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Peak oil notes - May 31

Developments this week
After stabilizing last week and even climbing a bit on Monday and Tuesday, oil and gasoline futures fell sharply on Wednesday as the European financial crisis spiraled ever deeper taking the euro with it. NY oil closed at $87.82 and London’s Brent at $103.47, down over $20 a barrel since the March highs. Oil prices are headed for the largest monthly decline since the Lehman collapse in October 2008. A raft of bad news from Europe sent equities, euro, and oil prices down with borrowing costs rising in Spain and Italy and new polls showing that Greek voters are likely to reject the EU’s austerity plans in the next election.

The decline was aided by a likely jump in US oil inventories – the weekly stocks report is delayed by a day this week – and a report from China that Beijing is unlikely to spend anything like the $680 billion it shelled out 3-4 years ago to revive its economy. With technical support levels broken and the hedge funds running for the sidelines, oil prices are likely to go still lower. It is noteworthy that oil prices are getting close to the level several major oil exporters need to make their budgets this year. In the US crude prices are getting close to production costs for some of the high-priced oil coming from fracked wells in North Dakota and Texas and even deepwater platforms.

US gasoline futures joined in the plunge despite forecasts that US gasoline stockpiles will be down again. Futures have now dropped about 50 cents a gallon since March. US retail prices are now down to $3.62 a gallon but remain around $4.25 on the West Coast where there are refining problems in the isolated market. MasterCard reports US gasoline consumption last week at 9.31 million b/d which is up to the highest level since last December. Consumption last week was still about 1 percent below the same week last year.

Natural gas prices have fallen rapidly this week from a high of just below $2.85 per million last week to $2.43 at the Wednesday close. The markets are concerned that the sharp rise in natural gas prices of nearly 85 cents per million since late April is making coal a better value for producing electricity again.

Although there has been little movement in the Iranian nuclear confrontation in the last week, the level of rhetoric is substantially lower pushing the issue to the back burner in comparison to the EU’s troubles and the fighting in Syria. The ever deepening Syrian problem is raising fears that the situation could evolve into a wider war as more states are drawn into the fighting.

The Spanish oil company, Repsol, is pulling out of Cuban waters after drilling and analyzing one dry well. After spending $100 million on the well, the company says it does not believe it worthwhile to continue drilling – at least in its blocs.

The Indian government announced that its economy is slowing and may be in worse condition to cope with the troubles shaping up in the EU. Over the past year we have had numerous reports of electricity, coal, oil, and natural gas shortfalls. Without adequate energy, it will be impossible for India to maintain the rates of growth it has seen in recent years.

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