1. Oil and the Global Economy
Despite a week of turmoil in Europe, oil prices continued to creep up despite the likelihood of still more serious troubles ahead for the EU. NY oil closed Friday at $94.26 after five weekly increases, the longest streak of gains in more than two years. In London, Brent closed at $111.97 after trading as low as $106 and as high as $112.30 during the week as the EU's sovereign debt situation ricocheted from one crisis to another.
For now the oil markets are balanced between increasing Asian demand and possibly lower global production against the prospects for faltering economic growth in the OECD. Even a stronger dollar does not seem to be enough to counter tightening oil markets.
The US stocks report showed an increase of 1.8 million barrels the week before last, but a 3.6 million drop in distillate stocks. While some of this drop in distillate stocks is going into consumer heating oil tanks there are diesel shortages in China and the EU which is leading to more US distillates being exported.
Despite much hoopla in the financial press, the weekly crude stocks number is more indicative of how many tankers showed up at US ports during the week than changes in US oil demand which usually moves slowly. The minor changes in US employment last week were statistically meaningless. Of more interest is the Federal Reserve assessment there are "significant downside risks to the economic outlook," despite the usual optimistic forecasts for GDP growth. Some knowledgeable observers say the US GDP numbers have become so manipulated that they are largely meaningless and that actual employment numbers are more indicative of the state of the economy.
US gasoline prices have been falling since summer and now average about $3.42 a gallon. This however is a record high for November and suggest that we may be seeing $4 gasoline again next spring.
2. The EU debt crisis
After a week that included a G-20 meeting in Cannes and comic opera ups and downs in the EU's sovereign debt crisis, the situation remains serious and could lead to global economic setbacks in the next year or so. The G-20 meeting refused to increase funding for the IMF to help with the impending EU bailouts. Germany is refusing to approve more bailout for Greece unless they get their act together and accept austerity measures. Over the weekend Athens announced an agreement to form a new unity government that will approve the bailout package. Few details have been made public the prospects for the Eurozone bailout is still uncertain. If the Greeks cannot persuade the French and Germans to release the bailout money in the next week or so a "disorderly" default is almost certain.
Italy, which is generally perceived as "too big to fail," is also in trouble. Interest rates on government bonds have climbed to an unaffordable 6.6 percent and the Berlusconi government seems likely to face a vote to confidence in the next week or so. Some commentators are already saying that Italy will meltdown shortly no matter what happens with the Greek bailout.
The conventional wisdom, however, is that a default by Greece turns into a run on Italy, the collapse of French banks, debt defaults in Spain and Portugal, and eventually the end of the Monetary Union. With credit default swaps being "made whole" the situation could easily grow into unprecedented financial disaster. Obviously the demand for oil would suffer to an unknown extent.
3. Iran's nuclear programs
After three years of relative quiescence, Iran's alleged efforts to acquire nuclear weapons are back on the front burner. Next week the IAEA will issue a report that is said to allege that Tehran has built a facility to test the explosives used to detonate a nuclear weapon. The report is also said to contain evidence that the Iranians have done computer modeling of nuclear weapons, but stops short of saying that Tehran is definitely building a weapon.
The Israelis have said for years that Tehran will never be allowed to obtain nuclear weapons and last week backed up their threat by test firing a ballistic missile capable of delivering nuclear warheads to Tehran. The US, UK, and France also increased pressure on Tehran to stop enriching uranium and to open their facilities to international inspection. So far Tehran has responded with the usual bluster culminating in threats to close the Straits of Hormuz and thereby deprive the world of 17 million b/d of oil exports.
Tehran is apparently making efforts to move its nuclear weapons development sites to new underground facilities where they would be less observable by and hopefully less vulnerable to air attack. In an era of smart bunker-busting bombs, however, this is an open question. The US and EU would obviously prefer to use still harsher sanctions against Tehran rather than military action that would endanger much of the world's oil supply. The key to all this remains China and Russia who do seem to appreciate the dangers that would ensue from a nuclear armed Iran and see political and economic benefits from keeping Tehran as a friend. China would be among the greatest losers should oil stop flowing from the Gulf.
The affair seems to be coming to a head in the foreseeable future with Tehran's "undergrounding" of its nuclear development programs as the driving force. The Israelis likely do not have the capability to effectively destroy Tehran's nuclear weapons facilities as it did in the cases of Iraq and Syria without using nuclear weapons -- an unthinkable possibility except "in extremis." Any non-nuclear attack on Tehran's facilities would likely be carried out by US forces, possibly in conjunction with those of other nations.
While an air strike on Iranian nuclear facilities would be rather easy to accomplish and would likely set Tehran's nuclear efforts back by many years, Iranian retaliation will be messier. In 2008, the commander of Iran's Revolutionary Guard said that in response to an attack it would seal the straits wreaking havoc in the global oil markets. At the time it was thought that the West could muster sufficient forces to keep the straits open, perhaps after a temporary shutdown but that if Tehran chose, the situation could evolve into open warfare between Tehran and those trying to keep the straits open. Another factor in all this is the Syrian situation which continues to deteriorate despite efforts by the Arab League to broker a settlement.
China's oil companies will be free to set retail prices for fuels under a new government pricing system. For years, Beijing has been slow to respond to changes in international oil prices which have left refiners in the position of selling oil products at a loss when the cost of imported oil rose. Under the new policy retailers can move retail prices freely within a range set by the government. The range which is based on international crude prices was not announced. Beijing will step in only when prices move outside of the range. Since 2009 Beijing has a policy of adjusting retail prices only when a moving 22 day average price of a basket of foreign crudes rose or fell by more than 4 percent.
Since the fight against inflation began, China's central planners have been reluctant to raise oil prices resulting in widespread shortages across the country as many independent refiners simply stopped refining marketing oil products at a loss.
Last week it was reported that Beijing is importing 2.2 million barrels of diesel fuel in an attempt to mitigate shortages. China is normally a diesel exporter, but banned diesel exports for most of this year due to shortages. Diesel markets in Asia are extremely tight at the minute due to a fire at Shell's 500,000 b/d refinery in Singapore which cut production by 50 percent.
The two major Chinese oil companies announced measures to increase the supply of diesel to those parts of the country experiencing shortages due to increased demand during the harvest season.
In the meantime, newly released numbers show China's economy continues to slow gradually as the effects of the government's anti-inflation efforts take hold.
Quote of the week
"Our moment in history is rather special. It is dangerous to assume that we'll gracefully handle problems at this scale, because such assumptions amount to dismissals and concomitant inaction... It bothers me that we don't have a plan. It scares me that we (collectively) don't think we even need a plan. Faith in the market to solve the problem represents a high-stakes gamble. We can and should do better."
-- Tom Murphy
The Briefs (clips from recent Peak Oil News dailies are indicated by date and item #)