1. Oil and the Global Economy
Oil prices rose steadily last week on the expectation, then the news, that the US Federal Reserve was going to resume quantitative easing by buying $40 billion of mortgage-backed securities a month for an indeterminate period. The open-endedness of the program came as a surprise and at
one point NY oil futures briefly topped $100 a barrel, but slid back to close at $99. In London prices rose steadily last week, closing on Friday at $116.66 – still about $10 short of the highs seen last March. The Federal Reserve move came in the wake of an announcement by the European Central Bank last week that it would begin unlimited bond purchases and a decision by the Germany’s constitutional court that the Eurozone bailout fund was legal. These moves were widely anticipated and along with the unrest in the Middle East were a prime contributor to the steady price increases in recent months.
US crude stocks climbed unexpectedly the week before last, but the disruptions caused by hurricane Isaac suggest that these numbers have little meaning. The IEA notes that as the share of the OECD countries declines as part of world oil consumption, the widely-reported OECD stockpile numbers
take on less significance as Chinese and other non-OECD stockpiles change with minimal publicity.
While US commercial crude stocks are currently above normal, many of these barrels are landlocked in the mid-West and are not readily available to substitute for supply disruptions. US gasoline futures continue to hover around $3 a gallon as retail prices continue to increase slowly.
The average retail price for regular in the US is now $3.86, up four cents a gallon from last week and 15 cents from this time last month.
There was little news from the EU last week after the German Court gave the constitutional goahead for EU bailouts. The Union’s finance ministers have been meeting on longer range issues to settle the Eurozone crisis but seem to be making little progress. A number of critical decision points
are coming up in October with regards to Greece.
2. The Middle East
With the widespread attacks against US embassies, a new dimension has been added to the interminable Middle Eastern crisis which until last week had been focused on Iran and Syria. Although the attacks have had no impact on oil exports as yet, many observers believe that the
turmoil is destined to continue for a prolonged time. The immediate problems – Iran and Syria – continued to bump along with few major developments.
Israeli Prime Minister Netanyahu continues to demand that the US set a “red line” and promise to attack Tehran’s nuclear facilities should the Iranians cross it. Washington still refuses to set such a marker. The situation has become embroiled in US election politics as the Presidential candidates debate the subtleties of Tehran’s actually having a nuclear weapon vs. having the capability to build such a device. On Sunday, Netanyahu warned that the Iranians were only six or seven months from achieving a nuclear capability.
In the meantime, the Iranian oil sanctions roll on with the restrictions growing ever tighter. The IEA reported that Iranian crude production in August fell by about 50,000 b/d to 2.85 million b/d. Despite the sanctions, the agency believes that Iran was able to export about 1.1 million b/d in August, up from 930,000 b/d in July, but given the secrecy surrounding these exports these numbers are likely to be revised. There are reports that Iran’s shipments may actually increase in September as China, South Korea, India and others are hungry for oil and are working their way around the restrictions. However, given the lack of progress in the nuclear negotiations, the West seems ready to impose
even tighter sanctions on Tehran’s financial transactions.
In Syria, the situation is largely unchanged with refugees streaming out of the country as government forces pound neighborhoods supporting the uprising from the air and with artillery fire. The insurgents in turn have started to attack military airfields in an effort to slow the air strikes. Tehran officially announced that it has military advisors and support personnel helping the Assad government.
A new twist to the Syrian situation is that the Saudis are becoming concerned that young men who are making their way to Syria to join the fighting against the Shiite government may someday return and become a threat to Saudi stability. Riyadh is doing all that it can to prevent its young men from joining the fighting. This is difficult as any Saudi can make his way to Turkey, Jordan, or Lebanon and sign up with the insurgency.
Although there were few new developments directly connected with Middle Eastern oil exports last week, the massive outpouring of anti-American sentiment across the Muslim world sparked by the release of a few minutes of an anti-Islamic movie is indicative of more troubles ahead.
3. The Oil Market Report
This month the IEA seems more uncertain as to just where global oil prices and production is going than usual. For the past four years, the markets have been torn between the lack of substantial economic recovery in much of the developed world and the threat of supply disruptions from
increasing geopolitical turmoil in the Middle East and parts of Africa. Bad economic news that would usually depress oil prices is now seen by the markets as an opportunity for governments to print more money and drive up oil prices. Oil stock statistics are becoming muddled as non-OECD
countries build stockpiles and refining shifts to new, efficient mega-refineries in Asia.
The Agency still sees global oil demand growing by 800,000 b/d in 2012 and 2013, although during the second quarter of 2012 demand is now thought to have increased by 1.2 million b/d. This jump may have something to do with the increasing prices we have witnessed this summer. For the next
18 months, the IEA is most concerned about the availability of distillates (heating oil and diesel) which are coming into short supply. Although there may be plenty of “oil” around, the supply of traditional crude from which distillates are refined has changed little in the past 6 years. Industry, power generation, and transportation all require increasing supplies of distillates, which for the most part cannot be made from increased supplies of natural gas liquids or biofuels.
A variety of factors have combined to reduce non-OPEC production by more than 1 million b/d for the last few months. These included the gulf hurricane, North Sea maintenance problems, a strike in Norway, and political troubles in Syria, Sudan, and Yemen. For the current quarter, these problems are expected to average about 1.3 million b/d. By the 4th quarter however, non-OPEC production is expected to reach about 53.6 million b/d or about 380,000 b/d more than last quarter of 2012. This increase is largely due to the increased output from the Canadian sands and tight oil production in the US. Net US all liquids production is now expected to increase by about 460,000 b/d in 2013 to 9.4 million b/d.
Quote of the week
• “The last time we had a presidential election, the U.S. was going to run out of oil. Since then, U.S. oil production has grown about 25%. As has happened in the past, technology has opened doors people didn’t know were there or didn’t think could be opened.”
– Daniel Yergin
The Briefs (clips from recent Peak Oil News dailies are indicated by date and item #)
• Saudi Arabian Oil Minister Ali al- Naimi said global supply, demand and inventories of crude don’t justify the current increase in oil prices. “Saudi Arabia is concerned about rising oil prices in the international oil market,” al-Naimi said. (9/10, #8)
• Japan’s government said it intends to stop using nuclear power by the 2030s, marking a major shift from policy goals set before last year’s Fukushima disaster that sought to increase the share of atomic energy to more than half of electricity supply. Japan joins countries such
as Germany and Switzerland in turning away from nuclear power. (9/14, #11)
• Turkey’s state-run oil firm TPAO plans to start offshore oil exploration on its own in 2013 in the Iskenderun-Mersin region of the eastern Mediterranean after it failed to attract applications for joint exploration licenses, officials said. (9/14, #9)
• Lebanon is reported to be close to appointing a panel to oversee exploration of potential natural gas fields offshore that could be the salvation of a country hovering on the brink of a new sectarian explosion. (9/14, #8)
• More than 40 percent of the Pakistani textile industry and around 200,000 power looms have moved to Bangladesh in the last five years due to energy crises in Pakistan and better incentives in Bangladesh. (9/13, #10)
• Kenya’s first offshore natural gas discovery is not large enough for commercial production, the drilling company said. Apache said it has stopped drilling at the Mbawa1 well after reaching 3151meters, with no hope of finding more gas or striking oil. (9/13, #16)
• Sky-high petrol prices are driving cash-strapped Britons off the road. Compelling new evidence from the Department of Transport shows millions of drivers are cutting back their mileage. Total traffic levels this spring fell by one per cent on the same period last year.
• With deals to sell almost $7 billion of oil and gas assets, Chesapeake Energy has solved its short-term cash crunch, raising enough money to pay for this year’s drilling plans and trim debt. But the natural-gas giant has yet to prove to investors that it can make money from operations. (9/13, #20)
• Production of light-duty passenger vehicles rose from 74.4 million in 2010 to 76.8 million in 2011, and 2012 may bring an all-time high of 80 million or more vehicles, according to new research conducted by the Worldwatch Institute. Hybrids remain below 2% of total vehicle output. (9/12, #6)
• Mexico’s state-owned oil company Pemex is embarking on a three-year, $200 million program to look for shale gas, including an extension of the Eagle Ford shale formation in Texas. (9/12, #13)• Energy companies in the US Gulf of Mexico have brought back nearly all of the region’s offshore oil and gas production capacity in the wake of Hurricane Isaac. (9/12, #16)
• Surplus global refining capacity is likely to reach to 4 million b/d next year as the pace of new plants coming onstream in Asia and the Middle East continues to outstrip closures in Europe and the US. OPEC estimated that global refining capacity will grow by 1.3 million and 1.7 million b/d in 2012 and 2013, respectively. At the same time, global oil demand is seen growing at around 900,000 b/d in 2013. (9/11, #4)
• China, the world’s second-biggest oil consumer, increased gasoline and diesel prices for the second time in about a month as rising crude costs threaten to curb profits at the nation’s largest oil refiners. (9/11, #10)
• Shell announced that it is pulling out of the Chukchi Sea to avoid sea ice that is forming in the area. The company announced this week that its Noble Discoverer drilling ship started operations at its Burger-A prospect in the Chukchi Sea. (9/11, #14)
• A move by Petroleo Brasileiro to seek a partner to invest in its U.S. offshore oil fields suggests the Brazilian state-controlled oil company is confident it can drill a difficult-to-extract oil deposit in the Gulf of Mexico. (9/10, #15)
• China’s implied oil demand in August fell 0.8 percent from a year earlier to 8.92 million b/d, the lowest since Oct 2010. (9/10, #10)
• China consumed 449.5 billion kWh of electricity in August, up 3.6% year on year, according to data released by the National Energy Administration. (9/14, #10)
• Inner Mongolia’s rivers are feeding China’s coal industry, turning grasslands into desert. In India, thousands of farmers have protested diverting water to coal- fired power plants. The struggle to control the world’s water is intensifying around energy supply. China and India
alone plan to build $720 billion of coal-burning plants in two decades, more than twice today’s total power capacity in the U.S. (9/10, #12)
• BP has agreed to sell some of its oil and gas fields in the US Gulf of Mexico to Plains Exploration and Production for $5.5bn, bringing it a big step closer to its target of $38bn in asset disposals by the end of 2013. (9/10, #16)
• Drought and rising temperatures are forcing water managers across the US to scramble for ways to produce the same amount of hydropower with less water, including from behemoths such as the Hoover Dam. Low water levels are affecting coal-fired and nuclear power plants’ cooling and impeding the passage of coal barges along the Mississippi River. (9/10, #17)
• Transocean is selling 38 of its shallow water drilling rigs to newly-formed Shelf Drilling International Holdings Ltd. for about $855 million in cash as it looks to become more competitive. (9/10, #23)
• A major wind farm project in Scotland’s Hebrides Islands has been approved after a 10-year battle and significant downsizing of the original plans. (9/10, #26)