1. Oil and the Global Economy
Oil prices fell 4 percent last Monday on bad EU economic news and then climbed slowly for the rest of the week largely on assurances from EU leaders that they will not let the Eurozone collapse. At week’s end NY oil was at $90.13 and London at $106.65, Bad news about the growth of the US’s GDP stimulated hopes that the Federal Reserve as well as the ECB will soon resort to quantitative easing again.
Last Monday’s selloff was largely triggered by fears that Spain will soon have to seek a full sovereign bailout by the EU. This sent the euro to a two-year low against the dollar, taking oil prices with it. The only economic bright spot of the week came on Tuesday when it was announced that Chinese manufacturing in July grew at the fastest pace in nine months adding to hopes that Beijing’s stimulus measures were having an impact. Other Chinese economic data released last week shows that while coal and electricity consumption continued to grow in the first half, the pace is nowhere near that seen in recent years.
US natural gas futures were volatile last week as the summer heat wave continued to envelop the US. At one point during the week natural gas futures traded in NY as high as $3.19 per million before declining to settle at $3.01. Some of this decline was related to the close out of the August contract. Drilling for natural gas in the US continued to fall last week with the “gas only” rig count falling to a recent low of 505 rigs. Some financial writers are foreseeing that a combination of natural gas replacing coal for electricity generation due to environmental regulations and the decline in drilling will soon have gas prices back in the $8 range.
MasterCard reported on Tuesday that US gasoline demand for the two-week period ending July 20 was 5 percent lower than the same two weeks last year. The decline came as US gasoline prices climbed by 10 cents a gallon – the first weekly price increase in 14 weeks. The EIA reported that crude, gasoline, and distillate inventories all climbed the week before last resulting in a 10 million barrel increase in total US commercial inventories. Gasoline supplied to US markets over the last 4 weeks was down 3.2 percent, but some of this may have been bound for export. The MasterCard data which reflects current sales in considered a more accurate indicator of recent US gasoline demand.
2. Middle East
The most disturbing development last week came in Iraq where a reinvigorated Al Qaeda launched a series of attacks killing and wounding hundreds, mostly Shiites, across the country. The number and size of the attacks, which Al Qaeda announced were in retaliation for Shiite attacks on Sunnis in Syria, raised concerns about whether the Iraqi government has the ability to control terrorism without the presence of US troops. This in turn raises questions about the country’s ability to achieve substantial increases in its oil exports in the years ahead or to avoid becoming engulfed by the centuries old Sunni/Shiite struggle. The focus of the Syrian uprising has shifted to Aleppo, the country’s largest city which has been partly taken over by insurgent forces in recent weeks. The Assad government is going all-out to retake the city, including the use of airpower, artillery and armored forces brought in from other areas. As the government’s most reliable forces are concentrating to control the major cities, much of the rest of the country seems to be slipping into rebel hands.
As hundreds of thousands of refugees flee the country, Turkey has closed its border to commercial activity thereby delivering yet another blow to what is left of Syria’s economy. Few think this situation can continue much longer, but with so many outside interests involved, the outcome of this uprising is difficult to foresee. Some are pointing out that the Syrian uprising and other regional conflicts are testing the national identity of the synthetic states that were carved out of the Ottoman Empire 90 years ago by the European allies.
There was little news of the Iranian confrontation and embargo this week. Tehran still says that the P5+1 talks which continued at the working level in Istanbul last week will remain active until they produce constructive results. The Iranians claim they have full control over the Straits of Hormuz, but have no plans to close it in retaliation for the sanctions. The Washington Post reports that Iran is rapidly gaining capabilities to strike at US warships in the Persian Gulf by means of hundreds of small fast boats armed with sophisticated missiles. This suggests that should open hostilities break out in the Gulf, they could easily escalate to a far bloodier and destructive conflict than many anticipate.
US Republican Presidential candidate Romney, who is currently visiting Israel, is putting out the word that his administration would “respect” an Israeli decision to attack Iranian nuclear sites. The Obama administration has been much more circumspect in its approach to the use of force against Tehran, emphasizing that military action should only be a last resort. Any attack on Iran could easily escalate to the level where oil exports from the region would be slowed leading to untold havoc in the world’s oil markets.
3. The Eurozone
It was generally a bad week in the EU with unsettling economic news balancing assurances from the ECB, Germany, and France that they would do whatever it takes to keep the Eurozone from collapsing. The situation in Spain was much in the news as interest rates soared to new highs – well above the level that Madrid can afford to finance its debt. Either a general bailout by the EU or a default seems inevitable.
The interminable Greek situation continues to roll on with Germany refusing to grant further extensions to Athens. While a Greek exit from the Eurozone would not be catastrophic, many fear that such a default would cause a chain reaction that would tear the zone apart.
Last week Moody’s moved the triple A members of the Eurozone –Germany, Netherlands, and Luxemburg — to a negative outlook on concerns that a Greek default later this year would lead to consequences for even the economically strongest zone members. The UK economy contracted more than expected in the second quarter and has now contracted three quarters in a row.
The next two months could be critical for the future of the Eurozone and the stability of the global economy. Many Europeans vacation in August, leaving the markets vulnerable to think trading. The mass exodus of decision makers means that many accumulating problems will not be dealt with until September at which time it may be too late.
Some see September as a make or break month after two years of muddling through crises and just doing enough to push the various problems down the road. In September, a German court will rule on the legality of the new Eurozone rescue fund to which German taxpayers are making a major contribution. The anti-bailout Dutch will be having an election and another decision must be made on bailing out Greece just again or cutting it free. By the end of the year, the picture should be much more clear.
Quote of the week
“We must conclude that the key assumptions about reserve growth and its effect on decline rates in Maugeri’s report are muddled, speculative and unverifiable. And sprinkling those assertions with repeated declamations about how Peak Oil is a non-issue, insisting repeatedly that the only real constraints on his scenario have to do with political decisions and geopolitical risks, suggests that his report is more about grinding a political axe on behalf of the oil industry than offering a serious or transparent analysis.”
– Chris Nelder
The Briefs (clips from recent Peak Oil News dailies are indicated by date and item #)
- An Ecuadorean court says Chevron must pay $19 billion for environmental damages to the Amazon region, nearly $1 billion more than previously assessed. (7/28, #6)
- Argentina will require oil companies operating in the country to submit an annual investment plan for official approval as the government strives to boost production after years of declining output and investment. (7/28, #7)
- Canadian pipeline company TransCanada announced it received the last of the permits needed to move forward the US leg of the Keystone XL pipeline. The border crossing still requires administration approval. The company said it’s in a position to start construction soon. (7/28, #11)
- The Canadian government approved Enbridge’s proposal to reverse the flow of its Line 9 oil pipeline from Sarnia to Westover in Ontario. The reversal will allow Enbridge customer Imperial Oil to feed its Nanticoke refinery with cheaper crude from western Canada. (7/28, #15)
- A Russian court ordered BP to pay its Russian joint venture TNK-BP $3.1 billion in damages for the failed Rosneft deal. (7/28, #16)
- The United States’ first commercial tidal energy project is expected to deliver electricity in September to consumers in Maine. The project at first will supply electricity to 75-100 households and ultimately will power more than 1,000 homes and businesses. (7/28, #19)
- Strong summer thunderstorms that pump water high into the upper atmosphere pose a threat to the protective ozone layer over the United States, researchers said. This study draws one of the first links between climate change and ozone loss over populated areas. (7/27, #5)
- Saudi Arabia is pressing ahead with its plans to develop nuclear power to meet rising electricity demands and save oil for export. But the outlook for other Arab states is less promising because of political turmoil and a lack of financial resources. The Saudis have built a foreign assets cushion of around $500 billion from oil exports. (7/27, #9)
- China’s power generation sector consumed 917 million mt of coal in the first half, up 1.5 percent year on year, a report by Beijing-based Dexin Yongming Consultation showed. (7/27, #12)
- An energy trade group said it filed a lawsuit against the US Environmental Protection Agency for mandating biofuels in a 2011 renewable fuel standard. The American Petroleum Institute sued the EPA, saying standards for biofuel mixtures were “unattainable and absurd.” (7/27, #14)
- Ford is working on one of the biggest gambles in its 108-year history: a pickup truck with a largely aluminum body. The radical redesign will help meet tougher federal fuel-economy targets, but Ford will have to overcome a host of manufacturing obstacles, plus convince die-hard pickup buyers that aluminum is as tough as steel. (7/27, #15)
- US coal production totaled about 19.7 million tons in the week that ended Saturday, the EIA said. This production estimate, based on railcar loadings, is 2% lower than the previous week’s estimate and 4.2% below the production estimate for the comparable week in 2011. (7/27, #16)
- Uranium resources and production are on the rise with security of uranium supply ensured for the long term, the OECD Nuclear Energy Agency and the International Atomic Energy Agency said in a joint statement. (7/26, #5)
- Prices of agricultural products have soared as the Indian government said it could not maintain the rate of agriculture growth like in the last two years given that rainfall this year has been 23 percent less than the average. (7/26, #8)
- From highways in Texas to nuclear power plants in Illinois, the concrete, steel and sophisticated engineering that undergird the nation’s infrastructure are being taxed to worrisome degrees by heat, drought and vicious storms. (7/26, #9)
- The US House of Representatives advanced a measure through a subcommittee that would phase out federal loans for solar energy programs. House leaders are using the bankruptcy of solar panel company Solyndra as the centerpiece of their frustration with President Obama’s domestic energy policy. Solyndra went bankrupt in September after receiving a $535 million loan guarantee from the US Department of Energy. (7/26, #11)
- People aren’t going to buy cars every two or three years anymore, an automotive website says based on an unscientific poll it conducted online. Now, 78% of the more than 4,000 people polled by AutoMD.com say they will keep their cars at least 10 years. (7/26, #13)
- For European carmakers, the day of reckoning may finally be at hand. The most dreadful year for car sales in more than a decade will require the industry to deal with the overstaffed, underused factories that have been undermining earnings for years. (7/26, #15)
- The surface of Greenland’s massive ice sheet has melted this month over an unusually large area. The thawed ice area jumped from 40% of the ice sheet to 97% in just four days from 8 July. Although about half of Greenland’s ice sheet normally sees surface melting over the summer months, the speed and scale of this year’s thaw surprised scientists, who described the phenomenon as “extraordinary”. (7/25, #3)
- Glacial melt in the Himalayas has been increasing over the last 30 years, a new study argues. The glaciers feed the Indus, Brahmaputra and Ganges rivers which supply water to around 1.4 billion people in Asia. (7/24, #22)
- It would take at least three months before China could realistically honor European sanctions on Iranian oil, as many Chinese refineries are designed to only process crude from Iran. “Even if China wants to follow the EU sanctions, it will take at least three to six months or early 2013 before we could see any meaningful reductions.” (7/25, #4)
- Iran’s nuclear facilities may have suffered a cyber-attack that shut down computers and played music from the rock band AC/DC, the F-Secure Security Labs website said. The virus also prompted several of the computers on site to play the song “Thunderstruck” by AC/DC at full volume in the middle of the night. (7/25, #5)
- Iraq hit out at Chevron over its just-signed oil contract with Kurdistan, barring it from any oil agreements with the central government in a move meant to deter other companies from dealing directly with the semi-autonomous northern region. (7/23, #7) (7/25, #7)
- Nigeria has given approval for the collection of a $5 billion fine imposed on Shell Nigeria for the December 20, 2011, oil spill from its deepwater facility, Bonga, despite threats by the company to resist it. (7/25, #14)
- Colombian oil supplies were disrupted after FARC rebels blew up a section of an oil pipeline, military officials said. Crude oil poured into Colombia’s river water system after the attack on the 220,000-barrel-per-day Cano Limon-Covenas oil pipeline. The spill was causing widespread damage to the ecology and the resulting pollution will likely cause major shortages of fish and disrupt river transport, environmental analysts said. (7/24, #8)
- The Egyptian pipeline built to carry natural gas to Israel and Jordan has been sabotaged for the 15th time since the start of the uprising in early 2011. (7/23, #9)
- Iran has completed testing the first oil tanker it has built for Venezuela. The oil tanker was built for Venezuela’s PDVSA, which has placed an order for four Aframax vessels to be built by Iran Marine Industrial Company. (7/24, #9)
- The worst US drought in a half century is putting pressure on natural-gas drillers to conserve the millions of gallons of water used in hydraulic fracturing to free trapped gas and oil from underground rock. From Texas to Colorado to Pennsylvania, opponents of the technique are using the shortage of rain to push the industry to recycle water and reduce usage — efforts that could prove costly to the industry. (7/23, #14)