1. Oil and the Global Economy
Oil prices climbed steadily last week with NY futures closing Friday at $86.80 and London at $114.68. The spread between NY and London oil widened to a record $27.88 a barrel, adding to the widely held perception that NY futures prices no longer have much value as an indicator of oil's value on the global market. London oil prices have recovered to levels seen in early September and are only about $10 below the 2011 highs set in April and May. Considering that London oil was trading below $100 a barrel two weeks ago the sharp upward surge is remarkable.
The conventional wisdom says that the announcement by France and Germany that the EU's debt problems would be settled shortly is the reason for strong equity and commodity prices last week. Certainly the 3.5 percent increase in the euro against the dollar last week contributed to the rising price of oil. Reading beyond the optimistic headlines, however, shows that the prospects for a quick settlement to the myriad EU economic problems are problematic. By mid-week Germany's Chancellor was backpedaling from the suggestion that all would be made well by the end of the month. With EU banks facing trillions of dollars in potentially bad loans, negotiations over just who was going to absorb losses of this magnitude are likely to go on for some time.
Beyond the optimism that the EU will soon be increasing its demand for oil, an increasingly tight supply-demand situation may be a significant factor in the price rise. Despite a stream of announcements about how much oil will be coming out of Libya by the end of the year, so far very little has been exported. The Saudis announced last week that their production was down by 400,000 b/d in September and most observers, including the IEA and Platts, are saying there was a drop in OPEC production last month. The IEA recently noted that OPEC's production will have to increase by 300,000 b/d in the 4th quarter to make up for lower output by non-members. This suggests that OPEC production may be lower than the IEA's current estimate and that the global oil situation may be tighter than is generally believed.
While US and EU imports are likely to be flat for the foreseeable future, Japan's are up due to the loss of much nuclear power and China as usual is chugging along, Although Chinese imports were down in September, the country is still growing at 9+ percent a year, and as we have seen many times in the past, is quite capable of stepping up imports whenever prices fall.
NY gasoline futures have climbed by 34 cents a gallon in the last two weeks, are now back to where they were in early September, and are only 20 cents below the 2011 highs set in April. Unless there is a sharp reversal soon, retail oil product prices in the US are likely to be on the rise in the next few weeks.
2. The Middle East
Resumption of Libyan exports remains the top Middle Eastern issue for the oil markets. With the insurgents seemingly mopping up the last of the armed resistance to the uprising, there is much optimism that oil production will soon be back to normal. Predictions of oil production reaching 600,000 b/d by the end of the year abound; foreign oil companies are sending employees back to assess the situation; a strike of Libyan oil workers protesting that their Gadhafi-era management was still in place was settled; and last week the flow of natural gas from Libya to Sicily resumed much to the relief of the Italians. Countering this, however, is the difficulty the insurgents are having in securing Sirte and a growing sense that it may be difficult to establish a stable government that would provide the security necessary to resume oil production to the pre-uprising levels.
Suppression of demonstrations in Syria continues apace with the UN reporting that over 3000 demonstrators have now been killed by security forces. The level of violence is increasing and the Syrian economy is coming apart. Even Moscow and Beijing who recently showed support for the Assad government by vetoing a UN resolution of condemnation seem to be having second thoughts about backing the wrong horse. At a minimum, the collapse of the Assad government would open a new period of heightened uncertainty in the region as various groups jockey for power and influence.
Elsewhere in the Middle East, the uprising in Yemen seems to be getting more violent; Israel and the Palestinians agreed on a 1000 for 1 prisoner swap; fighting in the streets of Cairo resumed; and the Justice Department revealed a bizarre plot in which Tehran attempted to orchestrate the assassination of the Saudi ambassador in Washington. The announcement of the plot set off a war of words between Washington and Tehran with President Obama saying he was satisfied the evidence pointed to a real plot and Tehran's Ayatollah proclaiming the whole affair is a US fabrication.
With Washington and the Riyadh threatening new sanctions against Tehran, the assassination allegations are yet another indication of the threats to Middle Eastern oil supplies that are still out there. The Iranian secret services are stretched thin these days. They are trying to prop up the Assad government in Syria; support Hezbollah against the Israelis in Lebanon; support the Palestinians on the East Bank and in Gaza; hasten the departure of the US from Iraq; confront the Saudis by supporting the uprising in Bahrain; deal with increasingly burdensome sanctions stemming from efforts to acquire nuclear weapons; and deal with their own domestic unrest. In such an environment there is little time for thinking through the repercussions that would ensue from the revelation of a plot to kill the Saudi ambassador.
For now the repercussions seem limited to an exchange of accusations for the benefit of other countries; however, there is already some talk of sanctions on Iranian oil exports and the usual Iranian threat to shut down the 17 million b/d of oil shipment through the Hormuz. Either of these possibilities would obviously lead to unprecedented stress on the global economy once again reiterating that nearly everything that happens in the Middle East can have the most serious consequences.
The news out of China was mixed last week with export growth slowing to a mere 17 percent year over year increase, but inflation moderating from 6.5 year over year increase in August to 6.1 percent in November. The markets have become so used to spectacular increases in Chinese economic growth that a drop from a 24 percent increase in August to 17 percent in September is seen as something approaching an economic collapse. Falling demand for Chinese goods from Europe and the US is seen as behind the drop in exports. The growth in imports was down to 21 percent. As much of China's imports are raw materials and components that will turned into exports in coming months, September's decline suggest lower exports ahead.
China's oil imports in September dropped for the first time in three months, declining by 12 percent to average 5 million b/d. Some of this decline may be due to maintenance. Beijing cut retail gasoline and diesel prices by 3.5-3.9 percent last week due to lower crude costs and a desire to curb inflation which is still running above 6 percent. At the same time, Beijing said it will extend a 5-10 percent value added tax on oil products to slow the growth of energy consumption and to pay for the development of the western provinces.
A high-level Russian delegation was in Beijing last week to discuss long term exports of Russian oil and gas to China. The meetings settled various disputes over prices and tariffs on Russian oil exports and are said to have paved the way for higher Russian exports in the years ahead.
Beijing's economy is still considered to be on track to grow by 9.4 percent this year despite various droughts and floods that have set back food and energy production. Of note last week was China's purchase of 900,000 metric tons of US corn. Beijing is forecast to import some 7-10 million tons of corn this year to replenish stockpiles drawn down by adverse weather. Rising Chinese corn imports will have an increasing impact on corn and hence corn-based ethanol prices in coming years.
4. The Oil Market Report
Aside from the headline that the IEA now says the increase in global oil consumption next year will be 210,000 b/d lower than previously forecast, the Agency noted an unusual drop in global oil stockpiles in August and September that will call for an increase in OPEC production for the rest of this year.
The growth in global demand for oil of 1.3 million b/d next year is still predicated on the global economy growing by 3.9 percent. Given the economic turmoil in Europe, the beginnings of a slowdown in China, and the massive cuts in US federal spending that are coming up in the fall, this seems like a rather optimistic forecast. As the current global economic outlook is not that rosy, the IEA has done a sensitivity analysis showing that if next year's global GDP growth falls by one-third, then next year's demand for oil will show little or no increase in 2012 over that of 2011.
Quote of the week
"In the next 10 years, more than 90% of the growth in global oil production needs to come from MENA (Middle East and North Africa) countries¡K There are major risks if this investment doesn't come in a timely manner."
-- IEA Chief Economist Fatih Birol
The Briefs (clips from recent Peak Oil News dailies are indicated by date and item #)