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1. Oil and the Global Economy

With the resignation of Egyptian President Mubarak last Friday, NY oil futures fell, closing on Friday at a two-month low of $85.58 a barrel. NY futures had touched a high of $92.19 at the height of the Egyptian crisis. In London, however, Brent crude climbed to close out the week at $101.43. There is obviously some sort of disconnect between the NY and London markets beyond the current stocks glut at Cushing Okla. delivery depot going on here. The spread between London and New York widened on Friday to $15.85 a barrel on Friday vs. an average spread between the two of 76 cents last year.

Some of the pressure on NY prices can be explained by a weaker euro, and the increase in US stockpiles that was reported on Wednesday. While US crude increased by 1.9 million barrels, US gasoline inventories grew by 4.6 million barrels to 240 million, the highest level since March 1990. Upward pressure on Brent crude can be partially explained by lower production from the North Sea this winter and increased demand for distillates because of the colder winter.

The EIA, the IEA and numerous commentators have pointed out that even if the troubles in Egypt could eventually lead to the closure of the Suez Canal and pipeline, it would do minimal damage to the world oil markets. There is sufficient spare tanker capacity available and the trip around Africa would only add a week or two to delivery times.

The major reason behind the London-NY price differential, however, seems to be the perception of how events will develop post-Mubarak. Comments from many American oil traders suggest that the resignation has put the Middle East uprising away for now so that markets can focus on stockpiles, while the London markets are concerned that more unrest, possibly in oil producing states such as Algeria, is in the offing.

Average US gasoline prices made it up to $3.13 last week, which seems to be a record for February. While no one seems to be anticipating another price spice to $4, analysts are talking about a $3.50 high this summer.

Beijing announced a new interest rate hike last week as the government‘s fight against inflation increases. The drought which threatens China‘s winter wheat crop continues. Although some snow fell in the region last week, the threat of a major fall in crop yields remains. The course of China‘s economy and the demand for oil during the rest of the year remains uncertain.

The IEA’s Oil Market Report

Once again, the IEA has increased its estimates of the demand for oil in 2010 and 2011. The Agency now says that demand during 2010 reached 87.8 million b/d, up by 2.8 million b/d in 2009 and for 2011 will reach 89.3 million b/d up another 1.46 million b/d year over year. If this increase in demand is met by utilizing spare capacity, the world could be producing over 90 million b/d by the end of the year.

Global production increased by 500,000 b/d in January to 88.5 million on higher output of OPEC oil and natural gas liquids. OPEC production is now at a two-year high of 29.85 million b/d due to increases of 200,000 b/d of Iraqi oil production and an increase in natural gas liquids in Qatar and the UAE. The surge in Iraqi production came from efforts by foreign oil companies to increase production from better utilization of existing facilities. Further production gains will require significant investment and considerable time.

Non-OPEC production remains flat at about 53 million b/d. OPEC‘s spare capacity is now estimated to be 4.7 million b/d, down 200,000 b/d from the previous estimate. OECD stockpiles declined to 2.668 million barrels during December to the lowest in the past two years as a colder than normal winter increased the demand for heating oil.

The IEA does not anticipate a dramatic increase in oil prices during the coming year as a combination of large OECD stocks and increasing OPEC production from its spare capacity will keep the situation under control.

Whether this rather optimistic forecast for 2011 turns out any better that last year‘s remains to be seen. The Agency is saying that the increase in global demand will only be 1.4 million b/d this year vs. an increase of 2.8 million b/d in 2010. This is based largely on a major fall in the rate of increase in Chinese demand this year – something which the IEA badly underestimated last year.

OPEC also released its demand forecast last week. The cartel continues to maintain that the $25 a barrel increase in oil prices since last September does not signal any supply shortage but is a result of unusually cold temperatures and speculators wagering on instability in the Middle East. OPEC also sees demand increasing by 1.4 million b/d during 2011, but sees global consumption for 2011 only reaching 87.7 million b/d, 1.6 million b/d below the IEA forecast.

China worries the IEA

After having badly underestimated the growth in China‘s demand for oil in 2010, the IEA comments in its latest Oil Market Report on the serious discrepancies in the economic data being released by the Chinese government. The Agency notes that “China’s oil demand outlook has become increasingly crucial for global oil balances. Predicting Chinese trends, however, is far from being an exact science, mostly because of huge uncertainties with respect to official data.”

While China‘s official figures show the country‘s GDP growing by only 10.3 percent in 2010, the figures also have industrial production growing by over 15 percent and the IEA calculated demand for oil growing by 12.2 percent. As Beijing considers the size of its oil stockpiles to be a state secret, calculating China‘s actual oil consumption is difficult as there is no information on whether oil imports and production were consumed in a given period or went into stockpiles.

Given all the uncertainties, and forced to come up with a number, the IEA says that China‘s demand for oil during 2011 will increase by 6 percent or roughly half the 2010 increase. This number is based largely on Beijing‘s need to rein in economic growth to curtail inflation during the coming year. Some of the unprecedented increase during 2010 can be attributed to efforts to meet energy efficiency goals of the China‘s 5-year plan which ended on December 31st. The IEA says that in December China‘s oil consumption rose 17.7 percent year over year to a record 10.4 million b/d.

Natural gas imports seem to be on the rise, but there are indications that days of 10 percent annual increases in coal production may be drawing to a close. Cities are starting to clamp down on the registration of new motor vehicles which should slow increases in demand. The country is being threatened by a major drought that could cut both ways with regard to energy consumption.

Unless there are major disruptions in global oil supplies over the next couple of years, the increase in Chinese demand still appears to be the major determinant of where oil prices go in coming months.

Oil and economic growth

In yet another important announcement, the IEA noted last week that the world‘s oil bill, which the Agency says is now about 4.1 percent of GDP, seems on track to increase to 4.7 percent by the end of the year. This is close to the level that has coincided with a “marked economic slowdown” in the past. Last month the IEA warned that sustained oil prices over $100 a barrel posed a real risk to the global economy, but forecast that demand would continue to grow even at this price level due to the subsidization of oil products in many countries.

In saying that high oil prices are about to endanger economic growth, the IEA is going out on a limb. Most economists that pontificate publicly about the effects of oil prices on economic growth are employed by the financial services industry where pessimistic forecasts are rare. While forecasts for oil prices are issued frequently, they are almost inevitably accompanied by disclaimers that whatever oil price is forecast will not be high enough to harm the equity markets.

Quote of the week

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

  • Anadarko has made a fourth major deepwater discovery off Mozambique’s coast. The Tubarao well was drilled to a depth of 13,900 feet in water depths of 2,950 feet, 18 miles offshore. Analysts say gas discoveries off Africa’s east coast would be ideally placed to supply Asia by mid-decade. (2/7, #5)
  • The March loading schedule for North Sea Brent blend crude oil is 4.2 million barrels, down 600,000 from February. Volume is 135,484 b/doe vs. 171,429 in February. (2/7, #7)
  • China is building strategic reserves in rare earths like neodymium as it tightens export quotas. Reports say storage facilities recently built in Inner Mongolia can hold more than the 39,813 metric tons China exported last year. (2/7, #9)
  • Volkswagen is putting final touches on a 95-mpg Up city car. Unlike the XL1 concept on which its powertrain is based, the Up won’t run solely on battery power. (2/7, #10)
  • The AFP misquoted Iraqi PM al-Maliki as saying the central government would honor Kurdish production-sharing oil contracts, says Deputy PM Shahristani, adding that the government hasn’t yet reviewed the contracts. (2/8, #8)
  • Iranian gas demand is falling in response to subsidy cuts while the first utility bills with higher rates are only now being distributed. Power consumption has fallen by 6.2 percent. The first tranche of planned cuts has doubled gas prices for most households. (2/8, #9)
  • Iran’s oil output has risen by 100,000 b/d as a second phase of Darkhovin field opens, the oil ministry reports. Output at the field, developed by a consortium including Italy’s ENI, is now 160,000 b/d. Iran’s total output is 3.7 million b/d, OPEC says. (2/8, #10)
  • Nepal will enforce 14 hours of daily power cuts, up from 12 hours. A further drop in water levels for hydropower projects led the Nepal Electricity Authority to make the cuts. Peak demand is 935 MW while generation is 470, according to the authority. (2/8, #19)
  • Natural-gas futures hit their lowest levels in six weeks last Monday as forecasts for the middle of February turned warmer. (2/8, #20)
  • Wind projects offshore Del., Md., N.J., and Va. could get federal leases as soon as the end of 2011 or early 2012. The secretaries of Energy and the Interior have announced $50 million for wind R&D. The Interior Department will soon identify candidates off Mass., R.I., and N.C. too. Environmental groups have praised the announcement. (2/8, #30)
  • In Nigeria, scarcity of kerosene and diesel has worsened. Two depots said they had no kerosene, contrary to a claim by Nigerian National Petroleum Corporation that it had pumped in 6.6 million gallons. Some private depots were selling kerosene at double NNPC’s official price; diesel was being sold at nearly the same premium above November’s price. (2/9, #17)
  • ENI has begun oil production at Nikaitchuq field offshore Alaska’s North Slope. ENI estimates its first Arctic project has 220 million barrels of recoverable reserves. It expects Nikaitchuq to produce for over 30 years at a peak of 28,000 b/d. The processing facility is complete, with 12 onshore wells already and the rest will be drilled by 2014. (2/9, #22)
  • The start up of the Algerian side of the Medgaz pipeline, exporting natural gas to Spain, is “imminent,” an Algerian official says, after a delay of more than a year. The pipeline has an annual capacity of about 280 billion cu. ft. (2/9, #24)
  • Saudi Arabia in 2007 threatened to exit a multi-billion dollar Texas oil refinery investment unless the US government intervened to stop Aramco from being sued for alleged oil-price fixing, according to leaked diplomatic cables. The cables also report Saudi concerns about legislation in Congress against OPEC price fixing, the so-called NOPEC bill. (2/10, #16)
  • Korea National Oil Corp. plans to invest up to $4 billion in overseas oilfields this year after investing $3 billion last year. “We plan to raise daily output by 60,000 barrels to 240,000 barrels by the end of the year,” a KNOC vice president says. (2/10, #20)
  • Chevron says it expects the federal government to start issuing permits for deepwater drilling in the Gulf of Mexico. The company is days away from complying with all federal requirements, an executive says. (2/10, #23)
  • PetroChina has agreed to buy 50 percent of Encana’s Cutbank Ridge gas assets in Canada for $5.42 billion in its largest overseas acquisition. The purchase, which requires approval from Canadian and Chinese authorities, would be PetroChina’s first of gas assets in North America. The acquisition value equates to a long-term price of $4.80 per million cu. ft. versus the $4 prevailing contract price for delivery at Henry Hub in Louisiana. (2/10, #25; 2/12, #17)
  • Russia’s Gazprom has posted a 9 percent fall in net profit for the third quarter: $5.42 billion versus $5.96 billion during the same period a year earlier. Gazprom is losing market share both at home and in the lucrative European export market. PM Putin last week criticized the behemoth for not giving independent gas producers enough access. (2/10, #26)
  • OPEC except Angola and Ecuador will reduce oil shipments to 23.79 million b/d in the four weeks to Feb. 26, down 0.6 percent from the previous period, according to Oil Movements. Global crude demand will slide by 0.4 percent in the second quarter, according to OPEC. Exports from Middle Eastern producers, including non-OPEC members Oman and Yemen, will fall by 1.6 percent to 17.58 million b/d, says Oil Movements. (2/11, #4)
  • Pakistan State Oil has threatened to halt 23,000 metric tons a day of furnace-oil supplies to power utilities if they fail to pay outstanding dues of $1.8 billion by today, Monday. (2/11, #8)
  • Venezuela will receive its first Japanese oil tankers in 30 years: four Aframax-sized ships, according to PDVSA. Expected delivery schedule is one ship in early March; two more later this year; and the final vessel in the first quarter of 2012. (2/11, #9)
  • A southern Colombian oil pipeline was likely to remain paralyzed until Monday, after being bombed last Tuesday by suspected rebels, according to Ecopetrol. The attack, in two different sections of the Transandino pipeline, forced Ecopetrol to stop pumping through the 48,000-b/d-capacity pipeline. Transandino was carrying 30,000 b/d before the bombing. (2/11, #10)
  • Having become the world’s second-largest economy after the US, China is considering making its money a global currency. Over the last year Beijing has begun to gradually loosen its tight currency controls. For the first time, for example, American companies like McDonald’s and Caterpillar have been allowed to finance their China projects by selling renminbi-denominated bonds in Hong Kong. (2/11, #12)
  • The US could increase oil production by 40 percent to 10 million b/d within a decade, to reduce dependence on foreign sources, former Shell executive Hofmeister has told Congress. Today the US produces 7 million b/d of the 20 million b/d it consumes. Developing resources in Alaska, the Gulf of Mexico, off the West Coast, and in the Bakken formation of North Dakota and Montana could add 3 million jobs, Hofmeister says. (2/11, #14)
  • The US House Energy and Power Subcommittee is debating legislation designed to halt the EPA’s efforts to limit greenhouse-gas emissions under the Clean Air Act. Republicans argue that trying to limit carbon emissions would cost businesses $300-400 billion a year and discourage hiring. Democrats say regulation under the CAA has created thousands of jobs and produced millions of dollars in business income. (2/11, #15)
  • The Stuxnet software worm repeatedly targeted five industrial facilities in Iran over a 10-month period, a new report says, in a possible clue into how the worm might have infected Iran’s uranium enrichment complex at Natanz. Symantec could chart the path of the infection because Stuxnet recorded information about each computer it infected. (2/12, #7)
  • International arbitrators have ordered Ecuador to suspend enforcement of judgments against Chevron in its rainforest-pollution case. Expecting to lose in an Ecuador court, Chevron appealed for arbitration under a bilateral US-Ecuador investment treaty. Ecuadorean plaintiffs, backed by US lawyers, began their case in 1993 against Texaco. Accusing it of dumping oil-drilling waste in unlined pits, polluting the forest, and causing illness and death, plaintiffs sought up to $113 billion. Chevron says Ecuador released Texaco from liability after its remediation work; plaintiffs argue that didn’t deal with private claims. (2/12, #8)
  • The Obama administration seeks to repeal subsidies of $46.2 billion for oil, natural-gas, and coal companies in the next 10 years, including $3.6 billion in 2012, to help pay for $8 billion in clean-energy investments, Energy Department Secretary Chu says. The administration also seeks cuts of $600 million to the department’s headquarters staff, including slashing the fossil-fuel research budget by $418 million, or 45 percent. (2/12, #11, 13)
  • Seahawk Drilling, shallow-water rig operator in the Gulf of Mexico, says it will seek bankruptcy protection and sell its assets to competitor Hercules Offshore. It blames the Obama administration for a crippling regulatory environment after the BP oil spill. Seahawk in August 2009 was spun off Pride International – itself just acquired by Ensco – and began a long financial slide soon afterward. (2/12, #14a)