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Peak oil review - Jun 2

Published by ASPO-USA on 2014-06-02
Original article: by Tom Whipple

1.  Oil and the Global Economy
As predicted last Wednesday, US crude stocks rebounded on revived crude imports which were up by 1.3 million b/d leading to a 1.7 million barrel increase in US stockpiles. For those keeping book, the 1.7 million barrel increase was about half way between the 100,000 barrels the Wall Street Journal’s consultants were predicting and the 3.7 million the API’s survey came up with. The increase in stocks, mixed news about the US economy, and a softening of the rhetoric over the Ukrainian situation sent oil prices downwards last week with NY futures settling at $102.71 and London’s Brent at $109.41. Supplies at Cushing, Okla. fell by 1.58 million barrels to their lowest since 2008. Stocks there are getting close to the minimum operating level which is thought to be around 20 million barrels.
Much of the news last week focused on President Obama’s plan’s to restrict carbon emissions. The US Chamber of Commerce has been firing off broadsides that the plan will destroy the American economy.  Echoing the American Petroleum Institute, the IHS consulting group (Daniel Yergin) issued a report saying that lifting the embargo on US crude exports would be good for the US economy. The report says conventional wisdom that gasoline prices would increase if the embargo were lifted is wrong. According to IHS, lifting the embargo would increase US crude production by 3 million b/d to 11.3 million – leading to cheaper gasoline for all.
A preliminary estimate says OPEC crude production grew by 75,000 b/d in May to just shy of 30 million b/d.  Saudi and Angolan production increased while Iranian, Nigerian, and Libyan production slumped. The IEA is still saying that OPEC must increase production by another 700,000 b/d during the second half of 2014 or the world will see higher prices.
US natural gas prices were volatile last week, rising sharply on Tuesday andWednesday on forecasts of warmer weather in June which would cut the amount of gas being stored for next winter.  When the weekly natural gas injection report on Thursday showed injections were higher than expected, prices fell to close at $4.54 per million BTUs. It does not look as if the US will have trouble getting rid of the increase in natural gas production emerging from the shale boom. Not only do we have unusually cold and hot weather to mitigate with more natural gas consumption, but imports from Canada are dropping, pipeline exports to Mexico are increasing rapidly, LNG exports are expected to surge, and according to the Wall Street Journal, the US will soon be awash with foreign-owned petrochemical plants taking advantage of cheap US natural gas.
2.  The Middle East & North Africa
Iraq:  Sunni bombers continue to kill and maim dozens of Shiites – most civilians. The fighting in Anbar province continues as some 42,000 Iraqi troops attempt to drive out the Sunni insurgents that have occupied portions of the province. Some news outlet are reporting ill-equipped government forces are losing the struggle against better equipped and motivated Sunni insurgents who continue to stream into the province fresh from the fighting in Syria. Hundreds of thousands have been driven from their homes by the fighting in Anbar as government forces resort to artillery fire on urban areas to dislodge insurgent forces. The International Red Cross is becoming increasingly disturbed by what is happening to civilians in the province.
The Turks seem to have sided with the Kurdish Regional Government in permitting the export through Turkey of all the oil the Kurds can produce. A Kurdish spokesman said Erbil will not yield to Baghdad and would continue exporting oil as the central government is no longer sending to the Kurds the full agreed-upon share of the national oil revenues. The Kurds say they need to export some 400-500,000 b/d to keep their government afloat without Baghdad’s support.
No progress has been reported on forming a new Iraqi government as charges of election improprieties muddy the prospects for a coalition. 
The province of Nineveh, which was home to the largest city in the world during Assyrian times, has asked Baghdad if it can get out and become an autonomous region as the central government never does anything for the province with all its oil revenues.
Libya: Things got even worse last week. The country now has two prime ministers and nobody knows which one has the keys to the nation’s treasury; the US embassy told all American citizens to get out; a militia stole the weapons the US had provided to train Special Forces – halting the training; and the Libyan air force is bombing militia bases in Benghazi. With a former general, carrying a US passport, trying to suppress Islamist forces in the country, many are saying that a lengthy civil war with little to no oil production is either here already -- or not far away.
3.  China
It was a quiet week as the struggle between economic growth and breathable air continues. China’s apparent oil demand in April rose by 1.4 percent to 9.75 million b/d even though industrial production slipped by 0.7 percent from March. The contraction is likely due to lower industrial activity, although Beijing says its manufacturing increased in May.
In the struggle to clean up the air, China will phase out some 6 million vehicles registered before 2005 prior to the end of 2014, but did not say how it plans to accomplish this. The scrappage will take place in northern cities most troubled with dirty air.  Next year another 5 million are to be scrapped.  To complement the move, gas stations in major cities are to start selling only the cleanest grades of gasoline and diesel. Chinese motor fuels are far more polluting than those sold in the West and until recently there have been no incentives or binding directions for China’s refiners to produce the cleaner but more expensive-to-produce fuels.
Most of the news this week has been concerned with China’s efforts to drill for oil in disputed waters in the South China Sea and the reactions from Vietnam, Japan, and the US.  Over the weekend, the level of rhetoric increased with China accusing the US and Japan of acting in concert to sow controversy in the Asia-Pacific region. So long as China continues to increase its need for oil, this dispute will continue.
4. Ukraine
The situation seems to be stabilizing as Kyiv uses its armed forces to drive pro-Russian groups from key installations in Eastern Ukraine. Government forces seem to be inflicting heavy casualties on the lightly armed insurgents. Moscow seems to have moved some of its armed forces back from the Ukrainian border and toned down its rhetoric against the newly elected Ukrainian President.  However, the capture of numerous Russian citizens fighting with the dissidents inside Ukraine shows that Moscow is still deeply involved in stirring the unrest. There are few controls on border crossing so Russians can freely enter the Ukraine. The Ukrainian government is trying to tighten border controls.
The major issue at the minute is the flow of Russian natural gas into Ukraine which Moscow says it will halt unless some agreement on payments is reached.
5.  Quote of the Week


--Nilanjan Choudhury, Zacks Equity research analyst 
6.  The Briefs

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