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By Tom Whipple

1.  Oil and the Global Economy

Oil prices dropped last week for the first time in more than a month. After having increased by $14 a barrel in the previous 30 days, NY futures were down by $4 a barrel last week closing at $104.70.  In London, oil which had risen only $8 a barrel in the previous month was down about a dollar closing at $107.17. Much of the impetus for the decline was profit-taking after the three-week rise, but concerns about Chinese economic growth continue to rise as additional adverse economic reports on Beijing’s economy come in. The WTI/Brent price spread widened to $2.47 after having traded at parity early last week. Conventional wisdom at the minute is that oil prices are too high for the fundamentals and that unless there is a significant downturn in the Middle Eastern situation, prices will drift lower for a while.

US crude stocks were down by 2.7 million barrels the week before last as US refiners continued to crank out an unusual quantity of distillates for a strong export market.

The general outlook for the global economy is not good. The Wall Street Journal concluded that the “long-anticipated acceleration in the US economy has been put on hold once again” as retail sales and corporate profits have been disappointing. China may be in more trouble than most think with real economic growth falling well below the numbers that Beijing continues to report. Europe struggles along with the occasional bright spot, but no real recovery, and some analysts are worried about growth in non-OECD countries that are not oil exporters.

US natural gas futures closed at a four-month low last week as weather forecasters called for “average”weather in the next few weeks.

A congressional hearing on whether investment banks are using their ownership of raw materials to manipulate the commodities market is causing quite a stir.  Changes in the commodities markets may be in store.  JPMorgan said last week they may spin off their physical commodities business and some believe that banks are moving to get ahead of what could be a new wave of commodities regulation. This could lead to less liquidity in the commodity markets in the months ahead.

US gasoline futures fell about seven cents a gallon last week, but are still 35 cents a gallon higher than at the beginning of the month.

2.  The Middle East & North Africa

Iran: There were mixed signals on the nuclear standoff coming out of Tehran last week.  In Baghdad, Prime Minister al-Maliki, acting as an intermediary for fellow Shiites in Iran, told Washington that Iran’s incoming President is serious about direct talks with Washington over the nuclear issue.  Iran’s “Supreme Leader” Ayatollah Khamenei, however, said he is not optimistic that talks with the US would lead to an agreement. The US House of Representatives is planning to vote on a bill aimed at cutting Iran’s ability to export oil. The bill, which is expected to pass the Senate too, would direct the President to take measures to halt Tehran’s oil exports completely by eliminating exemptions from harsh US sanctions for those countries still buying Iran’s oil.

There is a general feeling of optimism in the West, however, that Iran’s new President, Hassan Rouhani, has enough clout with the Ayatollah to push through concessions necessary for a nuclear deal, despite the nearly unanimous opposition of hardliners in Tehran.

Tehran and Baghdad signed a $14.8 billion agreement to use Iranian natural gas to fuel Iraqi power stations. A combination of strenuous US objections to the deal and the irresistible target the new pipeline will make for Sunni/al-Qaeda bombers make it unlikely that the project will be successful.

Iraq: It was another bad week in Baghdad. The Associated Press body count says that more than 550 Iraqis have been killed in violent attacks this month. The death toll for the last three months has been the highest in five years, surpassed only by the days when Sunni and Shiite militia battled each other and 175,000 US troops. The freeing of hundreds of hardened al-Qaeda terrorists during assaults on two Iraqi prisons last week does not bode well for the future.

While the violence has as yet had only a minor impact on Iraqi oil exports, the time is not far away when the impact will be substantial. The northern export pipeline to Turkey is a prime target for Sunni insurgents bent on denying the government export revenues and has been attacked frequently.  There have been so many repairs to bomb damage along the pipeline that its carrying capacity has been reduced; and some are wondering how long it can go without a major overhaul. Insurgent attacks have started to spread into southern Iraq where most of the oil infrastructure is located. So far there has not been a serious effort to drive out foreign oil workers that are rehabilitating Iraq’s oil industry, but this cannot be far away if current trends continue.

Egypt: The situation went from bad to worse over the weekend when the Army used force to suppress pro-Morsi demonstrators in several locations across Cairo. Scores were killed and the wounded may total 1,000 or more. Further exacerbating the situation was the report that former President Morsi was being moved to a prison and was being charged with collaboration with Hamas and other crimes by the new government.

Multi-billion dollar gifts and other subsides from the Gulf Arab states have stabilized the economic situation for the minute. However, the new government is showing no inclination to reduce the $150 billion program of grants, subsidies and social programs that support many of the country’s 85 million people.

The political troubles are starting to interfere with oil and gas production. The British energy company BG Group is pulling some of its staff out of Egypt. Offshore operations have not been affected, but LNG exports have declined. Although the domestic energy supply is under control at the minute thanks to the generosity of the Gulf Arabs, the wheat situation remains unclear. Given that Arab money is flowing in, Cairo should be able to import enough wheat to get through the rest of the year unless the uprising leads to a major societal breakdown.

Syria:  The country is slowly evolving into three states; the Assad regime is consolidating its hold on the west and coastal areas; the rebels are consolidating the area around Aleppo and down the Euphrates valley; and the Kurds are talking about forming an independent state in the northwest. There is talk of al-Qaeda forming a religious state within the rebel controlled territory. For the time being, Syria as we knew it has ceased to exist.

The situation seems to be in a stalemate with the rebels unable to overcome the Hezbollah-reinforced government forces and the government unable to move into the rebel held territory in the north and east. The EU seems ready to declare the military wing of Hezbollah a terrorist group which would harm its efforts to raise money in Europe, seize whatever assets are located there, and restrict travel of Hezbollah military officials. The blurry line between political and military Hezbollah, however, will make these sanctions difficult to impose.

Were it not for the growing refugee and food crises, Syria could slip from world attention as troubles grow in other countries. The country’s oil exports are all but gone and it is living on handouts from Russia and Iran. For the immediate future, Syria seems more important for the impact its insurrection will have on Jordan, Lebanon, and Iraq or possibly its role as a factor in nuclear negotiations with Iran.

Elsewhere in the region: There were number of developments last week that could eventually impact oil exports. In Libya, protestors attacked the offices of the Muslim Brotherhood and the headquarters of a liberal coalition after the assassination of a prominent political activist and opponent of the Brotherhood.  The Brotherhood holds the second largest number of seats in the legislature and there is growing opposition to its increasing influence. During the attack, more than 1,100 detainees escaped from a prison near Benghazi. Most were being held on serious charges and their escape will only add to the precarious situation in the country.  The pro-military demonstrations in Benghazi and Tripoli seem to be related to the anti-Brotherhood demonstrations in Cairo.

Kuwait held parliamentary elections on Saturday, the third such election in 17 months. This election was ordered by the court after in found flaws in the December election. Although the Kuwaiti parliament probably has more real power than any elected body in the Gulf Arab states, the Al Sabah family and the 84-year-old Emir still controls all key government offices and policies. This election comes amidst street demonstrations and government crackdowns on the social media. Nobody is expecting upheavals such as those in Egypt or Syria, but the country is a large oil exporter and the situation needs to be watched.

In Bahrain, three policemen were wounded in bomb blasts after demonstrations by militant Shiite factions against the Sunni-ruled Island. The bombings are a reminder that the 30 month old uprising on the island continues.

South Sudan has cut back its oil exports through Sudan to 97,000 b/d from 200,000 the week before last amid recriminations. South Sudan is threatening a total halt to exports.

3. China

The major development of the week was the announcement that China’s manufacturing sector contracted in July at the quickest pace since last summer. The new data emphasizes the stresses on China’s economy as it tries to move away from an economy based on exports and investment in infrastructure to one based on domestic consumption. Complicating the problem is the toll that rapid economic growth is taking on the environment and health. If emissions are to contract by 30 percent in the next four years, which is the current plan, we are obviously going to see an adverse impact on economic growth for increases in green energy or energy efficiency so quickly is improbable.

New Chinese figures on oil domestic production show it increasing by 172,000 b/d in the first half of the year to 4.18 million b/d. This is a substantial jump from the 62,000 b/d increase at the end of June. Outside observers are becoming increasingly skeptical of official Chinese economic numbers as economic growth slows and environmental problems increase. The speed with which China reports many economic growth statistics, often only a few days after the end of a reporting period, is something no other country has been able to do.

4. Quote of the Week

  • “In the space of less than two years the amount of oil being shipped by rail in Canada nearly tripled to almost 300,000 barrels a day. Without new pipeline capacity, the amount would surely go even higher.  [S]hipping oil by rail is far more environmentally challenging than moving it through a pipeline. The environmental movement definitely didn’t want oil to be diverted from pipelines to rail, of this I’m sure. But the Keystone [XL pipeline] saga is riddled with unintended consequences.”

— Jeff Rubin, oil economist and author

 

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

  • This year, more trains carrying crude will chug across North America than ever before – nearly 1,400 carloads a day. In 2009, there were just 31 carloads a day. (7/23 #23)
  • A series of surface oil leaks at Canadian Natural Resources Ltd.’s oil sands operation has called into question the safety of bitumen extracting methods.  Canada’s largest independent oil producer CNRL has not been able to stop the leaks in northeastern Alberta, the first of which was reported May 20.  At issue is an in situ production process called high pressure cyclic steam stimulation, a procedure used in oil recovery for over 30 years. (7/27 #24)
  • India’s crude oil production in June fell marginally from a year earlier and natural gas output continued its declining trend. Crude oil output fell 0.6 percent to 762,320 barrels a day. (7/25 #14)
  • High utilization of the offshore rig fleet is driving day-rate costs to historical highs as strong demand calls for new, deeper-water vessels to be built to the latest specifications. These can cost more than $500 million each, but a recent deal offshore Africa shows Total is paying almost $700,000 a day to hire a new ultra-deepwater drill ship. The expected demand from Brazil could push these rates higher still. (7/25 #4)
  • Off Israel’s shores, Noble Energy, the Texas company that discovered rich natural gas fields off Israel and Cyprus in the eastern Mediterranean, is getting ready to start deep-water exploration for as much as 1.8 billion barrels of oil in Israeli waters. (7/25 #10)
  • Israel’s navy is trying to figure out how best to protect the Jewish state’s expanding gas industry– and if current plans work out, oil production as well — from a wide spectrum of security threats that seem to be growing by the day amid the violence convulsing the Middle East. (7/27 #10)
  • In Mexico, Pemex has run up yet another large quarterly loss.  The state-owned oil giant saw its revenues shrink further due to a stronger home currency against the US dollar plus fewer exports as domestic demand increased. (7/27 #16)
  • Falkland Islands explorer Argos Resources revised upwards its estimate of the resource potential in its exploration license following new seismic work. The company said 52 mapped exploration prospects and leads in its block are seen holding total un-risked potential of 3.08 billion barrels of prospective recoverable resources, up from 2.11 bb. (7/26 #13)
  • Last Friday a Pennsylvania Democrat introduced in the US House of Representatives a bill aimed at eliminating a more-than-30-year-old federal loophole he claims has allowed oil and natural gas companies to avoid hazardous waste disposal standards. (7/27 #21)
  • Oil and gas rigs in the US increased by six to 1,776 this week, according to Baker Hughes.  The advance was the fourth in a row.  Oil rigs rose six to 1,401 while gas rigs were unchanged at 369. The total U.S. count reached the highest level since March 15.  (7/27 #23)
  • A combination of oil and gas innovations and well-site cost cuts is rendering the vaunted US rig count a less important oilfield indicator than the number of holes in the ground. In keeping with the times, oilfield services company Baker Hughes is complementing the rig count it has tallied for more than 70 years with a new metric: US well counts. (7/24 #4)
  • The US Dept. of Energy said Thursday that the world will use far more of every type of energy in coming decades. Their report predicts that China and India will drive growing consumption and that world-wide use of energy—mostly for transportation and electricity—will surge 56% by 2040 compared with 2010 levels. (7/26 #5) [NOTE: it seems there will be no supply constraints.]
  • Japan’s demand for imported natural gas, which ballooned after the 2011 Fukushima Daiichi nuclear disaster, is falling and may deflate a lot further if the government succeeds in getting dozens of idled nuclear reactors restarted. (7/24 #17)
  • Walter Oil Corp. lost control of a natural gas well off the coast of Louisiana. A natural gas plume ignited Tuesday evening and, by Wednesday, part of the rig owned by Hercules Offshore had collapsed.  By Thursday the failed well had “bridged over” or sealed itself with sand and sediment.  By evening it was just a small flame. (7/27 #20)
  • A landmark federal study on hydraulic fracturing, or fracking, shows no evidence that chemicals from the natural gas drilling process moved up to contaminate drinking water aquifers at a western Pennsylvania drilling site, according to the US DOE. (7/23 #24)
  • Makers of some renewable fuels are asking the federal government to ease quotas for use of their products in a bid to head off a congressional overhaul of a program that refiners say is driving up costs at the pump. The concern: production of fuels made from sources such as wood waste, algae or used cooking oils are a fraction of what was envisioned in a 2007 law. (7/26 #14)
  • Maryland will boost its renewable energy portfolio standard, strengthen its programs to further reduce energy usage and require power plants to reduce their emissions by 40 percent, Governor O’Malley said Thursday. O’Malley believes the state is likely to fall short of its target to reduce greenhouse gas emissions 20 percent by 2020 and therefore he was releasing a plan to get the program back on track. (7/26 #15)
  • The US Department of Justice has started an antitrust investigation of the pressure-pumping business, a key part of the oil and gas industry practice of hydraulic fracturing. (7/25 #18)
  • In the Kurdish region of northern Iraq, oil flowed from a well at a rate of 25,000 b/d, a site record for energy company DNO International. A Tawke well tested previously at a rate of 8,000 b/d.  (7/24 #8)
  • The Energy Information Administration said OPEC nations excluding Iran earned nearly $982 billion in net oil export revenues last year. That’s a 5 percent increase from 2011. (7/24 #12)
  • The US rail industry, in the wake of the deadly oil-train derailment in Quebec this month, is grappling with a safety problem regulators have warned about for years: tank cars that rupture during accidents. (7/24 #21)
  • The oil-production boom is delivering prosperity to pockets of the US, but in West Texas, the epicenter of activity, it is also bringing trouble in the form of surging electricity prices. Many municipalities and businesses are bracing for big surcharges this year, after having been hit hard last summer, as energy use by oil drilling and production equipment outpaces the capacity of the region’s power grid. (7/24 #22)
  • The potential for misunderstanding shale resource estimates is great. Various organizations have published resource estimates for shale gas plays in the US and around the world. These reports are commonly misinterpreted as representing commercially producible volumes of gas. (7/24 #24)
  • West African pirates will threaten the region’s oil and shipping industries for years as the measures used to curb attacks in the Indian Ocean aren’t able to help, according to a provider of armed guards for vessels. (7/23 #16)
  • Oil and gas companies in the US would face at least $345 million a year in extra costs if rules on hydraulic fracturing on public lands as proposed by the Obama administration are finalized, industry groups said on Monday. (7/23 #22)
  • Chinese authorities said they raised the price of gasoline by more than 3 percent because of high crude oil prices on the international market. The National Development and Reform Commission, which sets energy prices, said gasoline prices are on the rise in response to oil prices. (7/22 #15)
  • Forbes recently issued a commentary on the closing of The Oil Drum which deserves some rebuttal since, as with many stories on the “Peak Oil” topic, it conveys too many incorrect statements and false assumptions.
  • About half of China’s rivers have dried up since 1990 and those that remain are mostly contaminated. Severe water pollution affects 75 percent of China’s rivers and lakes and 28 percent are unsuitable even for agricultural use.  Without enough water, coal can’t be mined, new power stations can’t run and the economy can’t grow. At least 80 percent of the nation’s coal comes from regions where the United Nations says water supplies are either “stressed” or in “absolute scarcity.”  (7/27 #17)
  • Foreign nuclear experts harshly criticized the operator of the devastated nuclear power plant at Fukushima on Friday for its delay in disclosing that highly contaminated groundwater has been leaking from the site into the ocean. (7/27 #8)
  • In Tunisia, the government on Friday blamed an Islamist extremist cell linked to Al Qaeda for the killing of a leader of the political opposition and identified the chief suspect as the person who also killed an opposition figure in February. (7/27 #14)
  • Saudi Arabia is seeking about $109 billion of investment for a solar industry that will generate a third of its electricity by 2032. (7/23 #12)
  • China banned the construction of government buildings for the next five years, the latest in a series of initiatives to discourage corruption and foster frugality. (7/24 #16)
  • 350.org is asking colleges, cities and churches to divest their financial holdings from a group of 200 companies that produce coal, oil or natural gas. So far six schools, 16 cities and 11 religious institutions have agreed to divest from those companies. (7/27 #22)