1. Oil and the Global Economy
New York oil futures have traded in a narrow range around $95 a barrel since the beginning of November while London futures have climbed steadily for most of that period. NY closed on Friday at $94.84 while London closed at $111.05. These moves increased the WTI/Brent spread to $16.21, the widest since last March. NY oil prices are being held in check by the ever-increasing US crude stocks, increasing US crude production, which is now 1.2 million barrels per day higher than this time last year, and fears that the Federal Reserve will cut back on bond purchases. There was a surge in NY on Thursday when US unemployment numbers came in lower than expected. London prices are being driven upwards by lower production in Libya and Iraq.
Cold weather is forecast for much of the US this week, forcing fuel oil and natural gas prices higher. Natural gas futures have climbed by some 35 cents per million BTU’s in November and now stand at $3.76. Strong residential heating demand pulled down inventories more than expected last week.
Gasoline futures have climbed about 20 cents per gallon since the start of the month and retail prices are up about seven cents in the last week. US gasoline stocks are now about 8.5 million barrels above normal for this time of the year, down from 17 million in October.
In an interesting development, The Shanghai Futures Exchange said last week it could price its crude futures contract in Yuan rather than dollars. Not much is expected to happen in the near future as pricing oil futures contracts in Chinese currency could result in a de facto unpegging of the Yuan from the dollar with all sorts of implications for Chinese exports.
2. The Middle East & North Africa
Iran: The agreement signed over the weekend limiting Iran’s enrichment of uranium to a non-threatening 5 percent marks a major shift in Middle Eastern political relationships, but leaves the oil embargo intact until another agreement is reached. In return for limiting its enrichment of uranium, Iran will obtain access to $1.5 billion in revenue from trade and sales that is currently frozen. If Iran adheres to the agreement, $4.2 billion in revenue from its current oil sales will be released in stages. The agreement would provide Iran some $7 billion in relief from the $100 billion of its foreign exchange holdings that are restricted.
While the agreement does nothing to increase the global oil supply, it is being widely hailed by both sides as a good first step after 35 years of animosity. Only the Tel Aviv and some of their friends, who believe that Israel’s security rests on Iran having no uranium enrichment capability, are vehemently opposing the deal.
The agreement, however, has opened new strains numerous in Middle Eastern relationships. Israel, with some support from France, and the Gulf Arab states are worried that unswerving US support in their confrontation with Iran is slipping away. There are already suggestions that the Saudis are looking to Moscow for support.
Tehran remains deeply involved in the Syrian uprising in hopes of maintaining a supply line for its Shiite clients in Lebanon’s Hezbollah movement. Last week Sunni terrorists damaged Tehran’s embassy in Beirut in retaliation for the increasing involvement by Hezbollah fighters and Iranians in Syria.
Syria: Heavy fighting is still taking place in the country, as government forces reinforced by Hezbollah, and Shiite volunteers from Iraq, attempt to retake the Damascus suburbs and the city of Aleppo that has been held by insurgent forces for many months. Although there are occasional reports of rebel successes, most observers believe the momentum has shifted to the government’s side.
Fighting among the various rebel groups is continuing which reduces the possibility of their coming to the negotiating table and increases the likelihood that the insurgency will continue indefinitely with neither side able to overcome the other. The refugee situation continues to grow worse with millions driven from their homes. It is on track to become the biggest refugee crisis since World War II.
Insurgent forces seized a large oil and gas field from government forces on Saturday, further depriving the government of a resource needed to keep its economy and armed forces moving. Most of Syria’s need for oil products is coming from friendly foreign countries such as Russian, Iran, and Venezuela.
Iraq: Baghdad’s oil exports recovered from the 19-month low of 2.07 million b/d touched in September, but still remain far below last summer. The Oil Ministry reported that only 2.25 million b/d was exported last month due to the construction at the Basra oil export terminal and suspension of pumping along the Kirkuk-Ceyhan northern export pipeline several times due to insurgent sabotage attacks. The Ministry is still talking about increasing exports to 9 million b/d by 2017 which most observers consider unrealistic.
There is no word as yet about the hundreds of foreign oil workers who were evacuated from southern Iraq two weeks ago after a British security officer provoked a riot by tearing down Shiite religious posters. The usual number of terrorist bombs went off in Iraq last week killing and injuring dozens of innocent Shiite civilians.
Washington says it is pleased that Ankara has involved Baghdad, and sought its blessing, in the discussions over exports of oil from Iraqi Kurdistan to Turkey. Oil exports through a small pipeline to Turkey could begin in the next few weeks. Kurdistan maintains that under Iraq’s constitution it is entitled to 17 percent of Iraq’s oil revenues and intends to guarantee its cut by exporting its locally produced oil and collecting the revenues without involving Baghdad.
Libya: Some militias are withdrawing from Tripoli after the three-day general strike protesting the massacre of civilian protestors by militiamen. The militias are handing over their military bases to the government but are retaining the arms they looted from Gadhafi’s arms depots. There is no definitive word on how much oil is being produced and exported. The Austrian energy company, OMV, said it has not produced any oil in Libya since October. Italy’s biggest natural gas company said that gas had begun to flow through the pipeline under the Mediterranean again last week. The German oil and gas company, Wintershall, also reported that it had been forced to cut all it oil production as exports were being disrupted by protestors. The best estimate is that about 200,000 to 300,000 b/d are still being exported through the western oil terminals.
US Secretary of State Kerry arrived in London over the weekend to discuss the security situation in Libya with the British and Libya’s Prime Minister. The US is considering a request to send a military training contingent to Libya in an effort to rebuild a national army out of the 250,000 heavily armed militiamen, with diverse political and economic objectives, now running around the country.
Most of the news out of China last week related to the economic reforms that were announced 10 days ago. There is universal agreement that these are potentially the most important changes to China’s economy in the last 30 years. The 21,000 character document, entitled “The Decision,” lays out reforms encompassing economic, social, and financial policy. Most involve reducing the amount of state regulation in hopes that the economy can transition from an export/infrastructure economy to one that is better balanced and driven by consumer demand. The underlying goal of the reforms is to keep economic growth in the vicinity of 7 or 8 percent a year while coping with the consequences of environmental neglect.
For the oil industry, there will be less price regulation and less favoring of the large state-owned oil companies at the expense of their smaller private competitors.
One of Beijing’s principal goals is to bring growth-obsessed local officials under control. Until this is accomplished there is little hope of improving China’s air and water pollution situation. Over the weekend there was another bout of smog in Northern China as coal fired heating systems are cranked up for the winter. A new migration phenomenon is emerging in China in which residents of the large eastern megacities, realizing they are living in polluted death traps, are starting to make their way to smaller pollution-free towns in the southwest. Tensions between growth and environment are likely to dominate Chinese political discussions for years to come.
Another sign of things to come emerged last week when it was announced that China will stop accumulating foreign-exchange reserves, which are mostly US dollars, and which total $3.66 trillion.
4. Quote of the Week
“The security crisis comes with a huge economic cost to Libya. The continued disruption of oil and gas production threatens the lifeline of the country.”
— Oussama Romdhani, Al Arabiya News
5. The Briefs
- Cooperation between the US and China on climate change issues which has been rocky for many years, seems to be changing as awareness of problems being caused by emissions sink into Beijing’s policymakers. (22 Nov.)
- Demonstrators took to the streets in Warsaw demanding that the world climate summit take action to stop climate change. (19 Nov.)
- The Saudis have launched a major effort to extract natural gas from under the Red Sea. Saudi Aramco believes there could be as much as 100 billion barrels equivalent of natural gas in the region which would increase the Kingdom’s official oil and gas reserves of 267 billion barrels by 38 percent. (22 Nov.)
- Britain’s Tullow Oil announced last week that it has made another discovery inKenya. The discovery came in a region not known to contain oil or gas and marks the fifth straight oil find in Kenya for Tullow. (22 Nov.)
- A new report from a collaboration of independent research organizations says that industry claims concerning the number of jobs created by the shale gas development industry is greatly exaggerated. The report says that each new gas well created an estimated 3.7 jobs while industry claims run as high as 31. (22 Nov.)
- Canada’s National Energy Board is forecasting that the country’s crude oil production will increase by 75 percent to 5.8 million b/d by 2035. (22 Nov.)
- Apache Oil has eliminated the use of fresh water for fracking wells in the Permian Basin of West Texas. The company is using brackish water drawn from below the ground and recycling what is left after each use. The company says it only cost 29 cents per barrel to treat used fracking water while disposing of it properly costs $2.50 a barrel. (22 Nov.)
- Canada’s Suncor Energy says it will expand production by 10 percent next year using rail cars to move its production. The company will spend $7.4 billion next year to expand its production from the tar sands which now stands at 396,000 b/d. (22 Nov.)
- Oil and gas companies can expect that an unprecedented number of workers will retire next year. Currently, the number of job openings for the North American oil and gas industry exceeds the number of qualified applicants. (21 Nov)
- Canada has issued a new study that tries to convince the EU that Canadian oil derived from the tar sands creates no more emissions that conventional oil. Ottawa believes the EU is discriminating against its oil as being excessively dirty. (21 Nov.)
- Volkswagen displayed a new plug-in-hybrid-diesel concept car last week which it says can get 214 mpg. With mileage like this, the price of gasoline could increase 10X and still be affordable. (21 Nov.)
- Venezuela’s Congress granted President Maduro decree powers as he battles increasing economic difficulties. The US is still importing about 700,000 b/d from Venezuela. (20 Nov.)
- London’s Afren oil company said it had encountered more oil than expected while drilling off the coast of Nigeria. The block where it is drilling could contain some 800 million barrels of oil. (20 Nov.)
- Bolivia says it is on track to develop a nuclear power industry. Talks are going on with Argentina which already has a nuclear power plants. (20 Nov.)
- Japan’s trade deficit is widening as fossil fuel imports surge to replace its lost nuclear power production. The recent deficit of $11 billion was larger than expected. The situation is likely to continue until the energy question is settled. (20 Nov.)
- US natural gas exports by pipeline to Mexico increased by 24 percent between 2011 and 2012. Plans are underway to more than double the pipeline infrastructure which allows natural gas to be exported to Mexico. (20 Nov)
- BP has added two more drilling rigs, for a total of nine, to its deepwater fleet in the Gulf of Mexico. One of the new rigs is drilling in the Thunder Horse field which was producing close to 200, 000 b/d in 2008, but has been slipping since then. Another rig will drill the Mad Dog field where the previous rig was sunk by Hurricane Ike in 2008. (20 Nov.)
- Ukraine and Russia’s Gazprom have reached compromises that should avoid the European winter gas crisis of 2009. That year, Russia cut gas supplies flowing across Ukraine to Europe in order to force the country to pay its bills to Gazprom. (20 Nov.)
- Ecuador spent some $2.8 billion on fuel subsidies during the first nine months of this year. This is a 13 percent increase over 2012. The IEA has been complaining about fuel subsidies for years as they mostly help richer consumers who buy the most oil products. (19 Nov.)
- The battle over privatizing Mexico’s oil monopoly, which has been enshrined in the country’s constitution for the last 75 years, is beginning. Legislators from both political parties support constitutional changes that will allow the sharing of oil and profits with multinational oil companies that have the technology to exploit deep-water oil fields. (19 Nov.)
- The Japanese have started removing nuclear fuel rods from the tsunami damaged Fukushima nuclear power station. The dangerous job is expected to take a year to complete and is the first step towards dismantling the plant and cleaning up the site which is expected to take 30 to 40 years. (19 Nov.)
- The Alaskan government is considering taking a stake in a new gas pipeline and a liquefaction project that would bring natural gas from the North Slope for export. The oil companies want to have the government involved in the $45-$60 billion project as they believe state participation would lessen regulatory problems. (19 Nov.)
- Despite all the industry’s fuss during the safety review shutdown following the BP disasters, oil companies are rushing to get back into the Gulf of Mexicowhere at least 10 new large oil discoveries have been made recently. By 2014 deepwater production from the Gulf is expected to be 1.5 million b/d and to reach 1.9 million b/d by 2020. (19 Nov.)
- Colorado announced new rules to reduce emissions from fracking operations in the state. The new rules are the first by a state to reduce the emission of methane gas during drilling and fracking. (19 Nov.)
- During the climate summit in Warsaw, the UN’s climate chief called on the world’s coal industry to transition into some other business and leave the rest of the coal in the ground. Ironically, Poland produces about 90 percent of its electricity with coal. (18 Nov.)
- While Iranian officials had hoped to begin exports of natural gas to Iraq my mid-March 2014, higher consumption in Iran and delays is building the pipeline will delay the project by several months. (18 Nov.)
- A shortage of water could slow the shale oil and gas boom in the US. The industry is moving towards recycling the fracking water it uses as quickly as possible. (18 Nov.)
- Costa Rica, with Japanese funding, plans to build three geothermal plants using the steam from its volcanic area. By 2014 the country hopes to generate 95 percent of its electricity using renewables. (23 Nov.)
- An explosion of a crude oil pipeline in China’s eastern oil hub of Qingdao killed more than 50 people and shut off the crude supply to the refineries in the area. (23 Nov)
- Citicorp analysts believe that the recent volatility in the Brent/WTI spread is a sign that the US is running out of refining capacity to handle light, sweet crude. (23 Nov.)
- The National Resources Defense Council says that recent bills introduced in the US House to gut environmental measures in favor of more rapid exploitation of oil and gas reserves are irresponsible. Among the House measures, which should die in the Senate, are bills to remove federal regulation of fracking and the approval process for new gas pipelines. (23 Nov.)
- Norway will join with the Chinese in exploring for offshore oil around Iceland. Oslo and Beijing have been at odds since 2010 over the award of the Nobel Peace Prize to a Chinese dissident. (23 Nov.)