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1. Oil and the Global Economy

Last week the oil markets were dominated by the OPEC meeting in Vienna which failed to reach agreement on production levels; that Saudi Arabia allegedly is to raise its production to 10 million b/d; and new data showing growing weakness in the US economy. Oil prices fell early in the week touching a low of $98 a barrel. After OPEC failed to reach agreement, NY oil rebounded to over $102 and then fell to close out the week at $99 after a report that Riyadh was unilaterally increasing production.

The failure of the OPEC meeting to reach an agreement for the first time in at least 20 years came as a shock to the oil markets. As many OPEC members are already very close to full production, it was easy for Iran and Venezuela to form a coalition to block the Saudi call for a 1.5 million b/d increase. Most OPEC members have little concern for the state of the global economy and want to see still higher oil prices to offset falling production. The Saudis, who are facing unprecedented problems brought on by the uprisings across the region which in the long run could threaten the stability of their regime, still see their best interests lie in an alliance with the West which desperately needs to hold oil prices in check through higher production in the immediate future.

Following the OPEC meeting, the IEA issued a statement saying that a prompt increase in supply was necessary to meet rising seasonal demand at time when the global economy was fragile and output disruptions were ongoing in Libya and Yemen. OPEC itself issued a statement warning of a supply gap coming the second half of this year, but tempered the warning by noting recent reports of economic weakness in the US and sovereign debt problems in the EU.

Interestingly, the story of the Saudi production increase was not taken as seriously in London on Friday where Brent crude fell only 79 cents, as compared to $2.64 in NY, to close at $118.78. These moves increased the gap between NY and London oil to $18.49 a barrel, a new record for the spread. The increasing size of the gap, which is usually below $1, and the fact that stocks at Cushing,OK have dropped to the lowest level since February are raising concerns the NY futures market is broken and no longer reflects the true value of oil.

The EIA reported that US crude inventories fell by 4.8 million barrels the week before last. Whether this is the beginning of a trend towards tighter global supplies or simply an anomaly in tanker schedules remains to be seen. This news was offset by falling demand for gasoline in the US with MasterCard reporting demand down by 3.9 percent. Gasoline futures in NY continue to hover around $3 a gallon. The average US retail price for gasoline is now $3.70 according to the AAA.

2. Saudi Arabia

The major forecasters of supply and demand are saying that a combination of supply disruptions in Libya and Yemen; widespread electrical shortages in major economies as China, Japan, and India; a lot of unusually hot weather around the world; and rapid economic growth in China will increase the demand for oil in the second half of the year. The IEA is currently saying that demand in the fourth quarter of 2011 could be as high as 90.2 million b/d as compared with 88.4 in the first quarter. If this demand is to be fulfilled without markedly higher prices in the next six months, global production must be increased and this can only come from the Saudis in the amounts necessary.

After the OPEC meeting on Wednesday, Saudi Arabia’s oil minister said that his country will “meet consumer needs.” The was followed by a newspaper story in Al-Hayat, a leading Saudi newspaper, saying that Riyadh will boost output to 10 million b/d in July from what is said to be 8.8 million now. If this actually happens, the new production should just about cover the projected shortfall, provided Kuwait and the UAE kick in a bit and there are no more major supply disruptions this year.

As the Saudis do not publish official oil production statistics, following Saudi oil production is based largely on tanker trackers counting the amount of oil leaving the country coupled with wire service surveys of presumably knowledgeable people. These reports are massaged by analysts at the IEA and EIA for a sanity check and then released. This silence on the numbers is occasionally broken by an official pronouncement or leak to a prominent paper, but only when some political objective is to be gained from releasing whatever is released. Last April for example the Saudi oil minister Al-Naimi announced that the kingdom produced 8.292 million b/d in March down from 9.125 in February.

The 8.29 million figure given by the oil minister conflicts with the 8.66 million figure that the Saudis submitted as the official production to the Joint Organizations Data Initiative. The most recent figures for Saudi production released by the IEA give production for February as 8.9 million, for March as 8.9 million and for April as 8.8 million. As the IEA notes there can be several reasons, such as wellhead production vs. actual sales and the complications of floating storage, for the discrepancies between the oil minister pronouncement and other data. The political point one is trying to make frequently enters into the numbers released.

The NY Times says Saudi production is currently 9.3 million b/d which is quite a jump from the IEA’s April estimate and Al-Naimi 8.2 number for March. Some analysts are very skeptical that the Saudis can really reach and sustain production of 10 million b/d for very long despite the IEA’s current estimate that Saudi capacity is 12.0 million b/d. These analysts note that the last time that Saudi production approached 10 million b/d was 30 years ago when Saudi oil fields were in much better condition than they are today.

For now all we can do is wait to see what develops over the next few months and to remember that there is a good dose of politics involved whenever the Saudis release information about their oil production.

3. China

Developments in China remain a major concern is assessing global demand for oil. Last week Beijing reported that crude imports in May were 21.55 million tons or about 5 million b/d. This number was flat when compared with 21.54 tons imported in April, but was up by 20.7 percent over April 2010 which was a relatively low month. Imports of oil products in May were 3.3 million tons and exports were 2.46 million tons resulting in net imports of 930,000 tons. China’s apparent oil demand which is combination of refinery processing and net imports of oil products rose 9.2 percent in April over last year.

Although there is evidence that China’s industrial production is slowing, there are reports that Beijing is trying to build up its strategic petroleum reserves and that the widespread electric power shortages are clearly increasing the demand for diesel to power backup generators. As the hot weather approaches and power blackouts become more frequent, the use of diesel generators is expected to increase. China has banned diesel exports to conserve supplies prior to the summer power crunch. The Railway Ministry is ready to increase the shipping of coal around the country this summer to deal with local power shortages. China is expected to have an electricity deficit of 30-40 gigawatts by mid summer.

Overall Chinese imports increased in May suggesting that the economy may not be slowing as sharply as outsiders feared. Although export weakened, imports rose by 28.4 percent over May of 2010 and was up from the 21.8 percent increase in April. China’s economy grew by 9.7 percent in the first quarter, but recent data suggest that government efforts to slow inflation are having an effect. The trade deficit for May was $13 billion, well below forecast of $18-20 billion. While exports continued to grow, the rate of growth was lower than in April.

Quote of the week

“Consumption growth reached 5.6 percent, the highest rate since 1973. It increased strongly for all forms of energy and in all regions. Total consumption of energy in 2010 easily surpassed the pre-recession peak reached in 2008.”

— Bob Dudley, Group Chief Executive, BP p.l.c.

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

  • The world’s major airlines will make a collective net profit of just $4 billion this year compared with $18 billion in 2010, the International Air Transport Association said. “Natural disasters in Japan, unrest in the Middle East and North Africa, plus the sharp rise in oil prices have slashed industry profit expectations.” (6/6, #6)
  • Natural gas futures fell the most in five weeks after a government report showed a bigger-than-expected increase in U.S. inventories. Gas declined from the highest level in 10 months after the U.S. Energy Department said gas stockpiles gained 80 billion cubic feet in the week ended June 3 to 2.187 trillion cubic feet. (6/10, #4)
  • Exxon Mobil Corp., the largest U.S. natural gas producer, paid $1.6 billion for two closely held energy explorers to gain shale gas reserves in Pennsylvania and neighboring states. “The fact that Exxon is buying in now is a vote of confidence in shale in the U.S.,” said Tony Regan, a Singapore based consultant at Tri-Zen International. (6/10, #17)
  • Forces opposed to the rule of Libya’s leader Moammar Gadhafi said they hope to restart oil production in an effort to increase revenues. Rebel Oil and Finance Minister Ali Tarhouni, without specifying a timeline, said the opposition National Transitional Council hoped to “soon” resume oil production of as much as 100,000 b/d. (6/10, #8)
  • China surpassed the US to become the world’s largest energy consumer in 2010, as the rebounding global economy drove worldwide consumption higher and at a rate not seen since the aftermath of the 1973 oil price shocks, according to the latest annual BP Statistical Review of World Energy. (6/8, #8) (6/10, #12)
  • Chinese refineries have been suffering as international crude oil prices have remained high this year, and state enterprises have had to ramp up production to make up for the lost output from private refineries. “The more they refine, the more losses they suffer. This is the plight for the local refining industry,” China Petrochemical Corp. said in a report on its website. (6/9, #13)
  • China has accused Vietnam of “gravely violating” its sovereignty in an escalating row over disputed waters in the South China Sea. It follows an accusation by Vietnam that a Chinese fishing boat rammed cables from an oil exploration vessel inside its exclusive economic zone. The South China Sea includes important shipping routes and may contain rich oil and gas deposits. (6/10, #14)
  • Japan’s electricity shortages may be intensified over the coming months by a wide scale unofficial shutdown of nuclear power plants across the country. “We’ll definitely have a huge (power) deficit,” said Satoshi Waseda, energy analyst at think tank Mitsubishi Research Institute. (6/9, #14) (6/10, #15)
  • Japan has more than doubled its estimate of radiation that escaped from the tsunami hit Fukushima nuclear plant in the first week after the disaster. Japan’s nuclear safety agency also said meltdowns took place in three reactors more quickly than earlier believed. (6/7, #17)
  • Germany needs to build twice the number of new fossil fuel power plants than the government previously had earmarked in order to secure energy security while exiting nuclear power, Chancellor Angela Merkel said Thursday, while sticking to ambitious emission reduction goals. (6/9, #16)
  • Swiss lawmakers approved a government backed proposal to phase out the use of nuclear power, a move spurred by growing skepticism toward the use of atomic energy during an election year for the rich Alpine nation. (6/8, #25)
  • France’s Senate adopted a bill banning the exploration of shale oil and gas. The bill bands exploration of hydrocarbons using hydraulic fracturing. It has already passed the lower house, and its adoption by the Senate means it should soon become law. (6/10, #19)