Peak Oil Notes – Oct 1

Despite several important developments during the last few days which should affect the oil markets, prices have remained largely unchanged with New York futures closing at $45.09 and London at $48.37. London prices were down 10 percent and and New York down 8 percent.  The weekly stocks report showed US crude inventories up by 4 million barrels and gasoline up by more than 3 million. The stocks at Cushing, Okla. which always has an outsized influence on the markets were down by 1 million barrels which cancelled out the impact of the crude and gasoline stocks increases. The increase in US crude stocks likely signals the beginning of the traditional fall build-up when refineries close for maintenance.  Last week US refiners process some 240,000 b/d less than during the previous week. US crude imports were also up by 378,000 b/d last week over the week before contributing to the build.
 
The news that Russia has started to bomb anti-Assad forces (probably not ISIL, however) in Syria unsettled the London market on Wednesday which closed slightly higher. A hurricane which could morph into a “super-storm” is headed for the US’s east coast and has the potential to interrupt coastal oil facilities later this week.
 
In the weekly stocks report, the EIA said that US oil production was down 0.4 percent last week to 9.1 million b/d.  In a separate release, the Administration said that production in 2016 is expected to be just below 9 million b/d. This was the second time in two months that the EIA has cut its production forecast by 400,000 b/d.
 
There is now general agreement that US oil production peaked in April and has been falling since, but analysts are still arguing over how long the decline will last and how low oil prices will go. US oil production fell by about 500,000 b/d between April and August according the the most recent EIA estimate. It is expected to drop by another 500,000 b/d by August 2016 and then start rising again for an undefined reason. Iran is likely to start increasing its exports, perhaps by as much as 1 million b/d, next year. Chinese economic growth and how much it must contract before imports fall significantly remains a major market concern. If Beijing’s GDP growth falls to the 2-4 percent range which, some think is possible, even the optimists believe oil imports will fall.
 
The Executive Director of the IEA, Fatih Birol told an Austrian newspaper that he expects oil prices to remain around $45 a barrel “for a long time.” The Agency later called this forecast a “misquote.”
 
Russia’s entrance into the Syrian civil war on the side of the Assad government opens yet another new chapter in modern Middle Eastern history, with few able to predict where this is going.  Moscow says it will not introduce ground troops into the conflict but will only bomb “terrorist forces” – which means all of the groups trying to over through the Assad government. As the US and its allies have been bombing ISIL targets for a year and have driven nearly all ISIL and extremist forces to disburse their military assets among civilian population, the Russians will likely be bombing the mainly non-ISIL/Extremist groups that have been pressuring Assad’s forces.  These forces have only been targeted by Assad’s air force and so present much more lucrative and vulnerable targets for the Russians. Moscow is likely to take less care than western air forces to avoid hitting civilians, so the casualties and refugee flow will likely climb.
 
The problem is that some of these insurgent groups are being supported by the Gulf Arabs, Turkey, and even the US, which will not be happy seeing their “freedom fighters” coming under a rain of Russian bombs to save the Assad’s government from being overrun.  This situation has developed into a quagmire with little precedent in recent history.  It is much to early to say how this will impact oil production, refugee flows, the stability of Iraq, and numerous other issues.