1. Oil and the Global Economy
The death of Osama Ben Laden triggered a selloff in the oil markets which lasted all week. Closing out the previous week just below $114 a barrel in NY, prices fell steadily, at one point trading as low as $94 a barrel, before closing on Friday at $97.18. After a steady climb from $80 a barrel last summer some sort of correction was due. In London, Brent fell from $125 a barrel to close the week at $109 and US gasoline futures fell from $3.35 a gallon to close the week at $3.12 despite a 1 million barrel decline in US gasoline inventories.
Other than “it was time for a correction,” a number of factors contributed to the selloff which gained momentum as the week went on. The dollar strengthened a little during the week on worries about Greece and an unexpected jump in US unemployment claims and a drop in manufacturing cast doubts on the pace of the US recovery. The Middle East has been relatively quiet in the last couple of weeks with little in the way of additional threats to oil production. Libyan oil production has been largely written off for the foreseeable future. Although serious disorders continue in Yemen and Syria, neither country is a major oil exporter. In the last few months, the perceived need for more revenue to increase social spending in order to head off unrest has added a new factor that will influence Middle Eastern production levels and eventually prices.
The weekly oil stocks report showed US demand for oil dropping by 1.2 million b/d to 18.3 million during the last week of April. This drop in demand contributed to the 4.1 million barrel increase in product stocks, while the crude inventory increased by 3.4 million barrels. Gasoline stocks in the US, however, fell by 36 million barrels the week before last and are now 5 million barrels below the five year average. Gasoline inventories along the Atlantic coast have fallen to the lowest level on record for the last week in April.
While the selloff may have removed much of the “fear factor” from oil prices, the fundamentals of the global oil market remain extremely tight. The IEA still forecasts a 1.3 million b/d jump in global demand in the 3rd quarter and while there may have been a small rebound in Saudi production from the 8.2 million b/d they pumped in March, it is nowhere near enough to offset the loss of Libyan production. Many believe that global consumption currently is larger than supply. Electric power outages continue to grow around the world being the most pronounced in Pakistan, India and China. In the recent past, power outages have usually resulted in an increased demand for oil imports as businesses increase the use of emergency backup generators to keep plants and computer systems operating.
Japan’s nuclear energy problems continue to grow. The government is trying to shut down another vulnerable nuclear power plant. If they are successful, the demand for fossil fuel imports will grow still higher in coming months.
Much of the $16.75 a barrel drop in oil prices last week, the largest weekly drop on record, was due to technical factors as selling waves broke through key technical levels and led to more selling. It is doubtful that the selloff will be prolonged. The world’s supply/demand balance is so tight that a drop in US consumption will no longer have the impact it once had. US gasoline prices should be falling soon and the summer driving season is only a few weeks away. A combination of a fundamentally weak US dollar and increasing demand in the next six months suggest that prices should be rebound soon despite the loss of speculative interest.
A poll of economists taken last week shows China on track to grow by 9.5 percent in 2011, down from the 10.3 percent registered in 2010. If this turns out be the case, then all the inflation fighting of the last six months will have shaved less than a point off China’s economic growth. Electricity consumption in the country has been growing at 13 percent this year and power rationing is taking place in 20 provinces, autonomous regions and municipalities. Some of the problem is that the low electricity rates set by the government are forcing some power companies to operate at a loss in the face of high imported coal prices which are in the vicinity of $125 a ton. China’s electricity council warned that the shortage could increase to the highest level since 2004 this summer and is expected to continue for at least several years. For the year, demand for electricity is expected to grow by 12 percent while production grows by 9 percent.
Two weeks ago Beijing began to increase coal imports which is one reason coal prices hardly budged last week during the oil sell off. Beijing has always been clever in waiting for selloffs before making major purchases on the world commodity markets. If history is any lesson we can expect increased Chinese purchases of oil as soon as it becomes clear that prices have stabilized. A three percent shortfall in the electricity supply this year would be a major problem for China’s economic growth so increased coal imports and diesel for emergency generators can be expected later this year.
3. Disturbing Reports
There were several new reports out last week that have serious implications for long-term stability of the global economy. From the Arctic Monitoring and Assessment Program came the word that the arctic ice is melting faster than expected and could raise the average global sea level by as much as five feet in this century. Various feedback mechanisms such as warming of non-ice covered water have started to kick in thereby increasing the pace of melting. According to the report the sea level could rise from 35 to 63 inches in the next 90 years as compared to the 7 to 23 inches forecast by the UN in 2007.
The UN now says that the world population is expected to climb to 10.1 billion from the current 7 billion by the end of the century and 9.3 billion by 2050. Many of the countries with the fastest growth are already facing food and water shortages.
Water shortages across the Middle East will lead to food insecurity in coming years. After 20 years of pumping water from a non-renewing fossil aquifer, the Saudis are giving up growing the wheat that made the country self-sufficient in its principal staple food. In a few years, the country will be dependent on imported food to feed its rapidly growing population. This has led to Saudi purchase of land in Africa with ample water supplies as a captive source of food imports.
Yemen, Iraq, Syria, and Jordan are already facing serious water shortages. Syria’s grain harvest is already down by on fifth since its peak production 10 years ago, and Iraq’s down by one fourth. The population of the region is growing by 10,000 people a day as the amount of available water falls, suggesting that it will be difficult to fulfill the UN’s estimate that there will be an additional 3 billion people on the earth by the end of the century.
Quote of the Week
“The lower FY 2011 funding level will require significant cuts in EIA’s data, analysis and forecasting activities.”
-- EIA Administrator Richard Newell
The Briefs (clips from recent Peak Oil News dailies are indicated by date and item #)