1. Oil and the Global Economy
Oil prices remained stable for most of last week with NY oil climbing a dollar or so and London oil falling about the same. On Friday however a number of factors came together to send NY oil down $2.23 a barrel to close Friday at $84.86. London also fell, closing at $105.64, down $2.53. These were the lowest settlement prices in both markets since last July. The downward pressure came in the aftermath of Superstorm Sandy when it became apparent that two major refineries with a combined capacity of 308,000 b/d, which were shut down for the storm, could not resume operations immediately. The devastation and power outages caused by the storm resulted in little gasoline being pumped in the region. On the world scene, the stronger than expected US jobs report sent the euro down taking oil prices with it as did a weaker equities market.
While last week’s US stocks report showed a 2 million barrel decline in crude inventories, most analysts believe the widespread refinery outages caused by the storm soon will push the inventories to a 30-year high for this time of year. This expectation also contributed to the market weakness on Friday.
Natural gas futures fell steadily last week on the theory that with so much of the electric grid out in the New York area, the demand for gas, which is used to generate 35 percent of the electricity in New York and New Jersey, would shrink after more than eight million people lost power. The week’s natural gas inventory report showed that 65 billion cubic feet were added, sending the inventory to 3.9 trillion cubic feet – the highest level ever.
Gasoline futures gyrated during the week as concerns about refinery and distributions played against the region’s inability to supply much gas to consumers. On Friday futures fell as supplies coming into the NY area increased, but little progress was made on getting gas stations running again. State restrictions on gasoline sellers which keep prices from rising excessively – a 10 percent cap in New Jersey – helped keep the situation under control.
The global diesel and heating oil situation is tightening again. Colder weather is already settling in on Europe and Northern Asia, while the heating oil stocks situation in the northeastern US where most of it is consumed is becoming very tight. Forecasts of a colder winter in the US has caused the EIA to project that heating oil consumption will be up 16 to 18 percent over last year when temperatures were mild.
2. Sandy’s Aftermath
The supply of gasoline, diesel, and jet fuel into the NY area came to nearly a complete halt on Monday as the worst storm on record shutdown power to more than 8 million people. By week’s end more that 2.5 million utility customers were still without power although the lights were back on in southern Manhattan and much of the subway system was running again. The power outages served to emphasize just how much the oil product distribution system is dependent on the power grid to run pumps. Nearly all the gasoline stations that were still functioning were running on backup power.
At one point some 70 percent of the gas stations in the most affected areas were not open leading to miles-long backups and flared tempers. Many gas stations required a police presence to keep order. In New Jersey the situation became so bad that, in some counties, the governor decreed a police-enforced odd/even license plate system that has not been seen since the Arab oil embargo 40 years ago. In Manhattan, Mayor Bloomberg decreed that only cars carrying three or more passengers would be allowed into the city in a attempt to ameliorate the chaos caused by the lack of traffic lights. At one point NY was distributing 10 gallons of gasoline for free from five Army tank trucks, but that led to even more long lines.
By week’s end NY’s oil terminals had been restored to operation and tankers of fuel were coming in. Recovery from the storm remains spotty with hundreds of thousands still trapped in powerless, storm damaged homes along the shoreline and facing falling temperatures without any source of heat. Temperatures are forecast to fall into the 30s F. this week, raising fears that heating oil shortages or delivery bottlenecks will develop before the week is out. Finding fuel for fuel oil delivery trucks is currently a major problem. Some distributors are rationing customers to 100 gallons per building until the situation improves. The US Department of Energy released two million gallons of heating oil from a reserve in Connecticut to help with the shortage. There is another 42 million gallons still in reserve, but as somebody pointed out, 2 million gallons could be used up in about 8 hours on a cold day in New York.
To help the situation, the Obama administration waived the Jones Act so that foreign flagged tankers can be used to move oil products from the ample stocks along the Gulf coast to the NY area.
The silver lining to the week was the growing recognition that something has to done to cope with rising sea levels and stronger storms. A public discussion, led by NY’s governor Cuomo and the city’s Mayor Bloomberg, has begun as to the proper way to prepare for future storms. Proposals range from massive storm barriers – difficult to implement given the NY region’s geography – to floodproofing buildings, to what is called “managed retreat” that would cede low lying areas to the sea.
3. Middle East
On Tuesday, Israeli Defense Minister Barak told a British interviewer that Tehran had pulled back from its push for nuclear weapons in August and was delaying the “moment of truth” by eight to ten months. The Minister seems to be referring to an announcement by Tehran that has not received much attention that the Iranians were going to turn 30 percent of its enriched uranium into fuel rods for a nuclear reactor. This development moves the confrontation and the possibility of an attack on Tehran’s enrichment facilities off until next year. Last week an Iranian military commander said that closing the straits of Hormuz was not linked to lifting of the sanctions, further lowering tensions.
In the meantime the pressure brought on Tehran by the sanctions resulted in a rare public clash between Iran’s President Ahmadinejad and his rivals in the government. The situation became so bad that supreme leader Ayatollah Ali Khamenei issued a warning that public disputes within his government would be treated as treason as they provided ammunition to “foreign media and enemies.” The President then apologized to the Ayatollah and said he would concentrate on overcoming the Western sanctions.
With the situation in Syria deteriorating rapidly, the sanctions pressure continuing to grow, and domestic discontent, the Iranian government has a lot on its plate already without provoking a war. The Turks managed to cut their imports of Iranian crude by 50 percent between August and September by finding other suppliers. Stories of critical shortages of medicines that must be imported from abroad are starting to make their way out of Iran. Although medicines were not specifically targeted by the sanctions, foreign currency shortages and restrictions on banking are making it difficult to import almost anything into Iran.
The ring around the Assad government in Syria continues to tighten with government aircraft launching attacks on rebel positions and supposed supporters in and around Damascus on a daily basis. Rebel forces are attempting to overrun the government’s main attack helicopter base south of Aleppo and bombs continue to go off in downtown Damascus.
A US-sponsored conference is currently underway in Doha in an attempt to form some type of alliance among the disparate groups fighting the Assad regime. This is in anticipation that the Assad regime may not be able to hold on much longer and is an effort to avoid the dangerous anarchy that could ensue in its wake. Iraqi Sunnis are already looking forward to the day when a Sunni-dominated government in Damascus will act as a counterweight to the Shiite-dominated Baghdad.
There were several developments in the EU last week that are worth noting. In Germany Chancellor Merkel had talks with the governors of the 16 states on developing a nationwide renewable energy strategy. Although Germany has made much progress in developing renewable resources, thus far there has been no coordination among the states which are often going in conflicting directions. With elections coming up next year, the Merkel government is under increasing pressure from Social Democrats to get its act together. The eventual shutdown of all its nuclear power plants and its goal of reducing carbon emissions makes this a critical issue for the country.
In Athens, the three-party coalition will submit bills to parliament on Monday which should meet the EU demand for austerity reforms. If passed, the bills should ensure that the country will receive the €13.5 billion loan it needs to avoid bankruptcy later this month. The austerity measures are far from popular. Last week a 24-hour subway and commuter rail strike took place to protest austerity. A general strike has ben called for Tuesday this week.
As the EU’s economic crisis deepens, wealthier regions are beginning to question why their money should go to support poorer countries or provinces. This has long been true on the issue of the better off north European countries bailing out the south. The sentiment has now spread to Spain where the Catalonians are calling for independence from the poor provinces currently surviving on Catalonian taxes.
There are numerous places in Europe where provinces or regions have linguistic and cultural differences from the rest of the country. Should any of these nationalistic movements be successful the problems of keeping the Eurozone together would become more difficult and threaten the continent’s economic stability.
Quote of the week
- “I want our president to place scientific evidence and risk management above electoral politics.”
The Briefs (clips from recent Peak Oil News dailies are indicated by date and item #)
- Chevron’s third-quarter earnings fell 33 percent, reflecting a sharp drop in downstream earnings and lower production. “This quarter’s earnings were solid, but off from their near record level of a year ago,” said Chairman and Chief Executive John Watson. (11/3, #13)
- Exxon Mobil’s third-quarter earnings fell 7.4 percent as it received lower prices for oil and gas and production fell to its lowest level in three years. Profit in its refining segment nearly doubled, however, enabling the world’s largest publicly traded oil company by market capitalization to beat Wall Street expectations. (11/2, #21)
- Enterprise Products Partners reported that Phase 1 of its Enterprise Crude Houston (Echo) storage terminal in Harris County, Tex., is complete and receiving deliveries of crude oil. The facility is under consideration as an alternate delivery point for NY futures contracts.(11/3, #18)
- Canada has extended its review of CNOOC’s $15.1 billion takeover of Nexen for a second time, re-setting the deadline to Dec. 10. Prime Minister Harper’s government began its review of the bid for the Calgary oil and gas producer under the country’s foreign-takeover law after it was announced on July 23. (11/3, #19)
- Oil production from the OPEC fell last month largely due to a decline in output from Nigeria and Iran. (11/2, #6)
- Iraq’s independence-minded Kurds have started exporting oil independently of Baghdad, fueling a political battle that could threaten the cohesion of the state. The move by the Kurdish Regional Government which contains an estimated 45 billion barrels of oil reserves, is fraught with political risk and may well mark a defining moment in post-Saddam Hussein Iraq. (11/2, #10)
- A survey released on Thursday shows that a majority of the Chinese people are familiar with issues related to climate change. They believe it has been caused by human activities and inflicts suffering on the country, especially farmers. (11/2, #14)
- Amid rising costs, gyrating prices and a burst of supply competition from new US fields, Canadian oil companies are rethinking investment in one of North America’s earliest and fastest-growing “unconventional” oil frontiers—Alberta’s oil sands. (11/2, #22)
- Russian energy company Gazprom said it was investing about $38 billion to connect an arctic natural gas deposit to its existing natural gas pipeline system. (11/2, #23)
- According to Gazprom, the abundance of conventional natural gas reserves in Russia suggests it’s premature to start a full-scale investigation of shale reserves. (11/1, #23)
- German energy company RWE announced the startup of a biomass facility that can produce as much as 7.6 megawatts of energy. (11/2, #25)
- Exploration firm Tullow Oil announced a fresh discovery of oil deposits at Twiga South-1 exploration well, on Block 13T in Northern Kenya. (11/1, #12)
- Tokyo Electric Power has raised its planned use of liquefied natural gas, coal and crude oil in the fiscal year ending March 31, 2013, compared with projections it made in May, and it cut its planned consumption of more costly heavy fuel oil. (11/1, #14)
- Shell has concluded its 2012 exploratory drilling programs in the Beaufort and Chukchi Seas. The mandatory closing of the offshore Alaska drilling window “ends a season in which we once again demonstrated our ability to drill safely and responsibly in the Arctic,” Shell said. (11/1, #21)
- Chile is thinking again of meeting its future energy needs with nuclear power, after more than a year of hesitation and delays caused by the March 2011 Fukushima atomic reactor disaster in Japan. (10/31, #9)
- Chinese authorities scrapped plans to expand a petrochemical plant in the face of protest, though critics said it is part of a pattern of political appeasement. (10/31, #11)
- A Chinese government think tank is urging the country’s leaders to start phasing out its one-child policy immediately and allow two children for every family by 2015, a daring proposal to do away with the unpopular policy. (10/31, #12)
- Hydroelectric power plants could help emerging economies address growing energy needs while offsetting billions of tons of carbon dioxide, the IEA said. The Agency published a report with the Brazilian Ministry of Mines and Energy that said hydroelectric production could double worldwide by 2050 given the right investment climate. (10/31, #26)
- TransCanada Corp. and a unit of PetroChina Co. agreed to develop a $3 billion oil pipeline to ship crude from oil-sands projects in northern Alberta. TransCanada and Phoenix Energy Holdings will each own 50 percent of the proposed Grand Rapids Pipeline, which will ship oil 500 kilometers (310 miles) from the Fort McMurray oil- sands production area to Edmonton. (10/30, #9. #10)
- The tiny South Pacific nation of Tokelau has switched to renewable energy sourced primarily from solar power. Consisting of 4,032 photovoltaic panels and 1,344 batteries with generators running on biofuel derived from coconuts, the $7.5 million Tokelau Renewable Energy Project is considered one of the world’s largest off-grid solar systems. (10/30, #16)
- Royal Dutch Shell is struggling to settle the $1 billion it owes Iran for oil purchases after options such as financing a gas pipeline or paying for food shipments were rejected. (10/29, #6)
- A Chesapeake Energy-backed company and Oxford Catalysts Group are planning US factories to make diesel, gasoline and jet fuel from gas, which fell to a decade-low price this year. Their goal is to make motor fuels more cheaply and easily than oil-based products produced at giant refineries, and all within two years. (10/29, #16)
- The US drilling rig count fell by 26 units during the week ended Nov. 2, with the total number of rotary rigs down to 1,800, reported Baker Hughes. This compares with 2,026 rigs working during the comparable week last year. Land rigs plunged by 26 units to 1,733. (11/3, #17)