By Tom Whipple.

1.  Oil and the Global Economy
2.  The Middle East & North Africa
3.  China
4.  Quote of the Week
5.  The Briefs

1.  Oil and the Global Economy

In one of those economic paradoxes, US crude futures climbed by nearly a dollar on Friday to close at $92.72 a barrel after the US jobs report came in much worse than expected.  The reasoning of course is that a weaker economy will deter the Federal Reserve from slowing its bond buying program which supports oil prices. Even with Friday’s increase, US crude was still down $1.50 for the week due to lower demand and a large jump in US gasoline and distillate inventories.

In London where oil prices have been supported by supply problems in Libya, Sudan, Iraq, and Nigeria in addition to lower Saudi production, Brent futures ended at $107.25, up about a dollar for the week. The large difference between US and London which is the world benchmark price has created a clamor in the US to lift the ban on US crude exports that has been in place since the 1970s. US oil producers would love to get another $10-15 a barrel for their crude which has been suppressed in recent years due to the shale oil boom and lack of access to world markets.

If the US resumes crude exports, oil producers would do better, while US refiners who are currently doing quite well buying cheap US crude, refining with cheap US gas,  and exporting gasoline and distillates to the world markets at a nice profit would do less well.  Lifting the export ban would transfer much of the profit to the producers from the refiners and would likely result in higher prices for US consumers.

US natural gas prices eased last week to $4.05 per million as the departure of the polar vortex cut demand for heating gas. Another, but milder, polar vortex is due to make its way across the northern US later this week.

The EIA released some new data and forecasts about US oil and gas production last week. US natural gas output climbed to a new record of 70.2 billion cubic feet last year; however this was only 1.5 percent over 2012 — the slowest rate of increase since 2005. Although the EIA is projecting that natural gas output will increase by 2.1 percent in 2014 and 1.3 percent in 2015, many believe we are starting to see the end of the shale gas boom which has sent US prices down to an average of $3.20 for the last five years vs. $9 in 2008.

The EIA is starting to back off on how long the US shale oil boom might last. While it is still forecasting that US shale oil production will increase by 1.3 million b/d in 2014 to circa 9.4 million b/d by the end of this year, it is now saying the increase in production will be only 750,000 b/d in 2015. Given the rapid depletion of shale oil wells and the need to drill thousands of new wells each year just to maintain current production, many analysts believe that the extraordinary rapid growth in US shale oil production will come to an end sooner than the EIA has been projecting. Foreign investment in US shale oil production, which has been the backbone of industry financing for several years, is drying up. Recent derailments of trains carrying shale oil are likely to result in tougher regulations and higher costs for transporting the oil, and US oil prices are easing toward the profitability level for many shale operators.

The continuation of the US shale oil boom, which is the major factor currently keeping world supply and demand for oil in balance, will, along with the various Middle Eastern crises, determine where oil prices go in the next two or three years. The EIA is predicting that global demand for oil will rise by 1.2 million b/d in 2014, which for now is to be covered by increased US production.

2.  The Middle East & North Africa

Iran:  On Sunday the White House announced that Iran and the six world powers have agreed on the details of the agreement signed in November. Tehran is to start scaling back its nuclear stockpile on January 20th. This date will be the start of the interim confidence building deal that is to be followed by a more comprehensive agreement.

This news came after a blast at America by the Ayatollah Khamenei, citing a litany of complaints against Washington. The Ayatollah must arbitrate between many competing power centers in Tehran so any accommodation with the West must be balanced with warnings about its shortcomings. Many groups in Iran have done well over the last 30 years by playing on the specter of an American menace. Should the current talks lead to a normalization of relations and the settlement of at least some issues, the power of these groups would be undercut. There is still much negotiating to do before the sanctions are lifted.

Moscow and Tehran are reported to be close to a deal that would barter 500,000 b/d of Iranian crude in return for Russian equipment. As the world’s largest crude producer, Moscow certainly does not need to import oil, but the chance to muddle around in Middle Eastern politics and strengthen its position in the region was too good to pass up. While this deal would cut into the impact of the oil embargo, Tehran is not getting hard currency for its oil but only Russian-made goods. In recent months, it is the financial sanctions more than the oil embargo that has been hurting Tehran’s economy.

Iraq: The withdrawal of government forces from Anbar province, partly under pressure and partly in an attempt to calm the situation, has brought a whole new complexion to the Iraqi situation. With al Qaeda in control, Fallujah and Ramallah alarm bells are ringing from Baghdad to Washington. The US says it will support Baghdad with arms and supplies, but will not send US troops back into the country, even to fight al Qaeda. Baghdad is moving troops to the region while asking local Sunni militias to expel al Qaeda. Given the trouble the US Marines had retaking the region eight years ago, the chances of a quick victory by Baghdad’s forces seem dubious.  With the Kurds close to being a de facto state, Shiite-controlled Baghdad’s domain is shrinking and it is doubtful it has  the military capacity to regain control by force as it cannot even contain the daily bombings in Baghdad.

Last week Baghdad lost a major confrontation when the Kurds announced that they were starting to export oil directly into Turkey. Baghdad says it is “dismayed” and “bewildered” by the Kurds and Turks’ action. There is little it can do other than launching a full scale civil war which it is doubtful it would win, so for now the government is only threatening a lawsuit over the Kurd’s exporting their oil without permission.

So far the turmoil – incipient civil wars, the ever-spreading Syrian uprising, and the continuous bombings – have had remarkably little impact on the country’s ability to export oil.  Most foreign oil companies are reporting good progress drilling new wells and upgrading infrastructure. Oil exports are scheduled to increase rapidly in the next year or two. There is talk of building a new oil export pipeline from Basra to the Jordanian city of Aqaba.

There are all sorts of dangers ahead however. The rudimentary balance of power among the various religious and ethnic groups that Washington left behind is virtually gone. New elections are due this spring, but the prospects for a settlement among the various political groupings get worse all the time.

If US shale oil production begins to slacken in the next few years, rapid increases in Iraqi oil production is the best chance for increasing or at least maintaining global oil production for the rest of the decade. The ever increasing turmoil raises doubts that this can happen.

Libya: Oil production climbed by some 200,000 b/d last week when a Western Libyan oil field was reopened by local tribesmen. A spokesman for the tribesmen says that if Tripoli does not give in to its demands by the end of this week, it will shut down the field again.

In Eastern Libya, the separatists in Benghazi are trying to sell their oil directly to foreigners without involving Tripoli. The central government has already driven off one tanker trying to load oil without authorization and has threatened to sink any others entering its waters.

Political troubles continue. The Deputy Industry Minister was assassinated over the weekend and the small Libyan Christian community fears it will soon be subjected to Islamic law. This situation is not going anywhere and the likelihood of Libya’s oil exports reaching the pre-uprising level of 1.6 million b/d in the foreseeable future is low.

Sudan: Government forces have captured Bentiu, the key oil production town in South Sudan, but the government says the rebels badly damaged oil facilities before they left. Given that the city was ransacked and the population has fled, this victory may not mean much as rebel forces simply withdrew outside the city. The rebels say they still control the oil producing infrastructure and that the government does not have the forces to defeat them militarily. The press is estimating that more than 10,000 have been killed in the tribal violence and some 250,000 driven from their homes. Heavy fighting is taking place between government forces and the rebels in Bor while peace talks continue in Addis Ababa.

Uganda has sent a large military force to South Sudan, allegedly to evacuate its citizens, but most believe it is there to help the government defeat the rebels. Uganda has many economic ties with the oil rich state that it does not want to lose. As many as 100,000 refugees from South Sudan may have fled to

Beijing has the most to lose from the current fighting as China has invested more than $20 billion in Sudan’s oil fields, pledged an additional $11 billion when South Sudan was formed, and imported 14 million barrels of crude in the first 10 months of 2013. In 2012 the combined production of Sudan and South Sudan was roughly 320,000 b/d with 70 percent or 225,000 b/d coming from the area now part of South Sudan. Recent reports say that this is now down about 25,000 b/d to 200,000 due to the fighting. Given the level of the ongoing fighting and the reported damage to oil facilities this sounds low.

3.  China

With 1.3 billion people busy growing their economy at 7.5 percent a year, something is always happening in China relevant to the peaking of world oil production. Last week Beijing announced that China’s oil imports in December reached 6.3 million b/d which is up 13 percent from December 2012. In September, China became the world’s top oil importer which is raising concerns in Beijing about its vulnerability to foreign oil exports drying up due to political turmoil or increased domestic consumption by producing countries. To counter this possibility, last week Beijing announced a program to double oil and gas production by 2030.

Car and truck sales in China were over 22 million vehicles in 2013. At this pace the country will have the largest vehicle fleet in the world and the biggest demand for gasoline by the end of the decade. To fuel the 17 million new cars, China is preparing to produce more gasoline and less diesel fuel and recently opened two large new refineries which is part of the reason for the jump in crude imports. The downside is that surging vehicle sales is rapidly increasing air pollution in urban areas. Despite various schemes to limit new vehicle registrations in the major cities, the vehicle fleet continues to grow. Most of the recent air-pollution control measures are directed at limiting coal burning in urban regions. Obviously the increase in automobile use is taking a big bite out of efforts to limit coal burning. This destructive cycle has got to stop somewhere for as a civilization, China is choking on its own fumes. There are already projections that new car sales will be lower next year; even these will be at growth rates which will add to the pollution.

China’s exports in December slowed to a growth rate of only 4.3 percent, but forecasts of a better 2014 continue. In late December, the cabinet announced that the growth rate for 2013 is expected to be only 7.6 percent which is the lowest since 1999.

4. Quote of the Week

  • “There were a lot of government authorities saying the reserves of Brazil were 50 billion barrels, 100 billion barrels, even 240 billion barrels, more than Saudi Arabia.  Lots of wells have been drilled in the pre-salt area, and the well comes up dry.”

            — Wagner Freire, a geologist, who worked for 35 years at Petrobras.

5. The Briefs

  • In Brazil, when fields said to hold billions of barrels of oil were discovered off the coast, exuberant government officials said discovery would turn Brazil into a major energy player. More than six years later, the outlook for Brazil’s oil industry is more sobering. Oil production is stagnant, the state-controlled oil company, Petrobras, is hobbled by debt, and foreign oil companies are wary of investing here. Brazil’s pre-salt oil fields, which are complex and require expensive investments, are producing 300,000 barrels of oil a day, far less than had been forecast. (1/6)
  • In Iraq, Russia’s Gazprom Neft said its first production of oil was produced from the Badra field near the eastern Iraqi border with Iran. Gazprom Neft under the terms of a 2009 agreement with the Iraqis will develop the Badra field in Wasit province for the next 20 years. Total capacity could reach 170,000 barrels per day. (1/10)
  • The Nigerian government will not privatize its four ailing oil refineries prompting the country’s two powerful oil workers’ unions to declare that they have now dropped plans to start a nationwide strike. (1/8)
  • Ivory Coast’s Prime Minister said his nation will boost oil production within five years to 200,000 b/d as stability returns to a country after a decade of turmoil. The West African nation wants oil companies to increase exploration and drilling offshore after output more than halved to about 30,000 b/d because of technical problems. (1/8)
  • In China, steady energy demand has been a saving grace for the oil-tanker market, with much of the credit going to one Chinese oil trader: Unipec. This firm was the No. 1 charterer of oil tankers for the second year in a row in 2013. (1/8)
  • Kenya and Uganda were recruiting investors to back an oil pipeline in South Sudan in December when a rebellion upended the world’s newest nation. Now the two East African nations have joined a diplomatic effort to end the conflict in South Sudan —yet another reminder of how the security crises of a volatile region intrude on efforts to boost commerce among its countries. (1/8)
  • Baker Hughes said Friday the number of US oil wells drilled in the fourth quarter declined by 19 to 9,056 but drilling efficiency improved. Despite the quarter-to-quarter decline, Baker Hughes said the well count for the final quarter was up 5 percent year-on-year. Due to improved drilling efficiencies, the average US onshore drilling rig now produces 9 percent more wells compared to the same quarter last year. (1/11)
  • Average oil production from the US Gulf of Mexico has been relatively flat for the last two and one half years at about 1.260 million b/d. The big deepwater plays, however, continue to decline.  Four large fields brought on-stream since 2007 are Atlantis, Thunderhorse, Tahiti and Blind Faith; production from them peaked at roughly 550,000 b/day in the fall of 2009, while the most recent report has them at roughly 175,000 b/d, down 68 percent from their peak. (1/8)
  • US gasoline consumption averaged 8.79 million b/d in 2013 and should be almost the same this year, according to the US EIA’s latest Short-Term Energy Outlook.  Distillate consumption averaged 3.83 million b/d in 2013 and is forecast to increase slightly to 3.88 this year.  Gasoline and diesel averaged $3.51/gal and $3.92/gal., respectively, last year and should dip slightly ($3.46/gal and $3.81/gal) this year. (1/8)
  • The House Subcommittee on Energy and Mineral Resources scheduled a hearing Friday to review plans for seismic exploration that would provide a better understanding of the resource potential in the Atlantic Ocean. (1/8)
  • Alaska Governor Parnell signed a bill in May that wipes out a system backed by former Governor Sarah Palin tying oil producers’ taxes to the price of crude. The end of the “progressivity” formula has triggered investments from oil companies that may boost the state’s output by at least 90,000 b/d within four years and renew exploration in the nation’s second-largest oil reserve, estimated at 3.82 billion barrels. (1/8)
  • Senator Lisa Murkowski, the top Republican on the Senate Energy Committee, urged President Barack Obama to end a 39-year ban on exports of US crude oil, joining what is shaping up as a major election-year debate over energy policy. (1/8)
  • Over BP’s objections, a federal appeals court upheld a judge’s approval of the company’s multibillion-dollar settlement with businesses and residents who claim the massive 2010 oil spill in the Gulf of Mexico cost them money. (1/11)
  • Ethanol prices rose as icy, snowy conditions sweeping across the Midwest caused rail delays and terminal closures that may force companies to reduce operations. (1/8)
  • US rail delivery of petroleum and petroleum products was up 20.2 percent last week from the same period in 2013, the American Association of Railroads said. (1/10)
  • North Dakota Gov. Dalrymple said he’ll “pursue” BNSF Railway until he’s satisfied appropriate safety measures are in place for rail delivery of crude oil. A BNSF train carrying oil derailed Dec. 30 about 25 miles west of Fargo after colliding with a train carrying soybeans. (1/6)
  • Canada plans tougher standards for new tank cars used to ship dangerous goods by rail, as concerns mount about the increased use of trains to ship crude oil across the continent in the wake of several fiery derailments. (1/11)
  • LNG prices in Asia are higher than those in Europe and North America because the cost in Asia is linked to crude oil prices under long-term contracts. Indian Prime Minister Manmohan Singh urged Asian buyers of imported liquefied natural gas to unite to demand fair pricing. (1/7)
  • Partners developing the 18-Tcf Leviathan natural gas field in the Mediterranean Sea said a Palestinian utility company is the first to secure a supply contract. (1/6)
  • In the UK, Total of France is to become the first major oil company to explore for shale gas in a big boost for government efforts to create a US-style fracking boom on British soil. The deal will be seen as a big vote of confidence in the UK’s fledgling shale industry. (1/11)
  • The US will become a net exporter of natural gas by the first half of 2016, largely due to the expected rapid growth of the US liquefied natural gas export industry along with a boost in Mexican pipeline capacity and a drop in US demand for Canadian gas, analysts with Barclays Commodities Research said Thursday. Barclays says six US LNG export facilities will begin shipping by the end of the decade. (1/10)
  • Alaska Gov. Parnell announced a new way forward on a long-hoped-for natural gas pipeline. Parnell will seek legislative approval for the state to participate with Canadian pipeline builder TransCanada Corp.—plus partners Exxon Mobil, BP and Conoco Phillips—to sign and move forward with a new agreement to bring natural gas down from the North Slope. (1/11)
  • In Poland, construction will begin next month on 1,800 megawatts of new coal-fired generating capacity. Two 900-megawatt generators will cost $3.78 billion; the first unit will be completed within 4.5 years with the second one year later. (1/10)
  • In China, 2013 auto sales were up 14 percent from the prior year—the largest increase in three years—so China’s oil refiners are ramping up gasoline output at the expense of diesel. Sales totaled nearly 22 million vehicles—including almost 18 million passenger cars. Vehicle emissions contribute as much as 30% of the fine particulate matter known as PM2.5—which is considered particularly hazardous—in China’s urban air. (1/10)
  • The Colorado River and its slew of man-made reservoirs from the Rockies to southern Arizona are being sapped by 14 years of drought unrivaled in 1,250 years. The river’s upper-basin states are worried that they might have to curb their consumption to meet their obligations downstream. But the thorniest problems are in the lower basin, where a thicket of political and legal deals has left Arizona holding the bag should the Colorado River continue to diminish.[Editor’s note: what implications does this have for energy development and supply?] (1/6)
  • In at least four states that have nurtured the nation’s energy boom, hundreds of complaints have been made about well-water contamination from oil or gas drilling, and pollution was confirmed in a number of them, according to a review that casts doubt on industry suggestions that such problems rarely happen. (1/6)
  • asked its state Supreme Court to reconsider its decision that struck down parts of an oil and gas law. The Pennsylvania Supreme Court voted 4-2 in mid-December saying key provisions in Act 13, a 2012 law that governs oil and gas drilling, is unconstitutional. In a state known for its shale gas production, the decision broadened the rights of local governments to restrict fracking within their city limits, dealing a blow to oil and gas interests. (1/6
  • The energy industry has long insisted that fracking is safe for people who live nearby. New research suggests this is not true for newborn infants. University researchers found that proximity to fracking increased the likelihood of low birth weight by more than half, from about 5.6 percent to more than 9 percent. (1/6)