Peak Oil Notes – June 11

June 11, 2015

Oil prices fell on Monday after China reported a sharp drop in crude imports. They surged on Tuesday and Wednesday to a new 2015 high after the EIA reported a 6.8 million barrel decline in US crude inventories while Wall Street had only been expecting a 1.8 million barrel drop.  The EIA says US demand for gasoline also climbed by 622,000 b/d.  This was the biggest one-week decline since last July and was the 6th straight week of declining crude inventories.  The decline stemmed from near record refinery utilization rates in some parts of the country and a drop in Canadian exports to the US due to wild fires in the vicinity of the tar sands.  At the close Wednesday New York futures settled at $61.43 a barrel and London at $65.70. The price decline on Wednesday also was aided by a weaker dollar.
The debate on where oil prices are headed continues with evidence accumulating on both sides of the argument. The steep drop in Beijing’s imports; OPEC’s announcement that the cartel produced 30.98 million b/d last month – 1 million above target; and the EIA’s estimate that US production hit 9.5 million b/d last week all contributed to the assessment that there is too much oil for sale and prices still have a ways to fall.  The bullish side is being supported by the idea that US production is not going as well as the EIA has been estimating and we will soon see declining production, or at least much slower growth, in the US.
In its monthly Short-Term Energy Outlook, the EIA said that US production in May will reach 9.59 million b/d. It also says that US crude production will then fall in June and continue falling through early 2016. The government, however, is optimistic that the large backlog on unfracked wells, plus the recent price rebound, and the concentration on sweet spot drilling only will be enough to keep production from falling as much as the large drop in the rig count suggests might happen. The EIA now forecasts that US production will increase to 9.43 million b/d this year, which is 240,000 b/d higher than last month’s estimate.
The mid-west spot oil markets have nearly eliminated the $7.50 a barrel discount below WTI that Bakken drillers have been receiving for their oil. The discount is now down to 35 cents a barrel below WTI, which indicates that oil in the mid-west is in tight supply. Some of this is due to a steep decline in crude exports from the Canadian tar sands due to wildfires and the high costs of tar sands production. A number of analysts are suggesting that Bakken production is much lower than the EIA is estimating.  It will be several months before this situation is clarified; however, the April numbers for actual Bakken production will be out on Friday.
Rebels in southern Syria are on the move towards Damascus. They have already captured a major army base and are moving on an important airfield. In Iraq, the Kurds are complaining about how little they are receiving in return for their oil from Baghdad which collects and hands out the revenue. The Kurds note that they are fielding a major military force against ISIL and that foreign contractors drilling in Kurdistan are not being paid. This will lead to a collapse of oil revenue from the province unless Baghdad comes up with more money. 

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