By Tom Whipple
1. Oil and the Global Economy
Oil prices continued to climb last week so that NY oil futures are now up nearly $9 a barrel since late June and over $20 a barrel since mid-May. London’s Brent oil, which closed just below $109 on Friday is now within $6 of the three-year highs set in 2011, 2012, and earlier this year. Concerns about the deteriorating Middle Eastern situation; optimism over the prospects for economic growth in the US; the likely continuation of quantitative easing ; and a 20 million barrel drop in US crude stocks over the past two weeks were among the factors pushing prices upwards. The Brent-WTI spread dropped to as low as $1.99 last week, the narrowest differential since November 2010 as inventories at Cushing, Okla. dropped by 2.7 million barrels the week before last.
Late last week, gasoline futures led crude prices higher as a number of unplanned US refinery outages raised fears that gasoline supplies may tighten during the rest of the summer driving season. Despite stockpiles which are at their largest for this time of year since 2001, gasoline futures have climbed over 40 cents a gallon in the last three weeks and the average retail price is up 13 cents in the last seven days.
The only immediate dark spot in the demand for oil is China’s economy which continues to have a variety of problems.
Natural gas futures were little changed last week trading around $3.65 per million with inventories still ample and changing forecasts of temperatures across the US this summer.
A new report from the US Department of Energy highlights the ways in which climate change will affect energy — “increasing temperatures, decreasing water availability, more intense storm events, and sea level rise will each independently, and in some cases in combination, affect the ability of the United States to produce and transmit electricity from fossil, nuclear, and existing and emerging renewable energy sources.” The report notes that in the last 33 years the US has endured more than 130 extreme weather events, each of which caused more than $1 billion in damages. These events are likely to become increasingly frequent costing the US some $2 to 50 billion a year.
2. The Middle East and North Africa
There was little good news from the region last week as heavy fighting continued in parts of Syria, large demonstrations took place in Egypt, and bombings continued at a steady pace in Iraq. Instability in Libya is starting to cut into the country’s oil exports and Jordan is facing power shortages and large price hikes which some fear could bring down the government. The US is still waiting for some hint from Iran’s new President-elect as to whether Tehran is serious about finding a solution to the nuclear/sanctions standoff.
Egypt: Last week started with clashes between Morsi supporters and the Army with some 60 killed and 400 wounded as troops fired on demonstrators who may have been trying to free the former President. Demonstrations in support of the ousted President, numbering in the tens of thousands, continued throughout the week with little bloodshed. More demonstrations have been called for the week ahead. The new government is reported to have opened a criminal investigation of the ousted President for inciting violence and destroying the economy.
The only good news for Egypt this week came when the Saudi’s, the UAE, and Kuwait agreed to kick in some $12 billion in financial and oil aid in an effort to prevent the situation from deteriorating further. A tanker full of diesel has already been delivered by Kuwait. Fears that Egypt may be descending into civil war with refugees fleeing across the Middle East continue to grow. The recently ousted Minister of Supply told Reuters that Egypt’s wheat stocks will run dry in two months – a claim denied by the new government amidst much confusion as to the actual situation. With billions in financial aid available from the Gulf Arab states, it may be possible for Cairo to buy its way out of the impending food and oil shortages for a while longer.
So far there has been little impact on the country’s oil exploration and production activities, most of which occur in remote areas unaffected by the chaos in the cities. The Suez Canal, which is under the Army’s control, in functioning normally. An analysis published by ASPO Sweden last week highlights the massive cost to the Egyptian economy that occurred when the country switched from being an oil exporting nation to an oil importer a couple of years ago.
Syria: Government forces seem to be making slow progress in their efforts to retake what is left of Homs largely by blowing neighborhoods to rubble with artillery fire and air bombardment before moving in. The government seems to have ample supplies of ammunition and Baghdad said last week there is little it can do to stop air shipments of military supplies from Iran overflying its territory.
Fighting between the radical Islamist insurgent groups and the moderates is on the upswing with the murder of a Free Syrian Army commander at an al-Qaeda-linked group’s road block. The FSA has called for retaliation suggesting that the uprising against the Assad government may to turning into general chaos as groups jockey for power in a post-Assad era. It is easy to see Washington’s reluctance to get involved. Pakistan’s Taliban announced last week that they are opening an office is Syria so as not to miss out on the opportunity for Jihad. A car bomb wounded 18 in a Hezbollah stronghold in suburban Beirut as Sunnis began to retaliate for Hezbollah’s intervention in the Syrian uprising.
Two years of war, however, have virtually destroyed Syria’s economy which is existing on handouts from Moscow, Beijing, and Tehran. The food and refugee crisis grows with each government offensive.
Washington revealed that the recent explosions in Latakia were caused by an Israeli airstrike against a warehouse of long range naval missiles that Moscow had recently sold to the Assad government. Allowing such missiles to fall into the hands of Hezbollah is a red line for Israel as these missiles could not only bolster its naval forces but also its budding off shore natural gas industry.
Iraq: Bombs continue to go off daily with Shiite bombers getting back into the action with bombings of Sunni mosques and market places last week. At last report Iraq’s northern export pipeline to Turkey remains shut after a second attempt to restart the pipeline following a 22-day outage failed. The loss of this pipeline made a serious dent in Iraq’s exports last month and is likely to do the same in July.
Criticism of Iraq’s new oil strategy, which envisions the investment of $620 billion in the next 17 years and tripling the country’s oil production to 9 million b/d by 2020, is growing. Although the IEA is forecasting that oil production will reach 6 million b/d by the end of the decade, many have doubts. Critics point to Iraq’s aging pipeline infrastructure, incompetent government, lack of skilled workers and the security situation which sees hundreds killed every week as evidence that substantial increases in oil production in the near future are unlikely. The big increase in production between 2010 and 2012, when numerous international oil companies were brought in to revive declining oil fields, has stalled.
Further production increases will require large capital investments in upgrading crumbling infrastructure. Given the dangers of working in Iraq, and the return of only of $1-2 per barrel, it is unlikely that these investments will be made by the oil companies. Baghdad realizes that changes will have to be made and has begun to renegotiate contracts to give the oil companies who stay more favorable terms.
As the last place on earth with billions of cheap-to-produce barrels of oil, Iraq remains a very attractive place for the world’s oil companies, but the growing violence between Sunnis and Shiites could easily reduce the attractiveness.
3. Highlights of the July Oil Market Report
In its monthly report the IEA grapples with the uncertainties of global oil supply and demand in 2014. The Agency has increased its forecast for the growth in global demand next year to 1.2 million b/d, but has not yet factored in recent IMF projections of lower economic growth in the months ahead. Unusually large growth in non-OPEC oil production of 1.3 million b/d underpinned by growth of 530,000 b/d in US oil production is forecast for next year. Increased output from Brazil, Kazakhstan, South Sudan and Canada would make up the rest of the production increase.
On the face of it, the increased output which is supposed to come next year should outpace increased demand allowing for oil prices to fall and inventories to grow – but there are dark clouds on the horizon. OPEC production fell by 370,000 b/d in June due to disruptions in Libya, Nigeria, and Iraq. These situations are not yet stable, and increasing turmoil in Egypt, Syria, Iraq, and Lebanon could cause additional disruptions or spread to one or more oil producing Gulf Arab states. The Agency says that sanctions on Iran reduced its exports to 800,000 b/d in June and the nuclear/sanctions impasse is far from over. The IEA notes that rapid increases in the costs of producing and transporting fracked tight oil in the US could reach the point soon where it is no longer profitable to keep drilling and fracking for new production.
All this says that while the next 18 months looks good for increases in US and non-OPEC production, there are geopolitical factors in several OPEC states which could easily offset the increase and drive oil prices higher.
From GDP growth, to inflation, to exports, the news out of China last week was uniformly bad for the economic situation and the future of oil imports, but perhaps good for the environment. Forecasts for economic growth in the 2nd quarter show the economy is settling towards a 23 year low with no end in sight. Higher borrowing costs and increased inflation could lift unemployment as the government tries to shift its economy from slipping exports to domestic consumption. Last week the IMF reduced its forecast for the growth of China’s GDP this year to 7.8 percent from 8.1 percent. Although Beijing’s official growth target for the year is 7.5 percent, last week in an unscripted comment China’s Finance Minister talked about aiming for 7 percent economic expansion this year – sparking speculation as to whether he misspoke or China has lowered its growth target for the year.
On top of the problems associated with transitioning China from an export to a domestic consumption economy, there is the problem of curbing air, water, and soil pollution while continuing to grow, move people into cities and increase power consumption. Last week it was reported that smog in parts of China is cutting life expectancy by 5.5 years. It was also reported that eight more cities in China are likely to announce new policies restricting the licensing of new vehicles within their boundaries. The automobile industry warns that this move will cut new auto sales by 400,000 units per year.
Moreover, Chinese delegates in Washington for the fifth annual strategic and economic dialogue with US officials are talking about serious efforts to curb greenhouse gas emissions which seems to reflect a major change in policy.
5. Quote of the Week
- “Please don’t forget that our expected GDP growth rate this year is 7 per cent”
— Lou Jiwei, China’s Finance Minister
6. The Briefs (clips from recent Peak Oil News dailies are indicated by date and item #)
- A new survey shows that Turkey now has the highest gasoline prices in the world at $9.98 a gallon followed by Norway at $9.97. Venezuela, Saudi Arabia Kuwait and Egypt are at the bottom of the list with prices ranging from circa 10 cents in Venezuela to a dollar in Egypt. As a percentage of income spent on gasoline, however, the US ranks 7th , by far the largest among the developed industrial nations. (7/8 #2)
- Shell has reopened its 150,000 b/d pipeline in Nigeria that was shut down last month due to damage caused by oil thieves. (7/8 #11)
- The massive London wind energy array in the Thames Estuary was opened last week. A UAE company with a partial stake in the project is seeking to build additional wind turbines in the UK. (7/8 #20)
- The makeup of Kazakhstan’s Kashagan oil field consortium is about to change radically with ConocoPhillips selling off its 8.4 percent stake in the project. China’s CNPC is expected to eventually acquire the stake. At one time or another many international oil companies have been involved in the massive project which is years behind schedule because of extremely difficult drilling conditions. (7/9 #11)
- A new university study conducted by MIT and Beijing University among others shows that the average life expectancy in China has been cut by five years due to smog. The study is the first to use actual data on air quality and life expectancy. (7/9 #14)
- The southern leg of the Keystone XL pipeline called the Gulf Coast pipeline which runs 450 miles from Oklahoma to Texas is 80 percent complete. The new pipeline should be able to deliver 700,000 b/d to the Gulf Coast by the end of the year, which will take a major bite out of the oil glut at Cushing, Okla. (7/8 #15)
- US rail delivery of oil and oil products was up by 26 percent in June over May, but overall down by 1.5 percent as compared to the first half of last year. The Canadian National Railway plans to open a new terminal in Alberta in November which would increase rail shipments from the region. (7/8 #16)
- Tokyo Electric Power said it found very high levels of radioactive material during testing at the Fukushima nuclear power station. Highly radioactive material has reached the ground water and is likely leaking into the ocean with radioactive levels now some 200 times acceptable limits. Japan maintains there is no danger to public health as nobody lives around the damaged nuclear plant anymore. (7/11 #26)
- Workers aboard an oil and gas production platform 75 miles off the Louisiana coast were evacuated last week after natural gas began leaking to the surface. The well did not explode. Efforts are underway to pump mud into the well later this week. (7/10 #21)
- Alaska asked for federal permission to conduct seismic testing in the Alaska National Wildlife Refuge to determine how much oil might be under the 19 million-acre preserve. Last month Washington rejected a plan to use Alaska money to pay for a new survey of the region by the US Geologic Survey. The state is obviously looking for ammunition in its ongoing battle with Washington over drilling in the preserve. (7/10 #22)
- Currency controls which prevent the movement of Euros from Cyprus to other capitols are raising fears that money movements in the Eurozone may be in danger as the economic crisis gets worse. (7/10 #23)
- As the shale oil boom matures, drillers are seeking new ways of extracting more oil and profits through technological innovations rather than increased drilling. Drillers report major advances in reducing time and costs in opening fracked wells. (7/10 #25)
- OPEC is forecasting that the global demand for oil will increase by about 1 million b/d next year, but warns that increased output of oil could be jeopardized by political unrest. (7/11 #7)
- The demand for oil has risen sharply in Algeria over the last few weeks creating shortages in some parts of the country. The start of Ramadan, a hot summer, smuggling to Morocco, and an increased demand from farmers are reasons for the shortages. (7/11 #10)
- Saudi Arabia’s new $6 billion, 400,000 b/d refinery at Jizan in the western part of the country is facing a 6-12 month delay and will be unable to start up until late 2016. (7/11 #20)
- Libyan oil output has fallen some 30 percent from the pre-civil war peak of 1.6 million b/d due to a nationwide collapse in security, labor unrest and shortages of electricity. (7/11 #21)
- Angola will likely miss its goal of producing 2 million barrels of oil per day by the end of 2013, but is hoping to reach this target in 2014 or 2015. (7/11 #22)
- Mexico is very close to opening its oil industry to outside investment that has been banned by its constitution since 1938. The change in sentiment was sparked by eight years of declining oil production with only the state-owned PEMEX allowed to explore for new oil fields. (7/11 #23)
- Transocean set a new world record when it started drilling a well in 10,400 feet of water off India. (7/11 #25)
- US oil production increased by 134,000 b/d the week before last pushing output to 7.40 million b/d, a level not seen since 1992. Analysts expect US production to hit 7.75 million b/d by the end of the year and the EIA is forecasting production of 8.1 million b/d in 2014. (7/11 #27)
- Rail delivery of oil and products in the US was up 48 percent year over year to 356,000 carloads in the first half of 2013. This works out to 1.37 million b/d being loaded on rail cars. (7/11 #31)
- EU lawmakers have voted in committee to limiting the biofuel in the transportation sector to 5.5 percent by 2020. (7/11 #32)
- OPEC is forecasting that the demand for its crude will slip by 300,000 b/d in 2014 due to slowing economies and increased output from non-OPEC countries. (7/11 #7)
- Stanford University researchers have joined the chorus of those saying that peak oil is unlikely in the near future. The researchers favor the “declining demand” theory as the more likely case. (7/10 #8)
- Consumers in Jordan are faced with electricity price hikes now that the pipeline that brings in natural gas from Egypt has been blow up for the umpteenth time. Faced with the possibility of anti-government riots stemming from the price hikes, the government is even considering making a deal for natural gas with Israel. (7/12 #12)
- North Dakota’s monthly oil production report will likely show an 12,000 b/d increase in production during May and 170,000 b/d increase in production over last year. Over 70 percent of Bakken production is now moved by rail. (7/12 #15)
- Italy’s ENI is discussing drilling in the deepwater off Cyprus. (7/13 #14)
- Shell has shut a major pipeline for the second time in less than a month due to a “leak.” This term is a euphemism for either a terrorist attack or a hole drilled in the pipeline by oil thieves. The government does not allow the oil companies to publicly announce such incidents until well after the fact as they reflect badly on the incumbents. (7/13 #18)
- Hundreds demonstrated against a proposed uranium plant in south China last week – yet another protest against plans for economic growth at the expense of the environment.
- Due to depreciation of the rupee, India is now paying as much for crude oil as it did in 2008 when oil prices hit an all-time high of $147 a barrel. (7/13 #22)
- The US rig count increased by two to 1,759 last week. Oil rigs were down by four, and gas rigs were up by seven. (7/13 #28)