Oil traded between $94 and $100 last week as the markets balanced worsening economic news across much of the OECD against continued Chinese growth and a slowly tightening global oil supply situation. NY oil closed out the week at $97.24 and in London Brent remained $20 higher, closing at 117.26. The week was dominated by the ever-expanding EU sovereign debt crisis and Washington’s feuding over the debt cap. This week the rating agencies weighed in by lowering debt ratings of some EU members and threatening to lower the rating on the US debt unless the ceiling limit is raised.
Although Federal Reserve Chairman Bernanke played down the need for further quantitative easing which could push oil prices higher, many traders are worried that worsening US economic conditions could force another round.
The weekly US stocks report showed an unexpectedly large drop in US gasoline and crude stocks.
The IEA confirmed this week that the Saudis pumped 700,000 b/d more in June than in May; however, about half of this increased production was consumed by the Saudis themselves to satisfied increased demands for air conditioning and desalinization. Saudi refinery input increased by 250,000 b/d last month and much crude was burned in thermal power plants.
Barclay’s Bank joined the IEA and EIA in warning that global oil supplies are likely to become much tighter in the second half of this year. Barclays does not see Libyan oil production rising to previous levels for several years, sees the Saudi’s spare capacity eroding quickly and no end in sight for increasing demand from China and other growing countries.
As US gasoline inventories fall, prices are rising again. Although retailing for about 22 cents a gallon cheaper than in early May, it is still 95 cents a gallon higher than last summer. Hot and humid weather across much of the eastern US is forcing natural gas prices higher as the demand for air conditioning approaches record levels.
Although little happened in the region last week that directly affects oil exports, developments in several countries do not bode well for the future. In Syria anti-government demonstrations last week that took place in several cities were among the largest since the uprising began in March. At least 28 demonstrators in several cities were killed when security forces fired on crowds. The government claims that an explosion along a key gas pipeline was an “accident.”
The fourth attack on the Sinai gas pipelines since the Egyptian uprising has once again left Israel, Jordan, Syria and Lebanon short of natural gas for their power stations. Although the Israelis can compensate with increased imports until they can develop their own natural gas supply, the
Jordanians are in much worse condition. Amman is said to be considering an Iranian offer to supply the kingdom gas through the pipeline that supplies Iranian gas to Turkey and Iraq.
There was movement on the Libyan situation last week as rebel forces moved closer to Tripoli from the western mountains and the US and 31 other nations recognized the Transitional National Council as the legitimate government of Libya. The Transitional Council, however, was not given access to the estimated $160 billion in Libyan government financial assets held in institutions around the world.
Months of NATO air attacks have left the Gadhafi government with very little in the way of heavy military equipment. Food and fuel supplies are running short in Tripoli and the Gadhafi regime has already extended feelers in a search for a settlement that would exempt the Colonel and his closest associates from standing trial in an International court for crimes against humanity.
Rebel forces do not have the strength to overrun Gadhafi loyalists in Tripoli who fear retribution should they be captured. Short of a negotiated settlement, the situation is likely to continue for some time. Even a settlement of the conflict does not mean that the situation would be stable enough for oil exports to return to pre-uprising levels.
Yemen’s economy is on the verge of collapse as attacks on its electrical and oil infrastructure have left the country with serious shortages of power, gasoline, and food. A failed state of 24 million disaffected people along the borders of Saudi Arabia and Oman will not be good for regional stability or oil exports in the long run.
The steady drumbeat of reports of energy shortages, in some cases serious, around the world continued last week. The causes of these shortages remain diverse – from hydro power-stopping droughts, to strikes, unaffordable oil prices, rapid population and demand growth, nuclear accidents – the list goes on and on.
The most serious problem remains in Pakistan where the Chairman of the National Power Authority reported that the country is only producing half of its generating capacity due to the lack of money to pay for fuel. Foreign investors have started to transfer their operations to other Asian countries due to the prolonged power outages. One estimate has Pakistan’s industrial production down by 20 to 25 percent.
Japan’s energy problems are increasing. A new report says that, should the country shut down its nuclear reactors in response to public anxiety, the power shortage could not be made up by increased fossil fuel generation. Last week another Japanese nuclear power reactor was shut down due to a malfunction. There are already reports of Japanese manufacturers considering moving production overseas where the electric power situation is better.
Moving beyond the major situations, the Bahamas now have rolling blackouts; South Africa has an ongoing strike; Mozambique has grounded airline fights due to a jet fuel shortage; Uganda has 12 hours a day of load shedding as it cannot pay for fuel; and the list goes on. The bottom line is that there are dozens of countries where a combination of droughts and high oil prices means that electricity and motor fuels are no longer affordable.
A country with 1.3 billion people growing at 9+ percent a year cannot go through a week without releasing some sort of news that affects the global oil situation. Last week’s stories were GDP growth and the trade balance. Despite months of belt-tightening in an effort to control rampant inflation, particularly in food prices, China managed to come up with a GDP growth rate of 9.5 percent in the second quarter – down a bit from the 1st quarter, but above economists’ expectations.
Some commentators saw the 9.5 percent which was the lowest quarterly growth rate in nearly two years as evidence the China’s growth is slowing, while other thought it a remarkable accomplishment in the face of interest rate and reserve requirement increases and the electric power shortages, droughts, and floods the country has been through in the last three months. The government’s statistics bureau noted that GDP growth actually accelerated slightly in the quarter with a key industrial index increasing by 15.1 percent in June from a year earlier. China’s electricity consumption in the 1st half was up by 12.2 percent over 2010, including a 12 percent increase in industrial use which is about 62 percent of China’s consumption.
While the growth in China’s foreign trade slowed to the lowest rate of increase in 20 months, imports still rose by 19.3 percent and exports by 17.9 percent in June. It seems as if there is a lot of room for more belt-tightening and increased oil and coal imports in the six months. The energy for a 12 percent increase in electricity consumption has to come from somewhere – increased efficiency, domestic production, or imports.
"We will aim to bring about a society that can exist without nuclear power."
-- Japanese Prime Minister Naoto Kan
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