1. Oil and the Global Economy

New York oil futures traded around $94 a barrel last week closing on Friday at $94.60 — one cent lower than the previous Friday’s close. In London oil prices were more volatile, falling by nearly $3.50 a barrel during the week before rebounding on Friday to close at $105.12. US futures were driven by concerns about the increasing size of the US crude inventory which is now the highest for this time of year since 1930; increased demand, some of which may be due to seasonal filling of heating oil tanks or going for export; and an unexpected jump in US employment, which is, as usual, balanced by fears that the Fed will curtail bond purchases.

London oil prices were driven by expectations that sanctions on Iran may be coming to an end allowing Tehran’s oil to freely flow into the world markets. The price rebound in London on Friday, however, was driven by the news that an agreement with Iran had been delayed and that talks would not resume until November 20th. Many traders believe that there has been a $10-15 “Iranian risk premium” built into crude prices for the last three years due to the possibility that the standoff over Iran’s alleged efforts to build nuclear weapons would eventually lead to war and major reductions in oil exports.

The weekly US stocks report showed another gain in crude inventories, this time by 1 million barrels, but large and unexpected declines in gasoline and distillate inventories drove the markets higher.

A combination of increasing US shale oil production, increased use of rail to move this oil to refineries, and the ban on US crude exports, except to Canada, is causing numerous dislocations in the global oil markets. Crude prices along the US Gulf Coast have fallen, lowering the price of imported Middle Eastern that is tied to Gulf prices. Cheaper crude for US Gulf Coast refiners is resulting in cheaper oil products which are being exported in larger quantities than in recent years.

How long this situation will last is difficult to predict. Some believe that refiners will run down inventories in order to avoid year-end inventory taxes; others say that Brent and WTI prices will soon converge. At worst, the shale oil boom is likely to see two or three years of increasing production.

US gasoline prices continue to fall. The AAA says the national average retail price for regular is now $3.19, down six cents per gallon in the last week and 15 cents in the last month. The organization expects to see gasoline down to $3.10 or less by the end of the year.

US natural gas futures climbed steadily all week on forecasts of colder weather across the northern US. Prices are now up to $3.55 per million BTUs.

2. The Middle East and North Africa

Iran: After three days of talks, the six-country group of major powers and Tehran failed to come to an initial agreement that could have resulted in some lifting of the sanctions on Iran. Both sides, however, remained optimistic and reported that good progress has been made. The meetings will resume on November 20th, but at a lower level than the one last week which involved Foreign Ministers.

Hardliners on both sides are opposed to any settlement which would allow some level of uranium enrichment by Tehran, even with increased scrutiny of its nuclear programs. The week’s delay will allow opponents of the proposed agreement to marshal their forces in Washington and Tehran in opposition to the deal. Tel Aviv is on record as vehemently opposing any deal which permits Tehran to enrich uranium and operate reactors which can breed plutonium and is already making efforts to rally support for this position in the US.

For now all that can be said is the willingness to negotiate on the part of the new Iranian President, with the backing of the Ayatollah, has brought down oil prices as the risk of hostilities over the issue seems to be fading. This situation could quickly be reversed should talks fail or some other issue involving Tehran such as the Syrian uprising come to the fore.

A dispute seems to arising between Iran and Pakistan over the pipeline that will supply Iranian natural gas to energy-starved Pakistan. The problem is the $2 billion cost of the Pakistani section of the pipeline, which Islamabad cannot afford and which Tehran refuses to pay for. As the planned pipeline will cross the most restive and insurgent-infested regions of both countries, the chances of its ever transporting much gas seem remote.

Trackers say that the capacity of the ships leaving Iranian export terminals in October was down 22 percent from September. As Tehran goes to extraordinary lengths to hide its exports, this report may be undercounting actual oil deliveries.

Iraq: Although there were several serious bombings in Iraq last week, the number seems to have dropped a bit from the levels seen recently. The major news of the week seems to be an improvement in relations between Ankara and Baghdad which have been strained in recent years over the Syrian uprising and Turkey’s support for the independence aspirations of Kurdistan. In the last two weeks Ankara announced that it would not import large amounts of oil from Kurdistan without Baghdad’s approval. Turkish officials also said that a 1 million b/d pipeline from Kurdistan to Turkey would take longer to build than the two years Kurdish officials have been saying.

Over the weekend Turkey’s Foreign Minister flew to Baghdad for talks on improving relations. As the situation in Syria settles into a stalemate, and the refugee problems grows, the two sides may have more to discuss.

There is a report that work is nearing completion to increase the capacity of the Kirkuk-Ceyhan northern export pipeline from 300,000 to 400,000 b/d by upgrading pumps in northern Iraq. The pipeline was designed to carry 1.6 million b/d but has been running far below capacity due to neglect, sanctions on the Hussein regime, and frequent terrorist attacks. Recently, these attacks have been taking place so often it is hard to keep track of just when the pipeline is in operation. The Kurds, howver, plan to increase shipments through the pipeline by the end of the year if they can work out revenue sharing with Baghdad.

The CEO of BP was in Kirkuk last week trying to smooth over local opposition to its development of an oil field in the “disputed zone” between Kurdistan and the rest of Iraq.

Libya: Tripoli was subjected to some to the heaviest fighting since the overthrow of Gadhafi last week as two of the country’s most powerful militias fought it out in the capital. The government is threatening to stop paying militiamen who do not join the regular armed forces by the end of the year. Considering that the government has almost no revenue from oil exports this may happen anyway. Last week the country’s largest wheat importer warned that he will halt imports unless the government pays him some of the nearly $100 million he is owed.

Current Libyan oil production is difficult to determine. Occasionally a government spokesman announces that so many hundred thousand barrels per day are being produced, but this is usually followed by word of new strikes or shutdowns. Over the weekend, Prime Minister Zeidan said oil exports are so low that the country will not be able to cover its budget next month. He also warned of foreign intervention unless the strikes are settled.

During the uprising against Gadhafi, not more than 50,000 poorly-armed insurgents took part in the fighting. However, now that Gadhafi’s vast arms depots have been looted, the current estimate is that there are 250,000 heavily armed militiamen with disparate loyalties running around the country, many on the government payroll as “security forces.” Italy’s Foreign Minister said last week that the situation in Libya is “absolutely out of control” and hinted that Italy’s major oil company ENI is considering closing wells there.

Israel: In addition to lobbying Washington not to sign an agreement with Tehran that permits Iran to continue enriching uranium, Tel Aviv is hard at work drilling for oil along the “Green Line” that separates Israel from Palestine. New estimates for the Meged 5 oil field, much of which may be under Palestinian territory, claim that the field may hold as much as 3.5 billion barrels of oil. Although under the Oslo accords, the Israelis are obligated to coordinate with the Palestinians the exploitation of any resources which may lie under both sides’ territories, so far there has been no official move by Tel Aviv to acknowledge the situation. The Palestinians are already saying that the Israelis are planning to steal their oil.

Plans are moving ahead to exploit the giant offshore natural gas fields which lie between Israel and Cyprus. Although the politics of the region which directly involve Israel, Turkey, and Cyprus are difficult at best, the promise of much new energy that could leave the Israelis and Cyprus energy independent as well as permitting the Turks to reduce their dependence on Moscow and Tehran for their natural gas may overcome the political obstacles.

There are many ramifications to the development of these fields which lie close to major markets in Europe and could easily undercut US and Middle Eastern LNG exporters. This story is just getting underway.

3. China

Despite incessant predictions that China soon will be facing economic and political crises, its leaders are confidently moving ahead on plans to keep China growing at circa 7 percent a year for another decade. This implies that Beijing’s economy will double in ten years and could be the world’s largest economy and oil consumer by 2020.

Last week the Communist Party plenum convened in Beijing to map out reforms that will allow growth to continue at the desired pace. China’s leaders are already comparing this plenum to the famous one that took place in 1978 which set China loose on 35 years of breakneck economic development. It will likely be many months before the reforms decided upon at the meeting will be made public. Hanging over these grandiose plans, however, are the problems of pollution, climate change, housing inflation, an uncertain global economy and the ever increasing cost of energy. Political liberalization does not seem to be part of future plans so the “leading role” of the Communist Party is likely to be with the Chinese for many years to come.

On a more mundane note, China’s exports are reported to have grown by 5.6 percent year over year in October. This is a nice increase from the 0.3 percent decline in September, but way below the 20+ percent growth annual growth in exports that was seen a few years back. Oil imports in October were down 13.8 percent from last year. September’s imports set a one month record which may explain the decline in October./

4. Quote of the Week

With unconventional oil and with quantitative easing and deficit spending, we’re managing to maintain a façade of normality, at least for a large segment of the population. Certainly not for everyone, because every year more and more people fall off the edges of the table. But at what price, in the long run? The longer we try to maintain this false normality, the higher the cost in the end. The worse the crash will be once these back stops fail. — Richard Heinberg, author and commentator

5. Clip of the Week

“In its annual World Oil Outlook, OPEC said new oil supply from Canada and the U.S. would reach 4.9 million barrels a day within five years. That is more than double last year’s forecast of 1.7 million barrels a day by 2018. As a result, global needs for the group’s own crude will be one million barrels a day less by 2018, OPEC said…Still, OPEC insisted that the shale oil bonanza in the US may not make much difference in the long run, amid rising global demand for petroleum. The group argued that energy companies’ success in exploiting shale oil was unlikely to be duplicated outside North America. It also said that high depletion rates will result in declining shale oil production from 2018. During that period, ‘drilling efficiencies and [hydraulic fracturing] operations, impressive in the past, could plateau,’ OPEC said.” — The Wall Street Journal (11/9)

6. The Briefs·

  • Asian economies are expected to account for a significant portion of the global demand for oil, OPEC wrote in its 283-page World Oil Outlook Tuesday. Oil demand from India is expected to more than double from its 2012 level to 9.3 million barrels per day by 2035. Chinese oil demand should increase 80 percent from 2012 levels to 17.5 million barrels per day in 2035. (11/9)·
  • Russian oil output, the largest in the world, reached 10.59 million b/d in October, setting the record for the post-Soviet period. The country’s total output in October was 1.3 percent higher than during the same period last year. According to the IEA, Russia’s all-time production of black gold reached its peak at 11.41 million b/d in 1988. (11/4)
  • Russia forecast on Thursday that oil prices would remain flat in real terms (adjusted for inflation) through to 2030, taking a more bullish view than many independent forecasters who expect an exploration revolution to deliver ample supply and depress prices. In nominal terms – or the money of the day – Russia’s forecast sees crude rising to $160-$170 per barrel by 2030, and cited "worsening production conditions and increased demand from developing countries". (11/8)
  • Russia slashed its economic forecasts for the next two decades, issuing a dire warning that the oil-fueled growth that has been a foundation of Vladimir Putin’s rule is over and there’s nothing likely to take its place, given the country’s poor investment climate and aging infrastructure. The Economy Ministry said it expects annual growth at 2.5% to 2030, below the global average. (11/8)
  • Oil production at Kazakhstan’s huge Kashagan field, halted since mid-October because of a dangerous gas leak, won’t resume before next year, casting a cloud over one of the world’s biggest energy projects. NCOC, the consortium of oil companies operating the field, said it was too early to say when production—which exceeded 75,000 barrels a day at the time of the shutdown—might restart. (11/9)
  • Ernst and Young’s annual global oil and gas reserves study, released last week, points to worrisome trends: high exploration and development costs (up 20% in 2012 alone, 48% between 2008-2012) will lead to sluggish production growth (oil up 2%, gas up 3%). This could signal that the incredible advances made in drilling productivity recently are reaching its limits, especially in the US. The US E and Ps particularly are being pushed to spend beyond their means in order to maintain the growth investors have become so accustomed to for US shale plays. (11/8)·
  • Oil prices are essentially unchanged over the last two years. At the same time, exploration and production costs have been rising at an 11 percent pace. Thus, costs have been rising faster than revenues, which is why many of the oil majors are getting hammered. (11/7)
  • Four longtime oil market traders claim in a lawsuit that the prices for buying and selling crude are fixed — and that they can prove it. Some of the world’s biggest oil companies including BP, Statoil, and Royal Dutch Shell conspired with Morgan Stanley and energy traders including Vitol Group to manipulate the closely watched spot prices for Brent crude oil for more than a decade, they allege. (11/6)
  • The alleged fixing of oil prices is unlikely to sway traders from using Brent as a benchmark for buying and selling oil in the $5.7 trillion commodity market, according to analysts and brokers from London to Tokyo. (11/7)
  • A Citi Research report on so-called peak oil demand has been drawing a lot of attention lately. The report suggests “The End is Nigh” and we are “Approaching a Tipping Point” on global oil demand. Unfortunately, it’s less than persuasive. The first thing that ought to raise an eyebrow or two is how wildly Citi’s analysis diverges from that of established data information centers. (11/6)
  • In Libya, BP is in talks to relinquish control of a major oil and natural-gas project, a blow to the country as it tries to attract companies to tap Africa’s largest oil reserves. BP is negotiating a deal with Libya’s state-controlled National Oil Co. to transfer a stake in BP’s two Ghadames blocks to NOC subsidiary Arabian Gulf Oil Co. and make it the operator of the venture. (11/8)
  • A Shell subsidiary in Nigeria said it’s considering giving up its stake in a 60-mile, 400,000 b/d oil pipeline in the Niger Delta because of thefts and sabotage. The decision comes three years after the company spent $1.1 billion on pipeline overhauls. In July, a Nigerian group estimated Nigeria lost $10.9 billion in oil revenue to theft and sabotage from 2009-11. (11/5)
  • Since the US and the European Union imposed sanctions on Iran’s oil sales in July 2012 as punishment for illicit nuclear work, higher production in the US, Saudi Arabia and Iraq has offset the loss of more than 1 million barrels a day in Iranian exports. As US consumers pay $3.23 a gallon for gasoline, almost a dime less than when sanctions took effect, Iran’s economy will contract 1.5 percent this year after shrinking 1.9 percent in 2012. (11/7)
  • Colombia’s energy sector, its economic engine, is limping away from “Black October,” a term coined by Marxist rebels who set forth on a month-long blitzkrieg, attacking oil pipelines, coal trains, electricity plants and transmission towers in a show of strength during peace talks with the government. There were roughly two dozen attacks during October, by far the most this year. (11/4)
  • Venezuela has quietly seized control of two oil rigs owned by a unit of Houston-based Superior Energy Services after the company shut them down because the state oil monopoly was months behind on payments. (11/4)
  • Mexico’s President is negotiating a deeper revamp of the country’s nationalistic energy laws than his initial proposal this summer, aiming to put Mexico’s laws on a par with other top oil producers and to attract greater interest from private oil companies. Top government officials are in advanced talks to seal a deal that would give private energy firms a share in oil production and licenses designed to tap shale gas deposits and ultra deep-water oil. (11/6)
  • Canadian oil sands could account for 16 percent of all new oil production by 2030. Oil sands are viewed as more carbon-intensive to produce than rival grades. IHS CERA said the greenhouse gas intensity of oil sands imported from Canada is less of a threat to the environment than often suspected. They claim oil sands are on par with other sources of US crude, including crudes from Venezuela, Nigeria, Iraq and heavy oil production in the U.S. (11/7)
  • BHI’s international rig count for October was up 56 year-on-year to 1,315. For international offshore work, the rig count was up 10 year-on-year to 316. The count reflects the number of drilling rigs actively exploring for or developing oil or natural gas. For the U.S., the company said the average rig count for October was 1,744, down 90 compared to the same time last year. A similar trend in the US was observed last month. For Canada, the number was up 13 to 378 when compared to last October, but nine fewer than the number reported in September. (11/8)
  • The US drilling rig count gained 12 units to 1,754 rigs working last week, Baker Hughes Inc. (BHI) reported. Oil rigs picked up 7 units to 1,383 while gas rigs gained 5 units to 365. In Canada, a 16-unit drop compared with last week brought its total to 378 rigs working. Oil rigs were down12 units to 221 while gas rigs lost 4 units to 157. (11/9)
  • A 90-car train carrying crude oil derailed and exploded in a rural area of western Alabama early on Friday, leaving 11 cars burning and potentially bolstering the push for tougher regulation of a boom in moving oil by rail. (11/9)
  • A U.S. energy drilling boom is revolutionizing the niche market for liquefied petroleum gas (LPG), bringing down global prices and challenging established exporters in the Middle East. The changes are the latest sign of the global impact of a drilling renaissance in the United States that has already hit oil and natural gas. (11/5)
  • New research suggests that the US shale oil boom could end long before the US reaches its goal of energy independence. Many wells behind the energy gush are quickly losing productivity, and some areas could hit peak levels sooner than the US government expects. Two of the nation’s largest shale rock formations, now the source of huge amounts of oil and gas, could start declining as early as 2016 or 2017, according to geologist David Hughes. (11/6)
  • The problem for Big Oil is that one of the world’s biggest opportunities, shale oil, doesn’t necessarily reward bigness. Royal Dutch Shell’s partial retreat from US shale this year suggests it overreached as it scooped up assets there. Latecomers always risk getting the crumbs after first-movers have picked up the choice cuts. (11/5)
  • Since 1975, U.S. federal law has banned raw crude oil exports but it doesn’t restrict refined products such as gasoline or diesel. Added up, the U.S. shipped a record 3.2 million barrels a day of gasoline, diesel, and other refined products in September. That number is nearly 65 percent more than the U.S. was shipping in 2010, before the shale revolution took off in earnest. Three years ago, the U.S. was a net importer of gasoline and other refined petroleum products. Today, it’s a net exporter. (11/7)
  • Shell on Wednesday filed a formal exploration plan for the Arctic waters north of Alaska, marking an important step forward for its ambition to drill next summer what will be the world’s most closely watched oil well. (11/7)
  • The Gas Exporting Countries Forum, whose 13 member countries hold 60 percent of the world’s reserves, elected Iran’s former deputy foreign minister as its secretary-general. (11/5)
  • Spot LNG prices in Asia have risen sharply as power producers have started stockpiling for the winter much sooner than usual this year. The price for LNG for delivery to Asia in the second half of December is around $17.90 per million metric British thermal unit compared with less than $14 per mm Btu at this time last year. (11/8)
  • The Cyprus government reached an agreement with France’s Total for a liquefied natural gas plant in the country. While no exploration has yet taken place, that could happen in late 2015, drilling would occur in 2016, with an LNG plant started in 2017—if production is warranted. (11/9)
  • Greece this week hailed the preliminary results of an oil and gas survey in the Ionian Sea showing promising similarities to earlier finds in Italian and Albanian waters. (11/8)
  • Between Russia and Ukraine, it’s too early to declare a thaw in their natural gas relationship, a spokesman from Russian gas company Gazprom said. Gazprom’s CEO said last week that Ukraine has more than $880 million in unsettled debt from its August natural gas bills. (11/7) ·
  • Canada’s National Energy Board, along with provincial energy regulators, announced they completed the first-ever study of the marketable unconventional resources in the Montney area. The governments said the formation holds 449 trillion cubic feet of marketable natural gas and 1.1 billion barrels of marketable oil. (11/8)
  • The number of US homes heated by oil declined from a peak of 17.2 million in 1973 to 8.1 million in 2011, a 53 percent drop, according to the Energy Information Administration. Between 1999 and 2011, the decline was 19 percent. An average home with oil heat will spend $2,046 this winter, compared with $679 for homes using natural gas. (11/7)
  • Electricity generation from natural gas began to fade only months after it had gained ground in much the same way that shale gas wells fade only months after initial production. As gas prices moved up to trade between $3.50-4/mcf, utilities promptly began switching back to using coal for generation. (11/4)
  • America does not have 200 years in coal “reserves” since much of the coal that is now left in the ground cannot be mined profitably, according to a new report from the Boulder, CO-based nonprofit Clean Energy Action (CEA). The CEA analysis shows that the US appears to have reached its “peak coal” point in 2008 and now faces a rocky future of rising coal production costs, potentially more bankruptcies among coal mining companies, and higher fuel bills for utility consumers. (11/9)
  • Australia’s mining sector: With China’s economy on course for a rude slowdown over the coming years, says a report from Business Monitor, Australia’s mining sector is set to suffer the painful spillover effects of a sharp investment slowdown. (11/6)
  • Water shortages are threatening energy output and increasing costs in some of the world’s most prolific sectors including shale gas in the US, crude oil in the Middle East, and coal in China, and the situation is set to worsen, Wood Mackenzie said Thursday. The energy sector is already the world’s largest consumer of water for industrial purposes, using over 15% of global supply, and this is rising. (11/7)
  • Forget peak oil. It’s peak water we should worry about, says Lester R. Brown. It’s not that we will run out of water to drink; it’s that we won’t have enough to grow the food to feed the world. (11/6)
  • Voters in three Colorado cities approved anti-fracking initiatives by wide margins last week, which could have an impact on the drilling process that has propelled the nation’s oil and gas boom. Colorado produced 49.3 million barrels of oil in 2012, a 26 percent increase from. (11/9)
  • Votes this week to ban fracking in three Colorado cities may at best prove symbolic victories for environmentalists, as two decades of legal precedent suggests drillers can successfully contest the bans in court, experts say. (11/8)
  • The World Meteorological Organization said Wednesday the amount of greenhouse gases trapped in the atmosphere reached a record high in 2012. WMO said there was a 32 percent increase in the warming effect of greenhouse gases between 1990 and 2012.
  • The UN Environment Program published a report Tuesday saying the door is closing on an easy way—the least-cost pathway—out of the climate crisis. (11/6)
  • China’s top climate change negotiator has urged richer nations to help developing countries cut their emissions, as they had pledged to do in 2009. Xie Zhenhua, deputy head of China’s National Development and Reform Commission, was referring to the 2009 U.N. summit in Copenhagen in which developed nations pledged $100 billion a year by 2020 to help fight climate change. (11/7)
  • Amnesty International accuses Shell, Nigeria’s biggest petroleum producer, of manipulating oil spill investigations and documents in cases where the rights group says the company has wrongly reported on the cause and volume of pollution devastating the Niger Delta and made false claims about cleanup measures. (11/7)
  • Canada’s biggest energy companies including Suncor Energy and Imperial Oil are trailing global peers in reporting environmental performance as scrutiny of the oil sands intensifies. (11/8)
  • Wind farms and solar parks are changing hands at record rates, signaling both an increased taste for the assets among pension funds and hard times for utilities that are the biggest sellers. (11/6)
  • A report from the Global Fuel Economy Initiative suggests $2 trillion savings from fuel economy improvements in ICE vehicles through 2025 can help fund a long-term transition to plug-in hybrids. (11/9)