Peak oil review – Jan 27

January 27, 2014

1.  Oil and the Global Economy
The frigid weather which engulfed much of the US last week sent heating oil, natural gas, and propane prices spiraling upwards – taking crude along with them.  At week’s end, crude was trading at $96.64 after having been close to $98 earlier on Friday; NY heating oil touched $3.17 a gallon before closing at $3.14; and natural gas climbed to $5.24 per million before closing at $5.18. The surge in heating fuel prices was tempered on Friday by concerns that the world’s emerging economies, particularly that of China, are not doing as well as expected. These concerns led to drops in the equities markets as well as commodities.
The weekly stocks report showed refining down to 86.5 percent of capacity which resulted in a 1 million barrel increase in crude inventories. Refinery utilization normally drops in January as units are changed over from making heating oil to summer products. As could be expected, distillate inventories fell by 3.2 million barrels, considerably more than analysts had been expecting and are now down to 121 million which is 10 percent below this time last year. The cold snap has now lasted for another week following the period of the report so inventories will be still lower in the next few weekly reports.
With the opening of the Keystone pipeline from Cushing, Okla. to the Gulf more light sweet crude is arriving at Gulf refineries. As this oil cannot be exported, the new pipeline may be partially moving the Cushing oil glut to storage facilities along the Gulf where it will exert pressure on US crude prices. Many US refineries along the coast were designed to use heavier grades of imported crudes efficiently — not the lighter crudes coming from domestic shale.
Last week’s increase in natural gas prices brought them above $5 per million for the first time since 2010. The cold weather has quickly reduced the glut in natural gas stocks which now stand 13 percent below the five-year average for the week. About half of US households heat with natural gas. A slight warming is expected early this week which is forecast to be followed by another Arctic Blast that will keep temperatures low for at least another week or two.
A propane shortage is developing across the upper Midwest where many rural homes use the fuel for heating – some 5.5 million US homes are heated with propane.  Although US propane production has increased by 27 percent in the last five years to 1.3 million b/d, unusually large quantities of propane were used to dry last fall’s grain crops. Moreover, US exports of LPG have doubled in recent years, hitting 400,000 b/d in October. Shortages have developed in many regions. In some cases retailers are only delivering 100 gallons at a time to prevent customers from filling large tanks while others are left without heat. In some areas the cost of propane has doubled to well over $4 a gallon. Although prices subsided a bit last week, some are using the shortages as an example of why the US should not be exporting crude.
In addition to increasing the demand for heating fuel, the frigid weather is slowing natural gas and shale oil production. The EIA reported that US crude output was down by 100,000 b/d the week before last. Output is likely to be still lower in next week’s report as the cold weather not only affected North Dakota, it also brought unusual ice and freezing rain down to the Texas oilfields.
The EIA’s monthly Oil Market Report forecasts that global oil demand increased by 135,000 b/d in the 4th quarter of 2013. Global oil consumption is estimated to have increased by 1.2 million b/d in 2013 and is expected to increase by 1.3 million b/d in 2014. The Agency is also concerned about the rapid increase in US crude production which increased by 15 percent last year. The EIA says that the US will soon have all the light sweet crude that its refineries can handle and if the ban on exporting crude continues production of shale oil will have to slow as there will be no market or storage for the additional millions of barrels per day that the shale fields are expected to produce.
2.  The Middle East & North Africa
Iran:  President Rouhani is on a charm offensive across Europe trying to convince foreign companies that the nuclear standoff is nearly over and that they should begin investing in Iran. The US is warning that only a small part of the sanctions have been lifted and there are still months of negotiating to go before there is any possibility of normalizing relations between Tehran and the world. The US says Tehran has been exaggerating the size of its oil exports by claiming they are now 1.5 million b/d down from a pre sanction 2.5 million. The US and the IEA say the true size of Iran’s current exports is closer to 1 million b/d.
Although the first phase of the agreement with Iran seems to be holding, many are skeptical that the numerous stumbling blocks ahead can be overcome. Iran’s wholehearted support for the Assad regime is just one example of the many complicated problems to be overcome.
Syria: The peace talks in Switzerland are underway. The first task is to get the agreement of the Assad government to allow humanitarian supplies to be delivered to areas it has surrounded and where it is attempting to starve out the rebel forces and their civilian supporters. If nothing else the government is at least talking with representatives of some of the rebel groups fighting the government. There is still a long ways to go in this uprising.
Iraq: Problems continue to mount in Baghdad. In addition to the nearly continuous bombings and attacks on security forces, and the occupation of parts of Anbar province by al Qaeda, a revolt in brewing among the provincial governors where most of Iraq’s oil is being produced. The governor of Basra is threatening to file suits, drum up dissent, and even stop oil production over Baghdad’s refusal in increase revenue sharing with the provincial governments. Baghdad has established two new oil companies in provinces that may soon be producing increasing quantities of oil. These new companies are intended to give local officials some degree of autonomy in matters of oil production.
The struggle between Iraqi Kurdistan and Baghdad over Erbil’s direct export of local oil production into Turkey for sale on the world markets continues. As Baghdad does not have the military strength to force a solution, it has cut off all payments to Kurdistan, black listed Turkish companies and filed law suits. All this is likely to make the Kurds more defiant and to redouble efforts to gain independence from Baghdad. There is already concern about what the loss of revenues from the Kurdistan oil fields will do to Baghdad’s budget. The IEA reported last week that Iraq’s oil exports fell in 2013 from the previous year. Some of this is due to reconstruction of export facilities at Basra, but a lot is due to the Kurdish situation and frequent attacks on the northern export pipeline.
Libya: It was a relatively quiet week, although tribal fighting continues in the southern parts of the country. Libyan oil production was reported to be holding at about 580,000 b/d and there were no new threats by local tribes to turn off the taps again.
Four Egyptian diplomats were kidnapped by Libyan insurgents demanding that Egypt return a Libyan sheik they are holding. In response, Cairo withdrew its diplomatic missions from the country.  The anarchy across the country continues to mount, and it seems only a matter of time before oil exports take another dive.
Egypt: The security situation deteriorated in Egypt last week as supporters of the Islamist movement intensified attacks and protests. At least nine were killed and 300 arrested during clashes between security forces and pro- and anti-government demonstrators. A wave of bombings has begun targeting police and security installations. The immediate concern is that the insurgents are going to find a way to block the Suez canal/pipeline thereby upsetting oil flows from the Middle East to Europe and the North Atlantic.
Natural Gas: Moscow is injecting itself into the Mediterranean natural gas game by offering to develop Syria’s and Gaza’s shares of the newly discovered natural gas fields. In December, Moscow signed a 25-year deal with Syria that gives Gazprom exclusive rights to exploit 850 sq. miles of Syrian waters. Palestinian Authority President Abbas is in Moscow seeking a $1 billion deal for Russia to develop a natural gas field off the Gaza strip.  The Gaza field was discovered by a British company 14 years ago but was never exploited because of the conflict with Israel. Given that Gaza is now controlled by Hamas and not the Palestinian Authority, it is problematic that anything will come of this initiative.
3.  China
New GDP figures show that China’s economic growth last year came in at 7.7 percent just missing a 14-year low.  Many analysts are saying the China’s economy will continue to slow further this year in the midst of major economic reforms. All this raises questions as to how long Beijing will be able to keep its economy growing at spectacular rates and increasing oil imports.
Beijing is continuing efforts to diversify its sources of oil to reduce dependence on the volatile Middle East. Imports from Kazakhstan increased 14 percent last year to 140,000 b/d. Imports of Russian crude from Siberia are also on the rise. The Chinese are also piping in more natural gas which increased by 20 percent in December 2013 over December 2012.  Increased use of natural gas is one of the few “quick fixes” China has to improve air quality while maintaining rapid economic growth.
Although China has not had an air quality disaster recently, complaints are increasing about pollution from other parts of the country blowing into the country’s financial capital, Shanghai and other southern cities. Among the suggested solutions is issuing 23 million protective masks to Shanghai’s inhabitants. A new study suggests that polluted air from China is starting to make its way to the west coast of the US. While the shift in manufacturing from the US to China in the last 30 years has led to cleaner air in the US’s eastern cities, China is creating more pollution along the west coast.
4.  Quote of the Week

  • “I’m a squeaky wheel within the system.  I’m in Davos [at the World Economic Forum] to put the counter-arguments to Big Energy, and I’ll tell them: ‘You’re in grave danger of repeating the mistakes of the financial services industry in pushing a hyped narrative.’” This refers to the way in which banking leaders had “their particular comforting narrative catastrophically wrong, until the proof came along in the shape of the financial crash.”

              — Jeremy Leggett, CEO Solar Century, co-convenor of TransAtlantic Energy Security Dialogue
 5.  The Briefs

  • China National Petroleum and Ecuador have reached an agreement regarding cooperation in a plan to construct a long-delayed refinery on Ecuador’s Pacific Coast. (1/25)
  • Latin American nations are poised to accelerate imports of US refined-oil products after failing to build refineries to meet demand from a growing middle class. Freight traders booked tankers to send 5.4 percent more fuels than in 2012. Volumes may rise again because demand is expanding and no new regional refining capacity will be added in the short term. (1/24)
  •  “The theory of peak oil has peaked,” BP chief executive Bob Dudley said as he unveiled the company’s new energy outlook to 2035. BP has claimed the concept of global energy supply peaking amid rapidly rising consumption is no longer valid as new fuels emerge and energy demand growth slows. (1/24)
  • Japan is burning more direct-burn crude oil for power generation since late December as a cold spell across the country has increased appetite for loadings into March in the absence of nuclear output. (1/23)
  • An oil tanker that has disappeared off the coast of West Africa may have been hijacked by pirates, potentially marking the most southerly such attack to date in increasingly dangerous waters off African oil hubs Nigeria and Angola. (1/23)
  • The US drilling rig count was unchanged from a week ago with 1,777 rigs working during the week ended Jan. 24, Baker Hughes Inc. reported. Oil rigs increased 8 units to 1,416 while gas rigs decreased 9 units to 356. (1/25)
  • Alaskan coastal drilling by oil companies including ConocoPhillips and Royal Dutch Shell may be further delayed after a federal appeals court ruled the government acted illegally in opening almost 30 million acres on the continental shelf to energy exploration. (1/23)
  • Offshore Alaska, a court decision regarding oil and gas leases off the coast could hinder oil giant Shell’s plans to drill in the Chukchi Sea. Shell has devoted about $5 billion and more than eight years of work for its Arctic oil exploration off Alaska’s coast in the Chukchi and Beaufort seas. (1/25)
  • Hess Corp. said it plans to spend nearly half of its 2014 exploration and production funds of $5.8 billion on shale oil reserves, mostly in North Dakota. As a result of lower well costs and decreased investments in infrastructure projects they plan to operate 17 rigs versus 14 last year and to bring 225 new operated wells online in 2014 compared to 168 in 2013. (1/25)
  • California’s Monterey Shale formation is unlikely to be another North Dakota, despite large in-place resources, for three reasons: the geology is complex, the resource claims may be overstated, and the drought will ramp up ongoing concerns about water usage in fracking.  (1/20)
  • California formally declared a drought emergency due to a lack of winter rainfall and water reserves at only 20 percent of normal levels. This is the third year of dry conditions, and last year was the driest on record.  Environmental groups are calling for a moratorium on water-intensive fracking operations.  (1/21)
  • Koch Pipeline Co. called off plans to build a 250,000-barrel-a-day crude line to Illinois from North Dakota’s Bakken formation.  No reason was given for the decision. (1/22)
  • U.S. legislators are calling for a closer look at the regulations governing the rail sector following a series of accidents involving the transportation of crude oil by rail. A series of high profile accidents in North America involving crude oil transportation by rail won’t deter the industry, energy analysts say.  (1/23)
  • A government warning about the dangers of increased use of trains to transport crude oil—a potential for “a major loss of life”—is giving a boost to supporters of the long-delayed Keystone XL pipeline. US and Canadian accident investigators urged their governments Thursday to impose new safety rules on so-called oil trains. (1/25)
  • Australian company Icon Energy said it encountered significant volumes of natural gas in a shale basin in the state of Queensland. The region, it said, could be a “world class” shale reserve area. The well is the sixth for the company in the region. (1/25)
  • Britain scored a victory when the European Commission shied away from earlier plans to put forward legislation on the exploration of shale gas. Britain and Poland are keen to tap into potential shale gas reserves but public opinion in Europe is largely set against the technique, amid concerns over its impact on the quality of water, soil and air. (1/23)
  • Controlled charging of plug-in hybrid electric vehicles reduces the costs of integrating the vehicles into an electricity system by 54%-73%, depending on the scenario, according to a new study by researchers at Carnegie Mellon University. (1/25)
  • The Middle East, spearheaded by the oil-rich Persian Gulf monarchies, could spend up to $50 billion on developing solar power over the next seven years, says the Dubai-based Middle East Solar Industry Association. It estimates the region will install 12,000-15,000 megawatts of solar power by 2020, with another 22,000-25,000 gigawatts from other renewable energy sources such as wind and hydro-power. (1/23)
  • The European Union executive stuck to its guns in proposing far-reaching targets to combat climate change, defying expectations that it would ease off in the face of intense lobbying from heavy industry and even some member states. The European Commission said the 28-member bloc should cut carbon emissions by 40% by 2030, compared with 1990 levels. (1/23)
  • Venezuelans reacted angrily to international carriers’ refusal to sell tickets after the government devalued the bolivar for flights abroad. Several airlines halted sales as the higher exchange rate took effect, adding to uncertainty as carriers try to collect $3.3 billion they say they’re owed by the socialist government. (1/25
  • Venezuelan bonds fell hard a day after the government announced a partial currency devaluation seen largely as insufficient to resolve the oil-rich country’s growing economic challenges. Venezuela currently suffers from an inflation rate that is already at 56%. (1/24)
  • Venezuela spends more than $12 billion a year subsidizing the price of gasoline—which runs less than a nickel a gallon.  But with annual inflation topping 50 percent and the government burning through hard-currency reserves, the gravy train is coming off the rails. Soon, a projected price hike is likely to push gas closer to 17 cents a gallon, at unofficial exchange rates. (1/21)

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: Chinese economy, Middle East conflicts, natural gas prices, oil prices