1. Oil and the Global Economy
Brent crude, which is more susceptible to the Iranian sanctions and developments in the Middle East was up by some $5 a barrel last week to close just below $113 a barrel. NY oil, however, was only up a couple of dollars resulting in the Brent/West Texas spread widening to over $20 a barrel. The increase came despite a steady stream of bad economic news from much of the world. The shaky economic outlook led the IEA to reduce its oil consumption forecast for 2012 by 250,000 b/d to 89.6 million b/d.
Most of the numbers out of Beijing last week were bad, with industrial production, retail sales, and exports slowing more than expected. Some, of course, see China’s low inflation rate of 1.8 percent as another chance for Beijing to stimulate its economy and jump start growth. With Europe slipping into recession, Spain on the verge of a bailout, and the US economy struggling to gain traction, few see much increase in the demand for oil ahead. Indeed, the IEA now is forecasting that global demand for oil will only increase by 800,000 b/d next year to 90.5 million.
The situation in Syria continues to overshadow the oil markets. As the fighting drags on, the possibility of a confrontation between Iran and other powers increases. Pleas for help from out-gunned insurgents are increasing and talk of western-enforced safe zones and “no fly zones” are increasing. Tehran seems to be increasing its commitment to the Assad government. It is easy to foresee increased trouble in the months ahead for Middle Eastern oil exports.
US gasoline prices continue to climb on a combination of higher crude prices, pipeline and refinery problems in the Midwest, and a refinery fire in California where retail regular is now over $4 a gallon. Prices across the country are up by 30 cents a gallon in the last month and are now higher than at this time last year. The overall burden on the economy during 2012 could be heading for a record despite a drop in gasoline consumption of roughly 4 percent this year.
US natural gas futures gyrated over a 30 cent range last week, but closed lower on forecasts that the unusually hot weather was coming to an end reducing the need for air conditioning. If the unusually warm weather were to continue into to the winter heating season the weakened demand for natural gas could go on for sometime, offsetting falling production.
2. The Oil Market Report
The monthly release of the IEA’s Oil Market Report usually provides new insights into many of the issues bearing on the world oil situation. In addition to reporting the latest information on the global oil production, consumption, and stockpiles, the report digs into many of the major ongoing issues that will affect our oil supply in the months and years ahead.
Projections for the global GDP are reviewed monthly, as this of course is the most fundamental driver of demand for oil. This month the IEA, with the help of other international forecasting agencies, sees global GDP growing by 3.3 percent this year and 3.6 percent in 2013. OECD countries are seen as growing 1.3 percent in 2012 and 1.7 percent next year. These forecasts are down about 0.2 percent in the past month including a drop of 0.4 percent in China’s economic growth due to lower industrial production and exports.
Given the size of the global economy, these numbers usually move slowly so a 0.2 percent drop in a month is substantial.
The IEA is still grappling with the statistical problems brought on by the addition of Chile, Estonia, Slovenia, and Israel to the OECD. As the IEA reports global oil, production, consumption, and stockpile numbers in terms of OECD or non-OECD membership, the change forces the revision of numerous statistical series going back many years.
The top issue in the global oil markets at the minute is the effectiveness and repercussions of the sanctions that have been imposed on Iranian oil exports and other economic activities by the US and EU in response to Iran’s lack of cooperation over nuclear weapons. Iran’s crude supply in July now is seen as falling to 2.9 million b/d from an average of 3.6 million in the last quarter of 2011. Preliminary data for July, the first full month of the sanctions, suggest that Iranian oil exports fell to 1 million b/d from 1.74 in June. These numbers are of course subject to revision. Several countries are moving to self-insure cargos of Iranian oil coming to their countries so that while exports may be below 1.5 million b/d this summer, they could rise in the fall. Given the pace of events in the Middle East, the sanctions may or may not be relevant in coming months.
Under pressure from a UN resolution, Sudan and South Sudan ostensibly agreed to settle their differences over transit rights that have shut-in about 450,000 b/d of South Sudan’s oil production. The new deal results in an effective transit fee of $24 a barrel which South Sudan must pay for access to the sea through Sudan. Sudan had been asking $36 a barrel. Given the numerous problems involved in the relationship, and the damage done to the South’s oilfields by the rapid shutdown, the IEA doubts that full production can be resumed anytime soon.
OECD petroleum stockpiles are dropping once again, likely due to lower Iranian exports and slowly increasing Asian demand. Although China does not report its petroleum stockpiles, considering the number to be a state secret, analysis of production, imports and refining suggests that Beijing is currently adding about 600,000 b/d to its strategic stockpiles.
A final note concerns the refining situation on the US’s east coast. Last winter the EIA was warning that refining capacity could soon fall 450,000 b/d short of demand for refining products in the region and that it would be difficult to bring refined products into the Northeast. Since that forecast however, the Trainer refinery has been sold to Delta Airlines and will reopen this quarter, supposedly using cheaper US crudes from the Midwest that will enable it to turn a profit. A second refinery was sold and will remain open so that new estimates suggest that the region’s refining shortfall will only be 50,000 b/d.
3. Ethanol and the drought
The Department of Agriculture on Friday cut its forecast for US corn production to 10.8 billion bushels down 13 percent from last year despite the largest corn sowing since 1937 — 96.4 million acres. The precipitous drop in corn production once again raises the issue of the 13 billion gallons of ethanol that Congress has mandated as a substitute for gasoline this year. In an average year, about 30-40 percent of our grain crop is sent to the ethanol plants; however about a third of this grain is sold as high-protein fodder to the livestock industry. If the mandate is not relaxed, the US is on track to send 50 percent of the corn crop to the ethanol distillers. High corn prices have already led to the closure of a number of US ethanol plants so that production is now down to about 800,000 b/d vs. about 910,000 b/d in 2011.
Last week the UN called for an immediate suspension of the US’s ethanol mandate in the face of rising corn prices which have climbed 50 percent since June and fears that a repeat of the food shortages seen four years ago could be in store. The issue is a contentious one as corn state farmers benefit from high prices. Cutting 900,000 b/d out of the nation’s fuel supply could increase exports and drive up oil prices.
The US livestock industry is being seriously harmed by high prices so that several state governors are joining members of Congress in petitioning the EPA to waive the mandate. This will trigger a 90-day legal process that will force the administration to make a decision. Some analysts believe that a reduction of the mandate would be largely symbolic and would have little effect on food prices.
Quote of the week
Whether you’re a businessperson, whether you’re in government, whether you’re teaching – this is affecting your daily life. And the more you know about it, the better prepared you’ll be to deal with it.”
– Kurt Cobb
The Briefs (clips from recent Peak Oil News dailies are indicated by date and item #)
- Gasoline prices in the US have climbed since July 1 and now exceed levels that triggered lawmakers to urge the Obama administration to draw down from the Strategic Petroleum Reserve. Regular gasoline prices at the pump, averaged nationwide, were $3.673 a gallon. (8/11, #10)
- Iraq has overtaken Iran as the second-largest oil producer within the OPEC cartel for the first time since the late 1980s in a highly symbolic shift that highlights the impact of western sanctions on Tehran. (8/10, #4)
- Indian Oil posted a record quarterly loss after the government failed to compensate it for capping fuel prices, showing the challenge facing Prime Minister Singh as he attempts to rein in the nation’s finances. (8/10, #12)
- Repair work at the fire-damaged crude oil unit of California’s second-largest refinery could keep the unit shut for up to three months, refinery sources said, as regional wholesale gasoline prices rose to their highest since May. (8/10, #13)
- Cheniere Energy Partners is moving ahead with the construction of facilities to liquefy and export natural gas in Louisiana, moving the U.S. one step closer to becoming a major exporter of the commodity. (8/10, #16)
- A Japanese energy consortium took control of a 40 percent stake in shale natural gas assets in Canada from Nexen, the company said. Nexen said that, with the deal in hand, it controls a 60 percent stake in shale natural gas basins in northern British Columbia. The remaining 40 percent will be controlled by a consortium led by Inpex Corp. of Japan. (8/10, #18)
- The world could face a new food crisis of the kind seen in 2007/08 if countries resort to export bans, the UN’s food agency warned, after reporting a surge in global food prices due to a drought-fuelled grain price rally. (8/9, #7)
- Some manufacturers of gases used in air-conditioning and refrigeration saw a lucrative business opportunity in the carbon credits plan. They could earn more than 11,000 credits by simply destroying a ton of an obscure waste gas normally released in the manufacturing of coolant gases. The credits could be sold, earning tens of millions of dollars a year. (8/9, #8)
- China has announced new industry rules for rare earth production, a move expected to weed out smaller operations. Under the new rules, mixed-type rare earth mines must have a minimum annual production capacity of 20,000 metric tons and smelting companies must ensure an annual output of at least 2,000 tons. (8/9, #17)
- Chevron’s 245,000-barrels-per-day Richmond California refinery could be shut for a couple of months following this week’s fire at the plant’s crude unit. (8/9, #21)
- Belgium has halted one of its seven nuclear reactors on suspicion that one of its pressure vessels might be cracked. These same vessels are used in Virginia nuclear plants.(8/9, #23)
- With record heat waves reported in the United States, resource managers are seeing a growing number of fish kills because of high water temperatures. (8/8, #19)
- Production output from Danish North Sea oil fields continued to decline in July, in line with expectations for the mostly mature fields, operator Maersk Oil and Gas said. July output fell 4.3 percent on the month, to 172,200 barrels of oil equivalent a day from 180,000 boe/d in June. On the year, output declined 8.1 percent from 187,300 boe/d. (8/8, #20)
- In 2008 Goldman Sachs gave Petrobras a price target of around $60. Today, it is trading at $20 and will undoubtedly fall below that. It is arguably the black sheep of big oil plays in the hemisphere. (8/7, #10)
- South Korea’s state-run electricity distributor issued a power shortage alert due to a surge in electricity consumption caused by high temperatures, the second such move in as many days. (8/7, #12)
- The US Interior Department will make 16 million acres of public land rich in renewable energy resources available for defense-related projects, Interior Secretary Salazar said in a conference call. Defense Secretary Panetta and Salazar signed a memorandum of understanding to encourage projects harnessing solar, wind, geothermal and biomass energy resources on public lands previously restricted for military uses. (8/7, #16)
- Oil companies off Greenland’s shores may be basing risk assessments on outdated information as icebergs splinter the island’s coastline at an ever faster pace. Last month, an iceberg twice the size of Manhattan broke off a glacier on north-western Greenland, and 97 percent of the island’s surface ice melted. (8/7, #19)
- Africa’s biggest economy is running dangerously short of energy, even as the country sits atop what geologists say could be substantial gas reserves. South Africa, like the US and other countries, is caught in a debate over hydraulic fracturing, the process of shooting millions of gallons of water, sand and chemicals into underground rock to release hard-to-access deposits. (8/6, #6)
- The EIA updated its estimates of America’s proved reserves of oil and natural gas for 2010. Reserves of both oil and natural gas in 2010 rose by the highest amounts ever recorded in the 35 years EIA has been estimating US proved reserves. (8/6, #9)
- Pakistan’s government says it can’t afford to keep up with increasing electricity demand, as more and more people crowd into urban centers. But discontent over blackouts has some workers agitating for a return to military rule. (8/8, #8)
- Coal India is considering a plan to import 20 million metric tons of coal in the current fiscal year and blend it with its local production in a move that will increase the supplies of the dry fuel to power stations but will also drive up its price. (8/8, #15)
- US coal production totaled about 20 million short tons in the week ended Saturday, the US Energy Information Administration said Thursday. The estimate is 0.5% lower than the prior week and 4.4% lower than the comparable week in 2011. (8/10, #17)
- China’s crude oil imports in July rose 12.4% year on year to 21.83 million mt or an average 5.16 million b/d, according to preliminary customs data released Friday. July imports were up from June’s absolute volume of 21.72 million mt (5.31 million b/d) but down 2.8% on a barrel/day basis, the lowest so far this year. (8/11, #8)