By Tom Whipple
1. Oil and the Global Economy
At week’s end, oil prices climbed to a 28-month high on concerns about the deteriorating Syrian situation, the steep decline in Libyan oil production, and a weaker-than-expected US job market report that resulted in a decline in the dollar. The disappointing jobs report also added to speculation that the Federal Reserve will not be tapering off on bond buying in the immediate future. At the close, NY oil was at $110.53, the highest since May 2011, and London was at $116.12.
The possibility that the US will launch air and missile strikes against Syria remains the main factor driving oil prices. Little agreement on the issue was reached at the G-20 summit last week and the meeting ended with new threats by Moscow to increase military aid to Damascus should the US strike. This week could see a vote in the US Congress on whether to authorize the strike.
There is no telling where all this will lead in the next few weeks. Syria’s allies Russia, Iran, and Hezbollah continue to threaten severe consequences for the West in retaliation for a US strike; however, there are many other factors at play. Moscow can really do little in the short run to help the beleaguered Assad government, and Tehran is seeking to negotiate its way out of the sanctions that are eating away at its economy. While most people and governments now believe that the Assad government was responsible for the gas attacks, many have trouble seeing how a short-duration attack on a handful of vulnerable Syrian military assets could have much effect on the situation and could lead to wider war. There is a growing sense, however, that the Syrian situation could become a turning point for the Obama administration and the future of the Middle East and its oil production.
The weekly US stocks report showed US crude inventories resumed falling last week on lower imports and that Cushing, Okla. stocks continue to fall. With over 1 million b/d of Libyan oil exports off the market and the likelihood of lower Iraqi exports this fall, the world’s oil markets could be tighter in the months ahead than most believe. OPEC’s oil production in August fell to the lowest since June 2011, 30.2 million b/d, and short of a rapid turn in the Libyan situation there are few prospects for substantial increases in the near term. Hedge funds and other money managers recently have been increasing their bets that oil prices will be higher in the coming year.
US natural gas prices fell on Friday as US inventories rose somewhat more than expected. US power companies are cutting back on natural gas use as the price of gas remains above $3.50 per million BTUs.
2. The Middle East & North Africa
Syria: This week will see a full court press in Washington as the administration seeks to gain authorization from a wavering Congress for an attack on Syria. As polls show the US public is dead set against US involvement in another Middle East war, the congressional vote is expected to be close.
Simply the threat of US strikes has already changed the situation on the ground. Syria’s military is rushing to hide and disperse valuable military equipment and is reported to be emptying out vulnerable military headquarters and command centers. In some places the insurgents are taking advantage of the Syrian army’s disarray to make gains.
The cost of all this to Syria’s economy is growing. Refugees are streaming from the country in fear of the strikes and now top 2 million. According to the UN there are now some 716,000 refugees in Lebanon; 515,000 in Jordan; 460,000 in Turkey; 168,000 in Iraq; and 110,000 in Egypt – thousands are leaving Syria daily. In all these countries the sheer volume of the refugees is creating serious political and security issues. Car bombs are becoming more prevalent in Lebanon as the war moves across the border. No matter what is decided in Washington this week, the entire region is sinking into a morass as a result of the Syrian uprising and will never be the same again.
Libya: The consequence of the overthrow of the Gaddafi government two years ago are now coming home. Libya is close to becoming a failed state threatening its oil and gas industry which was producing 1.6 million barrels of oil per day before the uprising. Oil production is now thought to be around 150,000 b/d which is not enough to keep the country running. The government is already importing fuel to keep the power stations operating.
The central government in Tripoli does not have military power to reopen the oil terminals and pipelines and any attempt at using force would likely result in much bloodshed. So far the government has only succeeded in scaring off a foreign oil tanker that was trying to bypass the state oil company and purchase oil directly from those controlling the terminals.
The Libyan rebellion is coming at a time when Iranian exports are low due to sanctions, and Iraqi exports are slowing due to continual bombings of its northern export pipeline and an extensive round of construction at the southern export terminal. The loss of Libya’s light sweet crude which has been mostly going to European refiners is already roiling the oil markets and is certainly contributing to higher oil prices.
At the minute there is no end to the standoff between the government and the militias holding the oil hostage. Suggestions that foreign troops from friendly Arab countries could be brought in to confront the militias do not seem to be gaining much traction. As oil is the country’s major source of revenue, the central government and nearly everyone else will be bankrupt in a few months. For now foreign oil companies can do little and several are considering scaling back operations. Some think we are witnessing the collapse of the country and entering a period of local wars for oil revenue.
Egypt: With much of the Muslim Brotherhood leadership in jail or on the run, demonstrations against the Army takeover are dying out, but terrorism is on the rise. Last week the new Interior Minister survived a bomb attack, a Cairo police station was bombed, and a bomb was defused on a rail line. The government launched a major armor and air attack on insurgent forces in villages close to the Gaza Strip in the Sinai killing at least 31. Numerous insurgent attacks against police stations and other government facilities have take place recently in the area.
The Syrian uprising has spread into Egypt with some 100,000 refugees being invited into the country during the Morsi administration. Now that Morsi is gone, feelings against the Syrian refugees are rising as they are seen to be too close to the Brotherhood. Many have been physically attacked and others are being told to leave – just another example of the turmoil into which the region is descending.
Egypt’s state-run oil company currently owes foreign oil suppliers some $5 billion and is seeking to renegotiate the debt as the country is increasingly strapped for cash. Foreign oil operators in Egypt are being asked to increase production to pay off the debt. Apache Corp’s decision to sell of a third of its Egyptian operation to the Chinese is likely a harbinger of what we will see as the turmoil increases.
Iraq: Last week memories of the US’s Iraqi incursion and the role they are playing in the current Syrian debate were more important to the future of the Middle East than anything actually happening in Iraq. It was this incursion in search of Saddam’s mythical nuclear weapons which is making it so difficult to form a consensus on punishing Syria for its use of poison gas.
The usual number of bombings and shootings took place in Iraq last week including yet another attack on the northern export pipeline.
The US says it has an intercepted Iranian message directing its supporters in Iraq in attack the US embassy and other US interests in Iraq should the US strike Syria. While the embassy can probably take care of itself, there are many vulnerable oil facilities in the country.
Asian countries, which are taking the bulk of Iraq’s oil exports these days as a replacement for sanctioned Iranian oil, are becoming concerned that construction at Iraq’s export terminal will seriously restrict exports this fall. The IEA and Iraq’s South Oil Company expect that shipments will drop by up to 500,000 b/d while the Oil Ministry in Baghdad says oil exports will not be affected by the construction. August exports were around 2.6 million b/d, but preliminary indications are that September’s exports may be around 1.8 million.
Iran: Tehran’s relations with the outside world are becoming more complicated all the time. The new President is clearly launching a peace offensive aimed at getting the sanctions lifted while trying to give up as little of its nuclear program as possible. To this end the President and his Foreign Minister sent Israel New Year’s greetings for the Jewish New Year which is a far cry from the various utterances of his predecessor who allegedly called for Israel to be wiped off the map. President Rouhani is planning to address the UN this fall in a series of what could be conciliatory speeches.
More importantly the new President has transferred responsibility for the next round of nuclear talks to the Foreign Ministry from the hardline National Security Council.
On the other side of the coin is Syria. For Tehran, which suffered under many Iraqi poison gas attacks during their war, Assad’s use of gas has become a big problem. Not only does Tehran have to adhere to the story that it was the Syrian insurgents who did the gassing, but it must also cope with the possibility that the US will launch air and missile strikes on Syria, which would likely do considerable damage to Assad’s military posture.
This development has forced Tehran to begin threatening the US and possibly ordering attacks on American interests at the same time it is trying to cajole Washington into lifting the sanctions. It is going to be an interesting fall.
Beijing is becoming increasingly worried about what will happen to its Middle Eastern oil supplies should exports from the region be curtailed. Last week China joined Russia in attempting to talk Washington out of attacking Syria on the grounds that such a strike would hurt the world economy and drive up oil prices. In the meantime, the Chinese are doing their best to line up other sources of oil. In recent weeks, China has bought an 8 percent stake in Kazakhstan’s giant Kashagan oil field as well as agreeing to increased cooperation with Turkmenistan to build two additional natural gas pipelines.
A graft scandal is threatening to launch a major shakeup in the top echelons of China’s oil industry. The former PetroChina Chairman who left his post in March for an even more important post as head of the State Assets Regulator has been removed from his current post and is under investigation. PetroChina and CNPC have already removed four senior managers it what may turn out to be a major shakeup.
New ideas about controlling air pollution in China continue to surface as the debate between China’s environmentalists and the growth-at-any-cost people continues largely behind closed doors. Among the proposals is a carbon tax on fossil fuels and beginning limits on emissions in 2016. This is one more sign that the government is serious about cleaning up the air after last winter’s pollution disasters. China’s Meteorological Authority is to start issuing pollution forecasts rather than just waiting to report unacceptable levels of pollution as they occur. It is hoped that this will enable emitters to react in time to cut pollution.
4. Quote of the Week
- “One argument often made by the peak oil school is that the rise in liquids output around the world does not eliminate any suggestion that oil production has peaked, because so much of what is coming out of the ground isn’t really oil. Instead, much of it is NGLs, which are far less versatile in what can be produced from them.”
— John Kingston, Platts (9/6/13)
5. The Briefs
- Tightening oil supplies: Protests at oilfields and terminals in Libya are combining with the lowest loadings of North Sea Forties in 10 months and the weakest supplies from Azerbaijan since 2008 to stoke demand for other sources of similar-quality sweet, or low-sulfur, crude. Nigeria’s sweet crude sold for $3.58 higher than Brent crude last Tuesday. (9/6 #12)
- OPEC‘s oil production fell to its lowest level since June 2011 in August, averaging 30.2 million barrels a day in August, down about 165,000 barrels a day in July. An increase in Saudi Arabia’s output to 9.975 million barrels a day, the Kingdom’s highest level since June last year, wasn’t enough to offset substantial declines in Libya’s production as strikes and protests roiled the country’s oil industry. (9/3 #3)
- Iraqi crude exports in August were the second highest monthly average of the year, ending a three-month slide. Production from the first of four newly-ready major oil fields began over the weekend. Upgrades to Iraq’s southern export infrastructure are all but certain to lower exports. (9/2 #8)
- South Sudan appears to be determined this time around to clinch a deal with its northern neighbor Sudan to prevent frequent closures of pipelines carrying its crude to the international market. (9/3 #12)
- Mexico will soon approach the status of being a net oil importer if Pemex is not modernized and made more efficient. Even though Pemex ranks in the top 10 of all petroleum producers, the Mexican government taxes the company to support up to 40 percent of the national budget, leaving the company with very little to invest in technologies and innovation. (9/3 #13)
- Austrian energy company OMV said it confirmed the discovery of new oil while drilling an exploration well in the shallow waters of the Barents Sea. The company said it estimated the size of the discovery in the area drilled at between 60 million and 160 million barrels of oil and at least 10 billion cubic feet of recoverable natural gas. (9/7 #23)
- Tullow Oil discovered its first crude off Norway after at least 10 unsuccessful wells this year. The exploration well in the Barents Sea taps the Hoop-Maud Basin that may hold between 60 million barrels and 120 million barrels of recoverable crude. (9/6 #21)
- The basic issue is that there is a huge difference between the quantity of oil left in the ground (a lot), and the amount of high-quality oil that can be extracted and refined at a significant energy profit (not so much). (9/5 #26)
- Negotiations between Shell and the lawyers representing 15,000 Nigerians claiming compensation for two oil spills that occurred in the Niger Delta in 2008 are set to begin next week, in a bid to end litigation against the company in the U.K. (9/6 #14)
- Oil workers in Basra are threatening to stage a fresh round of demonstrations to protest unpaid bonuses and the Oil Ministry’s continued persecution of labor organizers. The most recent grievance is the renewed legal prosecution of a prominent oil union leader. (9/5 #9)
- The dreaded militant group, Movement for the Emancipation of the Niger Delta (MEND), has given the nation’s second largest oil producing company, Chevron Nigeria, until October 1, 2013 to evacuate the Escravos Terminal and Tank Farm or face attack. (9/5 #13)
- The US oil trade deficit: In terms of barrels, the US is now importing about the same amount of oil as 20 years ago — net imports are actually down 7 percent since the start of 1993. But in dollar terms, the petroleum trade deficit has more than tripled over the same period, even after adjusting for inflation. (9/5 #20)
- The EIA said US gasoline consumption for the first half of 2013 was 0.6 percent, or about 50,000 barrels per day, lower than the same period last year. (9/7 #16)
- The US drilling rig count dropped 9 rigs to 1,767 rotary rigs working during the week ended Sept. 6, Baker Hughes reported. Rigs drilling for oil lost 23 to 1,365 and gas-targeting rigs added 14 units to 394. (9/7 #21)
- Canadian Prime Minister Stephen Harper has offered to participate in joint efforts with the US to cut greenhouse-gas emissions to win approval of the Keystone XL pipeline, according to a person familiar with the matter. (9/7 #22)
- A decision on whether to approve the Keystone XL oil pipeline may slip into next year, giving opponents time to marshal efforts against it while offering President Barack Obama a chance to wring concessions from Canada. (9/3 #18)
- US companies that refine oil increasingly doubt that the controversial Keystone XL pipeline expansion will ever be built, and now they don’t particularly care. Railroads are carrying soaring amounts of crude from Canada down to refineries along the U.S. Gulf Coast, reducing the need for the TransCanada Corp. project. (9/5 #23)
- One of the hottest things going right now in shale and unconventional plays is a development technique based on a complex set of calculations: well spacing. Optimum spacing density is largely a question of economics. Overall estimated ultimate recovery rates generally increase with down spacing but incremental recoveries decrease with each infill because of well interference. (9/2 #20)
- EOG Resources, a star Bakken player, has a 160-acre well spacing program in that play’s Parshall field. Based on an evaluation of its down spacing program so far, EOG has boosted its total Bakken/Three Forks drilling inventory from seven to 12 years. (9/2 #20)
- Saudi Aramco is emphasizing natural gas development, pursuing opportunities in unconventional resources, and trying to become a technological leader. The new push for natural gas in part represents an attempt to displace subsidized oil in power generation. Saudi oil use increased to 2.9 million b/d, 25% of production, in 2012 from 1.6 million b/d, 17% of production, in 2000. (9/7 #12)
- UK shale pioneer Cuadrilla Resources said Wednesday it will submit a new planning application for its controversial oil-exploration well in southern England, adding further delays to a project that has already been shut down once during anti-fracking protests. (9/5 #25)
- The abundance of cheap natural gas means nuclear power is fast falling out of favor with the Vermont Yankee Nuclear Power Station the fourth U.S. atomic plant to be shut this year. More closures are likely. Sluggish power prices and competition from natural-gas-fired power plants are making nuclear power uneconomical. Plant costs have also soared over the same period, even before taking into account new safety measures imposed in the wake of the Fukushima meltdown. (9/7 #7)
- Iran has agreed to release an Indian oil tanker that was detained by its naval authorities more than three weeks ago, in an end to a dispute that had threatened to affect relations between the two countries. Iran detained the ship carrying crude oil from Iraq to India on Aug. 13, saying it was polluting Iranian waters. (9/7 #9)
- Beijing will reduce car registrations from next year in a bid to clean up its air and ease traffic congestion, local transport authorities said Tuesday. (9/3 #14)
- Egyptian state-owned energy companies are negotiating new terms and repayment schedules for debts owed to foreign partners, Oil Minister Sherif Ismail said, as the country tries to boost output amid political turmoil. (9/2 #10)
- In crowded Mexico City, with 20 million people and around four million cars, six-hour commutes are not uncommon. (9/6 #15)
- In Turkey, the recent sharp economic downturn is undermining the government’s claim to have transformed the traditionally boom-and-bust economy—and could threaten Prime Minister Erdogan’s bid to extend his 10-year rule as well. (9/6 #13)
- President Rouhani of Iran, a cleric who was elected in June after promising to ease the country’s economic isolation and tensions with the West over a disputed nuclear program, will attend the opening session of the United Nations General Assembly in New York this month and deliver three speeches. (9/5 #8)
- China’s airlines are likely to triple the size of their airplane fleets over the next two decades, driven by strong economic growth and rising tourism. Boeing and European rival Airbus Industries are looking to China to drive sales as growth in demand cools elsewhere. (9/5 #18)
- India had seemed tantalizingly close to embarking on the same dash for economic growth that has lifted hundreds of millions of people out of poverty in China and across East Asia. But its economy now stands in disarray, with the prospect of worse to come in the next few months. The economic decline has laid bare chronic problems: an antiquated infrastructure, a sclerotic job market, exorbitant real estate costs and bloated state-owned enterprises. (9/5 #19)
- A Virginia power company said it won the rights to develop a wind farm off Virginia’s coast, with the first turbine expected online within the next 10 years. (9/6 #25)
- The U.S. auto industry has shifted into high gear with new-car buyers snapping up vehicles last month at a pace not seen since before the financial crisis. All told, buyers purchased 1.5 million vehicles last month, up 17% from a year ago. (9/5 #21)
- Wood Mackenzie has estimated that China will see 12.7 million b/d of primary refining capacity by the end of this year, largely unchanged from its forecast last year. (9/6 #17)