1. Oil and the Global Economy

New York oil futures had their best week since July, rising by some $5 a barrel to close Friday at $97.65. Several factors supported the move including: a drop in the US unemployment rate and jump in US GDP growth; the first decline in US crude supplies in 11 weeks; an increase in the demand for petroleum products in the US (how much is still going to export is an open question); and the announcement that the southern leg of the Keystone pipeline that will move 700,000 b/d of oil from Cushing, OK to Port Arthur, Texas will open in January.

Keeping a cap on all this euphoria is the possibility that the improving economy will move the Federal Reserve to cut back on its $85 billion a month bond purchase program that has kept interest rates low and supported oil prices for several years. The Fed’s Open Market Committee is to meet on December 17th, although surveys of Wall Street analysts say that most believe there will be no change until next March or later.

The rising US demand issue still needs some sorting out. The EIA reported that US “fuel demand” hit 20 million b/d at the end of November; however through September, 3.6-3.8 million b/d of that was going for export – up 500,000-600,000 b/d from last year. Whether exports remained strong into October and November is still an open question. It is likely that the steep drop in US retail gasoline prices seen this fall has helped drive demand, but whether the US economy has picked up to the point where we are burning 9 percent more fuel is an open question.

US crude production dropped a bit from 8.019 to 8.011 million b/d in the latest EIA report. There have been reports in the last week that the bad weather in the mid-west has slowed drilling and production in North Dakota and the Permian Basin.

Oil futures in London were volatile during the week, but closed at $111.61 which was about where they opened last Monday. The major issue for the London market is the reduced oil supply from Libya which is increasing the demand for US-refined distillates; and the OPEC meeting that decided to keep production steady at 30 million b/d. The highlight of the OPEC meeting was the announcement by Iran and Iraq that they plan to increase production and exports by a combined 2 million b/d next year. They also implied that the other members should cut their exports to accommodate this increase and prevent prices from falling.

US natural gas prices took a big jump on Thursday last week, and at one point on Friday touched $4.20 per million, as a big blast of arctic cold enveloped much of the US. This is the highest natural gas has been since last spring.

2. The Middle East and North Africa

Iran: The fallout from the interim nuclear agreement topped the news from Tehran last week. The agreement has brought a sense of hope to the Iranian people that they can join the world again after 30 years of revolutionary bombast which has done considerable damage to economic growth. Iran’s President defended the agreement while his Foreign Minister rushed around the region mending fences with Iran’s neighbors. International oil companies including American ones are being invited to talk about developing Iran’s oil industry after the sanctions are lifted. Despite the difficulties, Tehran’s current leadership is clearly optimistic that a final agreement that will remove oil, trade, and financial embargoes will be reached next year.

While the Israelis, hardline Revolutionary Guard leaders in Iran, the Saudis, and a few members of the US Congress continue to mutter about the pact, most seem relieved that decades of confrontation could be coming to an end.

If a final agreement is signed, there will be major consequences for the Middle East. Iranian oil and gas production that has been hampered for 30 years by various trade restrictions, could embark on a major increase at the expense of the Saudis. How Tehran’s relationship to the Syrian uprising is handled in any final agreement is still up in the air and is likely be a major stumbling block as is the increasing tensions between Sunnis and Shiites across the region. Despite the optimism, the negotiations have a long way to go and many forces are working to derail them.

Iraq: The bombings and summary executions continued across the country last week. The UN has the death toll for the year at 8,000 and counting. Most observers are saying the current spate of violence is nearly the equivalent of what the country went through seven years ago.

Baghdad says it continued to increase its oil exports in November by exporting 2.38 million b/d despite the construction going on at the Basra oil export terminal and the periodic stoppage of the northern export pipeline by terrorist attacks. The country is planning to increase exports by 1 million b/d next year to some 3.4 million, including 400,000 b/d exported from Kurdistan. With domestic consumption running at 700,000 b/d, Iraq’s total oil production by the end of next year could be close to 4 million b/d if these plans are realized.

The issue of the Kurds exporting oil to Turkey through their own pipeline remains murky. Two weeks ago the Turks announced that despite a new agreement to buy oil from the Kurds, shipments would not begin without the concurrence of Baghdad. A week ago, Turkey’s Energy Minister flew to Baghdad to work out an agreement. Later Iraq’s Oil Minister announced a new agreement under which Baghdad would control the amount and quality of the crude that the Kurds exported, as well as receiving and controlling the payment for the oil. So far this announcement has not been verified by Ankara or Erbil suggesting that a deal as not yet been made. It appears that the Kurds may start exporting through their own pipeline to Turkey without Baghdad’s permission further confusing the situation.

Libya: The chaos continues with little hope for increased oil exports on the horizon. The security situation has become so bad that the UN is sending a military force of 235 men to guard its representatives in the country. Libya’s Oil Minister says that output has fallen to less than 250,000 b/d from 1.4 million in July costing the country $9 billion in revenue. Only the offshore El-Feel field and fields belonging to the state oil company are still producing. The abrupt halt in production has caused damage to pipelines and production facilities suggesting that a political settlement will not restore production levels in the near future. Electricity shortages are becoming more frequent as a major gas line is being blocked by Berbers demanding more political rights.

Syria: The fighting continues with minor gains being made by the Hezbollah-backed government forces. Radical Islamist groups are making progress in driving the more moderate insurgent forces from some bases. A senior Hezbollah officer, allegedly responsible for Hezbollah’s intervention into the Syrian uprising, was assassinated in Beirut. Hezbollah now has accumulated so many enemies, ranging from the Israelis to any of the dozens of Sunni countries and insurgent groups opposing the intervention in Syria, that it is impossible to even guess at who was responsible for the assassination.

Talk of a Geneva peace conference continues; the refugee problem gets worse; and the threat that the insurgency will eventually destabilize several Middle Eastern countries continues.

3. China

Beijing’s oil imports in November were 5.7 million b/d, up 0.7 percent from November 2012. Its trade surplus, however, set a four-year high last month, with exports increasing by 12.7 percent and imports gaining by 5.3 percent. Shipments to the US were up by 17 percent from last year and those to Europe were up by 18.4 percent. Analysts say the new export numbers do not appear to be inflated as they have in the past. The gains were in categories that do not raise suspicions. The data suggests that China’s industrial production continues to grow and that demand for oil products could be strong next year.

Last week it was Shanghai’s turn to be engulfed in dangerous levels of pollution forcing reductions in traffic and the closing of businesses. Beijing is making a major effort to cut back on coal burning so that more than half of the new electrical generation capacity installed this year will not use coal. While a step in the right direction, this does little to reduce the 4 billion+ tons of coal the country consumes each year. If dangerous air becomes an endemic problem in China’s major cities it will soon harm foreign participation in China’s economy as nobody with a choice will risk living there.

Chevron’s $6 billion natural gas partnership with PetroChina has been slowed by disagreements over how to drill the technically difficult gas deposits. The first gas production is not expected until late in 2014, seven years after the agreement was signed.

4. Quote of the Week

The EIA/INTEK estimate of 15.4 billion barrels of recoverable oil from the Monterey shale is likely to be highly overstated. Certainly some additional oil will be recovered from the Monterey shale, but this is likely to be only modest incremental production—even using modern production techniques such as high volume hydraulic fracturing and acidization. This may help to temporarily offset California’s long-standing oil production decline, but it is not likely to create a statewide economic boom.” (12/4) — David Hughes, geologist, author of “Drilling California: A Reality Check on the Monterey Shale”

5. The Briefs

  • Operators of the Kashagan oil field in Kazakhstan are homing in on microscopic cracks in steel pipelines as they try to understand the cause of dangerous gas leaks that have forced them to halt output indefinitely. The operators fear the stoppage could extend well into next year if a technical investigation concludes that a poisonous mix of hydrogen and sulfur contained in the crude oil has done extensive damage to the pipeline system in the $40 billion project. (12/5)
  • Brazil produced an average 2.079 million b/d in October, down 0.7% from September but up 3.4 percent from October 2012. October’s output was undercut by operational troubles at a floating platform tapping oil deposits in Brazil’s pre-salt, where billions of barrels of crude oil were discovered trapped under a thick layer of salt miles below the seabed. (12/4)
  • The late President Chavez’s dream of leveraging Venezuela’s oil wealth to spread revolution across Latin America is crumbling under the weight of an economic crisis that is forcing his successor to cut back on generous foreign aid. In recent weeks, representatives of Brazil and Colombia have come to collect overdue payment for food, manufactured goods and other imports. While Venezuela has fallen behind on payments before, the latest cash crunch is more severe, and the economic outlook more uncertain, than any time in 15 years. (12/2)
  • The Chinese, investing heavily in Africa to secure its oil and other raw materials for their expanding economy, are spearheading a new era of railroad building to unlock the continent’s interior. (12/5)
  • For the oil sands, Canadian government analysts identified transportation as a major export uncertainty in the National Energy Board’s latest long-term supply and demand projections, but expect market forces to resolve the question. For now, they expect oil to move by rail now to pipeline terminals. Te NEB expects emerging tight oil production to increase through 2016 before stabilizing and declining. (12/7)
  • Canadian Natural Resources Ltd. said a 50,000-barrel-a-day oil-sands plant will cost $8.5 billion, almost 50 percent more than estimated previously, and will be pushed back to September 2017 from mid-2016. (12/5)
  • Canada’s bid to become an energy “superpower” is at risk as delays for new pipelines threaten an industry already hurt by high costs and rival production. Canada can’t get its surging crude supplies to markets in Asia where prices are higher. Decisions in the next year or so on proposed pipelines may set the tone for the future of the nation’s energy industry. (12/2)
  • It’s too soon to fully assess the Duvernay shale area in Canada but “sweet spots” are being investigated, says an analyst for energy consultancy Wood McKenzie. The Alberta Geological Survey estimates the Duvernay shale reserve area holds more than 440 trillion cubic feet of natural gas and nearly 62 billion barrels of oil. Encana Corp. plans to spend more than $500 million on exploratory drilling in the Duvernay region. (12/3)
  • The oil market is on the cusp of a new cycle, Goldman Sachs said on Friday, with demand in the United States growing at a faster pace than in emerging economies such as China and India for the first time in a decade. The immediate impact may be subtle at first – Goldman is maintaining its price forecasts for next year for both North Sea Brent crude and U.S. benchmark West Texas Intermediate at $106 and $98, respectively. (12/7)
  • The number of US rigs exploring for oil and natural gas increased by 12 this week to 1,775, with 1,397 rigs exploring for oil and 375 for gas, according to Baker Hughes. A year ago there were 1,800 active rigs. The U.S. rig count peaked at 4,530 in 1981 and bottomed at 488 in 1999. (12/7)
  • The US Gulf Coast—home to the world’s largest concentration of petroleum refineries—is suddenly awash in crude oil. So much high-quality US oil is flowing into the area that the price of crude in the region has dropped sharply in the past few weeks and is no longer in sync with global prices. In fact, some experts believe a US oil glut is coming. (12/6)
  • ConocoPhillips said it plans to spend $16.7 billion on capital projects in 2014, with the bulk of it directed toward continuing oil and gas production in North America. The budget is about $900 million higher than the plan for 2013. About 39% of the budget will be directed to development-drilling programs, mostly in plays such as the Eagle Ford and the Permian Basins in Texas, and the Bakken in North Dakota. (12/7)
  • BP is leading an industry-wide push to develop technology that can retrieve oil from formations that are so deep under the sea floor, and under such high pressure and temperature, that conventional equipment would melt or be crushed by the conditions. One BP field in the Gulf of Mexico, called Tiber, makes the Macondo field that the Deepwater Horizon rig was probing look like simple puddle of oil. It is thought to hold twenty times the amount of oil as Macondo, but at 35,000 feet below the sea floor it is about twice as deep. (12/5)
  • Oil and natural gas development in the Atlantic Ocean could create hundreds of thousands of jobs and generate $51 billion in new revenue for the government, said Erik Milito of the American Petroleum Institute. “Oil and natural gas production off our Atlantic coast is a potential gold mine.” The oil and gas potential in the region is more than half of what energy companies are now producing from the Gulf of Mexico. (12/7)
  • So far this year, 655,619 rail carloads of oil, or about 458 million barrels, were delivered by rail, a 32.4 percent increase from the same period last year, according to the American Association of Railroads. (12/7)
  • The railroad industry boom: so far this year, in North Dakota alone, 140 million barrels of oil have left on trains. Shipments of crude oil by rail are up almost 50 percent over last year — and this upward trend is expected to continue. So far this year, 60 percent of all oil produced in North Dakota left the state by rail. One economist says there aren’t enough oil tankers to fill the demand. (12/5)
  • Fracking in the US is creating another boom—in sand. Energy companies are expected to use 56.3 billion pounds of sand this year, blasting it down oil and natural gas wells to help crack rocks and allow fuel to flow out. In Wisconsin, the source of white sand perfectly suited for hydraulic fracturing, state officials now estimate more than 100 sand mines, loading, and processing facilities have received permits, up from just five sand mines and five processing plants operating in 2010. (12/3)
  • Texas produced oil at a new recent high in September—2.7 million b/d. In less than three years, Texas has more than doubled its year-on-year daily oil production, based on the September daily average figure. University of Michigan economist Mark Perry noted that oil production in Texas had increased by more than 25 percent year-on-year for 25 months in a row. (12/6)
  • In Texas, it isn’t just hurricanes and floods that can knock out oil and gas production. Wintry wind and ice can do the trick. Bitter winds that blew sleet across Texas just before Thanksgiving led to power outages, frozen equipment and icy roads throughout the Permian Basin. Some energy companies are warning that their oil output—and earnings—are being affected. (12/6)
  • Natural gas is poised to play a far greater role in the world’s energy mix, threatening to supplant oil and coal in many areas of industrial activity as well as in transportation and in the home, according to a report recently published by GE. The report anticipates global gas consumption will increase by more than a third by 2025. (12/4)
  • Ukrainian officials failed to turn up to sign a deal Wednesday that could open a natural gas supply route via Slovakia, raising concerns that Kiev was walking away from an agreement the European Union spent months brokering. The gas deal would have opened up a major gas supply route to Ukraine that could have significantly reduced Kiev’s dependence on Russian supplies. (12/6)
  • As Lebanon stands on the brink of a new spasm of sectarian bloodletting, Energy Minister Bassil says he plans to go ahead with moves to launch exploration of offshore gas fields in the eastern Mediterranean on Jan. 10. That’s when the Energy Ministry has scheduled an auction in which some 46 international oil companies will bid to exploration rights on half a dozen offshore blocks. But with Lebanon’s fractious religious sects at each other’s throats, Lebanon’s prospects of an energy bonanza seem to be slipping away. (12/6)
  • Shell is scrapping its proposed gas-to-liquids project on the U.S. Gulf Coast. The facility was to produce 140,000 b/d of oil products from “low-cost shale gas,” at a cost of $12.5 billion. “Despite ample supplies of natural gas in the area,” the company said “GTL is not a viable option for Shell in North America, at this time, due to the likely development cost of such a project, uncertainties on long-term oil and gas prices and differentials, and Shell’s strict capital discipline.” (12/7)
  • A legal battle is brewing between the oil and gas industry and Colorado cities that have voted to ban shale gas extraction, raising questions about whether they can lawfully prohibit the controversial practice of hydraulic fracturing, or fracking. The Colorado Oil and Gas Association filed a lawsuit Tuesday against the towns of Lafayette and Fort Collins, Colo., which have passed ordinances prohibiting fracking. (12/5)
  • The conversion of Bangladesh’s vehicle fleet to CNG could provide large air quality and associated health benefits to residents of the capital Dhaka, according to an analysis by a local group. (12/3)
  • The International Atomic Energy Agency has advised the operator of the damaged Fukushima Daiichi nuclear-power plant to consider discharging lightly contaminated water into the ocean, as storing radioactive water at the plant has become increasingly unsustainable. (12/5)
  • India’s energy demand will double by 2035 due to economic growth and increased population, the head of the International Energy Agency predicted. She said India will be the largest importer of coal, will be the second largest importer of oil after China and will be No. 4 in importing gas after the European Union, China and Japan. (12/5)
  • Venezuela’s second massive power outage of the year plunged much of the nation into darkness on Monday night, prompting renewed talk of sabotage from President Maduro’s government and cries of incompetence from its foes. (12/3)
  • Japan has discovered methane hydrate lying over a large area in the Sea of Japan in northwestern Japan, in addition to previously discovered areas in the Pacific Ocean, the trade ministry said. The government plans to spend the next three years trying to determine the nation’s reserves of methane hydrate – a frozen gas known as “flammable ice” – as part of its goal to achieve commercial production within six years. (12/3)
  • BP won a big victory in its battle to limit the cost of compensation for its 2010 oil spill in the Gulf of Mexico after an appeals court called for an injunction to suspend payments to businesses that had not suffered losses as a result of the disaster. (12/3)
  • Bioethanol production from bamboo in China is both technically and economically feasible, as well as cost-competitive with gasoline, according to researchers at Imperial College London. (12/2)