1. Oil and the Global Economy
Last week the balance of forces moving oil prices shifted from concerns about what would happen to demand should the Eurozone falter to worries about supply disruptions. As new waves of unrest flared in Syria, Iraq, Egypt and Kazakhstan, prices rose steadily until by week’s end oil was trading 6.6 percent higher. Some minor improvements in US economic numbers and an unusually large drop of 18.2 million barrels in US commercial petroleum inventories contributed to the price jump. NY oil closed at $99.86 a barrel and London at $107.96. NY gasoline futures also reacted to the news, climbing by 8.8 percent or 20 cents per gallon during the week.
The week’s price moves left NY oil about where it was trading in the first two weeks of December before concerns about Europe took hold. London which is more attuned to developments in the EU is still a few dollars a barrel below where it was trading earlier in the month. Oil prices have climbed by roughly 25 percent this quarter. The spread between NY and London prices is now down to about $8 a barrel; some $20 a barrel lower than it was trading earlier this year.
During the week new factors such as unrest in the Kazakh oilfields, unraveling of the Shiite-Sunni coalition in Baghdad, and the death of North Korea’s leader Kim Jong Il joined familiar concerns of violence in Egypt and Syria, and the sanctioning of Iran’s oil exports, in moving the markets.
Despite incessant references in the financial press to the economic recovery that is supposed to be going on in the US, the EIA reported that over the last four weeks total petroleum products supplied in the US was down by 5.8 percent compared to last year – gasoline consumption was down by 4.7 percent, but distillate consumption was up by 2.4 percent. Some of this reported distillate “consumption” was likely exported.
2. Sanctioning Iran
Efforts continued last week to develop sanctions that would pressure Tehran into modifying its nuclear development policies while at the same time not driving oil prices to a level that would bring about a major economic decline. This of course is a very fine line, but is deemed in Washington and the European capitols as being worth the risks as the consequences of a nuclear armed Iran is widely believed to be considerably worse.
For now the efforts are aimed at gradually reducing Iranian exports while at the same time making up for the lost oil by pressuring other countries such as Saudi Arabia, Kuwait, and the UAE to increase production. National interests on doing without Iranian oil vary. While the US and Northern Europe import little or no oil from Iran, Southern Europe is more dependent as is India, China, Korea, and Japan. Sanctions already in place against transferring money to Tehran are making trouble for importers of Iranian oil who would prefer to get their imports elsewhere if only to keep the US and Europeans happy.
There is increasing evidence that the current sanctions on Iran are taking a toll. Last week Iran’s Deputy Oil Minister admitted that production is falling due to lack of foreign investment and technical assistance. Most of Tehran’s oilfields have been producing for many decades and require constant in-field drilling to keep up production. A number of new deals with foreign companies are on hold as the companies consider the possibility of being blacklisted by the US and EU in retaliation for doing business with Tehran. Iran’s currency has fallen by 50 percent against the dollar in the last three months.
Last week the Iranian Navy began a ten-day war game near the Straits of Hormuz as a warning of what Tehran might do if hostilities break out. While Moscow and Beijing still generally support Tehran, Beijing appears to be shifting much of its oil imports from Iran to the Saudi’s and other Gulf States. This is probably due to concerns that the situation could deteriorate further and that Iran might not be the most reliable source of oil in the future.
This standoff over Tehran’s alleged efforts to acquire nuclear weapons and which now encompasses most of the major powers still has a long ways to go. For now it remains the major threat to Middle Eastern oil exports and has the potential to send oil prices much higher at any time.
3. Europe on hold
The sovereign and bank debt crises were relatively quiet last week as the European Central Bank announced that it had loaned out $639 billion to 532 banks to help with cash flow problems. Close observers, however, note that much of this money was simply a rollover of previous loans and that the amount of the new money being disbursed was more on the order of $200 billion. So far there has been little real progress is settling the problem.
Major amounts of sovereign debt are coming up for refinancing in the next few months and as yet no one seems to have any idea as to where this money will be coming from. Warnings of a Eurozone break up are now coming from the President of the Central Bank and the IMF is warning of serious economic troubles in the year ahead. Two major European banks are reported to be installing parallel currency trading systems that would enable transactions to continue if the euro should fail.
The EU’s debt crisis remains the major downside threat to not only oil prices, but also the global economy for the foreseeable future.
4. Instability spreads
Political instability seems to be breaking out all over these days. While most of the troubles are having only a marginal impact on oil exports thus far – several situations have the potential of cutting oil exports by substantial amounts. The situation in Syria continues to deteriorate and is becoming perilously close to civil war. Thus far Russia has been successful in thwarting UN resolutions that might lead to outside intervention, but Moscow is having its own problems, as evidenced by the massive demonstrations over the weekend, and may become less interested in playing power politics in the Middle East. Syria says its oil production is now down to 260,000 b/d as EU sanctions start to take hold and its economy is clearly coming unglued. With so much of the tension in the Middle East centering on developments in Syria, there is considerable potential for the situation morphing into a wider conflict that would endanger oil exports.
It did not take long after the departure of US combat troops for Iraq’s delicate political balance to start unraveling. Last week Iraq’s Shiite prime minister went after the Sunni Vice President with an arrest warrant. The warrant was answered by a series of coordinated explosions directed at Shiites across Baghdad. Vice President al-Hashemi, is currently holed up in Kurdistan where he is beyond Baghdad’s reach and is calling for the government to resign. This sounds like the beginning of another round of chaos, with increased oil production likely to be an early casualty.
Over in Kazakhstan, which produces about 1.7 million b/d, a state of emergency was declared after a dozen people were killed in clashes with police. The trouble started with demands by oil workers for higher wages but has spread to a wider list of grievances more akin to Arab Spring. The government clampdown has reduced the flow of news, but for now there seems to be no disruption in oil exports.
Elsewhere demonstrations against military rule continue in Egypt with no end in sight. Beijing, which has invested billions in getting Sudan’s oil production up to 500,000 b/d is doing its best to keep exports flowing in the face of threats by North Sudan to halt exports from the newly created and landlocked South Sudan. Both parts of Sudan are facing insurgencies.
As we learned from the Arab spring uprisings earlier this year, all of these situations have the potential to deteriorate leading to lower oil exports.
Quote of the week
“Global giants such as Royal Dutch Shell and Exxon Mobil have essentially abandoned the effort to meaningfully expand their oil reserves. Instead, they are now shifting course in favor of a strong, natural gas emphasis. The result is that Russia in the past decade has accounted for nearly all of the supply growth in crude oil, among Non-OPEC producers. Indeed, without Russia, Non-OPEC supply would be in steep decline. Instead, it’s merely flat."
-- Gregor Macdonald
The Briefs (clips from recent Peak Oil News dailies are indicated by date and item #)