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Peak Oil Review - Sept 1

Published by ASPO-USA on 2014-09-01
Original article: by Tom Whipple

1.  Oil and the Global Economy
Oil prices moved higher last week resulting in the first weekly gain in more than a month on an increasingly serious Ukrainian situation and better US economic data. At week’s end NY futures were back up to $95.96 a barrel and London’s Brent was up to $103.19. Prices on both markets, however, are still about $10 a barrel lower than last June when the IS was threatening to overrun much of Iraq and the Ukrainian crisis was starting to heat up again.
The sustained price drop this summer was occasioned by increasing US shale oil production which is largely offsetting disruptions elsewhere; weaker demand for oil from China; and the growing belief that neither the worsening Middle Eastern situation nor the Ukrainian – EU standoff would lead to disruptions in oil supplies in the immediate future. In the past week, however, some traders are beginning to say that the summer’s selloff was overdone.
OPEC production in August increased to a one-year high of 31.0 million b/d due to increased output from Nigeria, of all places, Angola and Saudi Arabia. Iran and Venezuela registered production declines.
Lower crude prices have resulted in a drop in US retail gasoline prices over the Labor Day weekend to the lowest in four years.  The average price for regular last week was $3.45 a gallon which is 25 cents lower than at the end of June.  The decline in Brent crude from $115 a barrel to $102 has resulted in considerably cheaper oil imports for US refiners.
US natural gas futures which have been climbing since mid-August rose to $4.06 last week on the off-again, on-again prospects for warmer weather in the northern US which affects air conditioning demand. The Marcellus Shale, which is the only US formation with increasing natural gas production, saw a jump in its rig count to a five-month high last week. Contributing to the price increase last week was a smaller-than-expected surplus available for storage the week before last. Energy consultant Wood Mackenzie issued a glowing report on the prospects for the Marcellus last week. The report says that drillers are expected to spend $110 billion drilling 25,000 more wells in the deposit during the next 20 years. Some outside analysts, however, are saying that at $4 per million, shale gas is still not profitable for drillers who need considerably higher prices to make money.
2.  The Middle East & North Africa
The problems may still be years away, but concerns are rising about stability of the Gulf Arab states that make up the Gulf Co-operation Council. These countries, which include Saudi Arabia and Kuwait and which produce the bulk of the region’s oil, are becoming increasingly ensnared in the region’s problems, such as the Arab Spring unrest and the rise of the Muslim Brotherhood, not the mention the increasing brutality of the Sunni-Shiite conflict. As hereditary  monarchies they all face succession problems and are beginning to fight among themselves about a unified response to external threats such as the IS who would like to topple them all. The possibility of a Washington-Tehran rapprochement is also a major policy problem. For the immediate future, oil exports will continue, but such may not always be the case.
Iraq: Despite the increasing violence across the region, the oil continues to flow at close to normal rates from Kurdistan and southern Iraq.  Last week the IS solidified its control over recently captured towns and military facilities in Syria and Iraq, but met increasing resistance from US-assisted Kurdish and Iraqi forces who are pushing back against the IS in northern Iraq. Despite the talk of “mission-creep” the US is now flying surveillance missions over Syria, and is bombing IS forces that are still besieging towns in northern Iraq regularly.
The political situation in Baghdad is still in turmoil. The Kurds say they will join the Shiite government, but only under terms that would amount to independence. We have not heard much from the Sunnis about joining a coalition since a mosque-full of Sunni worshipers were massacred by Shiite militiamen a couple of weeks ago.
The row over separate Kurdish oil exports seems to be coming down in favor of the Kurds despite threats of legal actions by Baghdad. With the only effective military force that can fight the IS, the Kurds clearly has the upper hand in the export struggle.
Libya: Fighting among the various militias in the country evolved into a civil war between Islamists and nationalists in June when the Islamists suffered defeats in the parliamentary elections. Going on the offensive they captured Tripoli and set up a rival parliament. They have also burned what was left of the airport, the homes of 200 of their opponents in Tripoli, occupied the vacated US embassy, ransacked the government ministries, and are out in the streets kidnapping people with surnames from tribes they do not like.  The elected parliament is hiding out in Tobruk and is calling for foreign intervention. All this says a prolonged civil war leading to partition is in the offing.
Despite the turmoil oil flows to a key Libyan export terminal have resumed and the acting oil minister says he has been reinstated. Just how much oil is going to get exported from all this and just who will receive the money it is sold for is still much in the air. Until things settle down, Libya will likely be out of the oil export business.
Iran:  The US imposed a new round of sanctions on Tehran last week in hopes of exerting more pressure and deterring efforts to circumvent the various embargos. There are growing concerns that Iran is not yet willing to make the necessary concessions to conclude a nuclear agreement later this year.  In the meantime, Tehran has agreed to start working on designs to modify the under-construction Arak nuclear reactor to lower its capability to possibly produce plutonium. The IAEA says it has also agreed to provide much delayed information on their nuclear weapons program.
Tehran is still hopeful that the sanctions will be lifted soon so that it can contract with Western oil firms to upgrade its infrastructure. However, plans to start signing contracts in anticipation of reduced sanctions have been put on hold. Given all the complexities of Iranian involvement in Syria, Iraq, and Lebanon, it is impossible to predict where all this, including the nuclear talks, is going.
3. Ukraine
The situation clearly worsened last week. With Ukrainian forces on the verge of retaking the last cities held by pro-Russian separatist forces, Moscow had to act or accept an ignominious defeat in its support for the separatists. The Kremlin’s response was to send units of its regular armed forces into Ukraine to reverse the military situation. The Kremlin still denies that it has done this despite overwhelming evidence that regular forces at in Ukraine.  Moscow claims it is not interested in annexing the Russian speaking provinces of Ukraine in the manner it took over Crimea in March, but instead seems to be seeking more autonomy for ethnic Russians who would remain part of Ukraine. President Putin is asking Kyiv to open direct negotiations over increased autonomy with the dissidents in return for resumption of Russia’s natural gas sales to Ukraine.
EU officials met over the weekend and announced that they were prepared to stiffen sanctions against Moscow within the week unless there was some resolution of the situation. The exact nature of the new sanctions has not been announced, but for now are unlikely to involve oil and gas as both Russia and the EU are heavily dependent on these commodities for their economic well-being.
During talks on Friday, the EU failed to in an effort to broker a settlement in the long-running natural gas dispute between Russia and Ukraine. Moscow is insisting that Kyiv give up thoughts of closer integration with the EU and join a Russian-sponsored trade pact with countries that were part of the former Soviet Union. Moscow also wants to sell its natural gas at a price related by energy content to oil which sells for considerably more than world natural gas prices.
Considering what is a stake here and the possible risk to the global economy, the oil markets, so far, have been remarkably relaxed about the situation.
4.  Quote of the Week

“As I’m sure many of you in this room already know, a few tens of [billion cubic feet] of LNG will not make much difference, given that OECD-Europe production continues to fall by similar quantities.”

                        -- Maria van der Hoeven, executive director of the International Energy Agency
5.  The Briefs


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