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Peak Oil Review - Aug 18

Published by ASPO-USA on 2014-08-18
Original article: by Tom Whipple

1.  Oil and the Global Economy
The oil markets were volatile on Thursday and Friday last week – dropping to recent lows on Thursday and then partially recovering on Friday. At the close New York futures were little changed for the week at $97.35. London, however, closed out the week at $103.53, down 2 percent. A combination of fundamentals and geopolitical factors drove the markets last week. While last week’s developments in Iraq seem to point toward a lessened threat to the oil fields in Kurdistan and glimmerings of a political settlement between the Sunnis and the Shiites, tensions over the Ukrainian insurgency seem to be rising.
Oil prices have been falling since late June on hopes that Libya soon would resume significant exports; increased US crude production which is now at a 27-year high; and weaker global demand for oil – the IEA cut the projected growth in the demand for crude to 1 million b/d last week. Some of the selling also has been due to perceptions that the Eurozone’s economy has stalled and the China’s economic problems are worse than generally believed. Many traders believe that the outlook is still for lower oil prices, despite the tensions over Ukraine.
A new study shows that oil prices are not keeping up with the rapidly increasing costs of new oil sands and deepwater production. Some believe that it now requires $150 a barrel to earn a profit from new investment in the oil sands; and $115-$127 oil to earn a profit from deepwater production off Angola and Brazil. Given that the major oil companies are cutting back on capital investment, the future of major new deepwater and oil sands projects are becoming increasingly problematic until oil prices permanently go significantly higher – which of course cuts into consumer demand.
US retail gasoline prices continue to fall with the AAA reporting the retail national average down another 2 cents a gallon to $3.47, which is down 15 cents a gallon in the last month. The AAA says a recent survey shows that about half of American motorists believe that gasoline prices above $3.30 a gallon are too expensive.
Natural gas futures, which have fallen circa $1 per million BTUs since mid-June took another tumble on Friday to close at $3.77 after weather forecasts for the rest of August turned cool again. The mild temperatures in the eastern US this summer and a projected 5.3 percent increase in US natural gas production in 2014 have allowed the rebuilding of inventories for next winter’s heating season.  Unless next winter is extremely cold, traders believe there will be sufficient natural gas available even though inventories are still 19 percent below normal for this time of year.
2.  The Middle East & North Africa
Iraq:  It was a good week for the future of Iraqi oil production. With the resignation of Prime Minister al-Maliki and the appointment of a compromise candidate as prime minister, the prospects for a better political arrangement among the Shiites, Sunnis, and even the Kurds brightened. The US intervention into the fighting with minimal doses of airpower seems to have quickly changed the military situation in the northern part of the country. Over the weekend Kurdish forces, which given enough heavy military equipment and air support are fully equal to the IS forces, drove them away from the Mosel dam. The entry of Kurds from Turkey into the fighting has further enhanced the Kurds’ military position.
As more reports of massacres of ethnic tribesmen for refusing to convert to the IS’s brand of Islam continue to surface, world opinion is rapidly turning against the IS. The UN seems unanimous that their behavior is unacceptable and are moving to impose sanctions and call on all countries to counter the IS and its goals. Despite a reluctance to get involved, the US and at least France are now supplying arms to the Kurd’s Peshmerga which now seems able to not only halt the IS, but counterattack to retake important targets in northern Iraq.
The failure of the US to bomb IS forces around Baghdad has Iraqi politicians concerned that the US is playing favorites in its support for the Kurds. The IS continues to consolidate their positions around Baghdad and last week launched a series of attacks some 40 miles south of the capital.  It seems that a contingent of the Iranian Air Force, stationed south of Baghdad, is helping the Shiite forces defend the capital.
The oil situation is mixed at the minute. Although many foreign workers fled Erbil as IS forces moved on the city, the situation appears to have stabilized and as long as the US provides air support to the Peshmerga, oil production should continue or even increase. The Kurds say their largest oilfield will be producing 140,000 b/d by the end of the month. The IS has taken over several small oilfields in the north, but it seems likely they will be driven out by the Kurds in the near future.
The situation in the south is murkier. So far there has been no direct attack on oil production from the southern fields. While IS forces are slowly moving in that direction, there are a lot of Shiites in the way plus Iran which is already intervening to support Baghdad in a limited way. The best guess for now is that production will not be seriously harmed in the near future, but this situation could change if the IS decides to launch terrorist attacks on Baghdad’s oil facilities.
Libya: Considering the growing chaos, there certainly are a lot of optimistic news stories about the resumption of oil shipments. The oil fields are, however, remote from the turmoil in the cities and the export terminals are mostly small self-contained facilities. One tanker carrying 670,000 barrels of crude left the Ras Lanuf terminal last week, the first departure from that terminal in the last year. The government says production is up to some 300,000 b/d, but the Libyans are having trouble finding customers for their oil given the chances that it will be delayed or never shipped.
It the meantime, thousands of foreign workers continue to stream out of the country leaving the economy in shambles as fighting between militias continue. Over the weekend parts of Tripoli were shelled with heavy artillery. Heavy fighting resumed in Benghazi last week after a period of relative calm.
While sporadic shipments may take place from the oil ports that are officially open, it is unlikely that Libyan oil shipments will be sufficient to impact the international market. It seem far more likely that they stop completely as the country sinks further into an abyss and the remaining foreign workers who are the mainstay of the economy and even its healthcare system leave the country.
Iran:  The nuclear negotiations took a turn for the worse last week when the Supreme Leader, Ayatollah Khamenei, said Washington has become increasing hostile to Iran. Tehran’s Foreign Minister said that it is increasingly unlikely that a final nuclear agreement will be reached before November. Over the weekend, the head of the IAEA met in Tehran with President Rouhani about the lack on progress in responding to the IAEA’s concerns about Iran’s purported nuclear weapons program.  The meeting was described as “useful.”
Palace politics in Tehran are obviously in a state of turmoil with the radical Sunnis in Iraq and Syria rampaging around threatening Iranian interests across the region. Tehran has a lot invested in Syria and Iraq that could come undone in the next few years. Moreover, the Western sanctions continue to take a toll on the economy. In Tehran’s favor, the chance to make common cause with the West against the radical Sunni’s opens new opportunities for cooperation. It now seems that the threat that the IS will be able to spread its terrorism to the EU and even the US is now seen by many as more of a threat than a nuclear armed Iran. This could reduce the pressure for a nuclear agreement in the near term.
Tehran announced last week that the $500 billion oil deal with Moscow that would involve bartering Iranian crude for Russian goods was still on the table and had not yet been signed. The deal would allow Tehran to get its oil to world markets through Russia and thereby avoid the sanctions with Moscow’s help.
3.  China
The pollution problem continues apace. A major international meeting in Beijing forced local officials to ban more than half of the cars registered in the city from being used.  Last week, the NY Times editorial board took off after China’s massive consumption of coal which is the world’s biggest producer of atmospheric carbon. China has announced a ban on coal burning in Beijing and other major cities by 2020 and is considering a national cap on coal use by 2016.
Many fear that some of China’s plans may make the climate situation worse while cleaning up the air in major cities. One plan involves building 50 large plants to convert coal to gas which would be piped to the cities. This would result in still more carbon being released into the atmosphere while having the benefit of reducing the particulate matter released in the major cities.
Beijing’s efforts to produce large amounts of shale gas are running into troubles. The government recently announced that its 2020 target for shale gas production has been reduced to 30 billion cubic meters from the previous target of 60-80 billion. Last year China produced only 0.2 billion cubic meters of shale gas so it is difficult to see how it will reach the 2015 target of 6.5 billion. Although China is estimated to have the world’s largest shale gas reserves, the geology is difficult and costs of extraction are high.
The state of China’s economy is still a matter of debate, although the government says all is on track for a 7.5 percent GDP growth this year. New lending in July took a precipitous drop prompting some analysts to comment that things were much worse than they seemed and that there will be further repercussions. China’s oil imports for July were about 5.6 million b/d or 9 percent lower than in July of last year.
4. Ukraine
The confrontation between Moscow and Kyiv has the energy markets in a state of high alert. Ukrainian forces continue to make headway against the separatists and on Sunday said that its forces had entered Luhansk, one of the two remaining large cities that were taken over by the separatists. Moscow continues to send heavy weapons to the insurgents, but so far there has been no indication of direct participation by Russian army units in the fighting – except for possible artillery fire coming from inside Russian territory.
Most of the infamous Russian aid convoy of some 270 vehicles is still being held at the border amidst suspicions it is bringing arms and munitions to the insurgents in addition to humanitarian supplies. Although the border crossing is controlled by separatists, the Russians want guarantees the convoy will not be attacked by Ukrainian forces once inside Ukraine.
This situation seems to be getting to a critical point. As Ukraine’s army drives into the major separatist strongholds, Moscow must decide whether to intervene directly and set off years of trade sanctions or worse in a confrontation with the West. If there is direct Russian intervention, at some point this situation has got to affect current oil and gas shipments.
5.  Quote of the Week

                  -- Rosneft Chief Executive Officer Igor Sechin
                              (Who also said the entire area in the offshore Arctic could
                                        hold as much as 87 billion barrels of oil.)

6. .  The Briefs

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