Peak Oil Review – Oct 15

October 15, 2012

1. Oil and the Global Economy

Oil prices jumped about two dollars on Tuesday as Turkish-Syrian tensions increased, but remained relatively steady for the rest of the week with Brent closing down $1 on Friday at $114.62 a barrel and NY down to $91.86. The IEA’s new forecast of slightly lower oil demand for 2012 and 2013 helped send prices down on Friday. The IMF now is forecasting that world economic growth will be only 3.3 percent this year and 3.6 next year, adding to the pressure. Europe continues to grapple with the Greek and Spanish debt problems amid growing concerns that another global recession is in the offing.

The weekly US stocks report showed crude inventories increasing by 1.7 million barrels but product inventories falling, with gasoline inventories down by 500,000 barrels to the lowest level in four years. Distillate inventories declined by 3.2 million barrels as the EIA issued warnings about the adequacy of heating oil supplies for the coming winter. Accuweather released a forecast of cold and snow in the northeast this winter.

US natural gas futures climbed all week, setting a 2012 high above $3.60 per million on a combination of forecasts for a normal winter, lower than expected injections of gas into storage, less drilling, and increasing consumption by electric utilities. The US natural gas inventory is now 6.8 percent higher than this time last year – a big decline from the 57 percent above normal that was registered at the end of March. The large surplus seen in the spring has been eaten away by a hot summer and lower natural gas production.

2. The Middle East

It was an active week in the region with fighting in Syria taking place close to the Turkish border and Ankararesponding forcefully to the occasional shell that fell on its territory. The headline event of the week came when Turkish fighters forced down a Syrian airliner coming from Russia with what were apparently spare parts for Syrian air defense radars. The Turks have now banned Syrian aircraft from transiting their country. In the meantime, fighting in Syria appears to be on the rise with the rebels threatening to cut the road between Aleppo and Damascus. The US has sent 150 military personnel to Jordan to help deal with the increased flow of refugees.

The IEA reports that Iranian oil production has now fallen to 2.85 million b/d, the lowest in level in 23 years. Despite brave words, threats, and exhortations from the Ayatollah, the sanctions appear to be having an effect on the Iranian economy. Last week Tehran was forced to bring all trading in foreign currencies under state control to prevent further deterioration of its currency. Tehran blasted the UN’s IAEA that has been inspecting its nuclear facilities, suggesting that it may break or downgrade relations with the Agency in retaliation for the sanctions. The west is blaming Tehran for recent cyber-attacks on Saudi Aramco’s computer systems and corporate computers in the US.

The EU reached a preliminary agreement to further tighten economic sanctions on Tehran as Washington released new restrictions. The sanctions appear to be having a larger impact than Tehran is willing to admit. An increasing number of foreign companies are cutting ties to Iran because of the growing complexity of trade deals and the fear that they may be banned from doing business in the sanctioning countries. The extent of Iran’s troubles was revealed this week with a new report from a marine intelligence firm saying that only 980 vessels called at Iranian ports in the first nine months of this year as compared to 3,407 in 2011. The situation with container, refrigerator, dry bulk cargo, and fishing ships is even worse with port calls down about 75 percent. Tehran has started to implement an “economy of resistance” under which vital foodstuffs are being stockpiled.

Israeli Prime Minister Netanyahu has called for new elections early next year. Polling shows that he should win easily leaving him in a stronger political position to take action against Tehran should it become necessary.

3. IEA Reports

Last week, the International Energy Agency in Paris released its annual Medium Term Market Report which contains projections for the next five years as well as its monthly Oil Market Report. The monthly report downgraded the forecast growth of global oil consumption in 2012 from 800,000 to 700,000 b/d, but kept the forecast for 2013’s growth at 800,000 b/d. The Agency notes that OECD inventories are growing despite lower Iranian exports and various other reductions in the Middle Eastern oil exports. The IEA’s analysts see a paradox in the increase in US crude stocks and the fall in US product inventories. While various refinery outages are part of the problem, increasing exports of petroleum products to markets outside of the US and EU are becoming part of life in the oil industry.

The Medium Term Market Report is one of the more interesting documents the IEA has released in recent years for it grapples with forecasts of what will happen to global oil production and consumption in the next five years. The conclusions are surprising in that the Agency sees OECD demand growth falling, spectacular increases in oil production and falling prices between now and 2017 – provided the Middle East does not degenerate into export-reducing turmoil.

The Agency sees global demand for oil rising to 95.7 million b/d in 2017 vs. 2011’s demand of 89.0 million. Nearly all of this increase in demand will come from non-OECD countries in Asia and the Middle East as the next five years are seen as times of economic stagnation for the industrialized world. China’s oil demand is forecast as growing at 2.5 percent a year during the next five years – well down from the roughly 7 percent seen during the past decade.

It is the supply side of the equation that comes as a surprise for the Agency sees total productive capacity (production increase plus increase in spare capacity) growing by 1.5 million b/d each year to 102 million b/d for an increase of 9.3 million b/d. This, of course is in contrast with most estimates from the peak oil community that see global production leveling out somewhere between 90 and 95 million b/d.

The 9.3 million b/d increase is forecast to come from a combination of increased US tight oil production; increased Iraqi production; increased Canadian oil sands production; and more natural gas liquids and biofuels. Deep-water production is forecast to grow from 5.2 to 8.2 million b/d or 8 percent of global production by 2017.

While the Agency is careful to note the uncertainties and dangers of the various Middle Eastern conflicts, this is one of the most optimistic baseline forecasts it has issued for several years. The report waxes ecstatic about the “formidable power” and the “technological revolution” of fracking for tight oil. A lengthy section on US tight oil production discusses many of the factors that will play a role in future production, but fails to discuss the rapid depletion rates of fracked wells and the need for frequent re-drilling to maintain production that many in the peak oil community have been noting for many months.

However, the 134 page report discusses many important topics bearing on future oil production in depth. Among those of interest is the IEA’s concern that the global demand for diesel/gasoil is growing much faster than the industry can meet demand. Shortages of this most versatile fuel are already appearing and the situation can only get worse in coming years. Another topic of interest is that the Agency is starting to pay attention to the issue of “net exports,” where oil producing countries are consuming a greater share of their production domestically, leaving less oil for export to the industrialized world. In the Middle East, consumption is expected to grow at a compounded 3.4 percent per year for the next five years, far exceeding the increase in production from the region.

4. Fuel prices

The California gas price spike seems to have peaked with regular hitting an all-time high of $4.67 a gallon last Monday. California’s governor ordered an immediate switch to the cheaper and easier to make winter blends, normally not sold until October 31st so that by week’s end regular gasoline was selling for an average of $4.61.

The next fuel spike may be for heating oil in New York where there are low inventories and a new requirement that heating oil meet the same low-sulfur requirements that diesel trucks have had for several years. Refinery closures have cut the supply of legal heating oil to a third below that of last year. Only 6 percent of US homes use heating oil and most of these are in the northeastern US.

Quote of the week

• “Since 2005, China and India have consumed an increasing share of a declining volume of oil exports… If we extrapolate current trends, China and India alone would consume 100% of global net oil exports by 2030.”
– Jeffrey Brown, ASPO-USA Vice-President

The Briefs(clips from recent Peak Oil News dailies are indicated by date and item #)

• China could become a new oil product exports powerhouse if all planned projects for refining capacity expansion in the country go ahead, the International Energy Agency said. (10/13, #14)
• Iraq’s oil output is to more than double by the end of the decade and by the 2030s it will be the world’s second-largest oil exporter after Saudi Arabia, according to an in-depth study by the International Energy Agency. (10/9, #10, #11)
• Chinese oil companies are showing a growing interest in Iraq’s oil industry as Beijing widens its global hunt for mineral resources. (10/12, #13)
• Shell said the majority of the oil spills in the Niger Delta were the result of acts of sabotage. Nigerian farmers and the Dutch division of Friends of Earth are suing Shell for environmental damage caused by oil spills in the Niger Delta. (10/11, #8) (10/12, #14)
• Noble Energy executives said that oil production in the Falkland Islands could begin in about six years if an exploration well proves to be successful. (10/12, #15)
• Some of the world’s biggest oil companies and traders are poised to export substantial amounts of
crude from the US for the first time in decades. Shell, BP and Vitol are among the six companies known to have applied to the US government for export licenses. (10/12, #17, #18)
• US imports of light, sweet crude oil – mostly West African – will fall to virtually zero by 2014 as rising domestic shale oil production and refinery closures sap demand. The US is now pumping more than a million b/d of tight oil and the hydrocarbons produced are similar to top quality grades produced in Africa. (10/12, #19)
• Pennsylvania announced it issued a permit for the construction of a power plant that would run partially on domestic shale gas. The permit paves the way for construction of the first plant in the state to run on natural gas produced in the Marcellus shale play. (10/12, #21)
• Danish North Sea oil output fell 19 percent in September compared with the same month in 2011, a huge drop stemming from a prolonged shut down for maintenance in the mostly mature fields. (10/12, #24)
• The Saudi oil minister said the state-owned energy company made a natural gas discovery about 15 miles offshore in the Red Sea. The field, near the port of Dhuba, produced around 10 million cubic feet per day during an initial testing at a depth of 17,700 feet. (10/11, #4)
• Saudi Arabia’s oil minister said his country has the ability to meet existing and future demand for oil. Ali al-Naimi told reporters that the kingdom now pumps around 10 million barrels a day, and said its production capacity of more than 12 million barrels is sufficient to meet any demand. (10/10, #7)
• The oil industry sued to overturn a US rule requiring companies to report their payments to foreign governments to develop oil and gas fields, arguing the information would provide valuable secrets to competitors. (10/11, #15)
• Canada is focusing its attention on India and other Asian countries as it seeks to reduce its dependence on the US for exports of hydrocarbons, according to the country’s Minister of Natural Resources Joe Oliver. (10/11, #16)
• An oil field in the Celtic Sea may prove to be a game changer for Ireland, possibly producing enough to make the country self-sufficient or even turning it into an oil exporter. (10/11, #18)
• The Supreme Court refused to consider Chevron’s bid to block collection of a $19 billion Ecuadorean environmental judgment against the company. (10/10, #11)
• India said there is a fear of natural gas production becoming commercially unviable at Reliance Industries’s key oil and gas producing fields in the eastern offshore Krishna-Godavari basin if the output continues to decline. (10/10, #12)
• Chevron said a fire-damaged crude-processing unit at Richmond, California refinery won’t resume production before the end of the year. (10/10, #13)
• Iraq is quietly shipping supplies of fuel oil to Syria in a deal that has triggered concern in Washington and exposes Damascus’s difficulties keeping its economy afloat in the face of a growing civil war and economic sanctions. (10/9, #12)
• Oil producers in the Middle East and North Africa plan to invest $740 billion on energy projects in the next five years, led by Saudi Arabia. High oil prices will allow them to resume projects that were delayed at the height of the financial crisis. (10/8, #7)
• Saudi Arabian Oil Co. increased the number of supertankers it hired to haul oil to the US. The company chartered at least seven very large crude carriers to carry about 14 million barrels in October, compared with about four a month so far this year. (10/8, #8)
• The World Bank has cut its forecast for growth in China’s economy this year to 7.7 per cent, a sharp downgrade from the prediction of 8.2 per cent growth it made in May. (10/8, #15)
• The US’s EPA urged a federal appeals court to reject requests by industry groups to reconsider an earlier ruling that upheld the agency’s right to use the Clean Air Act to curb greenhouse gas emissions. (10/13, #16)
• Two European insurers have withdrawn coverage for tankers involved in the Iranian oil trade, the first such move since tough new sanctions were imposed in July. The tankers, operated by Hong Kong’s Titan Petrochemicals Group Ltd, were used to store Iranian oil. (10/12, #10)
• The US drilling rig count fell 2 units during the week ended Oct. 12, with the total number of rotary rigs reaching 1,835, Baker Hughes Inc. reported. This compares with 2,023 rigs working in the comparable week last year. (10/13, #19)

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.  

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