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Peak Oil Review - May 19

Published by ASPO-USA on 2014-05-19
Original article: by Tom Whipple

 1.  Oil and the Global Economy
Oil futures climbed circa $2 a barrel last week on the now-usual concerns over another drop in stocks at Cushing, Okla. moving the US markets; and concerns over the Ukrainian situation moving the London market. New York closed at $102 and London at $109.75.  Other factors moving the markets was better news about US housing starts and the announcement that the US was considering lifting the ban on crude exports to relieve the growing crude glut in the US. Lifting the ban would likely be a boon to US oil producers as US prices would increase to the level of the world market.
The monthly oil production report from North Dakota shows that output in March was essentially the same as in November 2013 indicating that harsh winter weather prevented the state from increasing its shale oil production during the past four months. During this period, a large backlog developed of new wells that had been drilled, but not yet fracked. Production in North Dakota is likely to grow during the summer months with April’s production coming in above 1 million b/d for the first time.  The rapid growth trend that had been in place since the summer of 2011 has clearly been broken, however, so that production increases in 2014 are likely to be smaller than in the previous three years.
Congress failed to pass a bill to promote conservation of energy last week. The bill contained several controversial provisions such as expensive higher efficiency standards for buildings, immediate construction of the Keystone XL pipeline, and new regulations on the coal industry. These combined to defeat the bill’s passage despite most members of Congress supported the underlying purpose of the bill which was to increase the efficient use of energy.
In its monthly Oil Market Report the IEA increased its forecast for the growth in oil demand this year to an average of 1.32 million b/d. The global supply of “all liquids” rose to 92.1 million b/d in April, an increase of 700,000 b/d over March.
Russian media is reporting that Moscow is readying another effort to move the oil trade off the dollar in an effort to retaliate for the sanctions that have been imposed on it during the Ukrainian crisis. Such a move, especially if Beijing joined Moscow in the effort, could roil the oil markets in unpredictable ways.
US natural gas futures had a volatile week as traders tried to sort out whether the US is adding to its natural gas stockpiles at a sufficient rate to prepare for next winter’s heating season.  Although the weekly natural gas report showed that 105 billion cubic feet had been added to US stocks the week before last, 8 billion cubic feet came from a redefinition of what constituted “working” gas as opposed to the “base” gas which is not available for use due to the nature of storage caverns.  Some traders believe that the US must inject some 20-35 billion feet more than the five-year average into storage every week for the next six months to adequately prepare for next winter.
Goldman Sachs weighed into this argument last week with a report predicting that all will be well. The report notes that new pipelines being built in Pennsylvania will allow more current production to reach users thereby reducing the draw on stockpiles next winter. Goldman Sachs also believes that natural gas prices will remain above $4.50 per million this summer which will not only reduce the demand for gas from the electric power industry but also lead to increased drilling.  The forecasts of an El Nino building this summer, which could mean milder weather in the northern US, adds to the case that even if natural gas production falls short this summer, there is little danger of stocks running low next winter.
In contrast to this optimism other analysts are saying that El Nino will lead to much higher temperatures across the south this summer thereby increasing the use of natural gas going for electricity generation. They also believe that increasing regulation of coal burning is likely to force more power companies into using natural gas rather than coal.
2.  The Middle East & North Africa
Iran:  Prospects for Iranian nuclear talks which had been upbeat in recently turned sour last week with “no tangible progress” being reported. The current talks have a July 20th deadline, after which the interim agreement will expire. US negotiators say the Iranians do not appreciate that failure to reach an agreement by July could lead to more sanctions and lead to increasing problems with Israel. The negotiators will meet twice in June to continue the discussions.
In its monthly Oil Market Report the IEA said that Iranian oil exports in April were likely down by 180,000 b/d to 1.11 million from a recent high of 1.58 million b/d in February. The current interim agreement limits Iran to an export cap of 1 million b/d.
Despite the seeming lack of progress on an overall treaty, negotiators say that Tehran is coming closer to agreement on several key issues such as agreeing to changes in a nuclear reactor so that it can produce less plutonium. Tehran also seems to be coming closer to divulging the details of past efforts to develop weapons related technology despite protestations that in does not seek to have nuclear weapons.
Iraq:  Sunni bombers continue to blow up Shiite civilians, soldiers, and security installations at about the normal pace we have seen in recent months as government forces continue to shell parts of the militant-held city of Fallujah. More than 1000 have been killed in various attacks during the last month bringing the 2014 death toll to 3,500. Results of the Iraqi election, which will only set off a protracted period of negotiations, are expected shortly and political maneuvering has already started. Prime Minister Maliki has called on the army and police to increase efforts to drive the Sunni insurgents from Anbar province without regard to the consequences. The US has agreed to supply Iraq with $1 billion worth of military hardware to deal with the Sunni uprising.
A Reuters report that the US and Israel were among the countries already buying from the recently opened export line from Kurdistan has been denied by Erbil. The Kurds have been pumping oil to the Turkish port of Ceyhan since January, but have stopped short of selling it – at least not openly. Tracking of crude’s origins after it comes into the hands of a middleman at a large export terminal can be difficult. Kurdistan’s President said last week that the province may not participate in the new Iraqi government and go its own way using revenues from oil exports. The Kurds currently are supposed receive 17 percent of Iraq’s national budget, but Erbil says in reality it is far less as Baghdad began withholding money in January to punish the Kurds for their oil exports to Turkey.
Although Kurdish oil exports cannot currently replace the 17 percent of Iraqi government revenues that is supposed to come to Erbil, the Kurds may be willing break ties with Baghdad even if it has to endure a period of economic hardship until oil revenues increase. The Iraqi government is having enough trouble with the Sunnis in Anbar and is unlikely to attempt a military confrontation with the Kurds.
Libya:  The chaos increased last week when a rogue retired Libyan general, Khalifa Hifter, led a ground and air assault on militia compounds in and around Benghazi using government troops still loyal to him personally. Over the weekend, forces loyal to the General attacked the parliament building in Tripoli scattering its members.  Hifter had lived in the US for two decades before returning to take a leading role in the uprising against Gadhafi.  Dozens have been killed in the fighting so far.  If Hifter is successful, in reducing the power of the militias, we could be seeing the beginnings of another military strong-man emerging in the midst of the chaos to take over the country.
It is hard to determine just where Libya’s oil output is going in all this. Offshore oil production presumably goes on as normal, and last week the government announced that a smaller oilfield in the west with a pre-shutdown capacity of 85,000 b/d had reopened, but that the larger 340,000 b/d El Sharara field remained closed. There is no word about the eastern oil fields as yet, but with a rogue general shooting up militia bases, it seems likely that exports from the region will soon be back to zero. If the western tribes are not happy with developments over the weekend, production there could halt too.
3.  China
Russian President Putin will visit Beijing this week for a visit which could mark the beginning of a major change in Russian energy exports.  Moscow’s increasing frictions with the West apparently has led to an agreement for Russian natural gas to start flowing into China. The agreement, which has been under negotiation for a decade, has always stumbled over pricing of the gas. However, with Moscow’s relations with the EU deteriorating rapidly, and the need to diversify Russian gas markets has resulted in the negotiating advantage shifting to Beijing. Although a preliminary Russian-Chinese gas agreement was signed 10 years ago, the lengthy dispute over prices has allowed Beijing sign agreements in the meantime import natural gas from Turkmenistan and Myanmar as well as stepping up LNG imports from Qatar and Australia.
China desperately needs to shift  much of its electric power generation as possible to natural gas, but is unwilling to pay for natural gas which Moscow has been linking to high-priced oil. Beijing been seeking to pay for natural gas at something akin to US domestic prices which are only a fraction =of what the Europeans have been paying Moscow for natural gas. A pipeline from Russia to Beijing would cost some $80 billion which only China is in a position to finance. Details of the new agreement should be available this week.
Much of the news last week was dominated by the dispute over Beijing’s efforts to drill in waters claimed by Vietnam. The dispute, which for a while involved Chinese and Vietnamese ships firing water cannons at each other, finally led to Vietnamese mobs burning what they believed were Chinese-owned factories in Vietnam and attacking Chinese citizens residing there.
It is becoming apparent that rising incomes in China and the demand for ever more cars is making up for the declining use of diesel as China’s industrial production slows. Beijing’s January-April crude imports are up 11.5 percent over last year and April imports are up 21 percent over 2013 to a record 6.8 million b/d.  Even a drop in China’s GDP growth from 10+ percent to circa 7 percent does not seem likely to stem the demand for increasing imports of oil in the near term.
4. Ukraine
The struggle for control of Eastern Ukraine took an unexpected turn last week when thousands of steelworkers in Mariupol took to the streets to wrest control of the city from the well-armed pro-Russian militants who, with Moscow’s help, seemed to be in control of key facilities. The development is in line with western polling showing that the majority of Eastern Ukrainians were not that thrilled about falling under Moscow’s control again. Talks between Kyiv (the preferred Ukrainian spelling of the capitol’s name) and local government officials are underway in an effort to agree on a new form of government prior to the May 25th presidential election. Kyiv favors more autonomy for local provinces, while the pro-Russian forces favor a federal system with most power resting with local governors.
This situation is likely to go on indefinitely. Moscow, in a burst of oil-fueled chauvinism, seeks to enhance its status by offering  protection to any Russian-speaking peoples who ended up as minorities in other countries after the demise of the Soviet Union. In the short run, neither Moscow nor the West wants to seriously upset the economic apple cart by hurting bi-lateral trade. Although it is not readily apparent, the Russian economy has already been hurt by the $50 billion in foreign capital that has fled the country in response to its actions in Crimea.  
For the immediate future however, Moscow is again threatening to shut off gas supplies to Ukraine for not paying its debt to Gazprom on June 1st. This in turn could mean that the gas flowing through the country to other parts of Europe may be halted as well. Talks took place in Europe last week in an effort to come to some agreement on this situation
5.  Quote of the Week

                                      - Ali Al-Maimi, Saudi Arabia Minister of Petroleum
[Historical note: OPEC adopted a price band of $22-$28 per barrel on March 28, 2000 and only abandoned it in 2005.]
6.  The Briefs

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