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Peak Oil Review - Apr 28

Published by ASPO-USA on 2014-04-28
Original article: by Tom Whipple

1.  Oil and the Global Economy

New York oil prices fell from highs around $104 a barrel to close at $100.60 last week as the EIA reported that US crude stocks for the country as a whole and along the Gulf coast have climbed to record highs. Disappointing corporate earnings and a drop in the equity markets also contributed to weaker US prices. London’s Brent crude traded around $109.50 a barrel for most of the week as threats of sanctions related to the Ukrainian situation continued to support prices.  Last week’s trading left the Brent/WTI spread at nearly $9 a barrel.
With US crude stocks at an 83-year high, it is interesting that US refiners continue to import so much high-priced foreign crude. The only reasons that come to mind is that US refiners are expecting a leveling off in US domestic production in the coming year; they do not want to lose their current allocations of crude from exporters; they fear supply disruptions from the Ukrainian or Middle Eastern situations that will send oil prices higher; or they are expecting a large jump in domestic or export demand for oil products in coming months.
The EIA reported last week that US petroleum product exports averaged 3.5 million b/d in 2013 and reached 4.3 million in December – the first time US petroleum product exports ever exceeded 4 million b/d in a single month. The advantage that US refiners have with access to relatively cheap domestic crude and cheap natural gas to drive efficient refineries gives them a significant advantage in competing in world markets.  The US still imported an average of 2.1 million barrels of petroleum products per day last year – largely gasoline from Canada and Europe, but this number is starting to shrink as European refineries close and US refineries are able to meet East Coast demand with cheaper gasoline.
Last week’s natural gas inventory report which showed 49 billion cubic feet being added to storage, coupled with warmer weather, combined to send US natural gas futures slightly lower last week. The 3 trillion cubic foot withdrawal from storage last winter will be difficult to make up before fall unless there is a surge in natural gas production or an unusually mild summer which will lower air conditioning demand.
2.  The Middle East & North Africa
Iraq: On Wednesday 30 April, Iraq’s first parliamentary elections since the US pullout will take place. No party is expected to win an outright majority so there will have to be negotiations amongst the various parties before a government can be formed. In 2010 these negotiations took seven months, so there may be a considerable period of political instability ahead. The run-up to the elections has been marked by an upswing in Sunni-Shiite violence with a high-casualty bomb attack on a Shiite political rally last week leading to reprisals against Sunnis. Government forces have made little progress against the Sunni insurgents who continue to hold large areas of Anbar province.
With the northern export pipeline closed indefinitely by terrorists attacks, Baghdad is considering building a new export pipeline into the more politically stable Kurdistan to link up with the line the Kurds already have running into Turkey and on to the export terminal at Ceyhan. Such a pipeline which bypasses what is essentially insurgent controlled northwestern Iraq would give the Kurds a strong hand in dealings with Baghdad. This in turn could lead to agreements that would increase the flow of oil out of northern Iraq and Kurdistan.
The billions that foreign oil companies have invested in reviving Iraq’s oil fields is starting to pay off with Baghdad’s oilfields producing 3.6 million b/d in February – the highest since before the Hussein era. Iraq’s problem is getting the oil out of the country. With exports to the north becoming increasingly uncertain, further increases in exports will have to come through Basra. Although progress was made in completing new offshore loading facilities this winter, the key to further increases is the Fao storage facility at Basra which will serve as a buffer between the oilfields and ships waiting to be loaded. With this facility in operation Iraq’s exports from Basra can increase. Recent reports, however, say that this facility is way behind schedule and is unlikely to be finished before 2018, making a major jump in Iraqi exports unlikely in the near future.
Two weeks ago the pipelines feeding the Baiji refinery north of Baghdad were blown up by terrorists and oil began spilling into the Tigris River adding to Iraq’s woes. Although the oil slick on the Tigris was immediately set ablaze as a control measure by local authorities, remnants of the oil slick are threatening Baghdad’s water intakes.
The new natural gas pipeline that Tehran is building to supply fuel for Iraqi power plants is said to be nearing completion. Whether this pipeline turns out to be more than another terrorist target remains to be seen.
Libya:  The much heralded reopening of the eastern export terminals that were closed by local militias seeking a larger piece of he pie does not seem to be much of an event. So far only one small terminal with a theoretical capacity of 70,000 b/d or one large tanker-full every two weeks seems to be functioning. Last week the militias controlling the eastern ports say the two larger terminals will stay closed until a deal is reached. As the country badly needs its major source of revenue, observers expect that a deal will eventually be reached, but for now mistrust, tactical maneuvers and the general chaos in the country are keeping exports to minimal levels.
3.  China
The adoption last week of Beijing’s revised environmental protection law may mark a major turning point in China’s 40-year breakneck increases in fossil fuel consumption. China’s leaders seem to have finally come to the realization that the country is slowly committing suicide by pumping ever-increasing amounts of toxic pollution into their air, water, and soil.  Although Beijing has been paying lip service to the environment for the last 25 years, in the past economic growth always trumped the environment.
Beijing says that those days are over and that protecting (or saving) the environment is now the country’s number one concern. While cleaner sources of energy are available, replacing coal and dirty petroleum products will not be cheap and will not come quickly. It is difficult to see how the 10 percent annual GDP growth that Beijing has achieved in recent years, or even the 7.5 percent it currently has as a goal can continue while making major reductions in fossil fuel consumption.
China’s coal consumption, which is the source of most of the pollution, is scheduled for a major turnaround. There are already indications that the annual 10 percent plus increases in coal consumption have slowed markedly. Major increases in natural gas, solar, wind, hydro, and nuclear power production are underway, but together these will have trouble matching the pace at which new coal powered plants were built in recent decades.
Over the longer term, shale gas may be beneficial but early indications suggest that shale gas deposits as productive as those that have been found in the US do not exist in China. Last week there was renewed talk of a major natural gas deal between China and Russia being concluded during President Putin’s visit to Beijing next month. This deal has been under discussion for many years, but the price Moscow wants for its gas has always been a stumbling block. With the current troubles in Ukraine, however, Moscow is anxious to reduce its exposure to the European market and China is in a position to take almost unlimited quantities of Russian natural gas if the price is right.
4. Ukraine
There was little change in the Ukrainian situation last week. Russian-speaking separatists, or perhaps thinly disguised Russian Special Forces, continue to occupy government buildings in the eastern parts of the Ukraine while Moscow and the West exchange blame for the situation.  New sanctions against Moscow have been promised, but the EU which conducts considerable trade with Russia is less enthusiastic than Washington over the imposition of sanctions that could bring economic hardships to the EU.
Both sides are being extremely careful to assure the world that natural gas flows to Europe will not be cut off, but considering that much of the gas flows through the Ukraine this may be tricky to regulate. Ukraine is seeking a way to import natural gas from Europe by reversing some of the east to west flow in the Soviet-era pipelines.  Moscow is threatening Ukraine with an alleged $11 billion natural gas bill and in turn Kiev is threatening to turn off the electricity flowing to Crimea for not paying last month’s electric bill.
4.  Quote of the Week
-- Chen Nengchang, a soil expert at the Guangdong Institute of Eco-environment and Soil Science

5.  The Briefs

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