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Peak oil review - April 7

Published by ASPO-USA on 2014-04-07
Original article: by Tom Whipple

1.  Oil and the Global Economy
Oil prices declined during the first three days of last week, and then partially recoveredon Thursday and Friday to close at $101.14 in NY and $106.72 in London. The decline came on weaker economic data out of China and the expectation that Libya may soon resume substantial oil shipments. The climb at week’s end was due to skepticism about a settlement in Libya and optimism that the US job picture might improve.  Last week’s stocks report was dominated by the four-day closure of the Houston Ship Channel which reduced US imports by some 800,000 b/d from recent levels resulting in a 2.4 million barrel decline in US crude stocks -- the first in 11 weeks. The Channel is now open and the missing crude imports should be unloaded in the next week or so.
As US crude imports fall, the share that comes from Canada, Mexico, and Saudi Arabia has climbed to 60 percent of US imports -- highest in 40 years. Continuing rapid growth of US shale oil production, which most expect to continue for at least another two years, is likely to increase this share even more and could bring US imports down to the vicinity of 6 million b/d from the current 7.3 million.
The North Dakota Petroleum Council weighed into the debate about the future of US shale oil production with a new report from the research firm of Wood-Mackenzie which forecasts that production from the Bakken shale will average 1.1 million b/d this year, up by nearly 250,000 b/d from 2013. The firm is also talking about Bakken production hitting 1.7 million b/d by the end of the decade, and Bakken wells lasting for 25 or 30 years. The next report covering February’s oil production in North Dakota, which is due next week, should give us a better idea as to how badly production has been hampered by the cold winter. Cold and snow continued in the region as recently as last week. Needless to say, many analysts are skeptical that the Bakken can keep growing shale oil production by an average of 100,000 b/d each year until 2020.
There is growing skepticism about the EIA’s forecast models. In December the Administration said that Bakken oil production in January would average 1.025 million b/d. When North Dakota released the actual production for January, it was only 871,000 b/d or 153,000 b/d less than the EIA estimated a month earlier.  While some of this shortfall was due to the cold weather, the size of the misestimate raises questions about the EIA’s reliance on models to produce the forecasts of US shale oil production it continues to issue.
US gasoline prices are climbing again due to declining supplies and the rapidly rising costs of the ethanol used for blending – up 81 percent in the last quarter. Railroad congestion is blamed for the higher ethanol prices.  The AAA says the national price of regular gasoline is now $3.58 a gallon which is up nearly 10 cents in the last month and the highest since last summer. California is already above $4 a gallon.  This is still well below the $3.78 we saw in February 2013. The AAA is expecting gasoline prices to peak this month at around $3.65 a gallon, or higher if things do not go well. While the EIA forecasts that US demand for gasoline this year will remain around the 8.8 million b/d we saw last year, demand for exports of US gasoline, which is highly profitable for US refiners, is likely to remain strong.
The report that US natural gas stocks fell by 74 billion cubic feet last week, at a time when drawdowns are usually minimal, has traders concerned about the prospects for the US natural gas supply in the next year or two. Last week was unusually cold in the northern US suggesting that the drawdown may continue for another week or so before storage facilities begin refilling again. The selling price of natural gas is still too low to be profitable in some areas and the number of rigs drilling for natural gas is down from last year.
Whether the storage caverns can be refilled to an adequate level in time for next winter is an open question.  A unusually hot summer would require more gas to meet the demand for air conditioning; a substantial increase in prices would encourage more drilling; and if next winter is anything like the one we just had, partially restocked storage caverns would likely result in shortages. In the next few years, the US is planning to export substantial quantities of LNG as well as shutdown numerous coal-fired power plants which will add a new drain on US natural gas supplies.
2.  The Middle East & North Africa
Iran:  Expert-level nuclear talks resumed in Vienna last week amidst reports that Moscow is contemplating a $20 billion oil-for-goods swap in which Tehran would essentially send its oil to Russia for marketing in return for Russian goods and equipment. Washington says it has no information on the alleged deal, which could undercut sanctions on Iran, but indicated that it will extend sanctions should such a deal come to fruition. The nuclear negotiations will continue at the chief negotiators level in Vienna this week.
Tehran has given China’s National Petroleum Crop three months to get moving on exploiting the South Azadegan oil field which Iran shares with Iraq.  In the seven years China has had access to the field, it has drilled only seven of 185 wells promised and is producing only 50,000 b/d. In contrast, Iraq is already pumping 175,000 b/d from its sector of the field and plans to raise this to 400,000 b/d.
Iraq: Campaigning for the 30 April parliamentary elections began last week amidst the ongoing sectarian turmoil. The elections will be the first in four years as Prime Minister al-Maliki tries for a third term with bloodshed at the highest in seven years.
The Kurds have postponed plans to export 100,000 barrels of their oil per day through the government’s northern export pipeline.  The pipeline, which is blown up frequently by Sunni insurgents, was reported to be out of service again last week. Erbil had announced that it would start sending oil through the pipeline as a “goodwill” gesture to ease tension with Baghdad.
Russia’s Lukoil considers its stake in the West Qurna-2 oilfield one of its most valuable assets. The field is estimated to contain 14 billion barrels of oil which is one of the largest undeveloped oil fields left in the world.  The plans are to start with production of 400,000 b/d which will be increased to 1.2 million and which is expected to keep producing at this rate for 20 years.
Libya: Tripoli reached an agreement with the rebels on Sunday to open two of the smallest export terminals that have been closed since July. Zueitina and Hariga, the two smallest oil ports with a capacity of 200,000 b/d. The larger occupied ports, Ras Lanuf and Es Sider, are be reopened after two to four weeks of further negotiations. Under the agreement the protestors are banned from further interference with the two ports turned over to the government. The return of the two ports could increase Libya’s oil production to some 350,000 b/d from the current 150,000, but will still be a million b/d below the 1.4 million that was being produced before the troubles started.
On Sunday there was a general strike in Benghazi to protest the lack of security provided by the government.
Without the oil revenues, some Libyans have taken to running the vast stores of guns that the Gadhafi regime left behind to insurgent groups in the Sinai and Palestine. Occasionally these gun runners are caught by the Egyptian authorities and given lengthy prison sentences. In one such incident last week, fellow tribesmen of a jailed gun runner kidnaped 50 Egyptian truck drivers transiting Libya and held them for release of the gunrunner. The drivers were freed after negotiations. In the meantime, Cairo has warned its citizens to only travel in Libya by air and if already in the country to exercise utmost caution.
3.  China
New economic figures show China’s manufacturing growth fell to an eight-month low in February; however, part of this decline likely is due to the nation-wide lunar holiday. Of more interest is the announcement that the government is undertaking a “mini-stimulus,” the first stimulus program since the great recession six years ago. This suggests that Beijing is worried that the country may not be able to attain the 7.5 percent GDP growth targeted for this year.  The new stimulus program mostly involves speeding up railroad and housing construction as this is the quickest way to record more GDP growth. Some believe that Beijing is on the wrong track by emphasizing capital-intensive infrastructure projects rather than undertaking efforts to boost consumer consumption.
The conventional wisdom seems to be saying the China’s economy is slowing and with it will go the demand for as much growth in oil imports. This notion is already having an impact on oil prices which will be amplified if we start seeing slower growth in China’s oil import numbers as the year progresses.
4.  Quote of the Week


·         "Nuclear power is probably the biggest asset we have in the fight against climate change…But I'm a business guy and I'm a pragmatist, and there's no future for nuclear in the United States. There's certainly no future for new nuclear…The fact that distributed solar is going to take over the built environment in the United States, it's a completely foregone conclusion that that's going to happen.  …[Very few know] how close the system came to collapsing in January because everyone wants to go to natural gas and there wasn't enough natural gas in the system.  The purpose of having old coal plants, to be frank, is keeping the lights on for the next three, five, 10 years…I'm not anti-utilities, I'm not anti-nuclear, I'm not anti-coal, I'm just anti-bullshit."
            -- David Crane, CEO of NRG Inc., the U.S.’ largest independent power generator
5.  The Briefs


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