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Peak Oil Review - Jun 16

Published by ASPO-USA on 2014-06-16
Original article: by Tom Whipple

1.  Oil and the Global Economy
2.  The Middle East & North Africa
3.  China
4. Ukraine
5.  Quote of the Week
6.  The Briefs
1.  Oil and the Global Economy
The week’s news was dominated by the Sunni extremists’ offensive against government-held cities in northern Iraq. By week’s end insurgent forces were within 60 miles from Baghdad and oil prices were up some $4 a barrel on fears that Iraq’s oil production of 3.3 million b/d could be disrupted.  New York futures closed Friday at $106.91 and London at $113.41 after topping $114 during the day.
The OPEC meeting in Vienna agreed to leave the cartel’s production quota unchanged at 30 million b/d. The decision was largely symbolic as most members are pumping as much as they can given their individual circumstances.  Around the world some 3.5 million b/d have been taken off the market in the past year or so due to various geopolitical upsets in oil-exporting countries. Recent increases in US shale oil production have been enough to make up for some of this loss but not enough to keep prices from rising. In its monthly report, the IEA notes that there has been an apparent increase in China’s strategic crude reserve averaging 1.2 million b/d which has also been contributing to the higher prices. The Agency expects global oil demand in 2014 will increase from 91.4 million b/d in the 1st quarter to 94 million in the 4th quarter. It is this forecast which has the IEA calling for increased OPEC oil production or the world will see higher prices before the year is out.
US natural gas prices were unusually volatile last week. After falling for three days on the theory that there will be enough surplus produced this summer to refill the storage caverns before winter, prices took a 25 cent per million jump on Thursday after the weekly injections report did not show as much gas had been stored away as analysts had been expecting. By Friday, however, prices were weaker again as revised weather reports forecast that the rest of June will enjoy normal temperatures for the time of year across most of the country.
So far there has been little reaction at the gas pump to the surge in crude prices brought on by the Iraqi and Ukrainian crises. The US retail price for regular is currently $3.65 per gallon – the same as last week and only up a couple of cents in the past month. Just prior to the new Iraqi crisis the EIA was expecting that US gasoline prices would only be up about 4 cents per gallon this summer over last year.  Given the dangers of a supply disruption implicit in the Iraqi situation, gasoline is likely to be higher before the summer is out.
2.  The Middle East & North Africa
Iraq: The suddenness of the Sunni insurgent offensive which captured Mosel and then drove some 200 miles south to the outskirts of Baghdad came as a complete shock. Four Iraqi army divisions were routed with little resistance and large stocks of US-supplied military equipment were captured by the insurgents. The week’s event showed how weak the Maliki government’s control over the Sunni controlled areas of the country really was and likely has opened a new chapter in the modern history of the Middle East.
Currently the Sunni offensive is halted a few dozen miles outside of Baghdad along the line where Sunni-majority towns and cities turn into Shiite majorities. The Maliki government, which seems unlikely to remain in office much longer, talks of driving back the insurgent forces, but considering how little success it has had in Anbar province in the last six months, this seems unlikely without foreign intervention. The Sunni extremists’ talk of driving into Baghdad, turning out the Maliki government and then moving south to destroy the hated Shiite shrines which are located south of Baghdad seems a stretch.
Thus further movement south by the extremists seems unlikely for now. The remaining ten divisions of the Iraqi Army consist of better led and motivated troops who would be fighting Sunni extremists for their lives and would be unlikely to run as they did in the north. Any move to capture Baghdad or to bypass it to move against southern cities would likely be met by foreign intervention in the form of US airpower and Iranian troops, some of which may already be in the country.
The Sunni surge resulted in other developments that are important to the future of Iraq and its oil production. When the Iraqi Army abandoned the oil center of Kirkuk just outside the border to Kurdistan, Kurdish forces moved in and seized the city while skirmishing with the Sunni insurgents.  While this move was ostensibly to keep the Sunni extremists at bay, in reality it fulfilled a decades-old goal of the Kurdish people to incorporate their historic capital into the Kurdish semi-autonomous province. This of course would leave a larger, if not a preponderant, share of the oil in northern Iraq in the hands of the Kurds. Another important result of the Sunni surge was the capture of the Baiji oil refinery north of Baghdad which is the source of the fuel for much of Iraq including for its electricity generation. For now the refinery continues to function, but if the Sunni extremists continue to hold the facility Baghdad would be in a lot of trouble.
What does all this mean for Iraq’s oil production? For the immediate future, the southern oil fields which produce the bulk of the exports remain safe from the Sunni extremists – at least this is what the IEA and the Iraqi government are telling us. The thinking is that there are simply too many Shiites, the bulk of the Iraqi Army, US airpower, the Iranian Army, and a growing force of highly motivated Shiite militiamen between the Sunni extremists and the oilfields for an attack into the region to be successful. This does not rule out increased sabotage and bombings however.
In the longer run, there are numerous problems which do not bode well for Iraqi oil exports. The country is now effectively partitioned into Sunni, Kurd, and Shiite sectors.  While the Shiites have the capitol and the bulk of the oil, the Sunnis have some important assets including control of much of the country’s water and oil refining capacity. Baghdad is between governments at the minute and the task of forming a new one became much more difficult last week.
The most likely course seems to be an indefinite standoff between the Shiite government and the newly strengthened Sunni extremists. Even if the southern oilfields remain in Shiite hands, it would not take much to drive the foreign oil companies from the country, seriously damaging Iraq’s oil production and its potential to increase production in coming years. Beyond this, what looks like the beginning of a major Sunni-Shiite conflict with a well-defined front has implications for much of the region including the Gulf Arab States that produce so much of the world’s oil.
IranThe offensive in Iraq has changed the tone of the US-Iranian relationship markedly in the past week as both share an interest in seeing that the Sunni extremists do not succeed in overrunning Baghdad and destroying sacred Shiite shrines in southern Iraq. Some are already saying that Iranian boots on the ground and US airpower would be the combination that could stop and reverse the extremist threat to southern Iraq. Such a development would have many profound, but unpredictable consequences for relationships in the Middle East.
The nuclear talks resume this week with mixed reports as to their progress. Tehran remains optimistic that an agreement can be reached before the 20 July deadline, but others talk of “obstacles” to an agreement,
Libya: Oil production has now fallen to the vicinity of the 120,000 b/d or so that is consumed domestically and it is doubtful that much will be exported in the near term. Over the weekend the Libyan oil ministry announced that the 80,000 b/d El Feel oilfield was back in production after being shut down by protestors with various grievances against the government.  The renegade general, Haftar, launched an offensive against Islamist forces in Benghazi on Sunday. Heavy fighting is taking place there and residents are fleeing to the deserts. No end to the turmoil and resumption of exports is anywhere in sight.
3.  China
Beijing may be anticipating a jump in world oil prices for it has been importing an additional 1.2 million b/d for the last two months to build its strategic reserves. Many, including the IEA, are attributing this new source of demand as a major factor in increasing world oil prices.
China’s May exports were up by 7 percent over last May, but imports fell 1.6 percent suggesting that the economy still has troubles. Electricity consumption, which is a good indicator of economic growth, was up by 5.2 percent in the first five months of 2014.
Chinese President Xi stressed the need for the country to revolutionize energy supply and consumption as the country faces growing environmental problems and a changing global energy market.
The controversy with Japan and Vietnam over oil rights in the South China Sea continued last week. Chinese fighter planes buzzed a Japanese patrol plane, while Beijing has taken the fight with Vietnam over its oil rig to the UN. Beijing says Vietnamese ships have rammed its vessels near an oil rig more than 1,000 times.
4. Ukraine
Fighting continues in the eastern Ukraine as Kyiv moves to drive the separatists out of the government installations they have been occupying. Evidence of Moscow’s involvement in the fighting increased when the separatists used an advanced surface to air missile to shoot down a Ukrainian military transport plane killing 49 military personnel. Three unmarked T-64 tanks showed up in separatist hands in the Ukraine and Washington verified that they came from inside Russia.
Gazprom reduced the flow of natural gas to Ukraine on Monday after the failure of last minute negotiations over the weekend. Moscow raised its price for gas from $326 per 1000 cubic meters to $485 in April in order to pressure the Ukrainians into joining a customs union with Belarus and itself. Ukraine is willing to pay the lower price, but Moscow insists that it must be paid $1.9 billion for gas already delivered immediately. The impact of less gas flowing into Ukraine is not clear. Since the opening of the Nordstream pipeline under the Baltic, Ukraine has become less significant as a transfer point for Russian gas going to Europe.
5.  Quote of the Week


-- Dwight Dyer, a senior analyst at the consulting company Control Risks
6.  The Briefs

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