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1. Oil and the Global Economy
Oil prices fell sharply last week. From nearly $100 a barrel in NY early in the week prices fell below $92 a barrel on Thursday before closing out the week at $93.01. In London Brent crude fell from nearly $120 early in the week to close at $113.21. The close left the London-NY price spread at $20.20 after touching an all-time high of $22.29 on Wednesday. The downturn, which left oil prices at a four-month low, came mainly on concerns about the consequences of the Greek debt crisis and a series of worst-than expected US economic reports.
On Wednesday, the IMF warned that the European debt crisis and the slowing growth of the US economy imperiled the prospects for global economic recovery. Widespread expectations that the Saudis will soon be pumping 10 million b/d and concerns over China’s economic growth also contributed to the fall in prices.
Although the weekly US stocks report showed a 3.4 million barrel drop in US crude inventories, much of the decline was attributed to the temporary closing of the major oil import pipeline from Canada the week before.
For the next few months, oil prices will be determined by the balance between what could become very serious economic problems in the US and EU and the likelihood of continued, albeit slightly slower, economic growth in China and a few other countries. Increasing power shortages, in what could be a very hot summer, are likely to drive the demand for emergency generator fuel to new highs in China, South Asia, and in parts of the Middle East and Africa.
Even higher gasoline and a further economic slowdown raises questions of just how much further the demand for motor fuel will fall. There is solid evidence that in the US and other highly motorized societies continued use of motor vehicles remains a high priority for many at the expense of other expenditures.
As the time for withdrawal of US forces from Iraq draws near, concern about the political and economic stability of the country continues to rise. Last week four bombs were planted in Iraq’s 2nd largest refinery outside Baghdad. Although the one bomb that did explode caused minimal damage, another one that was defused in time, could have taken out as much as 75 percent of the refinery’s production. In recent months, violent incidents across Iraq have been increasing although they are still way below the levels seen five years ago.
It is starting to be realized that Iraq’s shortfall in power and water supplies will be a limiting factor in determining how fast Iraq’s oil reserves can be developed. Although last year the government was confidently talking about becoming the world’s largest oil producer, the IEA noted that Baghdad will be lucky to get to 6 million b/d 20 years from now.
One interesting phenomenon that is emerging from Iraqi efforts to increase oil production is the emergence of US oil service companies — Halliburton, Baker Hughes, Weatherford International and Schlumberger – as the big winners. A combination of political pressures that favored anybody but the American oil companies and razor-thin opportunities for profits ($1.15 barrel) left US corporations with few prime contracts for oil. As the actual work starts, however, it is US oil service companies with the requisite technical expertise and equipment already in place that are winning the bulk of the actual drilling contracts. Not only are the US companies earning large profits up front, they are foregoing the risk that Iraq may not remain stable enough to fulfill its lofty production goals.
3. The IEA’s reports
Last week saw the publication of the IEA’s monthly Oil Market Report (OMR) and its Medium Term Oil and Gas Markets outlook which projects Agency’s assessment of global supply and demand for the next five years. In recent weeks the IEA has been sounding nearly non-stop warnings that ever since the Libyan and Yemen uprisings took some 1.5 million b/d off the oil markets there was a real danger of higher oil prices and shortages this summer. The current publications are no exception. The Agency is still expecting global oil demand to increase this year by 1.3 million b/d to 89.3 million b/d with OECD demand down a bit due to high prices and the economic slowdown, and Chinese and Indian demand up a bit.
The IEA says that global oil supply for May rose by 270,000 b/d from 87.41 billion b/d in April with 210,000 b/d coming from OPEC. The cartel is reported as supplying an average of 29.18 million b/d in May which is close to the Platts survey which put OPEC production for the month at 29.04 million b/d. The IEA, however, points out that the OPEC’s May production was still 1.25 million b/d below the pre-Libyan uprising level. Increases from Saudi Arabia, Nigeria, Kuwait and Iraq offset lower UAE and Angolan production.
At a press conference in St. Petersburg announcing the release of the Medium-Term Oil and Gas Markets 2011 (MTOGM), IEA Executive Director Tanaka warned again of the looming shortage of sweet crude which is unlikely to be replaced by increased Saudi production. At the press conference, Tanaka noted that while the Saudis have said they will make up for the lost Libyan production, so far they have failed to say how fast and how much. While a Saudi newspaper has claimed that the Saudis will soon be producing at 10 million b/d, a recent high, the paper failed to attribute the number to any Saudi official.
David Fyfe, IEA’s chief of Oil Industry and Markets told the same press conference that they now see the oil markets as being much tighter in the next two years than previously believed.
The MTOGM 2011 sees oil supplies growing at 1.1 million b/d annually through 2016 as higher prices stimulate new supplies from Iraq, UAE, Angola, Brazil, Canada, Kazakhstan and Columbia. The Agency is aware that much higher prices will damage economies so it has generated a base case in which production reaches 95.3 million b/d in 2016 and a lower growth variant which results in production only reaching 92.9 million b/d in that year. Ninety-five percent of the increased demand over the next five years will come from China, Asia, and the Middle East.
Two weeks ago Beijing’s chief concern was the drought that had engulfed much of southern and Central China. Now after days of torrential rains, some 500,000 have been forced from their homes by flooding. The government has warned that while the rains have brought some relief from the drought, they have also caused much damage and that crop shortages and dislocations caused by the drought and flood will be severe. Some analysts believe that China’s crop shortage could affect prices around the world.
China reported that inflation accelerated in May with the consumer price index hitting 5.5 percent as compared with last year. Much of the increase was due to the drought-stressed agricultural sector. The report spurred China’s Central Bank to raise reserve requirements for the sixth time this year. Although the inflation data was a little above expectations and industrial production was down a bit, most analysts see nothing that would endanger China’s GDP growth that is still in the vicinity of 10 percent a year. Oil consumption was flat in May, but even Beijing is warning of increased demand when the hot summer months arrive.
An interesting sidelight to the week was failure of Moscow and Beijing to reach agreement on how much China will pay Russia for new supplies of natural gas. The negotiations reached the level where President Hu and Prime Minister Putin were sitting across the table. The deal is to be one of the largest ever consummated with two new gas pipelines costing $100 billion bringing natural gas from Siberia into Chinese cities. The deal could amount to 2 percent of Russia’s GDP in future years.
Quote of the week
“The oil market for the rest of this year looks potentially short of sweet crude, should the Libyan crisis continue to keep those supplies restrained.”
The Briefs (clips from recent Peak Oil News dailies are indicated by date and item #)
- The British government was warned by its own civil servants two years ago that there could be “significant negative economic consequences” to the UK posed by near-term “Peak Oil” energy shortages. Ministers were told it was impossible to know exactly when production might fail to meet supply but when it did there could be global consequences, including “civil unrest”. The government consistently played down the threat with the contemporaneous Wicks review into energy security effectively dismissing Peak Oil as alarmist and irrelevant. (6/16, #6)
- The newly appointed director of the Libyan rebel National Oil Company said he believed it would take 10 months to a year after hostilities end for Libya to restore its oil production to the pre-crisis level of 1.6 million b/d. (6/13, #8)
- Iraq’s state owned South Oil Company and partners Shell and Malaysia’s Petronas have awarded Dubai based Dodsal Group a $106 million contract to build a pipeline connecting the supergiant Majnoon oil field with a pumping station near the southern export terminals in Basra. (6/18, #4)
- US oil supplies rose to the highest level in 31 years during May as refineries processed less crude amid a decline in gasoline demand, according to the American Petroleum Institute. Demand for gasoline declined 0.7% from May 2010 to 9.16 million b/d, a two-year low. (6/18, #9)
- The number of drilling rigs seeking natural gas in the US fell for a second consecutive week. There were 870 rigs drilling for natural gas this week, down by nine from the previous week. (6/18, #14)
- A bipartisan majority of the US Senate voted Thursday to end more than three decades of federal subsidies for ethanol as Democrats and Republicans negotiate a sweeping deficit reduction deal. The tax breaks, which now cost about $6 billion a year, had long been considered untouchable because of the power of farm state voters and lawmakers. (6/17, #14)
- A US House Energy and Commerce subcommittee passed a bill aimed at expediting a final Department of State decision on a cross-border permit for the proposed Keystone XL pipeline from Canada. (6/17, #15)
- Shell is hoping to have key federal air quality permits for its Arctic offshore drilling in the first half of July. (6/17, #16)
- Sales of full-size pickups, an economic indicator and a profit driver for Detroit, have stalled this spring. (6/16, #19)
- Three former US energy secretaries and other industry leaders urged Congress to rethink funding cuts to the US EIA, arguing the smaller budget could exacerbate market uncertainty and price swings. (6/15, #16)
- The US Department of Defense has drafted its first plan to change how it uses energy on the battlefield. The strategy, which will be fleshed out this summer with a more detailed implementation plan, constitutes the Pentagon’s promise to develop more energy-efficient weapons, embrace non-oil energy sources and demand more energy-conscious behavior from the troops. (6/15, #17, #18)
- The worst Texas drought since record-keeping began 116 years ago may crimp an oil and natural gas drilling boom as government officials ration water supplies crucial to energy exploration. In the hardest hit areas, water management districts are warning residents and businesses to curtail usage from rivers, lakes and aquifers. (6/14, #27)
- India’s Oil & Natural Gas Corp plans to spend as much as $39 billion in the five years starting April 2012, as it seeks to lift output to meet the demand for energy in Asia’s third largest economy. (6/18, #7)
- In a bid to feed India’s burgeoning power demand, companies across the country are joining with their foreign counterparts in Indonesia and Australia. The shortage is likely to more than double over the next five years, say traders and analysts and the current 125 million tons of coal production is just not enough to feed India’s power and heavy industries. (6/16, #15)
- India surpassed France, the UK and Italy to become the sixth largest automotive market in the world in 2010, and it is expected to become one of the three largest automotive markets in the world by 2020, according to a report by J.D. Power and Associates. (6/14, #18)
- Prices of the rare earths used in lasers and plasma televisions more than doubled in the past two weeks as China tightens control of mining, production and exports, according to market researcher Industrial Minerals. (6/17, #23)
- China said Tuesday it would not resort to force in the South China Sea dispute after its neighbors expressed concern about its more assertive maritime posture. (6/15, #13)
- China’s electric power consumption in May rose 10.8 percent year on year to reach 386.5 kWh, according to data released Tuesday by the National Energy Administration. The increase in power consumption slowed a bit from the 11.2 percent growth in April. (6/14, #19)
- China has declared all its active nuclear reactors safe after inspections triggered by Japan’s nuclear crisis and is proceeding with plans to build new ones. The decision rekindles concerns about how it deals with radioactive spent fuel that proved a major hazard in Japan after the March 11 earthquake. (6/16, #14)
- A rise in radiation halted the cleanup of radioactive water at Japan’s Fukushima nuclear power station on Saturday hours after it got under way, a fresh setback to efforts to restore control over the quake stricken plant. (6/18, #8)
- Concern has arisen that South Korea’s electricity supply might struggle to match demand this summer. The fear comes from an early arrival of warm temperatures and meteorologists’ predictions of a warmer-than-usual summer. The government already has taken preemptive measures to prevent shortages of electricity from crippling the economy. (6/16, #17)
- Malaysian imports of crude oil rose 57% year-on-year in April to 781,000 mt (190,000 b/d), but the country still managed to return to net exporter status after taking in more oil and products than it shipped overseas the previous month. (6/13, #16)
- One of the driest spring seasons on record in northern Europe has dried out soils and sharply reduced river levels to the point that governments are starting to fear crop losses and France is bracing for blackouts as its river-cooled nuclear power plants may be forced to shut down. (6/18, #17)
- The Nabucco energy pipeline, widely seen in Brussels as key to reduce Europe’s dependency on Russian gas supplies, “is not a solid project,” the head of Italian energy company ENI, Paolo Scaroni, said on Wednesday. (6/16. #23)
- Bulgaria’s government says it has granted Chevron a permit to explore for shale gas in northeastern Bulgaria over the next five years. The government said in a statement Wednesday that Chevron would undertake a five-year project worth $72 million and would spend $5.8 million on environment protection. (6/16, #25)
- A year and three days after the government suspended power-rationing measures, following the 2010 energy crisis, Venezuelan authorities announced the return of power saving measures. Further, a reward and punishment plan for heavy household power consumers, which was previously implemented only in Caracas, will be extended to virtually all the country. (6/16, #11)
- Residents in the capital of Yemen have been living with energy shortages. The situation began at the start of 2011 when energy supplies were severely affected by the riots which have frequently damaged the major local power-generating facilities. (6/16, #10)
- A natural gas pipeline from Egypt to Israel has reopened after more than a month’s shutdown due to sabotage. The pipeline, which also carries Egyptian gas to Syria, Jordan and Lebanon, has been sabotaged twice since February, when former Egyptian President Hosni Mubarak resigned. (6/13, #7)
- Petrol stations across Dubai are rationing fuel or turning drivers away altogether as a country-wide fuel shortage stretches into its second week. State-owned retailer ENOC has blamed disruption at more than 80 stations across emirates including Sharjah, Ajman and Ras Al Khaimah on maintenance problems. (6/15, #8)
- Nigeria’s crude oil export has suffered a major setback as Shell Petroleum Development Company declared force majeure on about 300,000 b/d of Bonny Light crude for June and July shipment. Before the latest incident, Nigeria’s crude oil export was 2.4 million barrels daily. (6/14, #13, #14) (6/15, #11)
- Some 1 billion 40 kWh Li-based electric vehicle batteries could be built with the currently estimated reserve of lithium, according to a recent study by researchers from Lawrence Berkeley National Laboratory and the University of California, Berkeley. (6/18, #20)
- Worldwide exploration and production spending for oil in 2011 is expected to rise 16 percent to $529 billion, compared with $458 billion in 2010, Barclays Capital reported in its global E&P capital spending update. (6/14, #6)