1. Oil and the Global Economy
It was a volatile week with oil trading between $104 and $95 a barrel before closing the week at $99.65. In London oil closed out the week at $113.83 a barrel after trading over a $20 range in the last two weeks. Developments moving the oil markets were all over the board last week as traders focused on numerous concerns. The week opened with worries that the Mississippi flood might disrupt oil refineries along the river and the euro zone debt situation. On Tuesday Platts reported that OPEC’s oil production in April was down by 340,000 b/d from March. China and Russia announced they were imposing export restrictions on oil products to combat domestic shortages.
Wednesday saw a nearly $5 a barrel drop as Beijing announced that inflation last month was 5.3 percent and the EIA announced an unexpectedly large increase in crude stocks, the first increase in gasoline stocks in 12 weeks and a dramatic drop in US gasoline consumption as prices hovered around $4 a gallon. Thursday saw a new IEA forecast that cut the increase in global demand for oil by 140,000 b/d in 2011 due to higher prices. This news sent NY oil below $96 a barrel for a time.
The news that economic growth in Germany and France was doing better than expected sent prices up on Friday. At the close of the markets on Friday there was a sudden surge over renewed concerns about the Mississippi flood damaging refineries or slowing oil shipments. At the end of the week NY Oil was up about $1 a barrel and Brent crude was up about $3.
Despite concerns about demand for gasoline in the US slowing due to high prices, the medium and long term outlook is still for higher prices. As the IEA points out at every opportunity, it is only in North America where the full weight of gasoline prices is felt by consumers as much of the world is sheltered by government subsidies or prices are rendered less noticable by very high taxes. The IEA continues to warn of troubles in the second half of 2011 as demand moves ahead of supply. Around the world power shortages are growing as growing populations, hydro-power reducing droughts and coal shortages are leading to spreading blackouts. In most of these situations, increased demand for diesel and gasoline to power emergency generators is the only short term solution.
2. The Mississippi flood
For the next two weeks, developments stemming from the record-breaking flood on the Mississippi have the potential of disrupting US oil deliveries in the central US. The current plan is to divert about a third of the Mississippi down the Atchafalaya River basin in order to relieve pressure on the levees between Baton Rouge and the Gulf of Mexico. If all goes as planned the 10 major oil refineries that process 2.4 million b/d along the lower Mississippi should be spared from serious flooding although shipments by tanker and barge to and from the plants and some pipelines would be disrupted.
The diversion of flood water down the Atchafalaya basin would threaten 8 small refineries located in the vicinity of the flooded area, although only two are expected to be affected. Inside the threatened area are 2,264 oil or natural gas wells that produce 19,000 barrels of crude oil daily, about 10 percent of Louisiana’s onshore total, and 252.6 million cubic feet of natural gas.
If all goes well the worst that will happen is a temporary cessation of barge and tanker traffic and the flooding of refinery docking facilities located on the river. However, there are numerous possibilities for worse outcomes. If levees fail or are topped by flood waters one or more refineries or even cities could be flooded. An unlikely possibility is that the flood control facilities that divert water into the Atchafalaya could be washed out by the flood leaving the Mississippi free to shift its course into the Atchafalaya River basin. This could leave parts of the current lower Mississippi un-navigable which would be a major economic disaster for the country, not to mention the refineries on the river banks.
3. The IEA’s Monthly Report
The IEA’s Oil Market Report for May came out last Thursday. Although the full report will not be available at no charge for another two weeks, the highlights and reviews in the financial press that have access to the complete document are always interesting. The headline news was that the Agency is lowering its forecast for 2011 oil demand to 89.2 million b/d or an increase of 1.3 million b/d over last year. This is a drop of 140,000 b/d from last month’s projection.
The Agency says that global oil production fell by 50,000 b/d in April to 87.5 million b/d. OPEC production was reported as dropping by 235,000 b/d from March to April, which is less than the 340,000 b/d decline reported by Platts.
The demand for oil is now forecast to drop by 230,000 b/d in the developed countries – including 194,000 b/d in North America. Demand in the developing world, particularly China will grow by 1.5 million b/d. The Agency points out that North America is where retail gasoline prices are the most directly linked to global oil prices and where consumers will feel the most impact.
Possibly the most significant conclusion of the report is that "OPEC's apparently relaxed attitude toward increasing production to offset lost Libyan supplies may also lead to sharply tighter markets later this summer once refiners are back in full swing." This inaction by OPEC implies that significant withdrawals from oil stocks will be required by the end of summer to meet demand thereby undermining oil market stability – i.e. higher prices are in store.
In contrast to what the IEA is saying, the monthly forecast just released by the OPEC secretariat says that the increase in demand in 2011 will be 1.4 million b/d, up 20,000 b/d from the prior month. The Secretariat also says that OPEC’s production increased by 70,000 b/d from March to April although the Secretariat has no insider knowledge of the cartel’s actual production and formulates its estimates largely from public sources. OPEC continues to maintain that high prices are the result of speculation and not from a supply/demand imbalance.
4. China’s problems
With demand for oil in the OECD countries remaining flat or falling, developments in China hold the key to what happens to energy prices in the next few years. Last week, there was considerable news out of Beijing related to energy. China’s daily net crude imports increased by 3 percent in April over March as refineries increased production. This is an increase of 1.3 percent from April 2010 imports. Despite the 8.9 percent increase in the price of oil, imports held up well.
Despite the government’s efforts to tamp down the economy, exports rose to an historic high of $156 billion last month, up 30 percent over April 2010. Consumer price inflation in April fell by 0.1 percent to 5.3 percent, well above the government’s target of 4 percent. Politically sensitive food prices were up by 11.5 percent over last April. As could be expected bank reserve requirements were raised another 50 basis points on Thursday.
Industrial output in April was up 13.4 percent over last year -- down a touch from the 14.8 percent increase in March. China’s official press is attributing this seemingly small drop in production growth to power shortages which seem to be growing every day. Water levels behind hydro dams in central China are said to be at record lows. In Hunan, hydro-power output is 2.2 million kwh a day as compared to a capacity of 9.2 million kwh. High-priced coal and low state-mandated electricity prices have led to massive losses in the power industry. China’s top five energy companies are reported to have lost $9.2 billion in the last three years.
Despite fears in the West that efforts to hold down inflation will stunt China’s economic growth, it still appears to be growing rapidly by anybody’s standards implying an increasing demand for energy. Demand for electricity grew by 13 percent in the first quarter. Extensive power cuts are already being forecast for the coming summer and if the past is a precedent, the demand for imported energy in the form of oil, coal, and natural gas should be rising soon. Last week China suspended the export of diesel fuel to help counter the coming shortages and to prevent refiners from selling diesel abroad where prices are not regulated.
All this supports in idea that we will be seeing higher demand for oil from China and higher oil prices in the months ahead.
5. In Washington
In the face of rising voter concerns about the high gasoline prices and complaints from Republicans and business leaders that administration policies are restricting development of domestic energy sources, President Obama announced on Saturday that he was taking steps to speed drilling for oil and gas on public lands and waters. In the last two weeks, the Republican-controlled house had passed three bills that would speed drilling for oil and gas in the US, charging that the President was driving up gas prices and preventing the creation of more jobs. The House-passed bills that are deemed to have little chance of passing the Senate would make it more difficult for environmentalists to mount legal challenges to offshore drilling.
The new administration policy calls for annual auctions of oil and gas leases in the Alaska National Petroleum Reserve, will accelerate the review of the environmental impact of drilling off the Atlantic coast, and will extend the leases already granted for drilling off Alaska and in the Gulf. The new policy is a reversal of the freeze imposed after the Macondo well disaster last year that placed the Atlantic Seaboard off limits to drilling until 2018.
The Republican bills and the President’s “capitulation” are largely political posturing in advance of the 2012 elections. A new study of the Alaskan petroleum reserve – not to be confused with ANWR (Arctic National Wildlife Reserve) which remains off limits – shows that the region contains much less oil than previously believed. The reserve was opened for drilling by Congress in 1980 but recent auctions have drawn limited industry interest. If there is much oil off the Atlantic coast, it is likely to be years before exploratory drilling begins and many more years before any oil found is exploited in significant quantities. In short, the whole furor is a charade to convince the voters that Congress is doing something about high gas prices, while in reality there is little that can be done. The exercise is similar to the umpteenth investigation of oil speculation that was launched by the administration a few weeks ago.
Some in Washington are calling for the release of crude from the 727 million barrels stored in the Strategic Petroleum Reserve as a way of lowering prices. The administration is resisting this move. Senate Democrats held hearings last week on a bill to eliminate $2 billion a year in tax breaks for the oil industry considering that the five largest oil companies reported $35 billion in profits last quarter. The industry is arguing that any “increase” in their taxes will cost US jobs and slow the search for more oil despite the massive disparity between the proposed tax “increase” and industry profits. This debate is likely to go on for some time.
Quote of the Week
“I am directing the Department of Interior to conduct annual lease sales in Alaska's National Petroleum Reserve, while respecting sensitive areas, and to speed up the evaluation of oil and gas resources in the mid and south Atlantic.”
-- US President Barack Obama
The Briefs (clips from recent Peak Oil News dailies are indicated by date and item #)