1. Oil and the Global Economy
After falling from $103 to $100 a barrel on Tuesday, NY oil remained in a trading range between $98 and $100 for the remainder of the week, closing at $100.57 on Friday, In London Brent crude traded some $15 a barrel higher, closing the week at $115.84. Trading last week was dominated by bad news about the US economy which suggests that US demand will be lower, and better news about the EU's and the IMF's bailout of Greece, which strengthened the euro thereby putting upward pressure on oil prices. The euro touched $146.3 on Friday, the highest level since early May. At present the oil markets are driven by a balance between rising euro and declining propects for US oil consumption.
Expectations about US economic recovery have changed markedly in the last two weeks after reports showing US manufacturing slipping and unemployment increasing. Factories in the US cut payrolls for the first time in seven months and employment by government agencies, retailers and hospitality companies fell.
US crude inventories rose by 2.8 million barrels the week before last and gasoline inventories rose by 2.5 million barrels.
OPEC will meet on Wednesday to decide on a production increase in the face of numerous warnings that the oil market will become much tighter in the second half of this year. It is an open question as to whether any increase in OPEC's formal production quota has any meaning at this time. Most OPEC members have been producing as much as they can for many months and the Saudis, who may have several million b/d of reserve production capacity, have been very guarded on the production issue in the wake of the unrest in the Middle East.
Surveys by the financial wire services say OPEC production increased by 355,000 b/d in May from April's production. According to Dow Jones, the Saudis increased production by 450,000 b/d to 9 million b/d. One observer notes that much of the Saudi increase in oil production is due to higher domestic demand to support air conditioning during the very hot summer months and is not offsetting the loss of Libyan exports.
Most of the pre-OPEC conference comments from various insiders are suggesting that there will be an increase in the formal production quotas although a consensus of analysts expects the quotas will remain unchanged. Whether a increase in quotas translates into exports to meet increases in demand expected in the 2nd half of the year remains to be seen.
Disturbances in the Middle East continued last week. Stepped up NATO attacks on government forces in Libya seem directed at bring the fighting to an end in the foreseeable future. The demonstrations in Yemen and Syria continue to grow worse with increasing numbers of demonstrators being gunned down by security forces in Syria and Yemen¡'s President being forced to leave the country for medical treatment in Saudi Arabia after an attack on his palace. Two months of protests in Yemen have left its economy on the verge of collapse with shortges of fuel, water, electricity, and food in many areas.
The real issue, however, remains in the Gulf where protests against the Kuwaiti government took place for the third straight Friday and tensions between the Saudis and Iran are increasing over the sectarian fighting in Bahrain. Unlike the other uprisings, the one in Baharain is a sectarian conflict that could eventually spread into Iraq and Saudi Arabia threatening large amounts of oil production.
On Monday the Keystone pipeline which carries Alberta oil to the Cushing, Oklahoma depot was shutdown after a leak at a pumping station. On Thusday the US government ordered the pipeline remain shut until it is satisfied that all safety concerns have been addressed. The pipeline is a sensitive issue because of an application to extend it to the Gulf and because it runs under some prime farm land and an important acquifer. Should the pipeline remain closed for an extended period, the lack of Canadian oil arriving at the NYMEX delivery point at Cushing may affect the spread between the NY and London futures oil contracts.
Gasoline futures in NY continued to trade around $3 a gallon after fallining from above $3.50 around the beginning of May. The AAA reports that currently the average gasoline price in the US is $3.77 a gallon, down about 20 cents from $3.98 a month ago.
Last week Beijing released an index of manufacturing for May showing a small decrease from April, but above what analysts had been expecting. This suggests that China's economy was still growing robustly last month by global standards despite efforts by authorities to rein in inflation and spreading power shortages. To deal with the growing power shortage, the government raised the prices that power companies are allowed to charge commercial electricity consumers, but kept the price for domestic consumption at current levels in order not to exacerbate retail price inflation. The move is expected to encourage power producers to step up generation of power.
Whether the move will have much effect remains to be seen as Chinese electricity consumption is expected to pick up in June and remain high for the rest of the summer. The government is reporting that domestic fuel stocks are falling as more industries are turning on diesel-fired generators to keep production lines moving. The State Grid Corporation predicted that this summer's power shortage will be worse than in 2004.
The drought in Central China is now said to be the worst in 60 years, and in Hunan province the papers are calling the situation the worst in 100 years. In several provinces there is inadequate drinking water and river traffic has been suspended. In 30 percent of Hunan's reservoirs the water level is too low for irrigation and some 700,000 hectares of farmland have been affected. On Saturday, China's Premier, Wen Jiabao, presided over an anti-drought seminar and called for stronger efforts to combat the situation.
Despite the dire pronouncements coming out of some of the key agricultural regions, China's Agriculture Ministger Han Chjangfu announced that China will have a bumper harvest of wheat and rapeseed this summer. Wheat is mainly grown in the north which only a few weeks back was reported as having a major rain deficit. Nonetheless, winter wheat production is expected to grow for the 8th straight year thanks to an increase of 200,000 hectares from the 2010 harvest of 27.7 million hectares. In 2010 China's grain output rose by 2.9 percent to 546 million tons.
Looking further ahead, however, China's environmental and water situations remain serious, and some of its megaprogects to control the environment are running into unforeseen consequences. Last week, China's top environment officials held a press conference to say that China's biodiversity was declining and that the country side was becoming more polluted as industries move to more rural areas.
Chinese planners admitted last week that they had failed to foresee the impact of the massive Three Gorges dam on lakes and rivers downstream. Water levels in the lower Yangtze and two of China's largest lakes have dropped dramatically because of all the water stored behind the dam. The planners, however, see the 84 billion KWh the dam produced last year as outweighing the damage that has been caused. Last week the government felt impelled to announce that the dam was not responsible for the drought which would have happened anyway.
Quote of the week
"We don't want the West to go and find alternatives [to our oil]"
-- Prince Alwaleed bin Talal, nephew of Saudi King Abdullah
The Briefs (clips from recent Peak Oil News dailies are indicated by date and item #)