1. Oil and the Global Economy
As has been the case for several months, last week's trading in oil futures was dominated by the twists and turns of the EU¡¦s debt crisis. Hopes for a solution sent NY oil prices from the high $80's to the low $90's last week ¡V closing on Friday at $93.32. NY crude futures are up by almost 18 percent in October after touching a low of $74.89 a barrel early in the month. London futures traded in a range between $109 and $112 all week before closing at $109.91.
The most notable feature of the oil markets in October was the narrowing of the spread between NY and London crude which hit a record of $27.88 a barrel early in the month and then narrowed to close to $16.59 on Friday. Reductions in the amount of oil being stored at Cushing, Okla., the delivery point for NY futures contracts, is likely the reason for the move. Some analysts believe that NY oil has been under-priced due to the Cushing glut and believe it is due to move higher as the inventory situation eases.
A 4.7 million barrel increase in US crude stocks the week before last was due to an unusually large number of tankers bringing in foreign oil during the week. An unusual October snowstorm struck the northeastern US to send natural gas prices up 4.2 percent on Friday to close at $3.92 per million BTUs.
The global oil markets remain tight. Despite many optimistic announcements, not much oil is coming out of Libya as yet, the Chinese seem to be having growing shortages and Japan is still importing increased quantities of fossil fuels to make up for lost nuclear power. Last week the NY futures market joined London by going into backwardation that typically signals a near-term supply crunch.
US gasoline futures have had a volatile month. After climbing by nearly 40 cents a gallon in the first two weeks of October, prices then reversed in the last two weeks, closing out the week nearly 20 cents a gallon lower at $2.68 a gallon.
2. The EU debt crisis
Despite the euphoria in the equity markets over the supposed "settlement" of the EU's debt crisis, most observers believe that there are still years of troubles ahead. While the basics of a plan were agreed to last week, little has been done on the details of implementing the plan. The euro surged two percent to $1.41, its highest point in two months, after the plan was announced Thursday morning and the Dow Jones surged in relief that the crisis was "over."
Greece is to undergo a "controlled default" under which its bond holders are supposed to accept a 50 percent reduction in the value of their securities. Such a default is seen as a way to avoid the triggering of credit default swaps on the Greek debt which it is feared would cause untold havoc. A day after the agreement, Italy's borrowing costs surged to a euro-era high amidst a civil service strike protesting layoffs. Many observers believe the course of Italy is the key as to whether the Eurozone holds together.
The Europeans are turning to China as the lender of last resort in an effort to raise the cash to keep the banks solvent. If Beijing agrees to help, it is likely to drive a hard bargain and extract concessions affecting global trade.
The situation still remains unstable and is likely to remain so for the foreseeable future. The major fear is that the collapse of the Eurozone could trigger off a series of events leading to global economic troubles and a large reduction in the demand for oil.
3. Shortages in China
Despite fears that China is in a real estate bubble and over extended, Beijing continues to release figures showing that economic growth is continuing apace. China's value-added industrial growth is reported as increasing by 14.2 percent in the first three quarters and is on track to meet the goal of 11 percent growth in 2011 and 2012. All this activity requires energy and there are already reports of growing diesel shortages.
Some of this shortage the Chinese brought upon themselves by cutting retail prices for gasoline and diesel as part of the battle against inflation. Given the recent increase in global oil prices refiners are hard pressed to make a profit and there are charges that the shortage is intended to force Beijing to raise prices. Statistics from the two major Chinese oil companies say that demand for diesel last month was up by 8-9 percent over last year. Both companies say they are stepping up production to ease the shortages.
Platts reports that PetroChina's refineries have been running at full capacity this month with crude runs averaging 5.7 percent higher than last year. For the nine-month period ending in September, PetroChina's refineries processed 10.3 percent more crude than in the same period last year. Sinopec says it will boost production to 4.47 million b/d in November. Chinese diesel imports since July are running 122 percent more than in the same period last year. All this suggests that despite worries about a slowing economy, China's industrial production and oil consumption continue to grow smartly adding pressure to oil prices.
4. Cold fusion test
Media interest in the Andrea Rossi "energy catalyzer" (e-cat) is growing after an apparently "successful" test of a new and larger version his "cold fusion" device in Bologna, Italy last week. As many aspects of the program and details of the device have not been made public, many observers remain skeptical and believe that these demonstrations of energy reactor are nothing more than an elaborate fraud. While the device and the scientific concepts behind its apparent production of energy have not been verified by independent researchers, numerous physicists from European universities have been observing the demonstrations of the device which have been taking place since last January.
Building on the work of Pons and Fleischmann 20 years ago, Andrea Rossi says he has developed a process whereby nickel and hydrogen are fused with the help of an undisclosed catalyst to produce large quantities of heat. As such a nuclear reaction is not thought to be possible under the known laws of physics; mainstream scientific journals have refused to publish on the topic.
Should the device prove viable, however, the energy industry would be changed forever. Nickel and hydrogen are abundant and cheap, and as is well known vast amounts of energy are contained in the bonds of atomic nuclei. The device that has been demonstrated is simple to build and the nuclear reaction is said to produce no emissions, hazardous radiation, or toxic/radioactive wastes.
As Kjell Aleklett, professor of physics at Uppsala University in Sweden and President of ASPO International said about the project, "What shall we do as scientists? Shall we say madness as many do today, or should we try to understand what is happening? I myself have nothing against revealing a scam, or joining in and verifying something that no one could imagine. Both extremes belong to that which makes life as a researcher incredibly interesting."
After the test last Friday, the device's inventor said it has been sold to an unknown organization in the United States and that research contracts with the Universities of Bologna and Uppsala to clarify the scientific principles behind the device are in the works.
Quote of the week
The heart of our request is the formation of a national oil emergency response plan. We are not demanding that the Department of Energy enact any specific policy change at this time, but rather set up a properly funded and sufficiently empowered commission to study the full range of potential consequences to the United States if we were to experience a near-term imbalance between global supply and demand of liquid fuels.
-- Lt. Col. Daniel Davis
The Briefs (clips from recent Peak Oil News dailies are indicated by date and item #)