By Tom Whipple
1. Oil and the Global Economy
2. The Middle East & North Africa
5. Quote of the Week
6. The Briefs
1. Oil and the Global Economy
The price surge which began early in May continued this week leaving New York oilfutures closing at $104.35, up some $6 a barrel in the last month, and London’s Brent closed at 110.54 up about $4. Behind the price moves was the Ukrainian situation, political problems in several oil exporting countries, and a 7.2 million barrel drop in US crude inventories the week before last. US oil futures which are now up 4.6 percent for the month are approaching their highs for 2014. The US crude glut remains however as the large surpluses that were at Cushing, Okla. have merely been shifted to Gulf Coast storage facilities and the drop in crude inventory last week was due to much lower imports.
US gasoline futures, which have been rising slowly for the past two years, are now within a few cents of reaching their highest levels since the 2008 price spike. Average national retail gasoline prices have been holding around $3.65 a gallon in recent weeks, but in a few states are above or flirting with the $4 level at which consumer price resistance has become stronger in the past.
The IEA is predicting that industrialized countries will be facing an oil supply shortage later this year unless OPEC steps up its production by another 900,000 b/d. The Agency notes that increasing Chinese demand which reached 6.8 million b/d in April is adding to the problem. OPEC may have trouble increasing exports even if they want to this summer. Several OPEC members are having serious production problems. The Gulf Arab states which probably have some spare capacity are likely to be facing a very hot summer which requires additional domestic crude consumption to keep the air conditioning running.
The LA Times report that almost none of the shale oil thought to be under California can be exploited brought little reaction last week. The EIA did confirm that the story was true and is based on a report about to be published, but did its best to back away from the administration’s highly flawed estimate that the US had more than twice as much shale oil reserves than it apparently does. In talking to reporters, the Director of the EIA emphasized that the 13 billion barrels of oil actually exists under California and that the only trouble is we don’t yet have the technology to extract it at economic prices. Industry spokesmen also noted that the “now un-producible” oil was still under the state and with dozens of smart engineers working on the problem would one day be produced.
The EIA continues to publish new highs for US domestic oil production nearly every week and now has the number up to 8.43 million b/d despite the suspicions of some observers that the Administration is simply making straight line forecasts of growth, especially in the Eagle Ford shale without the numbers to back it up. They note a substantial divergence between what Texas says its production is and that reported by the EIA. There is also an issue of the quality of the “oil” the EIA says is being produced with a large share of the Eagle Ford production coming in the form of lower energy lease condensates which do not qualify for delivery on futures contracts.
The API says US gasoline production in April hit an all-time high of 9.79 million b/d with most of the increase going to exports which are setting new records. With relatively cheap oil and much cheaper natural gas to fuel refinery oil heaters, US refiners are in a position to undercut many foreign refiners even when transportation costs are included.
US natural gas futures were volatile last week falling to a near 7-week low Thursday on news of the largest stockpile addition this year and then rebounding on Friday as the markets try to divine whether our low stockpiles can be replenished in time for next winter. Stocks are now 47 percent below normal. Bloomberg reported last week that new drilling for natural gas is being hampered by the lack of pipeline capacity to move the gas to markets. Industry observers note there are several thousand newly drilled natural gas wells waiting to be connected to pipelines.
2. The Middle East & North Africa
A conference held in Turkey last week reemphasized the threat to the entire region from the growing scarcity of water and rising temperatures. Nearly every country in the Middle East with the exception of the rich Gulf Arab states that can afford the massive cost of desalination is vulnerable to widespread water shortages and the likelihood of social unrest on a heretofore unseen scale. For those that have excess oil, the need to use it to deal with the water crisis will in the long run reduce exports.
Iran: There was little news of the nuclear negotiations last week. Some reports suggest that the US might be continuing to hold talks with Tehran in secret. The IAEA reported last week that Iran is adhering to its pledges in the interim agreement to cut back its highly enriched uranium and to divulge more information about its previous efforts to develop what could be detonators for nuclear weapons. The IAEA report has not yet been released to the public, so there are many questions as to what it contains and whether it will help conclude a final nuclear treaty this summer.
Beijing is trying to work its way back into Tehran’s good graces after the China National Petroleum Corp was tossed off a $2.5 billion Iranian contract last month for failure to perform. This time Sinopec is offering to revive a lapsed contract to develop an Iranianoil field close to the Iraqi border.
Iraq: The election returns are in and Prime Minister Maliki’s party seems to have won 92 out 328 seats in Parliament. This time however it may be more difficult for Maliki to form a broad coalition as relations with the Sunnis and Kurds have deteriorated markedly in recent months. A coalition with other Shiite parties is possible, but some are saying a new Prime Minister would be the price for such a coalition. The negotiations to form a government are expected to continue for an extended time.
Fighting in Anbar and Sunni attacks on Shiites continue as usual. The US embassy has warned Americans living in the oil capitol of Basrah that they may become targets for kidnappings by Sunni insurgents. Such an eventuality could trigger a mass exodus of foreigners developing Iraq’s oil fields.
More than a million barrels of Kurdish oil was shipped from Ceyhan to Europe last week. This has outraged Baghdad which, lacking the power to do much about it, has asked that the matter go to international arbitration.
Libya: In the wake of the attack on parliament by forces loyal to renegade general Haftar last week there has been more chaos than usual in Libya. Haftar, who has held prominent positions in numerous Libyan coups, countercoups, and wars going back go 1964, has vowed to crush the Libyan Islamists who dominate the Parliament. After being forced out of their building, the Parliament met secretly in a hotel and agreed to hold new elections on June 25th. Over the weekend however, the Parliament attempted to form a new government in opposition to Haftar who wants power to be handed over to a commission of judges. The country and the various militias seem to be splitting along Islamist and anti-Islamist as well as tribal lines.
In the meantime there has been little word on oil production which was down to 215,000 b/d in April. Foreign oil companies are pulling out their expatriate employees and the head of the National Oil Company has resigned. All this seems to be headed towards a lengthy period of civil unrest with little oil production ahead, unless, of course, Haftar can muster the support to become the next military strongman.
The $400 billion Russia-China natural gas deal was the subject of much commentary last week, with most observers seeing the deal as a major games changer. It is generally agreed that the deal is a response to the sanctions that have been imposed on Russia and the EU’s announced efforts to reduce its dependence on Russian energy. Most believe that Moscow has made major price and other concessions to Beijing to close the deal which has been under negotiation for ten years at this time. Of equal importance may be an agreement between Beijing and one of Russia’s largest banks to pay each other in domestic currencies rather than dollars.
Beijing’s troubles with Japan and Vietnam over its efforts to drill in or gain control over disputed parts of the South China Sea continue. The latest round of confrontations involves Japanese and Chinese planes.
The head of China’s central bank says the country has entered a period of manageable slowdown as reforms and environmental protection take precedence over economic growth. China’s gasoline stocks hit a record in April along with crude imports.
The Sunday elections seem to have produced a new President, candy maker and billionaire Petor Poroshenko. The elections seem to have gone well except in staunchly pro-Russian cities of eastern Ukraine where intimidation kept the polls closed. Moscow’s attitude to all this is still an unknown. Moscow insists that the ousted pro-Russian President Yanukovych is still the legitimate head of the country, but will decide after the election whether to recognize whoever was elected President. Reports from eastern Ukraine suggest that there was considerable covert Russian intervention in the election which many pro-Russian Ukrainians boycotted.
The US and Germany announced recently that Russian disruption of the elections would bring further sanctions. For now we are waiting to see what happens after June 1st when Moscow says it will cut off natural gas supplies to Ukraine.
5. Quote of the Week
- “Exxon Mobil had its company oil peak in 2010, BP its in 2007, Shell before 2004, Total before 2004, ConocoPhillips in 2006 and Chevron in 2010. Their combined crude oil production has declined from Gb 4.225 in 2004 to Gb 3.451 in 2013, a fall of 18.3%. As far as the Western oil majors are concerned peakoil passed years ago.”
6. The Briefs
- For years, Mexico, Iran, Iraq, Algeria and Libya—most of them among the top 10 producers world-wide—were fiercely nationalistic when it came to oil. They either offered Western companies punitive terms to develop their reserves or didn’t do business with them at all, controlling their supplies tightly with state-owned companies. Now, facing a range of problems, these nations are looking to tap more of their reserves—and they’re offering Western companies generous deals to win their help. (5/19)
- China’s Sinopec is pushing to start a new phase in Iran’s Yardavaran oil field, a plan Iran says it is likely to approve. The push is part of a broader attempt by China and Iran to mend fences after the recent cancellation of a separate project. (5/23)
- In India, the Bharatiya Janata Party’s decisive win in the general elections should see key reforms in the oil and gas sector pushed through and could end years of under-investment in the country’s exploration sector. As a first step, analysts expect the new government led by Prime Minister Narendra Modi to swiftly raise natural gas prices — which would promote offshore investment — and deregulate diesel prices to cut the government’s subsidy burden. (5/19)
- In Argentina, Exxon Mobil said its affiliate discovered oil and natural gas in the Vaca Muerta shale play in the country’s Neuquen province. Appraisal wells will need to be drilled before Exxon makes a commercial decision on the area, but the company expressed optimism about the potential. The EIA estimates Argentina has 774 trillion cubic feet of technically recoverable shale gas resources, the third most in the world. Oil reserves are estimated at 2.5 billion barrels. Its Vaca Muerta region is considered one of the best shale reserve areas in the world. (5/22)
- Spanish oil company Repsol said it sold off its stake in Argentina’s YPF and the $5 billion in bonds it received from the nationalization of the state energy company. (5-24)
- Ecuador, after about three years of negotiations, is preparing to sign a $7 billion financing deal with Chinese banks to finance a $10 billion new oil refinery which will process 200,000 barrels of crude oil a day. (5-24)
- In South Sudan five months of civil war has led to the death of thousands and the displacement of more than one million people. But officials warn the tragedy is just beginning. A serious food crisis is looming over the country, and the consequences could be dire. (5/20)
- In the UK, more than four billion barrels of oil could be present in shale formations lying underneath Kent, Sussex, Surrey and Hampshire – although it is doubtful if much of it could ever be recovered through fracking, according to a long-awaited government study. Government geologists played down the prospects for an onshore oil and gas bonanza in the area because of the difficulty of extracting it. (5/24)
- TransCanada Corp. is considering ways to deliver Canadian crude by rail to the U.S. as customers of its proposed Keystone XL seek an alternative to the delayed pipeline. A rail option may cost twice as much as sending the crude via Keystone. The trigger for pushing ahead with rail was the Obama administration’s April 18 announcement that it was delaying a decision on the $5.4 billion pipeline bell project because of a court battle. (5/22)
- The Canadian government is poised to take another step to boost support for pipelines as it prepares to rule on Enbridge Inc.’s proposed Northern Gateway project. Natural Resources Minister Rickford plans to announce his department will set up a new branch office based in British Columbia to oversee discussions with aboriginal groups. (5/22)
- Crude oil from the Bakken Shale formation doesn’t pose special risks to rail transport and shouldn’t require a separate classification regime than other hazardous liquids, North Dakota oil producers said in a study released Tuesday. The report compiled for the North Dakota Petroleum Council, a lobbying group for energy producers in the state, found that Bakken oil is comparable in volatility to gas-rich oils from other shale formations in other regions most of which is not transported by rail. (5/21)
- US gasoline production climbed 9.2 percent to an all-time high 9.79 million barrels a day in April as fuel exports surged. Output of distillate fuel, a category that includes diesel and heating oil, rose 12 percent to 4.95 million, a record for the month. (5/22)
- Koch Pipeline Co. plans to install a 24-mile, 200,000-b/d pipeline in San Patricio County, Tex. Koch operates 540 miles of crude oil transportation lines in Texas. The 16-in. line is expected to begin service in the second quarter. (5/21)
- Shell is selling a 100% interest in 106,000 net acres in Dimmit, LaSalle, and Webb Counties, Tex. The transaction is part of Shell’s restructuring of its North Americas shale oil and gas plays portfolio to focus on acreage positions that can reach the scale required by the company. Shell previously divested its acreage position in the Mississippi Lime in Kansas, its Utica shale interest in Ohio, and a portion of its acreage in the Sandwash Niobrara basins in Colorado. (5/22)
- BP faces billions of dollars in additional payments after failing again to convince an appeals court that the company is being forced to pay claims that aren’t directly related to the 2010 Gulf of Mexico oil spill. The company is appealing to the U.S. Supreme Court. (5/20)
- The European Commission has identified the ongoing shale gas boom in the US as one of the primary reasons for profit margin losses in the EU refining industry in recent years. (5/22)
- Ukrainian presidential candidate Oleh Liahsko said shale gas could help bring a layer of political and economic independence to a new Ukrainian government. Liahsko, founder of the minority Radical Party, said the Ukrainian government needs to break the Russian grip on the energy sector for the sake of independence. (5/20)
- British shale gas developer Cuadrilla Resources announced its intention to submit a plan for exploration work to the county council in Lancashire. The company said it would submit its planning application for a hydraulic fracturing campaign for four exploration wells to the Lancashire County Council before the end of May. In March, the company said it believes there are 200 trillion cubic feet of shale natural gas in the Bowland basin in Lancashire. (5/20)
- Russia’s Gazprom said all contracts for the construction of the South Stream gas pipeline’s offshore section have been signed. Gazprom touts South Stream — which would stretch about 575 miles long offshore and more than 900 miles through the territory of southern European countries — as an option to ensure European gas supplies are stable. (5/20)
- US rigs targeting natural gas slipped from a one-month high with drillers limited by a shortage of pipeline capacity to move supplies to market. The count dropped by one to 325 this week, down by 29 in the past year even as prices gained, underscoring the record volume from existing rigs. The boom has companies jockeying for transportation capacity as output in the Marcellus alone is set to rise by 25 percent in June from a year earlier. (5/24)
- US consumer energy bills during the last two quarters were more than 4 percent higher year-on-year because of a harsh winter. (5/22)
- The US’s petrodollar hegemony is being chipped away at, whether by foreign policy faux pas, crossed red-lines, or economic fragility. On Day 1 of Vladimir Putin’s trip to China, VTB – among Russia’s largest banks – signed a deal with Bank of China to pay each other in domestic currencies, bypassing the need for US Dollars. (5/21)
- In the Middle East, there is a growing scarcity of water. Years of war, careless water supply management, unchecked population growth, ill-advised agricultural policies, and subsidies that encourage consumption have turned a basically arid part of the world into a voracious consumer of water. The trajectory is not sustainable. (5/21)
- At the most dire moment of the Fukushima nuclear crisis three years ago, hundreds of panicked employees abandoned the damaged plant despite being ordered to remain on hand for last-ditch efforts to regain control of its runaway reactors, according to a previously undisclosed record of the accident that was reported Tuesday by a major Japanese newspaper. (5/21)
- On May 16th radiation at five monitoring points in waters adjacent to the crippled Fukushima No. 1 power station spiked to all-time highs according to the semi-nationalized TEPCO. The measurements follow similar highs detected in groundwater at the plant. (5/20)
- In Japan, a court ruled Wednesday that Kansai Electric Power Co. can’t restart two of its reactors due to safety concerns, dealing a setback to Prime Minister Abe’s efforts to jump-start idled nuclear power plants. The judge Hideaki cited uncertainty surrounding the plant’s ability to withstand earthquakes. (5/22)
- A US federal appeals court dealt a blow to electricity-conservation efforts when it struck down a rule allowing big energy consumers to reap special payments in exchange for cutting their power use. The D.C. Circuit Court of Appeals nullified a 2011 order by the Federal Energy Regulatory Commission that promoted paying businesses to reduce electricity consumption during heavy times of demand. (5/24)
- Bourbon lovers, you’d better stock up. A day of reckoning is quickly approaching, warns Buffalo Trace, one of the oldest distilleries in the country. A whiskey shortage—or Peak Whiskey—may soon be upon us. (5/21)