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Peak Oil Review - May 12

Published by ASPO USA on 2014-05-12
Original article: by Tom Whipple

 1.  Oil and the Global Economy
Last week’s trading left futures prices little changed. New York oil closed Friday at $99.99 a barrel and London closed at $107.89. As has been the case for several weeks, the US crude inventory, weak demand, and the Ukrainian and Libyan situations were the main drivers of the oil markets. US crude imports were down markedly the week before last leading to a drop in inventories along the Gulf coast and even total US crude inventories for the first time in many weeks. Some analysts are wondering if Gulf Coast storage facilities can absorb much more oil.
Natural gas futures dropped sharply on Thursday after the inventory report showed that the warmer weather has led to natural gas being injected into storage caverns at close to the normal pace. Futures prices are down about 30 cents per million from the $4.85 level touched the week before last. Even though injections are back to a normal level for the time of year, the EIA warned that above average injections will be necessary this summer if US stocks are to be ready for normal temperatures in the years ahead. The Administration is worried that increases in natural gas production are not keeping pace with forecasts and notes that more effort is being directed towards producing “wet” gas which contains valuable natural gas liquids. This may not be an option for gas producers in Pennsylvania and West Virginia which is the region where production is growing the fastest and produces mostly unprofitable “dry” gas. Many producers there continue to lose money in hopes that prices will someday climb to profitable levels.
The EIA notes, however, increased production of natural gas liquids is leading to lower prices as the markets cannot currently absorb all that is produced. One study estimates that some 200,000-400,000 b/d of natural gas liquids are simply being sold off as natural gas for lack of a market.
A new study by Barclays Bank says that the shale oil and gas boom continues because Wall Street is financing unprofitable drilling companies through high-yielding junk debt which has grown nine-fold since the shale boom began.  Of the 97 shale oil and gas production companies rated by S&P, 75 are below investment grade. Cheap debt stemming from government policies has been just as important as fracking and horizontal drilling in fostering and sustaining the shale boom.
The major news of the week was a renewal of the administration’s efforts to reduce carbon emissions and still another federal court ruling supporting the EPA’s drive to regulate industrial emissions. To bolster the administration’s claims that something must be done now, the government released a new 840-page report that directly blames changing weather patterns on the burning of fossil fuels. The study holds that human-induced climate change is being felt in every region of the US through water scarcity and torrential rains, heat waves, fires and dying forests.
2.  The Middle East & North Africa
Iran:  With the nuclear negotiations resuming in Vienna this week, many Iranian conservatives fear that the Rouhani government will sell out Iran’s right to develop nuclear energy in hopes of relieving the sanctions and reviving the economy.  Part of the issue is that the hardliners who run much of the country got only 4 million votes out of 50 million eligible voters in the last election and fear a successful nuclear treaty would further diminish their political power. With the future of Iran at stake, Rouhani will have a hard time curtailing the political and economic power of institutions such as the Revolutionary Guard that have dominated the government of the country for the last 35 years. The next few months may see a turning point in the history of modern Iran and even in the stability of oil exports from the Middle East.
Iraq:  Although oil exports increased by 113,000 b/d in April to 2.5 million b/d, there was very little other good news out of Baghdad last week.  The preliminary vote counts from the parliamentary elections should be available this week and are expected to show that no party or bloc has the votes to form a government. This will usher in a lengthy period of negotiations among the parties aimed at creating a workable coalition.
In the meantime, the violence continues apace with attacks on mostly Shiite civilians and government installations and shelling of insurgent-held districts in Anbar province continuing. The government clearly does not have the military strength to dislodge the insurgents so has to be content with shelling of populated areas, adding to the growing refugee stream. There are reports of desertions among the 42,000 government troops that have been sent to Anbar to drive out the insurgents.
Sunni insurgents have responded to the shelling by launching a series of attacks on Shiite civilians and army facilities. In one incident the insurgents overran an army outpost that was guarding the northern export pipeline and executed the 20 soldiers captured at the facility.
The situation has become so hopeless that the government is seeking more US help in the form of armed drones and would even be willing to allow US military personnel back into the country to operate them. Some observers hold that Iraq is not as yet close to coming apart along ethnic and confessional lines; however, events are moving quickly. Despite progress in extracting ever increasing amounts of oil from fields in southern Iraq which has been mostly immune from the fighting, the overall situation continues to deteriorate.
Libya:  Libya’s Congress seems to have elected a new prime minister last week, but the dissidents who are occupying the eastern oil ports are refusing to deal with him.  For now, the two smaller eastern oil ports with a combined capacity of 140,000 b/d seem to remain open, while no progress has been made on opening the larger ports. This would leave Libya with sporadic exports that may total some 250,000 b/d, down from 1.4 million before the dissidence began.
The usual amount of violence and unrest continues in the country. The African refugee issue is back in the news. Libya told the EU this week that unless it can provide unspecified help in dealing with the thousands of Africans making their way across the Sahara in hopes of getting to a better life in the EU, Tripoli will start facilitating their journey across the Mediterranean.
Syria: Although Damascus no longer exports oil, the growing scope of the uprising with its focus on the Sunni/Shiite conflict has the potential to destabilize the region as is already happening in Lebanon, Turkey, and Iraq. Last week was marked by a deal under which the insurgents were evacuated from Homs under a flag of truce leaving behind a devastated city for the Assad government and their allies to deal with. While the evacuation of Homs may have been a “victory” for government forces, the rebels managed to blow up the Carlton Hotel in Aleppo which was being used as a barrack by government forces.
The Assad government has clearly regained the initiative in the fighting in the past year and now feels confident enough to hold an election for another seven-year term.  Assad is, however, presiding over a basket case in which the insurgents hold large swaths of the country, much of the population has become refugees and the government is forced to exist on handouts from Moscow and Tehran.  There is no end of this situation in sight and its potential to destabilize the region continues to grow.
3.  China
Chinese crude imports rose to an all-time high of 6.81 million b/d in April passing the previous record of 6.66 set in January. Analysts attribute the increased imports to the opening of a new refinery, refilling of commercial stockpiles that fell during the winter, and the return of refineries from maintenance.  Beijing’s manufacturing contracted for the fourth straight month in April; however, the pace of contraction is slowing and the April trade numbers were better than recently with exports up by one percent year over year.
China switched on its 19th nuclear power reactor as it rushes to increase nuclear generation. The country plans to switch on 8.64 gigawatts of nuclear generating capacity in 2014 as compared to 3.24 gigawatts of new capacity in 2013. The availability of uranium for China’s nuclear industry is becoming an issue. Beijing may have to import some 80 percent of its uranium by 2020, as compared to the current 60 percent.
Concerns are growing over Beijing’s plans to build large numbers of massive coal-to-methane conversion plants to pipe the methane into large cities thereby cleaning up the particulate pollution that is damaging the health of millions of Chinese. While burning the gas in cities certainly reduces the smog, the conversion of coal to methane results in an 82 percent jump in carbon emissions as compared to simply burning the coal. If these plans come to fruition China is likely be consuming ever more coal offsetting worldwide efforts to control carbon emissions. While China’s leaders clearly have gotten the message that much of their country is succumbing to dirty air, they have yet to appreciate the full dangers of global warming in their race for economic growth.
4. Ukraine
The situation is as chaotic as ever with referendums over the weekend run by pro-Russian separatists showing that in the cities that voted, voters want to separate from Kiev despite polls showing that 70 percent wish to remain part of the Ukraine. The vote was taken despite Moscow’s objections and insistence that it does not want to annex eastern Ukraine and only desires a fair shake for the Russian speakers living in the country.  Moscow may fear that more annexations could eventually lead to a sanctions war with the West which would damage its economy. With the heavily pro-Russia Crimea no longer part of Ukraine, Moscow is unlike to see a pro-Russian president elected in Ukraine in the near future and therefore seeks to weaken the country as much as possible so as not to encourage anti-Russian sentiments among its minorities.
Despite the fears of oil traders, so far trade with the West and Russian energy sales have not figured prominently in the sanctions that have been imposed. Last week Moscow said that it Ukraine will have to prepay for the natural gas it receives in June as Ukraine’s debt to Gazprom has now reached $3.5 billion.
The situation is likely to remain chaotic for some time to come as Kiev attempts to hold an election to select a permanent president on May 25th amid efforts to drive well-armed pro-Russian separatists from the government buildings they are occupying in eastern Ukraine.  The economies of the EU and Russia have been inextricably linked and neither side wants to trigger more economic troubles by imposing serious sanctions during hard times. For this reason alone the world is likely to muddle through this crisis unless one side or the other seriously miscalculates.
 5.  Quote of the Week


                                  -- Tim Gramatovich, chief investment officer Peritus Asset Management LLC.
6.  The Briefs

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