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Peak Oil Review - Apr 14

Published by ASPO-USA on 2014-04-14
Original article: by Tom Whipple

1.  Oil and the Global Economy
Futures prices in New York and London climbed in the first days of last week before falling slightly to close at $103.74 and $107.33 respectively. Optimism about the prospects for the US economy and higher gasoline demand sent NY oil prices to a five-week high while London remains concerned about Libyan oil exports and the Ukrainian situation.  The premium of London oil over NY is down to $3.59; however many analysts expect to see this back in double digits shortly as the crude glut along the Gulf Coast slows or halts the transfers from Cushing, Okla.
The demand for US gasoline has been stronger than expected lately causing, along with refinery maintenance, a drop in US gasoline inventories of 5.2 million barrels the week before last. Most of the 8.8 million b/d US refineries are shipping is going into US gas tanks, but 600,000 b/d or more is going for export. Total petroleum products export numbers are currently around 3.6 million b/d which is about 28 percent higher than last year. The EIA expects that US gasoline prices will peak at about $3.66 per gallon in May and then decline. The Administration currently has the average gallon selling at $3.60.
Last week the International Energy Agency released its monthly Oil Market Report. The Agency sees “elevated risks” for the oil market stemming in part from the Ukrainian situation. Russian oil demand is forecast to fall by 55,000 b/d to 3.5 million due to the fallout from the Crimean annexation. Further economic sanctions on Moscow could cut Russian demand by a further 150,000 b/d. The Agency now forecasts that the global demand increase will be 1.3 million b/d in 2014, down 100,000 b/d from last month’s estimate.
World oil production fell by 1.2 million b/d in March due to sharply lower production totaling 550,000 b/d by Iraq, Saudi Arabia, and Libya. OPEC says the March decline is likely to be made up in coming months due to increased exports from these countries.  Year over year, however, world oil production was up by 1.1 million b/d for the month as a 2 million b/d increase in non-OPEC production offset the 1 million b/d drop in OPEC output.
The weekly natural gas storage report showed US inventories finally increasing again, but only by 4 billion cubic feet which is less than half normal for the week. Four billion barely makes a dent in the nearly 3 trillion cubic feet that will have to be stored away before next November to make up for this winter’s cold weather. Stocks in the more vulnerable East Region actually fell by 5 billion cubic feet last week. As below normal temperatures are forecast for the rest of the month, the rebuilding of US natural gas stockpiles is not off to a good start. Natural gas futures, which are up by nearly 40 cents per million in the last two weeks, closed on Friday at $4.62.
2.  The Middle East & North Africa
Iran:  Last week started with much hopeful talk about progress in the nuclear talks, but spokesmen warned that much work is left to be done. The talks continued to the weekend with no final agreement yet in sight. Tehran’s appointment as its UN ambassador of an individual who was involved in the takeover of the US embassy 35 years ago has added another dimension to the nuclear talks. The White House and Congress are refusing to let the new ambassador into New York and Tehran is refusing to appoint anyone else. The next round of negotiations is scheduled for mid-May.
The IEA reports that Iranian oil exports were up to 1.65 million b/d in February. March exports are currently thought to be 1.05 million b/d, but the IEA expects to revise that upward as more information is received. With other OPEC oil production down sharply last month many oil importers are willing to risk US sanctions by importing more Iranian oil. The generally optimistic atmospherics surrounding the nuclear negotiations leaves many importers with the impression that the sanctions will be over soon.
Iraq:  Two Iraq’s are starting to emerge: the relatively peaceful south where foreign oil companies are making good progress in exploiting the last easy-to-tap oil fields left in the world and the increasingly chaotic north.
In addition to the usual string of shootings and bombings, last week Sunni insurgents closed eight of ten gates on a major irrigation dam on the Euphrates river that they had seized last February. The action shut down 80 percent of the Euphrates’ water flowing towards the southern part of the county. The insurgents’ immediate goal was to flood the low lands around Fallujah to hamper government efforts to retake the city, but the closure of such a large river also threatened much of the country’s agriculture and forced a partial shutdown of power stations down the river due to the lack of cooling water. After a few days, the insurgents realized they might also flood parts of the city they occupied so they reopened five of the eight gates they had closed. The army says it will mount an operation to recapture the dam shortly.
It was revealed last week that Iraq’s northern export pipeline has now been closed for more than 40 days and is unlikely to reopen soon.  Past bombing of the pipeline were quickly repaired, but this time the insurgents stayed in the area of the bombings and massacred the repair crew. Additional crews accompanied by military forces were driven back by insurgent attacks. The oil company has decided to leave the pipeline closed until the government can guarantee security for the repair crews – an unlikely proposition.
An interesting insight into the dire Iraqi security situation was seen last week when it was announced that Baghdad will send its most dangerous inmates to prisons in Kurdistan for safekeeping. After a series of spectacular prison breaks in which a combination of bribed guards and superior fire power freed hundreds of al Qaeda insurgents, Baghdad decided that the Kurds could do a better job of securing captured terrorists.
There was some good news from Iraq last week. Shell announced it has lifted the first crude from the newly developed Majnoon oilfield and Baghdad announced that the newly installed single point mooring buoys at the Basra oil export terminals loaded an average of 829,000 b/d in March. This new export capacity will partially offset the indefinite loss of the northern export pipeline to Turkey.
With only two weeks to the parliamentary elections, the political situation in Iraq continues downhill. The government has not yet passed a budget. The Insurgent control of large parts of Anbar province will prevent voting from taking place there, and there are increasing doubts that a viable government can be formed after the vote. To top it all off, there are reports that the Sunni insurgents in Anbar province are considering a drive towards Baghdad.
Libya: After reaching an agreement with the dissidents holding the four eastern oil ports, it now appears that only one of these ports with an export capacity of 110,000 b/d will be opened this week. Negotiations continue to open the other three ports. An additional 110,000 b/d will not do much for Tripoli’s cash flow, but it is a start. Some 60,000 b/d continues to be lifted and exported directly from offshore oilfields where it has been exempt from interference by the militias.
Over the weekend, Libya’s major refinery and oil export terminal were temporarily shut down by yet another dissident group demanding a bigger share of the pie. The country in reality is under the control of dozens of large well-armed militia groups and hundreds of smaller ones who want little more than a share of the oil revenue. The government has little or no authority other than that stemming from the support of the US and other NATO powers that are reluctant to become too deeply involved in a chaotic situation that is likely to last for decades. The chance that Libya will be able to export large amounts of oil on a regular basis does not look good.
3.  Ukraine
The situation took a turn for the worse last week when unidentified groups of well-armed and well-organized men seized numerous government buildings in eastern Ukraine.  As they all speak Russian, no one can say if they are from the Russian special forces or are local ethnic Russians who have simply been organized and armed by Moscow or local separatists . In the meantime a large Russian military force has been positioned close to the Ukrainian border where it could easily intervene in what Moscow is calling a civil war. The eastern Ukraine has most of the country’s industrial and mineral wealth so what without these provinces a new Ukraine would be a much poorer state.  Despite Moscow’s protests that it does not want to take over the Russian speaking provinces of Ukraine, it is giving every indication that it wants to detach these provinces from Kiev’s control in one form or another.
Kiev has set Monday as the day for the militants to disperse or it threatens force. If Moscow uses this as a pretense for more military intervention, relations with the West are going to be different.
The impact of all this on the global economy and the world energy markets has yet to be seen. Kiev is refusing to pay its gas bill to Moscow and the Russians are threatening to cut off the natural gas supply – some of which passes through to Europe. The IEA is already forecasting that Russian trade will be hurt by the crisis and ensuing sanctions so that its domestic demand for oil will fall this year.  There is much discussion of the US and other western powers helping Ukraine by supplying fuel.  There are many downsides to this situation that could easily result in higher energy prices or even shortages. As all this still has a ways to play out it seems too early to consider what might happened.
4. China
Evidence continues to accumulate that China is in the midst of an economic slowdown. March trade data shows imports and exports falling by more than expected, raising questions as to whether China will able to achieve its 7.5 GDP growth target for the year. Food prices jumped in March, but deflation of industrial prices continues casting still more doubt on the prospects for this year. China’s manufacturing in February fell to an eight-month low. While the economy continues to grow slowly, the purchasing managers’ index shows that it is very close to contraction. Some of the lower numbers being reported may be related to the lunar holidays and various tax and regulation avoidance schemes. Chinese officials have rejected an IMF warning that the country may be facing a hard landing.
The new Chinese government is undertaking several major reforms this year ranging from anti-corruption drives and increased privatization to a major effort to clean up the environment. Slowing economic growth should lessen the demand for oil, but China’s oil product consumption is uneven. The rapid growth of its car fleet continues unabated so at a minimum the demand for gasoline should continue to increase.
Drinking water for the 2.4 million people that live in Lanzhou, China was contaminated last week when a broken pipe leaked benzene into the city’s water supply. The leak has been fixed and people have been warned not to drink the water for a while.
4.  Quote of the Week

--Barney Jopson, The Financial Times; April 10, 2014
5.  The Briefs

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