Peak Oil Notes – July 17

After falling steadily for three weeks, New York oil futures reversed on Wednesday as US crude stocks dropped and China reported some better economic numbers. Brent oil continued to slip on Wednesday, however, closing at $105.85, the lowest close since early April. With New York rebounding to close at $101.20, the WTI/Brent spread narrowed to $4.65, the smallest since April 11^th.  Despite the increasing turmoil in the Middle East, traders seem convinced that little of this will affect oil exports in the immediate future, that Iraqi oil will continue to flow in increasing quantities, and that Libya will resume substantial exports any day now.
 
The week’s US stocks report showed refineries operating at 93.8 percent of capacity, the highest since August 2005. The surge in refining brought US crude supplies down by an unexpected large 7.5 million barrels and stocks at Cushing, Okla. down by 650,000 barrels to 20.3 million –close to the minimum that Cushing needs to operate.  Analysts had been expecting only a 2.75 million barrel drop in US crude stockpiles. US crude production rose by 78,000 b/d last week to 8.6 million b/d. Some of this increase is coming from the completion of wells that were drilled last winter but could not be fracked until spring because of the cold weather. Some analysts are concerned that the EIA is reporting production numbers that may be more optimistic than the actual case. Demand for gasoline in the US is down a bit in the last four weeks and gasoline prices have slipped to the lowest in the last four months. Diesel demand, much of which is likely going for export, remains strong.
 
US natural gas futures, which have fallen by some 70 cents per million BTU’s since mid-June, have been relatively stable this week, trading around $4.12. US natural gas production continues to increase rapidly, despite the large losses sustained by many operators who are selling their gas at prices well below the cost of production. Unseasonably cold weather across the northern US is keeping the demand for air conditioning well below normal.
 
The Iranian nuclear talks seem likely to be extended for several months beyond the self-imposed July 20^th deadline. Secretary Kerry, who has been attending the talks this week, reports tangible progress, but still some major areas of disagreement. Events are moving quickly in the Middle East these days with Iraq splitting apart and the Gaza situation spiraling ever downwards. By the time the next negotiating deadline rolls around, Tehran is likely to be faced with a new set of problems and concerns.
 
The Libyan government, such as it is, says its oil production has risen to 554,000 b/d from less than 300,000 last month. While government claims that Libya’s exports will soon be back to 50 percent of normal have had a lot do with the recent drop in oil prices, many observers have doubts.  While production may have started up at the oil fields, the lengthy shutdown of the major export terminals means it will be several weeks before they can be in condition to export as much as 500,000 b/d. In the meantime chaos continues in the country. The Tripoli International Airport was badly damaged due to fighting between militia groups over the weekends and clashes continue in other cities. The lifting of the export stoppages could easily be reversed.
 
The Iraqi government’s effort to drive the insurgents out of Tikrit has failed again with heavy casualties.  The ISSI insurgents clearly have the upper hand and it is likely to be only a matter of time before Iraqi exports are affected more seriously than they have been.