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By Tom Whipple

1.  Oil and the Global Economy

Oil prices continued to fall last week and are now down roughly $5 a barrel since mid-May. Weak demand in the US and EU, adequate production, large inventories, expectations as to Federal Reserve actions, and little perception of a threat to oil exports from the turmoil in the Middle East have resulted in slipping prices. The decision by OPEC to maintain its 30 million b/d production quota was behind Friday’s sharp decline which left NY oil just below $92 a barrel and London just above $100.

The EIA reported that US crude stocks grew another 3 million barrels the week before last and are now at the highest level since 1931, a big historical jump from the 1981 high reached only recently. US tight oil production is up 17 percent over last year with Eagle Ford production now over 500,000 b/d.

The outlook for the global economy and oil demand in the immediate future is generally not good. Unemployment in the Eurozone hit another record high last week. Nearly all forecasters are making downward adjustments to their outlooks for China, and despite incessant optimism in the financial press, the US economy does not seem to be rebounding in any significant way.  The OECD said last week that protracted economic weakness in Europe “could evolve into stagnation with negative implications for the global economy.”

Of long-term significance was last week’s report that China’s coal production fell 2 percent to 1.15 billion tons in the 1st quarter, while stockpiles climbed to 150 million tons above normal. China’s coal imports climbed 25 percent to 110 million tons during the period. Rapid growth in China’s coal production, which has been running at around 10 percent a year, has been the backbone of China’s economic miracle and of course  a primary reason for ever-increasing air pollution for the last 30 years. Without steady increases in coal production it is difficult to see how China can maintain spectacular economic growth rates in coming years by relying on renewables, nuclear, and increased efficiency.

US natural gas futures declined for five straight sessions to settle Friday at $3.98 on forecasts that milder weather will be returning to the East Coast. Analysts expect natural gas futures will trade within 50 cents of the $4 level for the rest of the summer depending on temperature forecasts. The IEA noted last week that if US exports of natural gas should drive prices up to the $5 level, there would be a major switch from gas to coal by power producers.


2. Middle East & North Africa

IRAN:  The first televised debate of the Iranian Presidential election took a bizarre turn last week when the eight “mullah-approved” candidates took off after the sorry state of Iran’s economy.  They sounded more like dissident exiles than carefully selected regime candidates for the Presidency. The candidates spoke of high unemployment, huge government deficits, shuttered factories, and the Revolutionary Guard taking over an increasing share of the economy. The leading candidate for President seems to be Saeed Jalili, the hardline, anti-western, nuclear negotiator. No matter the outcome of the 14 June election, the major policy decisions –Syria, nuclear weapons, and relations with the West –will remain firmly in the hands of Supreme Leader Khamenei. The best a new President can do to effect change is to slowly convince the Ayatollah that the situation is so bad that change must come.

In the meantime, Iran’s crude shipments to Japan in April were down 97 percent over last year and the lowest since 1957. Tehran is believed to have some 30 million barrels of crude in floating storage that it can’t sell.

Syria:  The assault on the key town of Qusayr by government and Hezbollah forces continues into a second week of heavy fighting. The well-armed government and Hezbollah forces, said to number about 1,700 men, have the town surrounded and are shelling the insurgents and thousands of civilians trapped inside. The UN is becoming concerned about 1,500 wounded trapped in the city with no medical attention.

Reaction to Hezbollah’s intervention against fellow Muslims is growing, with rockets being fired at Hezbollah cities and neighborhoods in Lebanon.  A leading Sunni cleric based in Qatar has called for a Sunni holy war against Assad and Hezbollah. Hezbollah’s leaders believe that keeping a Shiite-dominated government in power in Syria which will guarantee them access to Iranian weapons is worth risking a holy war with their co-religionists.

The proposed Geneva talks to settle the Syrian conflict seem to be going nowhere. There is much talk of Europe and the US supplying weapons directly to rebel forces if the talks do not take place.

Moscow says it is going to supply “defensive weapons,” that had previously been ordered, to Syria – most likely air defense missiles and fighter aircraft. Whether or not these ever arrive or are effectively integrated into Syria’s armed forces, the announcement has inspired President Assad to start threatening the Israelis with retaliation against any more air strikes into Syrian territory, even if they are only aimed at arms going the Hezbollah.

There seems to be no end to the conflict in sight as more neighboring countries are drawn deeper into the uprising.  Over the weekend, there were even riots in Turkey that seem tangentially related to the Syrian conflict. Lebanon, Iraq, and Jordan are already deeply involved, as are Iran, Israel and the Gulf Arab States that are financing the rebels.

On a more mundane note, Syria’s oil minister said last week that production is down to 20,000 b/d from 380,000 b/d two years ago and that natural gas production is about half pre-war levels.

Iraq: The UN announced last week that some 1,000 Iraqis were killed and 2,300 wounded in bomb and other terrorist attacks during May. These numbers which are the highest since June 2008 are approximately double what the wire services have been reporting, but the UN says it has better numbers. Last Monday more than 70 were killed in a wave of bombing in Baghdad’s Shiite neighborhoods. Bombings somewhere in Iraq is now a daily occurrence and fears of still more violence or an open civil war are growing. Old Middle Eastern analysts, however, point out that Iraq has been in turmoil for over 50 years and there is no reason to believe that the current round of troubles will slow or stop oil exports. The loss of 2 million b/d of exports would be noticeable however.

Last week the government announced it had foiled an al Qaeda plot to use explosive-filled oil tankers to blow up a major Baghdad oil facility. No one knows how many Iraqis are fighting, on both sides, in Syria, but the number of bodies being returned to Iraq for burial is on the rise.

Egypt: Ethiopia has begun diverting water from the Blue Nile to build and fill its $4.7 billion “Grand Renaissance” hydroelectric dam. The dam which is supposed to be completed by 2015 is to hold 63 billion cubic meters of water – which will not reach Egypt and Sudan. The announcement came the day after the Ethiopian prime minister had met with Egyptian President Morsi to discuss the issue.

The current water-sharing agreement for the Nile which was brokered by the UK in 1959 gives Egypt 55 billion cubic meters a year and Sudan 18.5 million out of the river’s annul flow of 85 million cubic meters per year. Egypt currently needs about 47 billion cubic meters per year to feed its population of 82 million which continues to increase.

Addis Ababa say an independent panel has concluded that the dam will not reduce the flow of water going into Sudan and Egypt. In the past, Cairo has threatened to go to war over the issue, but for now both sides are downplaying the possibility of conflict.




The Organization of Petroleum Exporting Countries has fallen on hard times. The price of oil has been falling; increases in US tight oil production has markedly reduced US imports from Algeria, Nigeria, and Angola; the sanctions on Iran have cut its exports and are turning its economy into a basket case; the Syrian insurrection is raising hatreds between Sunnis and Shiites; several OPEC members, such as Nigeria, Libya and Algeria, have active or incipient insurgencies that threaten oil production; the post-Chavez Venezuelan economy is a mess; and to top it all off rising global temperatures are forcing the Arab Gulf monarchies  to divert increasing amounts of oil to keeping their people cool in the summer and off the streets.

With all these problems, it is little wonder that all the cartel could do was vote last Friday to maintain the meaningless 30 million b/d production cap. Several OPEC members, for a variety of reasons, can no longer produce at their authorized quotas, while others routinely exceed them at will. About the only substantive development was to abolish its Production Monitoring Committee that oversaw member compliance with their quotas.

While the threat of “shale” oil dominated the Vienna meeting, the members kept a united front during the public sessions, but after the press left, spoke out in their own interests. Iran and Venezuela would like production cuts to prop up prices, while the African states that are suffering from the drop in US imports would like some kind of relief.

The Gulf Arabs, who dominate the cartel and are reasonably happy with the status quo, told the Africans to go find other customers, and have not the slightest interest in helping out the Iranians who are fast becoming their mortal enemies.

The meeting did agree to study the “shale” oil question and its possible impact on oil exports.