1. Oil and the Global Economy
A number of factors combined last week to push oil prices to a three-month high, the longest run of weekly price gains since April 2009. Fueling the increase were falling global petroleum inventories; the perception that the EU is making progress in settling its financial crises; increasing unrest in Syria; revival of concerns about Iran's efforts to develop nuclear weapons; easing inflation in China; and optimism that improvements in a handful of US economic numbers are harbingers of better times ahead. By week's end, NY oil had climbed by $23 a barrel from the lows set in early October to close at $98.99. Brent crude, which has been more volatile during the past six weeks due to the twists and turns of the EU's debt crisis, closed out the week at $114.16.
The major factor exerting downward pressure on oil prices remains the debt crises in Greece and Italy and the threat that they could spread to engulf the rest of the OECD nations and spark a still deeper recession. While oil and equity prices rose on the optimism surrounding the resignation of Prime Ministers Berlusconi and Papandreou, most observers see no fundamental solution to the debt problems in sight and maintain that an EU fiscal meltdown in the next year or so remains a distinct possibility. Recent economic numbers from the EU are not good and many are expecting a recession there next year no matter what happens regarding the debt crisis.
The weekly US stocks report showed a 1.4 million barrel decrease in US crude stocks the week before last, but total commercial petroleum inventories down by 15.3 million barrels. Distillate stocks dropped by 6 million barrels and are pushing the bottom of the normal range for this time of year. Many places around the world, including parts of China, are reporting diesel shortages. US diesel prices are running some 78 cents a gallon higher than last year.
The revival of Libya's oil production seems to be going better than expected. The IEA reports that production is now about 500,000 b/d and is expected to reach 700,000 b/d by the end of the year. For next year the Agency expects production to hit 1.1 million b/d by the end of 2012. Much of the recent production increase, however, has gone to refill pipelines and tank farms so only an estimated 180,000 b/d were exported in October as compared with 1.3 million b/d before the uprising. For November, exports are only expected to be on the order of 200,000 to 250,000 b/d leaving a shortfall of over a 1 million exportable barrels.
Beijing reported last week that inflation fell sharply in October to 5.5 percent year on year, the third straight month to post a falling rate of inflation. The rate of growth of China's exports slowed somewhat to 15.9 percent year on year from 17.1 percent a month earlier. Imports, however, grew by 28.7 percent year-on-year in October showing that China's economy is still growing robustly and with it the demand for increasing amounts of oil and natural gas.
2. The IEA's November Oil Market Report
The IEA reports that global oil supply rose by 1.1 million b/d in October to 89.3 million b/d. This increase was largely due to recovering Libyan production, but higher output from several countries including Saudi Arabia, Angola, Brazil, Russia, and the US contributed to the jump. It should be noted that a large share of the 1.2 million b/d increase in "oil" production in the past year is made of natural gas liquids which has only limited utility as compared to conventional crude.
For next year, the IEA forecasts that despite slowing growth in the OECD countries, the demand for oil will rise to 90.5 million b/d by the 4th quarter of the year. This number, however, is based on 3.9 percent global economic growth next year and there are numerous signs, ranging from the problems in Europe to the flooding in Thailand, of more economic slow-downs ahead. Projected increases in demand for oil are highly sensitive to the pace of economic growth so that faltering economies could result in little or no increase in demand.
Global oil stockpiles continue to fall slowly, indicating that oil consumption is still above production, and is the key reason behind firm oil prices despite the fiscal turmoil in Europe. OECD stocks fell by 11.8 million barrels in September and preliminary data indicate a drop of another 34 million in October, more than double the five year average decline of 14.4 million barrels during the month.
3. The IAEA's report on Iran
Last week the International Atomic Energy Agency issued its most detailed report yet indicating that there was indeed "credible" evidence that Tehran was carrying out activities related to the development of nuclear weapons that could be carried on ballistic missiles. The report set off a spate of charges and counter-charges concerning the truth of the allegations. Increasing tensions arising from the standoff are likely to have contributed to rising oil prices last week as traders consider the consequences that could arise from either an attack on Iranian nuclear facilities or very harsh sanctions on Iran.
Thus far, the sanctions imposed on Tehran, while hurting the country economically, have not been sufficient to force a change of course on the part of the country's rulers. Israel, which has a history of bombing nascent nuclear weapons facilities in Iraq and Syria, has already threatened unilateral military action against Tehran if the UN or western powers do not do something to keep the Iranians from acquiring nuclear-tipped ballistic missiles. The US Secretary of Defense said last week, however, that a strike on Tehran could have "unintended consequences" and would only delay Tehran's nuclear weapons programs by three years, thereby damping speculation that the US would sanction a military strike on Iranian facilities.
Tehran's trump card in all this is its ability to threaten or even block the 16 million b/d flow of crude through the Straits of Hormuz. Even temporary interruption of this vital shipping lane would be sufficient to bring much of the world to its economic knees and would send oil prices to undreamed of levels. Such an action on the part of Tehran, of course, would be tantamount to a declaration of war and would likely lead to military hostilities.
The key to all this rests with Russia and China which, because of economic interests and great power politics, have chosen to give Iran the benefit of the doubt and vote to limit the scope of economic sanctions against the country. Neither of these countries as yet seems to have developed an appreciation of the dangers to the world's energy supply that would ensue from nuclear-armed Iran and Israel confronting each other.
The Middle Eastern situation is being further complicated by the impending withdrawal of US forces from Iraq and the deteriorating situation in Syria, Tehran's "best friend" in the region. The course of all this is impossible to predict, but the danger to oil exports remains substantial.
4. The Keystone pipeline decision
The decision by the Obama administration last week to delay a decision on the $7 billion Canada-Gulf Keystone XL pipeline may eventually prove to be a turning point in the nation's environmental policy. The Administration was caught between labor unions which see the pipeline project as a substantial creator of jobs, the oil industry which likes the security of Canadian oil, and the environmental movement which sees the pipeline as symbolic of whether the nation will ever move to stem global warming. Nebraska's government, which feared that possible leaks from the proposed line would end up in its main aquifer, had asked that the pipeline be rerouted through less sensitive areas thereby giving the administration a year's reprieve and removing the issue from next year;s election.
Reactions to the decision ran from elation in the ranks of the environmental movement, to disgust on the part of the oil industry who maintain that the Keystone project vital to the nation's energy security and economic wellbeing.
Of more interest is the reaction of the Canadians, some of whom, ignoring the environmental issues, want the country to become an oil superpower, but need a way to get their oil to market. Some Canadians believe that a year's delay will kill the project permanently and are reviving a proposal for a new pipeline from the Alberta tar sands to the west coast where oil from the sands could be shipped to Asia.
Quote of the week
"Governments need to introduce stronger measures to drive investment in efficient and low-carbon technologies. The Fukushima nuclear accident, the turmoil in parts of the Middle East and North Africa and a sharp rebound in energy demand in 2010 which pushed CO2 emissions to a record high, highlight the urgency and the scale of the challenge."
-- IEA Executive Director, Maria van der Hoeven
The Briefs (clips from recent Peak Oil News dailies are indicated by date and item #)