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Peak Oil Review - May 26th

Published by ASPO-USA on 2014-05-26
Original article: by Tom Whipple

1.  Oil and the Global Economy
The price surge which began early in May continued this week leaving New York oil futures closing at $104.35, up some $6 a barrel in the last month, and London’s Brent closed at 110.54 up about $4. Behind the price moves was the Ukrainian situation, political problems in several oil exporting countries, and a 7.2 million barrel drop in US crude inventories the week before last. US oil futures which are now up 4.6 percent for the month are approaching their highs for 2014. The US crude glut remains however as the large surpluses that were at Cushing, Okla. have merely been shifted to Gulf Coast storage facilities and the drop in crude inventory last week was due to much lower imports.
US gasoline futures, which have been rising slowly for the past two years, are now within a few cents of reaching their highest levels since the 2008 price spike. Average national retail gasoline prices have been holding around $3.65 a gallon in recent weeks, but in a few states are above or flirting with the $4 level at which consumer price resistance has become stronger in the past.
The IEA is predicting that industrialized countries will be facing an oil supply shortage later this year unless OPEC steps up its production by another 900,000 b/d. The Agency notes that increasing Chinese demand which reached 6.8 million b/d in April is adding to the problem. OPEC may have trouble increasing exports even if they want to this summer. Several OPEC members are having serious production problems. The Gulf Arab states which probably have some spare capacity are likely to be facing a very hot summer which requires additional domestic crude consumption to keep the air conditioning running.
The LA Times report that almost none of the shale oil thought to be under California can be exploited brought little reaction last week. The EIA did confirm that the story was true and is based on a report about to be published, but did its best to back away from the administration’s highly flawed estimate that the US had more than twice as much shale oil reserves than it apparently does. In talking to reporters, the Director of the EIA emphasized that the 13 billion barrels of oil actually exists under California and that the only trouble is we don’t yet have the technology to extract it at economic prices. Industry spokesmen also noted that the “now un-producible” oil was still under the state and with dozens of smart engineers working on the problem would one day be produced.
The EIA continues to publish new highs for US domestic oil production nearly every week and now has the number up to 8.43 million b/d despite the suspicions of some observers that the Administration is simply making straight line forecasts of growth, especially in the Eagle Ford shale without the numbers to back it up. They note a substantial divergence between what Texas says its production is and that reported by the EIA. There is also an issue of the quality of the “oil” the EIA says is being produced with a large share of the Eagle Ford production coming in the form of lower energy lease condensates which do not qualify for delivery on futures contracts.
The API says US gasoline production in April hit an all-time high of 9.79 million b/d with most of the increase going to exports which are setting new records. With relatively cheap oil and much cheaper natural gas to fuel refinery oil heaters, US refiners are in a position to undercut many foreign refiners even when transportation costs are included.
US natural gas futures were volatile last week falling to a near 7-week low Thursday on news of the largest stockpile addition this year and then rebounding on Friday as the markets try to divine whether our low stockpiles can be replenished in time for next winter. Stocks are now 47 percent below normal. Bloomberg reported last week that new drilling for natural gas is being hampered by the lack of pipeline capacity to move the gas to markets. Industry observers note there are several thousand newly drilled natural gas wells waiting to be connected to pipelines.
2.  The Middle East & North Africa
A conference held in Turkey last week reemphasized the threat to the entire region from the growing scarcity of water and rising temperatures. Nearly every country in the Middle East with the exception of the rich Gulf Arab states that can afford the massive cost of desalination is vulnerable to widespread water shortages and the likelihood of social unrest on a heretofore unseen scale. For those that have excess oil, the need to use it to deal with the water crisis will in the long run reduce exports.
Iran: There was little news of the nuclear negotiations last week. Some reports suggest that the US might be continuing to hold talks with Tehran in secret. The IAEA reported last week that Iran is adhering to its pledges in the interim agreement to cut back its highly enriched uranium and to divulge more information about its previous efforts to develop what could be detonators for nuclear weapons. The IAEA report has not yet been released to the public, so there are many questions as to what it contains and whether it will help conclude a final nuclear treaty this summer.
Beijing is trying to work its way back into Tehran’s good graces after the China National Petroleum Corp was tossed off a $2.5 billion Iranian contract last month for failure to perform. This time Sinopec is offering to revive a lapsed contract to develop an Iranian oil field close to the Iraqi border.
Iraq: The election returns are in and Prime Minister Maliki’s party seems to have won 92 out 328 seats in Parliament. This time however it may be more difficult for Maliki to form a broad coalition as relations with the Sunnis and Kurds have deteriorated markedly in recent months. A coalition with other Shiite parties is possible, but some are saying a new Prime Minister would be the price for such a coalition. The negotiations to form a government are expected to continue for an extended time.
Fighting in Anbar and Sunni attacks on Shiites continue as usual. The US embassy has warned Americans living in the oil capitol of Basrah that they may become targets for kidnappings by Sunni insurgents. Such an eventuality could trigger a mass exodus of foreigners developing Iraq’s oil fields. 
More than a million barrels of Kurdish oil was shipped from Ceyhan to Europe last week. This has outraged Baghdad which, lacking the power to do much about it, has asked that the matter go to international arbitration.
Libya: In the wake of the attack on parliament by forces loyal to renegade general Haftar last week there has been more chaos than usual in Libya. Haftar, who has held prominent positions in numerous Libyan coups, countercoups, and wars going back go 1964, has vowed to crush the Libyan Islamists who dominate the Parliament. After being forced out of their building, the Parliament met secretly in a hotel and agreed to hold new elections on June 25th. Over the weekend however, the Parliament attempted to form a new government in opposition to Haftar who wants power to be handed over to a commission of judges. The country and the various militias seem to be splitting along Islamist and anti-Islamist as well as tribal lines.
In the meantime there has been little word on oil production which was down to 215,000 b/d in April. Foreign oil companies are pulling out their expatriate employees and the head of the National Oil Company has resigned. All this seems to be headed towards a lengthy period of civil unrest with little oil production ahead, unless, of course, Haftar can muster the support to become the next military strongman.
3.  China
The $400 billion Russia-China natural gas deal was the subject of much commentary last week, with most observers seeing the deal as a major games changer.  It is generally agreed that the deal is a response to the sanctions that have been imposed on Russia and the EU’s announced efforts to reduce its dependence on Russian energy. Most believe that Moscow has made major price and other concessions to Beijing to close the deal which has been under negotiation for ten years at this time. Of equal importance may be an agreement between Beijing and one of Russia’s largest banks to pay each other in domestic currencies rather than dollars.
Beijing’s troubles with Japan and Vietnam over its efforts to drill in or gain control over disputed parts of the South China Sea continue. The latest round of confrontations involves Japanese and Chinese planes.
The head of China’s central bank says the country has entered a period of manageable slowdown as reforms and environmental protection take precedence over economic growth. China’s gasoline stocks hit a record in April along with crude imports.
4. Ukraine
The Sunday elections seem to have produced a new President, candy maker and billionaire Petor Poroshenko. The elections seem to have gone well except in staunchly pro-Russian cities of eastern Ukraine where intimidation kept the polls closed. Moscow’s attitude to all this is still an unknown. Moscow insists that the ousted pro-Russian President Yanukovych is still the legitimate head of the country, but will decide after the election whether to recognize whoever was elected President.  Reports from eastern Ukraine suggest that there was considerable covert Russian intervention in the election which many pro-Russian Ukrainians  boycotted.
The US and Germany announced recently that Russian disruption of the elections would bring further sanctions. For now we are waiting to see what happens after June 1st when Moscow says it will cut off natural gas supplies to Ukraine.
5.  Quote of the Week

-- John Busby, Trends of Six Oil Majors (5-12-14)

6.  The Briefs


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