Editors:   Tom Whipple, Steve Andrews

Quote of the Week

[Europeans on Iran and the US sanctions] “They have sovereignty and self-respect at issue here. They’re trying to say we’re going to do Iran trade; we’re going save the nuclear deal and provide a mechanism; and we don’t appreciate being unilaterally dictated to.”-Sanjay Mullick, a sanctions lawyer at Kirkland & Ellis LLP.

Graphic of the Week

Global Crude plus Condensate Production

Graphic from ShaleProfile

1.  Oil and the Global Economy

The storm in the Gulf of Mexico and geopolitical tensions in the Middle East pushed New York oil futures above $60 a barrel last week, with NY closing at $60.31 and Brent at $66.86.  Nearly 70 percent or 1.3 million b/d of the Gulf’s oil production was shut in as oil producers evacuated 283 platforms in the northern Gulf.  Natural gas production from the Gulf was cut by 56 percent.  The slow-moving storm is producing unprecedented flooding, and it may be the middle of the week before the extent of the damage to onshore oil and petrochemical facilities is known.

The IEA issued its monthly report last week forecasting that surging US oil production will outpace sluggish global demand and lead to a significant increase in the world crude inventory during the next nine months. OPEC also predicted that the world oil glut is forming despite the cartel’s efforts to restrain production.  “Market tightness is not an issue for the time being, and any rebalancing seems to have moved further into the future,” the IEA said.  The demand for OPEC crude oil in early 2020 could fall to only 28 million b/d, with non-OPEC expansion in 2020 rising by 2.1 million b/d — a full 2 million b/d of which is expected to come from the United States.  At current OPEC output levels of 30 million b/d, the IEA predicted that global oil stocks could rise by 136 million barrels by the end of the first quarter of 2020.

The Agency expects that the demand for oil will not decline in the next two years as an improvement in the China-US trade situation and continued growth in the US economy offsets deteriorating trade and manufacturing elsewhere.  In recent years, the IEA has been highly optimistic about the prospects for the US shale oil industry.  This optimism is not without cause as the industry has achieved remarkable gains in production during the last three years.  Whether the Agency’s optimism is justified at a time when there are increasing signs of slowing production growth is a crucial question.

The US’s Energy Information Administration is not as optimistic as the IEA, saying on Tuesday that it expects global oil consumption to average 101 million b/d in 2019, up 1.1 million b/d from 2018, an indicator that demand is growing at a slower rate than previously expected.  That 1.1 million b/d in growth is 200,000 b/d lower than what EIA forecast in June and marked the sixth straight month that the EIA lowered its forecast for global oil consumption in 2019.

The OPEC Production Cut: OPEC’s oil production dropped by another 68,000 b/d to 29.83 million in June, as output from Iran and Libya—exempt from the production cut pact—and other members offset substantial increases in Saudi Arabia and Nigeria.  The most significant drop in production was Iran’s, whose crude oil production fell by 142,000 b/d to 2.225 million, due to the US sanctions.  Iran’s oil output is now more than a million b/d down from its 2018 average of 3.553 million to OPEC’s secondary sources. Tehran has stopped supplying production figures directly to OPEC.

The OPEC+ agreement to extend oil production cuts until the end of the first quarter of 2020 will lower oil inventories, help stabilize the market and address price volatility, Iraqi Oil Minister Thamer Ghadhban said on Wednesday.  Asked about OPEC’s position on prices, Ghadhban noted that the general view is that $70 per barrel or higher was acceptable, adding that the producer group is seeking prices that are fair to consumers and producers alike.

US Shale Oil Production: Total US crude output increased by 246,000 b/d in April, the latest month for which trustworthy data is available, and the EIA expects output to grow by another 70,000 b/d in July, with the Permian alone adding 55,000 b/d.  However, the rate of growth is slowing.  In April, production was up 1.6 million b/d compared to the same month in 2018.  This is a massive increase, but it is down sharply from the nearly 2.1 million b/d year-on-year increase seen in August 2018, which looks set to be the peak in terms of the pace of growth.

Graphic from Oilprice.com

Currently, none of the organizations and analysts watching the shale oil industry is talking about a decline in US shale oil production, but the rate of growth clearly is slowing as the rig count drops, and Wall Street turns its back on an unprofitable industry.  While many are saying that future growth of the global oil industry is tied to the growth of production from the Permian Basin, no one has been willing to connect the dots and say that a decline of Permian output would lead to a shrinking global economy and all that would imply.

Despite a steady stream of stories in the financial press discussing the woes of individual shale oil production companies that are certain to fail due to massive debt and unprofitability, there is a blind eye to what this means.  Some assume that the increasing presence of the large oil companies in the shale oil business will turn the industry around and lead to decades of profitable oil production.  The profitability of large oil companies producing shale oil remains to be seen.

2.  The Middle East & North Africa

Iran: The US sanctions are crippling the Iranian economy and its main export, oil. The fourth quarter of Iran’s calendar year—December 2018 through March 2019—saw the inflation rate surging to 26.9 percent and an unemployment rate at 12.1 percent. After March, Iran’s inflation climbed further and stood at 37.6 percent in June, according to the National Council of Resistance of Iran.  The decision to challenge the United States by boosting its uranium enrichment beyond limits in its 2015 nuclear deal has deepened fears among Iranians that their country will remain in crisis mode for the foreseeable future.  On Wednesday, the US accused Iran of “nuclear extortion” and threatened further sanctions against Tehran, although it is difficult to see what is left to sanction.

Britain’s seizure of an Iranian tanker passing through Gibraltar waters on the way to Syria has added a new dimension to the confrontation.  Last week Iranian gunboats attempted to retaliate by trying to stop a British tanker passing through the Straits of Hormuz.  The small Iranian boats were driven off by a British warship.  The situation in the region is deteriorating as the confrontation grows.  Tankers are shunning the port of Fujairah in the UAE, the main refueling hub of the Middle East, following the two attacks involving oil tankers in the area in the past six weeks.  Insurance rates for tankers going through the Strait of Hormuz have skyrocketed tenfold in the two months since the first attacks.

Washington is still attempting to step up the pressure on Tehran.  The US views Chinese imports as weakening the ‘maximum pressure’ on Iran.  As China is believed to be importing some 150,000-200,000 b/d of Iranian crude, the US will sanction China if it continues to import Iranian oil in violation of American sanctions.  A State Department spokeswoman said last week, “We’re going to zero [exports of Iranian crude] and … countries that don’t abide by US sanctions will face repercussions.”

Iraq:  Baghdad, naturally, is concerned that any disruption in oil exports flowing through the Strait of Hormuz will be a disaster for its economy as oil provides the country with 89 percent of its revenue.  With few options available, Iraq’s cabinet approved a plan to build a pipeline to send the output of oil fields in Rumaila to Aqaba in Jordan.  The 1 million b/d pipeline has been under consideration for years but finding financing has been a problem.  Rumaila is located in southern Iraq, which means the pipeline would need to pass through several Iraqi provinces to reach Jordan and security is still a concern for investors.  Years ago, Iraq had a pipeline running north to Turkey’s port of Ceyhan, but insurgents blew it up so frequently Baghdad abandoned it.

Saudi Arabia:  Oil production will remain below 10 million b/d through August and exports will stay under 7 million b/d to avoid excess stock buildup. The Saudis, which are pumping below its 10.31 million b/d quota under the OPEC+ agreement, expect the positive outcome in the US-China trade talks at G20 will help to boost demand in the second half of this year.

Saudi Aramco awarded 34 contracts with a total value of $18 billion for engineering, procurement, and construction projects at its Marjan and Berri oilfields.  The company plans to boost production capacity at the two fields by 550,000 b/d and 2.5 billion standard cubic feet a day of gas.  The company’s maximum sustained oil output capacity is currently 12 million b/d.

Two weeks ago, the Saudis announced that they will issue their first Euro-denominated bonds, following the recent bond issue from Saudi Aramco.  At around the same time, Crown Prince Mohammed bin Salman said that the long-delayed initial public offering of 5 percent of Saudi Aramco may occur as early as next year.  The prestige of the Crown Prince is wrapped up in the Aramco IPO even though many advisors believe that the government would be better off issuing more Aramco bonds rather than selling equity in the company.

3.  China

The United States and China are relaunching trade talks this week after a two-month hiatus.  However, a year after the trade war began there is little sign their differences have narrowed.  After meeting with Chinese President Xi Jinping in Japan in late June, US President Donald Trump agreed to suspend a new round of tariffs on $300 billion worth of imported Chinese consumer goods while the two sides resumed negotiations.  Trump said that China would restart large purchases of US agricultural commodities, and Washington would ease some export restrictions on Chinese telecom equipment giant Huawei Technologies.  The course of these talks likely remains one of the most critical factors in the demand for oil and oil prices during the next few years.

China’s refiners likely will cut their output in the third quarter after supply from new refineries increased an already-sizeable glut.  Private refiner Hengli Petrochemical ramped up its 400,000-b/d plant in northeast China to full capacity in May, while Zhejiang Petrochemical began trial runs at a similar-sized refinery on the east coast.  In the wake of a wave of fresh supply and amid slowing local demand for fuels, refiners are cutting their crude processing.  A decline in the pace of refining probably would result in lower Chinese crude imports.

China set a crude oil import record in April and continues to import growing volumes of crude oil this year. Beijing’s imports are an estimated two-thirds of global oil demand growth so far in 2019.  However, actual Chinese oil consumption patterns lately suggest that the U.S.-China trade war has hit China’s industrial production and that nearly half of the rise in crude imports have gone into storage so far this year.  China’s crude oil imports suggest that first-half imports jumped by 8.8 percent from the same period last year, or by around 800,000 b/d, according to estimates from Reuters.  Imports and domestic production, minus refinery runs, suggests that between January and May, China put 1.21 million b/d into either commercial or strategic storage, compared to 850,000 b/d put into storage in the same period last year,

Sales of passenger cars in China fell 14 percent in the first half of the year compared with 2018, putting automakers on track for a historic second year of sales declines.  China’s car market shrank for the first time in almost three decades in 2018 due to receding consumer confidence and cuts to government subsidies.

4. Russia

Russian oil production fell close to a three-year low in early July, as a row between Russian oil pipeline monopoly Transneft and the country’s biggest producer Rosneft undermined output.  Transneft curbed oil intake from Yuganskneftegaz, Rosneft’s principal upstream unit, the oil producer said, hurting production that has already been depressed by the oil contamination crisis.  Rosneft confirmed intake limits first reported by Reuters.  Transneft also confirmed to local media it had capped the amount of oil received from Yuganskneftegaz.  Transneft said it put the restrictions in place after Rosneft sent oil to the pipeline network without clearly stating the destination for 3.5 million tons of crude.

Transneft and Rosneft have been at loggerheads over efforts to resolve the problem of contaminated oil found in April in the Druzhba export pipeline to Europe.  Supplies have only partially resumed since then, after weeks of disruption.  Transneft criticized Rosneft on Monday over its handling of the tainted oil issue, saying the oil producer had dragged its feet over setting up quality controls for its oil and had made unsubstantiated claims from the pipeline firm.  Transneft transports 83% of Russian oil via its network, while Rosneft accounts for over 40 percent of Russian output.

Russia’s second-largest oil producer, Lukoil, has restored its oil supplies to customers after the contamination of the Druzhba oil pipeline disrupted Russian crude supply to the west for weeks in the spring.  Lukoil shipped its oil through other export channels, including by sea, “which made it possible to avoid negative consequences of breaking export contracts.”

5. Nigeria

In recent months, Nigeria increased its oil production to 2.3 million b/d again as opposed to 1.6 million b/d it was producing three years ago when insurgents were damaging pipelines and production facilities across the Niger Delta.  However, Shell Nigeria says security remains a challenge due to the theft of crude oil and vandalism of oil and gas facilities.  Illegal activities result in the loss of some 11,000 barrels of crude oil each day.  Third party interference caused close to 90 percent of the larger spills.  According to a study by the Nigeria Natural Resource Charter, Nigeria loses between $7 billion and $12 billion to crude oil theft annually.  This amounts to much more than ten times what Nigeria spends on health.

The price of gasoline, N145 per liter in Nigeria, is the lowest in the West Africa sub-region, where the average cost is N350 per liter.  This “cheap gas” policy is leading to more smuggling and insufficient revenue for the National Petroleum Corp.

6. Venezuela

More trouble hit Venezuela as an electricity blackout on July 7 halted operations at the 635,000-b/d Amuay and the 305,000 b/d Cardon refineries.  The two refineries account for over 70 percent of Venezuela’s refining capacity.  The facilities were expected to come back online as soon as July 10, but lingering damage to power plants and refineries could hamper a full restoration of power.

Venezuela’s oil production has been in decline for years, but plunged by 142,000 b/d in February, and 289,000 b/d in March, as sanctions scared away buyers.  Venezuelan production averaged 1.354 million barrels per day in 2018, but that figure fell to just 732,000 b/d in March of this year.  Output has held up surprisingly well since then, stabilizing at lower post-sanctions levels.  According to S&P Global Platts, Venezuela’s production stood at about 760,000 b/d in June.

In January, the US government tightened sanctions on Venezuela but issued a series of waivers to oil companies operating in joint ventures with PDVSA in Venezuela.  The logic, in addition to shielding American companies from sanctions, was to keep the oil sector alive long enough that it could provide an economic foundation for the new government under Juan Guaidó.  But the regime change effort has stalled.

The waivers expire later this month, and the US government is considering letting them expire as a way to further tighten the fiscal noose around the Venezuelan government.  That could affect operations for Chevron, Halliburton, Schlumberger, Baker Hughes, and Weatherford International.  If the Trump administration follows through, the companies would have 60 to 90 days to wind down their operations.

7.  The Briefs(selections from the press – date of article in Peak Oil News is in parentheses – see more here: news.peak-oil.org)

UK not vulnerable: Iran’s alleged attempt to disrupt the passage of a UK crude tanker through the Persian Gulf has added to fears in oil markets, boosted prices and raised insurance costs for shippers.  But for the UK itself oil is not the issue or a particular vulnerability. The country imports hardly any crude from the Middle East to the point where it spent more on olive oil imports last year than it did on petroleum from the Gulf. (7/12)

European oil problem: Water levels along the Rhine river, a key waterway for transporting commodities and other products from coastal areas to inland locations in France, Germany and Switzerland, fell to their lowest since May 21.  Levels at Kaub, Germany have been steadily declining since late June. Oil barge brokers said the low water levels meant barges were leaving the Amsterdam-Rotterdam-Antwerp refining and storage hub to inland locations not fully laden. Water levels along the river hit a record low in October, which led to oil product shortages in Germany and Switzerland. (7/13)

Pirates hurt Nigeria: Despite Nigeria’s effort to curb the menace of pirate attacks on vessels particularly in the Gulf of Guinea, Nigeria has continued to lead other countries of the world that are bedeviled by the negative impact of pirates. In the report covering January – June 2019, Nigeria led the table of pirate attacks with 21 recorded incidents between January and June, as against 31 for the period of 2018, thereby beating Indonesia which recorded 11, Venezuela 6 attacks and Peru with 4 attacks in six months. (7/10)

Eastern Canada is vulnerable to any shutoff of two major pipelines from the US north.  Michigan governor Gretchen Whitmer has vowed to shut down Line 5; her Attorney General has launched a lawsuit to that end. Operated by Enbridge, Line 5 has a capacity of 540,000 b/d of crude oil and natural gas liquids. It’s a vital source of supply for the Sarnia refinery complex that satiates Central Canada’s energy needs. (7/12)

The US oil rig count fell by four to 784 while active gas rigs also declined by two to 172, according to GE’s Baker Hughes.  The combined oil and gas rig count is now 958 for the week, with oil seeing a 79-rig decrease year on year and gas rigs down 17 since this time last year. The combined oil and gas rig count is down 96 year on year. More than half the total US oil rigs are in the Permian basin in West Texas and eastern New Mexico, where active units decreased by six this week to 437, the lowest since March 2018. (7/13)

Permian pause: Despite the bustling shale drilling activity in the Permian, it led all major basins in losses this week, dropping six rigs. This brings the Permian’s active number of rigs to 437. However, the Permian still accounts for almost half of the U.S.’ total number of active rigs. (7/13)

Diesel demand hiccup: A disappointing planting season due to massive flooding in the US Midwest this spring is expected to have spillover effects on diesel demand during harvest season, analysts and traders said. Heavy storms that lingered over the Midwest left millions of acres unseeded and put crops that were planted late at a greater risk for damage from severe weather during the growing season, which is expected to reduce overall harvested acres in the fall. (7/11)

Alaska’s governor won a showdown on Wednesday with lawmakers trying to reverse his bid to slash spending on higher education by 40%, but opponents vowed to keep fighting the unprecedented cut, which university officials have warned would wreak havoc. Republican Mike Dunleavy, in his first year as governor, wants deep cuts in education and other programs to help pay for his chief campaign promise – a sharp increase in the annual oil revenue dividend Alaska pays to each resident. (7/11)

Natural gas bottlenecks: America is awash in natural gas. Yet in parts of the country there isn’t any extra to burn. Earlier this year, two utilities that service the New York City area stopped accepting new natural-gas customers in two boroughs and several suburbs. Citing jammed supply lines running into the city on the coldest winter days, they said they couldn’t guarantee they’d be able to deliver gas to additional furnaces. (7/8)

Demand for US thermal coal will “erode significantly” between 2020 and 2030 as total use for US power generation could fall to as little as 11% based on scheduled and likely retirements, Moody’s Investors Service wrote in a report.  Mines in the Powder River Basin are expected to be the hardest hit as thermal coal generation declines. (7/11)

Solar vs. air pollution: Cleaning up China’s hazy skies would increase electricity generation from the country’s vast array of solar panels by 13 per cent and provide billions of dollars of extra revenue. China has more installed solar power capacity than any other country, at 170 gigawatts at the end of 2018. But it also has one of the world’s worst air pollution problems. Now we know there could be a big economic benefit to the action too, as clearer skies boost the power-generating potential of solar panels. (7/10)

EU renewables winning share: Ever since 2013, the installation of new renewable energy capacity has outstripped all other major energy generating sources combined, coal, oil, gas and nuclear. There are impressive figures for all renewables but the growth and fall in costs of solar power has stunned even seasoned industry observers. (7/12)

Nuclear booster: The US plans to extend the lifespans of existing nuclear reactors and support new technologies as it seeks to revive an industry seen as crucial to its energy security. A US Deputy Secretary said that both technologies were crucial for reducing carbon emissions and boosting energy security. The US nuclear industry has been in the doldrums for years because of competition from cheap natural gas and falling wind and solar power costs. (7/12)

Japan’s nuclear issue: The most severe challenge facing policy-makers and the nuclear industry in Japan is the loss of public confidence in this type of energy. For instance, the 2015 Japan Atomic Energy Relations Organization survey found that 47.9 percent of respondents want nuclear power abolished gradually. 14.8 percent think it should be halted immediately.  Only 10.1 percent said that the use of atomic energy should be maintained, and 1.7 percent said it should increase. (7/12)

India’s nuclear issue: India continues to hold technical and commercial discussions with Westinghouse for arriving at a project proposal for nuclear reactors in the state of Andhra Pradesh. India and Westinghouse have been negotiating the US supply of nuclear reactors for more than a decade, and earlier this year, India and the US committed to building six nuclear power plants in India as part of strengthening their civil nuclear cooperation and security. (7/11)

Rare earths scramble: The Pentagon is assessing the United States’ rare earths capability in a race to secure stable supplies of the specialized material amid the trade conflict with China — which controls the rare earths industry. The push comes weeks after China threatened to curb exports to the US of rare earths, a group of 17 minerals used in building fighter jets, tanks and a range of consumer electronics. (7/13)

Sales of passenger cars in China fell 14 percent in the first half of the year compared with 2018, putting automakers in the world’s largest market on track for a historic second year of sales declines.  China’s car market shrank for the first time in almost three decades in 2018 due to receding consumer confidence and cuts to government subsidies. (7/10)

EU driverless cars: A handful of European startups are developing driverless cars to navigate the clogged, chaotic, rain-swept roads of European cities. Startups such as Oxbotica, FiveAI and Wayve that are testing cars in Britain say the old continent is a unique proposition with quirks and challenges that tech giant Alphabet’s Waymo, Uber, Aurora and others have yet to crack. (7/11)

UK vehicle test: Three months since the introduction of the Ultra-Low Emissions Zone in London, results of a year-long trial in the capital suggest that plug-in hybrid electric commercial vehicles could present the most practical, readily available option for businesses trying to meet clean-air targets in cities. (7/9)

Vehicle fatality increase: The arrival of ride hailing is associated with an increase of approximately 3 percent in the number of motor vehicle fatalities and fatal accidents, according to research from the University of Chicago Booth School of Business and Rice University. The researchers used the staggered roll-out dates from Uber and Lyft to review the eight quarters before and after ride hailing adoption in large US cities from 2001 to 2016—analyzing traffic volume, transportation choices and accidents to arrive at their conclusion. (7/9)

EV charging stations: As of May 2019, there were more than 68,800 Level 2 and DC fast charging units throughout the US.  Of that total, 16 percent, or approximately 10,860 units, were DC fast chargers that make long-distance travel more practical for electric vehicles. A DC fast charger adds 60 to 80 miles of range per 20 minutes of charging, while a Level 2 charger adds 10 to 20 miles of range per hour of charging. California has the most EV charging units of any state at 22,620, which represents about a third of the nationwide total. (7/9)

VW pushes EV partnerships: Volkswagen will create joint ventures and help finance battery production to persuade skeptical cell suppliers to back its aggressive push for mass producing electric vehicles.  VW has said it will buy 50 billion euros ($56.57 billion) worth of battery cells and has identified Sweden’s Northvolt, South Korea’s SKI, LG Chem and Samsung SDI as well as China’s CATL as strategic partners. (7/8)

Electric scooter wars: Almost half of the electric-scooter companies in Paris have suspended or scaled back operations in the past week, after the French capital’s mayor swore to crack down on the “anarchy” caused by the sudden proliferation of thousands of new two­ wheeled vehicles on its streets.  At the same time, many of the same start-ups are rushing to launch in cities across Germany, after Europe’s largest economy legalized the vehicles last month. (7/8)

Climate censorship: A State Department intelligence analyst has resigned in protest after the White House blocked portions of his written testimony to a congressional panel to exclude data and evidence on climate change and its threat to national security. The analyst, Rod Schoonover, prepared a written report citing peer-reviewed scientific journal articles and intelligence reports, which conclude that climate change could have wide-ranging national security impacts. (7/11)