 a barrel since early January, New York oil futures held steady around $100.50 a barrel last week.  London prices increased only about $4 a barrel in the same time period and traded around $108.50 last week, closing on Friday at $109.  Much of the reason for the narrowing of the WTI/Brent spread was attributed to the opening of the southern leg of the Keystone pipeline which allowed an increased flow of oil from the Cushing, Okla. storage facility to Gulf Coast refineries.
Another major factor in the increase of US crude futures has been the extreme cold and paralyzing snow storms that have been engulfing much of the US. NY heating oil futures have increased by 17 cents a gallon since early January and natural gas futures have climbed from circa $4 per million to close at $5.20 last week. With warmer temperatures in the forecast, these prices are expected to fall in coming days. The cold and snow has also reduced demand for motor fuels; the EIA reported that overall petroleum demand fell by nearly 600,000 b/d the week before last as airline flights were canceled, businesses were closed and people remained home during the storms.
The signals are mixed as to where the demand for oil is going in the coming year. US consumer confidence is at a recent high, but the Federal Reserve is reporting a drop in industrial production. Outlook for the Fed’s bond-buying program is uncertain. The US is about to begin its annual refinery maintenance and switch over to summer gasoline production, so many are predicting that a large jump in gasoline prices, perhaps as much as 10 percent, will begin shortly.
The IEA and the EIA warned last week that there are major uncertainties surrounding global oil supplies in the next two years. Although the EIA is forecasting that US oil production will grow by 1 million b/d in 2014 and another 800,000 in 2015, a variety of other problems may combine to tighten oil markets. Among these is the growing turmoil in the Middle East, which could lead to a further slowdown in Iraqi oil production. Libya, Sudan, Syria, Yemen, and Egypt are in the midst of upheavals which will continue to restrict oil production.  Little oil is coming out of the giant Kashagan oil field, the perennial problems in North Sea oil production continue, and above all the costs of finding and producing oil are skyrocketing.
The IEA reported last week that global crude inventories underwent an unexpected drop in the 4th quarter due to higher demand from the US and other OECD countries and are now at their lowest level since 2008. Global stocks were 103 million barrels below the five year average at the end of December and failed to grow their normal 44 million barrels January increase last month. “Far from drowning in oil, markets have had to dig into inventories to meet unexpectedly strong demand.”  The Agency is now forecasting that global demand will grow by 1.3 million b/d this year to a record 92.6 million.
Even the projected growth in US and other non-OPEC oil production may not be enough to keep up with demand. The IEA is concerned by the volatility in Libyan production which has been fluctuating from 1.1 million b/d to zero and Iraqi production where various factors have combined to lower exports. The Saudis have trimmed their production to 9.76 million b/d and some are wondering whether the days of 10 million+ b/d of Saudi  production could be coming to an end.
2.  The Middle East & North Africa
Iran:  Tehran’s oil exports climbed by 100,000 b/d in January with China, India, and Japan taking more oil after the partial lifting of sanctions went into effect.  The mood in Tehran is seems optimistic as there is much talk of growing foreign investment and a new day in relations with the outside world. The IAEA reports good progress on its investigation of links between Iran’s armed forces and the country’s nuclear program. Whether the coming round of negotiations will lead to a settlement, the end of sanctions and wide open foreign investment in Iran’s oil and gas industry remains to be seen.
Iraq: The incessant bombings and fighting between government forces and al-Qaeda in Anbar province continued last week. On Friday government forces started an assault to drive the jihadist forces out of Fallujah. Some 300,000 have been displaced since the fighting in Anbar province began.  Someday someone is going to call all this a civil war.
Among the more disturbing incidents last week was an attack on an army unit that was guarding the northern export pipeline to Ceyhan, Turkey.  The attack, which killed 15 soldiers, is raising fears that there will be more attacks on the country’s energy infrastructure in an effort to weaken the government. Although the northern export pipeline has been bombed weekly for over a year, steady attacks on pipeline guard forces and repair crews could shut the pipeline completely. 
There have been only a handful attacks in the south, where most of the oil is produced and exported. So far these have had little or no impact.  The fighting in Anbar province is already hampering efforts to open new oilfields in the western part of the country, but as long as the insurgency does not reach the mega-oilfields in the south, Iraq should be able to maintain production.
Syria:  With the collapse of the second round of peace talks, the situation is going nowhere fast.  Many feel that Moscow, which has control of Syria’s purse strings, did not do enough to pressure Damascus into some sort of settlement, but is content to let the situation and its accompanying humanitarian disaster continue indefinitely so long as Assad can remain in power.
The Saudi’s, who are disgusted by the lack of progress, announced that they are going to supply man-portable air defense missiles to the insurgents in an effort to stop the Assad governments “barrel bombing” of civilians. The West has been reluctant to supply such weapons to the insurgents for fear that jihadists would soon be using them against civilian airliners.
While the situation in Syria will have little impact on Middle Eastern oil exports in the immediate future, a prolonged disintegration of the country is bound to lead to similar situations in Lebanon, Jordan, Iraq, and eventually to the Gulf States. At some point Israel is likely be pulled further into the turmoil with unpredictable consequences.
Libya:  On Sunday Libya’s National Oil company said that production has now fallen by 70,000 b/d to 390,000 as protestors have partially blocked pipelines from the El Sharara oilfield in western Libya.  Negotiations with the “government” in Benghazi which is blocking the exports from the Eastern parts of the country does not seem to be going anywhere despite the occasional government threat to use force to open the oil terminals. As about 250,000 b/d goes to domestic consumption, there is not much being exported – which, of course, is why the IEA is starting to worry about oil supplies in the coming year
An army general announced last week that he had staged a coup and was now in charge of the country, but further investigation revealed that he hadn’t and that the government was functioning normally.  Tripoli realizes that it must form some kind of stable government as quickly as possible so the current General National Congress has decided on a road map to write a constitution, create a parliament and a presidency, and eventually hold elections. The bottom line remains that it may be some time before we see much oil exported from Libya.
Egypt: Things are not going well in Cairo either. Egyptians are suffering through rare winter power outages – suggesting that things will get worse when the air conditioning season comes next summer. Last summer frequent electricity cuts were part of the motivation for the riots that ousted the Morsi government.
 The trial of former President Morsi on a variety of charges began and promptly adjourned over the weekend with Morsi being kept in a sound proof glass box to keep his shouts of protest from being heard. Field Marshal Sisi traveled to Moscow where he received the blessings of President Putin for his election bid, signaling that the military government is shifting it allegiance to Moscow from the US. Moscow seems to be back in the business of supplying weapons for the Egyptian Army.
A bus full of South Korean tourists, traveling from Cairo to Israel, was blown up over the weekend killing four. This is not going to do much for the tourism industry that was the mainstay of Egypt’s economy before Arab Spring. The natural gas pipeline crossing the Sinai was also blown up once again.
Ethiopia’s Grand Renaissance Dam, which will partially block the Nile and likely do considerable damage to Egypt’s agriculture, is back in the news. Ethiopia says that should Egypt take the issue to the UN Security Council, it will surely lose. Egypt says all options are open which presumably includes using force to stop the project.
3.  China
Beijing is starting to worry about its energy future. A new paper released by the State Council, China’s cabinet, notes that as much as 75 percent of China’s oil will need to be imported by 2030 and says the country needs to revamp its strategy to build a “secure, green and efficient” system of energy production and consumption. In the meantime, China hit a new monthly record for auto sales of 2.16 million cars in January. Although this pace is not expected to continue into the coming year, the country could add in excess of 20 million cars to its fleet in 2014.  As China is not into much scrapping of vehicles as yet, most of these new cars will add to gasoline consumption.
The government also reported that it installed 94 million kilowatts of electric power generating capacity in 2013. Thirty six million was thermal, mostly coal; 30 million was hydro; 14 million was wind; 11 million solar; and 2 million nuclear. China’s total generating capacity is now 1.25 billion kilowatts, up 9.3 percent during 2013. Thermal power grew by 5.7 percent to 860 million kilowatts during the year. China’s electricity consumption, which tracks fairly closely with GDP, grew by 7.5 percent during the year. The billowing of coal smoke into the atmosphere continues to grow.
4. Venezuela
The rapidly deteriorating Venezuelan economy has led to an outbreak of student riots, some of them violent, across the country. At least three students were killed and many tear-gassed and arrested during the demonstrations which have been going on since Wednesday. The government has closed down a Columbian cable TV network which was broadcasting news of the demonstrations, and has resorted to armed motorcycle gangs to break up the protests.  For now the protestors are badly outnumbered by government forces and few believe they can bring down the government in the immediate future.
US imports, which have been slowly falling in recent years, are now running about 750,000 b/d with an occasional spike to a million. An increasing share of Venezuela’s production, however, has been going to China in repayment of the multi-billion dollar loans Beijing has made to Caracas in recent years. China is probably getting preferential prices for the oil it is importing so that Caracas’s hard currency earnings are slowly withering away and with it the means to import consumer goods. This problem is not going to go away given the competency of the people now running the country.
Every indicator suggests that disturbances will continue. At some point it is possible that oil exports will be affected as has happened during previous upheavals.
5.  Quote of the Week

-- Jun Tateno, author of books on Japanese nuclear power
6.  The Briefs

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