By Tom Whipple

1.  Oil and the Global Economy

Oil prices rebounded last Friday on better-than-expected Chinese factory data after six days of decline. At the close NY oil futures were up $2.75 a barrel to close at $105.97 and London crude was up $1.45 to close at $108.22. The IEA reported last week that global refining increased by 3.1 million b/d in June as new refining capacity came online and maintenance shutdowns at several big refineries concluded. Although Beijing reported a 9.7 percent increase in factory production during July over last year, there has been growing skepticism of late about the accuracy of China’s economic statistics which are not only reported very quickly, but have not been consistent with other indicators such as electric power consumption. The six day drop in prices – the longest this year – came among concerns that the Federal Reserve will start slowing quantitative easing in September.

US crude production in July increased to 7.5 million b/d, the highest level in 20 years. As US consumption of oil products is still weak, the EIA is forecasting that US domestic crude production will surpass imports for the first time since 1995. Net US oil product exports are expected to hit a record high of 1.54 million b/d in August as compared to 690,000 b/d a year ago. Refiners are expected to process 15.8 million b/d, the highest since August 2004, as more oil is getting to refineries along the Gulf Coast and US refinery maintenance has been completed.

US natural gas prices continued to slip on Friday, closing at $3.23 per million after the EIA reported rising inventories and forecasts of unseasonably cooler weather across much of the US. The cool weather is forecasts continue through the third week in August. Natural gas prices have now fallen to the point where they become attractive as an alternative to coal for those utilities that have the option to switch.  The government approved exporting LNG from a third terminal last week. The US has now given approval to export up to 5.6 billion cubic feet of gas per day or about 8 percent of production. Nearly two dozen additional applications to export gas are still pending. Some lawmakers and companies who will benefit from the exports are complaining that the approvals are taking too long while others who fear the loss of cheap domestic natural gas are calling for a slower approval process.


2.  The Middle East & North Africa

Iraq: The pace of the bombings seems to be increasing. Some 100 were killed and over 300 injured as 17 car bombs exploded across Baghdad and other cites this past weekend. An additional 50 were killed and 100 wounded in attacks on Tuesday.  Oil production in June slipped to below 3 million b/d from an initial target of 3.7 million and various agencies are warning that more problems are ahead. Planned outages connected with rebuilding of export infrastructure are expected to reduce production below 2.5 million in September.

Coordinated bombings across the country made this the bloodiest Ramadan in years with more than 800 killed and a gridlocked government, which cannot even keep captured bombers in prison, unable to cope much less make progress.

The randomness of the violence is forcing the closure of cafes and sports events as people fear congregating anywhere that will attract bombers. The various political factions are not even talking to each other, much less reaching any agreements and the national polity is deteriorating rapidly.

Baghdad is planning to build a new northern export pipeline to Ceyhan, Turkey despite being unable to keep the current one running for more than a few days at a time because of terrorist attacks. There is nothing in sight short of return of US forces, an unlikely proposition, which can turn this situation around. There seems no other outlook than for oil exports continuing to slip.

Egypt: There has been little progress in the political standoff which has pro-Morsi supporters continuously in the streets and the new government threatening violence to clear the demonstrations. So far the government/army has exercised restraint and there have been few casualties.

Violence has been increasing in the Sinai in the five weeks since the Morsi government was overthrown. Insurgent groups are conducting nightly attacks on military and police installation and murdering those they do not like. The violence is starting to draw in Israelis who are concerned about attacks on the Red Sea resort of Eilat. Last week the Israelis conducted air strikes against insurgents allegedly preparing to fire missiles at Israeli territory.

Concerns are growing that the anarchy we are seeing in the Sinai will spread to the rest of Egypt unless there is a political settlement between the Islamists and the secularists.

Syria: The government is trying to consolidate its hold on the Damascus – Aleppo corridor. The rebels have started tearing up Alawite villages along the coast and the government is retaliating with aerial bombardment of Sunni villages. The government continues to lob large missiles in neighborhoods it believes support the insurgency.  Moscow denies it has made a deal with the Saudis to back down on its support for the Assad government. There is little real progress in the situation—just increasing numbers of refugees and an ever growing body count.  As the Jihadists pour into the country there are growing fears that it will become a center for terrorism in the years to come.

Iran: Newly sworn-in President Rouhani used his first news conference to call for serious negotiations to end the decade-old nuclear dispute. While these remarks appear to be seeking a settlement, it will take months of negotiations and concessions on both sides before we know how this is going to play out.

There is a new report that Tehran could start producing weapons-grade plutonium by next summer thereby complicating the dispute which has focused on enriching uranium with centrifuges.

Libya: Worker unrest at refineries and export terminals continues to restrict oil production and exports. Those who don’t have jobs want them, and those that do work for the oil industry want more pay. As best as can be determined from contradictory reporting is that exports are now about 600,000 b/d or about half of pre-unrest levels. Sporadic violence and assassinations continue across the country with no sign of a stable government in sight.

Yemen: The government said it uncovered an al Qaeda plot last week to seize port facilities and completely cut off exports of oil and LNG. The US and Britain have urged their nationals to leave the country as violence and threats increase.


3.  The August Oil Market Review

The IEA in Paris reduced it forecast for the increase in global oil demand in 2014 by 100,000 b/d to 1.1 million b/d. Growth in demand for 2013 remains the same at 900,000 b/d. The cut in next year’s forecast is largely based on IMF economic projections which show China slowing and the US and EU stagnant. Global oil supply is believed to have increased by 575,000 b/d in July over June largely due to increased North American production.

OPEC production slipped by about 165,000 b/d in July due to the troubles in Iraq and Libya and despite an increase in Saudi production of about 100,000 b/d.  This was the lowest OPEC production since March.

Global refinery demand increased by 3.1 million b/d in June, the largest monthly increase on record. At 77.2 million b/d, June processing was 2 million b/d higher than last year. Refining is expected to have increased further in July but to slow in August due to increased scheduled maintenance.

4. Quotes of the Week

  • “Iraqi supply is going backwards this year, when a lot of the market expected it to be delivering the biggest growth outside the US. That’s a big shock.”

— Richard Mallinson, chief policy analyst at Energy Aspects consultancy

  • “There is no longer any credible scientific debate about the basic facts: our world continues to warm, with the last decade the hottest in modern records, and the deep ocean warming faster than the earth’s atmosphere. Sea level is rising. Arctic Sea ice is melting years faster than projected…. We can have both a strong economy and a livable climate. All parties know that we need both. The rest of the discussion is either detail, which we can resolve, or purposeful delay, which we should not tolerate.”

— By William D. Ruckelshaus, Lee M. Thomas, William K Reilly and Christine Todd Whitman, past Administrators of the US Environmental Protection Agency

5. The Briefs

  • China is poised to top the US as the world’s biggest importer of oil in October and will hold the ranking for all of 2014, according to forecasters at the US EIA. China’s fuel consumption is targeted to increase to nearly 13 million b/d next year, a 13-per-cent increase from 2011 levels. (8/11 #10)
  • China bought a record net 25.9 million metric tons of oil, or 6.13 million barrels a day, last month according to government data. (8/8 #2)
  • OPEC kept estimates for global oil demand growth in 2014 unchanged amid a stable outlook for the world economy. World oil consumption will increase by 1 million b/d, or 1.2 percent, next year to about 90.8 million b/d.  Increasing output from countries outside OPEC means demand for the organization’s crude will slide to 29.7 million b/d, or about 600,000 a day less than its 12 members pumped last month. (8/11 #3)
  • The IEA warned Friday that oil supply from OPEC nations was falling, as it raised its forecast for demand for the exporters group’s crude this year. It said continued supply outages in Iraq and Libya…may reduce the group’s output in coming months. (8/11 #4)
  • North America’s shale boom is insulating the world from steep oil price spikes as several OPEC members struggle to maintain production due to unrest and infrastructure problems, the International Energy Agency said on Friday. (8/9 #6)
  • Wood Mackenzie would have us believe that US oil production will exceed peak production by about 2 million b/d, and will increase present production by almost 70%.  That would be awesome but seems highly unlikely based on the history of oil production decline in countries and basins around the world. (8/8 #25)
  • So the high costs and harsh decline rates of the North American shales are two reasons for high WTI oil prices. Another reason that is starting to rear its ugly head is write-downs of shale formations. Shell was the first major to announce a major shale write-down in North America, writing down about $2 billion, mainly associated with liquid-poor shale projects. (8/6 #16)
  • Recent billion-dollar write downs by Shell and some other majors are a sign they came to the shale boom late in the day, overpaying for lower-quality and less well-explored assets – not that the shale revolution is stuttering. (8/7 #28)
  • Smaller oil explorers focused on high-margin shale drilling from Texas to North Dakota are set to outperform Big Oil this year. EOG Resources, Pioneer Natural Resources and Continental Resources are poised to reap bigger returns for investors than energy titans 15 times their market values as they devote almost all their drilling capital to higher-margin, domestic crude wells. (8/6 #19)
  • Iraq has gone from being a leading source of growth in global oil supplies to an uncertain one in just the last 12 months – a development that is putting pressure on prices and posing challenges for policy makers in Baghdad, Washington and Riyadh. (8/9 #12)
  • The production of Libya‘s main grade of crude oil, called Es Sider, has collapsed after the terminal that exports the oil to global markets was shut by protesters, Libyan oil officials said late Wednesday. (8/9 #13)
  • The oil company calls it “seepage.” Environmentalists describe it as a “blow out.” Either way, the leak at the oil sands project in Northern Alberta – which has spilled 280,022 gallons of oil across 51 acres since June – is stoking controversy over the energy source. (8/9 #21)
  • Iraq has first production scheduled to come on line from three fields later this year: 150,000 b/d from the 13-billion-barrel supergiant West Qurna-2 by the end of this year or early 2014; 175,000 b/d from the 12.6-billion-barrel supergiant Majnoon oil field at the end of September; and up to 35,000 b/d from the Garraf oil field within a month. (8/8 #6)
  • Nigeria’s oil production is set to rise to 2.5 million b/d in the next two weeks as repairs are completed on a major pipeline.  Output in the first quarter fluctuated between 2.1 and 2.3 million b/d, well below the forecast production level of 2.48 million b/d. (8/8 #11)
  • In Nigeria, foreign firms such as Royal Dutch Shell, Chevron, Eni and Total are only selling small blocks that are not worth their while — those assets worst affected by theft and sabotage or fields that risk expropriation in a government push to promote local ownership. The oil majors intend to remain in Nigeria.  (8/8 #10)
  • Troops from former civil war foes Sudan and South Sudan clashed near a disputed oil field, threatening to spark fresh tensions along their poorly-marked common border. (8/7 #16)
  • Peak demand for oil?  Analysts at Citi think the world’s thirst for oil could peak in a few years at around 92 million barrels per day — as long as vehicle efficiency for cars and trucks keeps improving by about 2.5 percent per year. This is an unusual prediction, to say the least. For context, BP expects global oil demand to keep growing from 89 million barrels per day today to around 104 million barrels per day by 2030. (8/11 #18)
  • The world doesn’t require an oil production to peak in order to suffer certain expected consequences of peak oil — like much higher oil prices. (8/6 #25)
  • A conflict-of-interest ethics probe of the contractor assessing the environmental impact of TransCanada Corp.’s proposed Keystone XL oil pipeline has energized critics who say it should be grounds for the project to be delayed. (8/8 #22)
  • The proposed Keystone XL pipeline would not have an impact on greenhouse gas emissions, a study by energy consultancy IHS CERA concludes. (8/11 #14)
  • Shipping oil across Canada to the Atlantic coast, as TransCanada proposes to do with its Energy East project, is hardly the industry’s first choice. Taking oil south to the Gulf coast via Keystone XL or west through British Columbia are clearly more expedient options. Still, it’s no surprise to see Energy East jump ahead in the queue, given the public and political opposition facing the other routes. (8/8 #26)
  • The 2013 spot prices for natural gas at the Henry Hub are expected to average $3.71 a million BTUs, the EIA said Tuesday. It is lower than the $3.76 forecast in July. But the agency edged up its 2014 forecast to $3.95, from $3.91 expected in July. (8/7 #22)
  • US regulators said they would propose for the first time lowering the mandated consumption of corn ethanol used in motor fuel, a reversal in policy that puts a powerful industry on the defense. (8/7 #24)
  • In a five-year lease plan outlined in November 2011, the Bureau of Ocean Energy Management said the resource potential in the Atlantic Outer Continental Shelf “is not well understood and surveys of these areas are incomplete and out of date.” (8/7 #25)
  • Chesapeake Energy has given up a two-year legal fight to retain thousands of acres of natural gas drilling leases in New York State. (8/7 #27)
  • Australia is forecast to surpass Qatar as the world’s largest exporter of LNG by the end of the decade.  (8/7 #30)
  • The cost of moving LNG from the US into foreign markets has been estimated at $6/Million BTUs, and in 2012 the differential between US natural gas and LNG in Japan was $14/Million  BTUs. The differential between the US and European markets was above $8/ Million BTUs. These differentials provide a compelling economic case for LNG exports. (8/6 #25)
  • The first of five shipments of liquefied natural gas from Qatar arrived at an Egyptian port to help address energy concerns, the Qatari government said. Tight demand for energy in Egypt exacerbated frustration with post-revolution political developments. (8/6 #18)
  • In the U.K., companies looking to explore and develop shale gas need to engage with local communities much earlier in the process if the country’s fledgling industry is ever going to develop and have the transformative effect it has had in the U.S. (8/9 #23)
  • Royal Dutch Shell’s oil spill plans for drilling in Alaska’s Beaufort and Chukchi seas don’t violate environmental laws, a federal judge in Anchorage ruled in rejecting a challenge by conservation groups. (8/6 #20)
  • Improved rig efficiency is consuming capital budgets faster. This is not good news for drillers who are finding that fewer rigs are needed to drill the same number of wells each year. Unless capex budgets expand, the drilling rig count is unlikely to improve during the balance of this year and it raises questions about the pace of drilling and the number of rigs needed in future years. (8/6 #23)
  • The US drilling rig count decreased 4 units during the week ended Aug. 9 to reach a total of 1,778 rotary rigs. Rigs drilling for oil lost 3 units to reach 1,385, while those drilling for gas slipped 2 units to 388 rigs working. Compared with the same week last year, gas rigs were down 109 units. (8/11 #17)
  • In China, surprisingly firm rebounds in exports and imports during July offered some hope that the world’s second-largest economy might be stabilizing after more than two years of slowing growth, although an imminent rebound still looks unlikely. Imports of crude oil and iron ore rebounded from multi-month lows to record highs last month. (8/8 #14)
  • As more Chinese cities propose license-plate lotteries and other ways of limiting the number of cars on the road, consumers are responding by buying more expensive automobiles with bigger engines. (8/8 #16)
  • The EPA said it would give refiners until June 2014, a four-month extension, to increase the blend of renewable fuels in gasoline and diesel supplies. The announcement sparked mixed reaction; opponent said it seems short-sighted while green groups called for more action. (8/8 #23)
  • The world’s richest nations, moving to combat global warming, are cutting government support for new coal-burning power plants in developing countries, dealing a blow to the world’s dominant source of electricity. (8/6 #5)
  • At Japan’s Fukushima plant, a new rush of radioactive water has breached a barrier built to stop it, allowing heavily contaminated water to spill daily into the Pacific. As the scope of the latest crisis became clearer on Wednesday, Japan’s prime minister ordered his government to intervene in the cleanup of the plant.  (8/8 #17)
  • Average global temperatures in 2012 were roughly in line with those of the past decade or so, but the year still ranked among the 10 warmest on record as melting arctic ice and warming oceans continued to boost sea levels, NOAA said in a recent report. (8/7 #5)