1. Oil and the Global Economy
Brent oil fell on Friday after six straight sessions of gains that took prices from the vicinity of $111 a barrel to a six month high of $118.61 on Thursday before falling to a close of $117.31 Friday. As the Iranian situation was relatively quiet last week, most of gains were due to perceptions of progress in the Greek debt negotiations and very cold weather in much of the EU. The price drop on Friday came when it appeared that the settlement would not be satisfactory for the Eurozone finance ministers and a weaker Euro.
NY oil followed Brent higher last week and then falling to a close of $98.67 on Friday. NY oil continues to be plagued by a growing glut at Cushing, Okla. and very weak demand in the US. Last week’s petroleum stocks report showed total commercial inventories grew by 4.2 million barrels the week before last.
Gasoline futures in NY continued to climb last week, trading above $3 a gallon before selling off to close at $2.97 Friday. The average retail price for gasoline in the US is now above $3.50 a gallon with prices above $3.80 in NY, Connecticut and California which have gasoline taxes above 60 cents a gallon.
The spread between NY oil (West Texas Intermediate) and London’s Brent climbed back above $19 a barrel during the week raising fears that the spread could climb past the $28 seen last November. Stockpiles in the Midwest are climbing again thereby holding down crude prices in the region as compared to the London prices paid by coastal refiners for imported crude. The situation is likely to continue for a while as production in Canada and North Dakota increases faster than demand in the Midwest and London prices remain vulnerable to the Iranian confrontation.
Over the weekend Greece’s parliament approved a new austerity package which it is hoped will satisfy the other Eurozone members to the point where they are willing to loan Greece €130 billion in time to prevent a disorderly default.
2. The Iranian Confrontation
There was little movement in the Iranian confrontation last week. Tehran threatened to retaliate against any of their neighbors who aided in an attack on Iranian nuclear facilities; US Defense Secretary Panetta expressed concern over the possibility of an Israeli attack on the Iranian facilities by mid-year; and Iranian President Ahmadinejad said that he would be making a major announcement regarding Iran’s nuclear program shortly.
Iran’s parliament which has been threatening for the last two weeks that it would impose an immediate pre-emptive embargo on selling oil to Europe went into month-long recess without taking any action on the matter. An immediate embargo on shipments to Europe is a two edged sword. It would undoubtedly damage the precarious EU economy and drive world oil prices higher, but it would also cut Iranian oil revenues at that time when China is only buying half of the amount of oil it has been purchasing from the Iranians due to a contract dispute. Most other purchasers of Iranian oil are scrambling around trying to line up other sources or ways to pay Tehran for the oil and are unlikely to be interested in purchasing the oil that would have been going to Europe. In the end, Iranian leaders may have decided that an immediate cessation of some or all of the oil going to the EU may not have been a good idea.
Reports continue to arrive telling of the economic problems the sanctions on Tehran are already causing. The country imports about half the food eaten by its 78 million people. Most of this food is brought by small merchants who do business through normal commercial and banking channels that are being closed or disrupted by the sanctions. Several major shipping lines have announced that they no longer visit Iranian ports, greatly adding the Tehran’s problems in exporting oil and importing food and other goods. Although many commentators have expressed skepticism that economic sanctions will never be enough to pressure Tehran into changing its policies, Iran has elections coming up. Given the sanctions, the situation in Syria, Iran’s only true friend, and problems feeding its people, may all be more than Tehran bargained for when it decided that it would be nice to either be, or be perceived to be, a nuclear power.
3. The February Oil Market Report
The IEA once again lowered its forecast for global oil demand for 2012 in the face of less optimistic economic conditions. The new number is 89.9 million b/d, down 300,000 b/d from last month’s forecast. Non-OPEC supply fell by 200,000 b/d in January as outages in Syrian, Sudan, and the North Sea offset increasing tight oil and NGL production in the US. OPEC got its production in January up to 30.9 million b/d, the highest since October 2008 mostly because of increased Libyan production. This puts the cartel’s production 900,000 b/d above the 30 million b/d target agreed to at the December meeting.
Saudi production continues at about 9.85 million b/d, up by about 400,000 b/d from last October. Most of this recent increase in production is thought to have gone to China which has cut its imports from Iran as a negotiating tactic in drafting a long-term contract. Saudi Oil Minister Naimi went on record recently saying the country could easily increase production to 11.4-11.8 million b/d immediately and bring an additional 700,000 b/d into production within 90 days.
Iran has been exporting about 2.6 million b/d of late. The EU takes about 600,000 b/d of these exports; India and China about 900,000; and the rest of the world, primarily Japan, Korea and South Africa, take the rest. China and India have announced that they will not cooperate with the blockade; the EU must comply; and most other purchasers will attempt to find alternative sources of oil to avoid becoming entangled in the sanctions. Thus, the IEA believes that about 1 million b/d of Iran’s exports are likely halted by the sanctions. Although Tehran continues to maintain that it can easily sell this oil on the world market, it continues to threaten the Saudis and other potential suppliers against increasing production at the expense of Iran. While it is possible that the Chinese could take up the unsalable Iranian oil, at a deep discount of course, Beijing must be careful not to get too dependent on Tehran for its oil lest Tehran’s exports be halted.
A 2 million b/d increase in Saudi production should, in theory, be sufficient to cover the estimated loss of 1 million b/d of the 2.6 million b/d of Iranian exports that would be blocked by the sanctions. Alternatively, Angola, Libya, the UAE and Iraq and a variety of non-OPEC states are expected to be able to increase production by 1.85 million b/d during 2012. All this suggests it may be possible that there will be enough production around by the time the EU’s sanctions start on July 1st to avoid a major spike in oil prices – at least this is what Western policymakers appear to be hoping.
Quote of the week
“I think it’s better than 50%…”
— John Hofmeister
former Shell CEO, on his prediction for $5 gasoline in 2012S
[ Note: “World Oil Supply: Looming Crisis or New Abundance?” – a debate between John Hofmeister & ASPO-USA Board Member Tadeusz Patzek is Tuesday February 14, 2012 in Madison, WI. More Info: http://madisonpeakoil-blog.blogspot.com/2012/01/debate-feb-14-world-oil-supply-looming.html]
The Briefs (clips from recent Peak Oil News dailies are indicated by date and item #)
- The Nuclear Regulatory Commission approved the construction of two new nuclear reactors, the first to be built in the United States since 1978. (2/11, #25)
- Get ready for another round of pain at the pump: $4 (or higher) gasoline. After rising 19 cents a gallon in the past four weeks, regular unleaded gasoline now averages $3.50 a gallon, vs. $3.12 a year ago and $2.67 in February 2010. Prices could spike another 60 cents or more by May. (2/7, #25)
- The police in Saudi Arabia killed a protester for the second time in two days during demonstrations in the oil-rich eastern province of Qatif, where a majority Shiite population has long complained of discrimination by the Sunni Muslim majority. (2/11, #17)
- Petrobras will pay $76 billion to lease 26 drilling rigs it would use over 15 years in Brazil’s offshore pre-salt zone. (2/11, #22)
- Venezuela plans to send as much oil to China as it does to its traditionally largest buyer, the US, within the next three years. (2/10, #8)
- Chinese imports fell sharply in January, a sign of sluggish domestic demand that will fuel concerns about whether the fragile global economy can count on China as a bastion of growth. (2/10, #9)
- China’s rate of inflation unexpectedly accelerated in January for the first time since it peaked in July, as consumers raised spending around Chinese New Year. (2/9, #14)
- Beijing announced a series of measures aimed at reducing air pollution in the city, specifically targeting a reduction in readings of PM2.5, or fine particulate matter, in the air. (2/10, #10)
- The US Energy Information Administration said it expected US crude oil production would stay at more than 6 million barrels per day through 2035 despite a predicted decline in overall production after 2020. (2/10, #11)
- Oil production in Saudi Arabia, the world’s largest crude exporter, remained steady at around 9.8 million b/d in January, a level it is likely to maintain in the short term. (2/9, #7)
- Israel is reported to be seeking to deploy fighter aircraft in Cyprus to protect the energy resources. Turkey is seen as one of the main threats. (2/9, #9)
- Nigeria’s main rebel group in the oil-rich Niger Delta has threatened to launch more attacks on the oil industry, days after it claimed responsibility for an explosion on an Eni-owned pipeline. (2/9, #11)
- The government of South Sudan is in talks with a Texas-based company to explore options for building an oil pipeline which would serve as an alternative to the one passing through the territories of Sudan. (2/9, #12)
- Repsol’s Argentine unit said its shale oil resources at the Vaca Muerta formation in the south of the country probably hold about 23 billion barrels, almost half the size of Brazil’s so-called pre-salt reserves. (2/9, #13)
- Bakken Blend crude production in North Dakota climbed to an average of 534,879 b/d in December, a new record for the state. (2/9, #17)
- Less than two months after American troops left, the State Department is preparing to slash by as much as half the enormous diplomatic presence it had planned for Iraq, a sharp sign of declining American influence in the country. (2/8, #7)
- Iraq’s Sunni ministers returned to the cabinet on Tuesday, an incremental step that eases the tensions of the country’s political crisis but does not end it. (2/8, #8)
- China, the world’s second-biggest oil consumer, raised domestic fuel prices for the first time in 10 months to spur production by refiners including China Petroleum & Chemical Corp. and PetroChina. (2/8, #11)
- Alaska produces about 10% of the oil in the US. It once was producing over 60,000,000 barrels per day month, but Alaska now produces less than 18,000,000 barrels, or not even one third of what it once did. (2/8, #17)
- US energy company Noble Energy announced the discovery of a major natural gas prospect in the deep waters off the coast of Israel. (2/6, #10) (2/7, #19)
- Exports of 140,000 b/d of Bonny Light crude oil from OPEC member Nigeria are now at risk following repeated sabotage of a pipeline by suspected thieves. (2/6, #15) (2/7, #22)
- US farmers will plant the most acres in a generation this year, led by the biggest corn crop since World War II, taking advantage of the highest agricultural prices in at least four decades. (2/7, #28)
- A loss of sea ice could be the cause of the bitter winds that have swept across Europe in the past week. (2/6, #4)
- The Electricity Council said that China will face tightened supplies of electric power this year, with a shortage estimated to reach up to 40 million kilowatts. Both regional and seasonal power shortages will occur in 2012, the council warned. (2/6, #18)
- The Chinese government has barred the country’s airlines from complying with a European Union charge on carbon emissions, escalating a dispute that officials have warned could turn into a trade war. (2/6, #19)