Peak Oil Review: A Midweek Update – 23 June 2016

June 23, 2016

The oil markets are still dominated by the possibility that today’s vote in the UK may result in Britain leaving the EU. Recent polls put the results as too close to call, and results are not expected until Friday morning.  While the election will have little direct impact on oil prices, many fear that a vote to leave will cause turmoil in the financial markets and a surge in the US dollar against the pound and euro. This, in turn, would push oil prices lower.
 
Oil started the week showing some strength on analyst and API forecasts of a drop in US crude stocks. The API put the size of the drop at 5.2 million barrels. The weekly stocks report showed a US decline of only 900,000 barrels and large increases in oil product stocks so that total commercial petroleum inventories were actually up by 5.2 million barrels last week. At the close Wednesday, US futures were at $48.14, and London was at $49.88.
 
With more Canadian tar sands production coming back on line and US imports running about 14 percent higher than at this time last year, some analysts are wondering if the price rally is not going to run out of steam despite the outages and threats of outages in Nigeria and Venezuela. It is only two months until September when the summer driving season ends and stockpiles normally begin to build again. Current US crude inventory levels are about 150 million barrels above the 2010-2014 average. To reach normal levels by Labor Day, crude stocks will have to drop by 12 million barrels each week, which they are showing no sign of doing.
 
Fears are growing that southern California will be subjected to serious electricity shortages this summer due to the heat wave and problems at the Aliso Canyon natural gas facility — the second largest natural gas field in the Western US. There are six major refineries in the region which depend on electricity and natural gas to refine some 1 million barrels of oil per day. Refiners are exempted from rotating power blackouts, but this does not apply to the natural gas used to run refineries.  It would take several days to recover from any unplanned shutdowns and in the meantime, gasoline prices would likely surge.
 
Despite the reactivation of a handful of drilling rigs in the last few weeks, recent analysis shows that $50 oil is not enough to profitability produce much shale oil even with the costs of oil services at the lowest they have been for decades. The Dallas Federal Bank reports that much of the oil industry in the Southwest is in trouble with the number of non-performing loans increasing. The Bank warns that current methods of evaluating the creditworthiness of oil producers need to be reevaluated. Some analysts continue to warn that very high oil prices are just a few years away due to the large drop in capital investment and the fact that oil is still selling for well below costs of production.
 
The Nigerian government says that the 30-day truce with the Nile Delta Avengers is in place. The Avengers deny having reached such an agreement.  Nigeria currency plummeted by more than 40 percent against the dollar on Monday after the naira was allowed to float.
 
Iraqi oil exports are averaging 3.1 million b/d so far in June, down from 3.3 million in April. Saudi exports fell to 7.44 million b/d in April from 7.54 million in March due to increased domestic consumption. The situation in Venezuela is no better as food shortages spread. There is no progress on a political settlement or changing the government.  A senior US diplomat is in Caracas for talks about the situation. 

Tom Whipple

Tom Whipple is one of the most highly respected analysts of peak oil issues in the United States. A retired 30-year CIA analyst who has been following the peak oil story since 1999, Tom is the editor of the long-running Energy Bulletin (formerly "Peak Oil News" and "Peak Oil Review"). Tom has degrees from Rice University and the London School of Economics.  

Tags: geopolitics, oil price