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By Tom Whipple

1. Oil and the Global Economy

Oil prices fell some $3 a barrel last week on indications that China’s manufacturing has slipped to a seven-month low, weak demand from the US, and hints that the US Federal Reserve may slow quantitative easing,  which many believe has supported oil prices in recent years. At Friday’s close NY oil was down to $94.15 and London at $102.64. Despite the lower prices, tanker trackers say that OPEC seems to be maintaining its recent level of exports. Much of the recent buildup in global oil stocks, however, is taking place in the US.

US average gasoline prices are holding around $3.63 a gallon prior to the Memorial Day holiday. Overall US gasoline inventories are above normal and US gasoline demand is down to the lowest in 13 years. Local refinery outages in the US and Canada, lower-than-normal local inventories, and distribution problems are behind the late spring price run-up which had prices above $4 a gallon in parts of the mid-west ($4.27 in Minnesota) and on the west coast.

The weekly stocks report showed crude stocks down a bit but a 4 million barrel increase in total commercial petroleum inventories. The glut at Cushing, Okla., which had been declining lately, reversed and went up by 450,000 barrels showing that the industry still has a ways to go in straightening this situation out.

The oil price fixing investigation in the EU is moving ahead with investigators asking trading houses to provide whatever information they have to regulators. The British say they are reviewing whether their Serious Fraud Office should join the EU’s investigation or whether a criminal investigation should be opened. Given the trillions of dollars that pass through the oil markets each year, even tiny price manipulations can result in large profits. Platts, which is at the center of the probe, has launched its own internal investigation of the procedures used to set oil prices.

US natural gas prices touched a three-week high of $4.30 per million last week. Forecasts are for warming weather in the US in coming weeks and a more active than usual hurricane season this fall.


2.  Middle East and North Africa

Most attention last week was focused on the prospects for the US-Russian sponsored Syrian peace talks that are to be held Geneva. Under pressure from Moscow, the Syrian government has promised to show up, provided the departure of Assad is not a pre-condition. For its part the opposition which is made of dozens or possibly hundreds of rebel groups with different aims and aspirations all seem to agree that Assad’s departure is the only precondition they care about.  Given these positions the prospect for a conference does not seem good.

The impetus for the peace talks comes from the growing realization that the fighting could go on for years eventually spreading across the region which is in nobody’s interest. Should the conference not get off the ground, Washington says it will start supplying weapons to the insurgents.

Syria: In a major turn of events, the government went on the offensive last week to drive the rebels back from Damascus and to capture the key city of Al Qusayr which controls the roads into Lebanon and to the Shiite-dominated northern coast of Syria. The key to this offensive seems to be the addition of organized Hezbollah militia units from Lebanon which has now officially entered the fighting. The US says an unknown number of Iranian troops are also taking part in the offensive. Government initially made progress and some of the heaviest fighting of the war is now taking place. The Sunni insurgents have issued a call for reinforcements realizing that these battles may to critical to the course of the war.

The fighting in Syria is spreading into Lebanon where Shiite and Sunni militias have been battling each other. Rockets have been fired into a Shiite neighborhood in Beirut, possibly in retaliation for Hezbollah’s official involvement in the fight.  The events of the past week clearly represent major complications to any settlement of the problem.

A recent report holds that much of Syrian oil production has fallen into the hands of the anti-Western jihadist Al Nusra rebels who are selling the crude and refined products for their own benefit.  These developments have major implications for the future stability of Syria. The Assad government now seems to be cut off from its own oil and is relying on imports from Iran, Venezuela and Iraq to fuel the areas it holds and its military equipment.

Iraq: Events continue to spin out of control as more bombs go off and casualties mount. Although the violence is not as bad as it was six or seven years ago, it is on the upswing. Talk of civil war increases as does the talk of a new constitution that would form a federal-style Iraq with more autonomy for the Kurds, Shiites, and Sunnis. Some 50,000 Syrian Kurds are moving into Iraqi Kurdistan to escape the violence in Syria and growing problems with the Sunni militias that now control much of northern and eastern Syria.

A new Kurdistan-to-Turkey oil export pipeline is nearly complete. The rapid completion was due to conversion and additions to an existing natural gas pipeline. If the Kurds gain a way to export large amounts of oil without reference to Baghdad, it puts them in a much stronger position. It also increases the possibility that Baghdad will attempt to stop the exports with military force sparking still more trouble.

Iraqi exports for May averaged 2.6 million b/d while production for the month was 3.1 million according to Iraq’s Oil Minister.  Lower exports were partly due to sabotage of the northern export pipeline during the month and the Kurds’ refusal to use the pipeline for oil extracted from their territory.

Iran:  The International Atomic Energy Agency announced last week that Iran is attempting to speed up its uranium enrichment by installing more advanced centrifuges. The Agency believes that Tehran now has the capability of manufacturing the more advanced devices itself despite the tightening sanctions.

Last week Iran’s Guardian Council banned former President Rafsanjani from taking part in next month’s presidential election. By banning Rafsanjani and other moderates the coalition of conservative mullahs and Revolutionary Guard commanders currently in power assure themselves that the next president will be firmly in their camp. Security forces already have the country well under control in the run-up to what will likely be a low turnout election. Whether there will be any repercussions from this naked power grab on the part of conservative forces remains to be seen.

Israel: Israeli forces on the Golan Heights exchanged fire with Syrian forces, after the Syrians fired on an Israeli vehicle. Damascus which probably took the worst of the exchange later announced the Israelis had invaded Syrian territory. Tel Aviv issued a strong warning to Damascus about not making trouble on the Golan Heights.

Concern deepens in Israel over the course of the Syrian uprising. Over the weekend, the Israelis had a countrywide defense-against-gas exercise and the chief of the Israeli Air Force warned the country must be prepared for widespread hostilities at any minute.  There is still much concern over just what weapons Russia is planning to supply to Syria. Should the Syrians acquire the latest Russian air defense systems, it would theoretically be possible for the Syrians or Hezbollah to turn Israel into a no-fly zone by shooting at civilian airliners. These are very sophisticated systems, however, requiring much training to be used effectively. It is a doubtful if what is left of Assad’s armed forces could use advanced air defense systems effectively in the midst of the current conflict.

There is also concern about the threat long range anti-ship missiles would pose to Israel’s budding new natural gas industry in the Mediterranean, especially if they fall into the hands of Hezbollah.  Last week a new natural gas discovery which could hold as much as 2 trillion cubic feet was announced. The total natural gas discoveries announced now total about 38 trillion cubic feet.

Pakistan: The country is currently going through the worst energy crisis in its history with electric power cut off from 12 to 18 hours a day in most places. Now the Ministry of Petroleum has warned that still more cutbacks are in sight for this summer as the Ministry was already delinquent on payment for previous oil shipments and was unlikely to be able import more oil this summer.

Last week Chinese Premier Li visited Islamabad and said the two countries should work together to solve Pakistan’s energy crisis. Building new power generation facilities would be nice but will take many years and Pakistan’s needs are critical given the deteriorating political situation. Unless China, or some other friendly state, comes through with loans to import the badly needed fuel oil in the next few weeks, Pakistan may be in a lot of trouble this summer.

 

3.  China’s Economy

With China on tap to absorb roughly half of the 900,000 b/d increase in demand that that the IEA and other forecasters predict will come about this year, the staus and outlook for China’s economy is always a major concern. Last week when it was announced that China’s factory activity shrank for the first time in seven months, the news started oil prices downwards. When it was announced that China’s purchasing managers’ index had fallen below 50, which indicates economic contraction, the Asian financial markets dropped sharply.

The government’s goal of a 7.5 percent increase in GDP this year now seems like a difficult target. As exports fell in 2012, China’s economy tipped more towards credit fueled investment to maintain economic growth. This, of course, adds to debt problems, industrial overcapacity, and “ghost cities.” Most observers agree that China needs to rebalance its economy to a consumption-driven model if it is to continue growing at anything like recent rates.

Last week Beijing announced a major shift in economic policy that seem intended to do just what most observers have been asking for. The new proposals, which will not be acted on until fall, envision more market competition and giving private businesses a bigger role in investment and setting prices. A major change would be to allow private capital in finance, energy, railways, and telecommunications that have been in the sphere of state owned enterprises. Another proposal would let foreign investment into banking and other service industries.

The apparent slowing of China’s economic growth is increasing worries that 2013 might not turn out to be as rosy as forecast. Many economists are now lowering their growth forecasts for the remainder of the year. Whether the demand for oil remains as strong as the IEA and OPEC have forecast remains open.

 

4.  Quote of the Week

  • “I want to hear what the industry can do to get other states’ levels of flaring down to Texas’ levels [at 0.5% of produced gas; North Dakota flares 30%].”

—  Senator Ron Wyden (D-OR), Chairman, Energy and Natural Resources Committee

 

5.  The Briefs (clips from recent Peak Oil News dailies are indicated by date and item #)

  • Algeria is under growing pressure to ease its much-criticized foreign energy investment laws following this month’s warning from BP that it may delay important projects in the nation’s gas-rich south because of security concerns. The moves by BP and other foreign oil companies could jeopardize Algeria’s ambitious $80 billion development plans. (5/24 #7)
  • The Libyan economy is vulnerable to fluctuations in oil prices as well as security and political challenges, the IMF said. OPEC reports that Libya produced 1.51 million b/d in April, near its pre-war level of 1.65 million b/d. (5/24 #8)
  • Nigerian oil exports are set to remain well below last year’s average in July as thefts and sabotage have continued to harm the country’s oil infrastructure. Nigeria plans to export 1.92 million b/d in July, well below the country’s average export volume of 2.24 million b/day last year. But this shortfall is not boosting world oil prices, thanks to gains elsewhere. (5/25 #13)
    • Canada’s rig count was up 8 rigs last week to 131–75 rigs drilling for oil and 56 drilling for gas. The total was down 27 units from the comparable week last year. The US drilling rig count was down 7 units last week, reaching a total of 1,762 rotary rigs working.  Of that total, Texas accounted for 840 rigs, or 48%. (5/25 #19)
    • The U.S. House of Representatives passed legislation to approve the Keystone XL oil pipeline, the eighth time congressional Republicans have advanced a measure promoting the project. However, the Senate isn’t considering similar legislation, and President Barack Obama’s administration has said he would likely veto the bill  (5/22 #19)
    • Alaska’s ANWR: the state government proposed investing as much as $50 million of its own cash in an assessment of oil reserves in the U.S. Arctic National Wildlife Refuge, seeking to prod the federal government to consider drilling in the protected area. (5/21 #13)
    • BP has stepped up its efforts to challenge what it believes are unjustified compensation payments under the multibillion-dollar settlement it agreed with victims of the 2010 Gulf of Mexico oil spill. Contested claims recently reached 9.3% of awards granted. (5/22 #14)
    • Britain came within six hours of running out of natural gas in March, according to a senior energy official, highlighting the risk of supply shortages amid declining domestic production and a growing reliance on imports. (5/24 #21)
    • The Freeport LNG facility on Quintana Island in Texas is conditionally authorized to export as much as 1.4 billion cubic feet of natural gas a day for 20 years, DOE said Friday. Twenty other applications to export LNG are pending. (5/21 #9)
    • As the US debates exporting more plentiful natural gas from new liquefaction along the East and Gulf coasts, gas exports to Mexico in the past 3 years have doubled. Over the same period, natural gas production in Mexico has declined 11%. (5/22 #17)
    • US coal production: US year-to-date coal production totaled 368.5 million short tons through Saturday, 6.1% lower than output in the comparable period in 2012. (5/24 #19)
    • China’s growing fleet of SUVs will offset gains in fuel efficiency and continue to drive oil-demand growth, according to Bernstein Research. Chinese oil consumption will increase at an average annual pace of 5 percent to reach 12.9 million b/d in 2018, from 9.6 million b/d in 2012. (5/22 #11)
    • China: A government test indicated that nearly half the rice sold in the Chinese city of Guangzhou was contaminated with cadmium, triggering anger from consumers that China’s staple food hasn’t escaped the widespread pollution tainting its air, water and soil. (5/21 #8)
    • China’s environmental ministry has approved the construction of a new hydroelectric dam in Sichuan province which will be the country’s largest hydro project. (5/22 #9)
    • In India, a blistering heat wave has swept across most northern and western parts of the country, causing massive electricity cuts and leading angry residents to protest and even attack power company officials and property. (5/23 #15).
    • The High Plains Aquifer is drying up. Vast stretches of Texas farmland lying over the aquifer no longer support irrigation. In west-central Kansas, up to a fifth of the irrigated farmland along a 100-mile swath of the aquifer has already gone dry. (5/21 #14)
    • Iranian-backed hackers have escalated a campaign of cyber assaults against U.S. corporations by launching infiltration and surveillance missions against computer networks running energy companies, according to current and former U.S. officials. (5/24 #5)