1. Oil and the Global Economy
Oil prices were relatively steady at around $100 for NY crude and $111 for London's Brent until several factors came together to push prices down a bit on Friday. News that manufacturing in China continues to contract combined with the possibility that Iran might return to the negotiating table to discuss its nuclear programs and limited progress in the Greek debt negotiations all contributed to the decline. The news on Thursday that gasoline consumption in the US continues to fall and is now down to the lowest levels in more than a decade did not help. The EIA also reported that petroleum consumption in the US over the last four weeks was down 7.2 percent as compared to last year. Optimism for an economic rebound in the US remains difficult to understand given that oil consumption in the US is now some 2 million b/d below that of the mid-90s and continues to fall.
Natural gas prices in the US have fallen 24 percent in the last eight trading days to 10-year lows. NY futures closed on Friday at $2.34 per million BTUs and at one point touched $2.18 on the spot market. Given that warm weather is forecast for next month across much of the northeastern US, some analysts are expecting prices to fall below $2 per million shortly.
Last Monday the Nigerian trade unions called off their nationwide strike after President Jonathan said he would cut gasoline prices by reinstating part of the subsidy. Violence on the part of Islamic separatists in northern Nigeria continued to grow last week. All this suggests the instability in the country will continue.
The IEA's monthly Oil Market Report reflects the prevailing pessimism over the state of the world economy by forecasting a drop in the increase of global demand for oil next year from 1.3 million b/d to 1.1 million. The Agency also notes that if the economic situation really goes down hill, there might not be any increase in oil consumption at all in 2012. OPEC production has been growing of late with more Libyan production coming back online and the Saudis pumping more oil than usual. December OPEC production increased by 240,000 b/d to 30.89 million -- the highest in three years.
2. The Iranian Confrontation
Much of last week's news was dominated by threats and bluster from an aggrieved Iran as the sanctions imposed by the US and EU, with a little help from their allies, continued to squeeze the Iranian economy. The Saudi's announcement that they and their Persian Gulf allies could make up for any loss of Iranian oil shipments due to the sanctions was particularly galling for Tehran which responded with yet another round of threats and bluster. Most of the countries that are currently importing significant amounts of Iranian crude are threading a middle course by quietly trying to line up other sources of supply while not provoking Tehran too much.
Moscow, which sees little to lose by continuing the confrontation, continues to support Tehran by announcing its opposition to tougher sanctions. The Iranians are busy moving their nuclear scientists to places where they would be safe from assassination, and continue burying whatever they can of their nuclear program.
The most important development last week may have been the visit of Chinese Premier Wen Jiaboa to Riyadh and other Gulf Capitols. While Beijing is still publically opposing stronger sanctions on Iran, it is clearly worried about what the situation could do it its oil supply as nearly half of China's oil imports and a quarter of its current consumption is coming through the Straits of Hormuz. While Tehran is saying that Beijing will take any of its crude production that it cannot sell elsewhere due to the sanctions, the Chinese, who got about 550,000 b/d from Iran last year, do not want to be in the situation where they are dependent on Iran for that much of their oil supply. Should hostilities break out, Iranian crude exports would likely disappear entirely leaving Beijing in dire straits. Interestingly, Chinese imports from Tehran this month are due to drop by 220,000 b/d allegedly due to a commercial dispute, but Beijing may have ulterior motives.
During his visit to the Middle East last week, Prime Minister Wen Jiabao warned Iran not to build nuclear weapons and to settle the dispute through negotiations. While unwilling to join in the West's sanctions, Beijing is clearly sending a message to the Iranians that they are on a course that threatens world peace. While visiting Doha, Wen stated that China "adamantly opposes Iran developing and possessing nuclear weapons" – which is about as clear as Chinese diplomacy can get.
It is not difficult to connect the Premier's statement with hints on Friday that Tehran might be willing to return to negotiations. The EU's Foreign Ministers will meet on Monday, January 23rd to ratify the EU's sanctions program with Paris pushing for the embargo to start in three rather than six months. Another side effect in recent days is that the Iranian military has stopped warning the US Navy to keep its ships out of the Persian Gulf or face the wrath of Iran.
3. The Euro Crisis
Europe continues to muddle along with endless meetings taking place to deal with the many aspects of the crisis. Last week bond auctions in Spain and Italy went well thanks to hundreds of billions of dollars in nearly interest-free loans that the European Central Bank made to European banks. In turn the banks used the money to buy government bonds thus kicking the can of Eurozone collapse further down the road.
Greece, which is facing a messy bankruptcy in March unless it gets a €130 loan from its Eurozone partners, is the current upcoming crisis. Prior to receiving the loan, Athens must get its fiscal house in order and has been meeting with representatives of its bond holders over how much of a loss the bondholders vs. the taxpayers should take when the bonds' value is written down.
Beyond the possibility of a Greek default, there are numerous mini-crises popping up all over which do not bode well for the continent's economic stability. France's president is fighting for his political life in the wake of the S&P downgrade of the country's debt. The Euro continues to fall keeping downward pressure on oil prices. The key question is whether the EU's muddling along, by printing money and implementing "reforms" will do much good. The effect of the proposed embargo on Iranian oil on Europe is another unknown, but Tehran is warning of dire consequences. With numerous austerity programs being implemented in response to mounting debts, it seems almost certain that economic activity will slow. The conventional wisdom that a recession or worse is coming this year continues to dominate much of the commentary.
Despite the gradual slowing of China's economic growth, oil consumption is still moving upwards at about 400,000 b/d additional barrels each year. Economic growth in the 4th quarter was reported as 8.9 percent, down from 9.7 percent earlier in 2011. For the year, China's growth was reported to be 9.2 percent as compared to 10.4 percent in 2010. Industrial production, however, was up by 12.8 percent in December as compared with last year.
Even with the slowdown, economic growth at this pace continues to strain China's energy supply. Electricity consumption for the year was up 11.7 percent, but still resulted in shortages of 25-30,000 MW during the peak power consumption months of January and July. Similar shortages are expected again this year.
In looking at China's oil consumption for 2012, the IEA expects that total oil consumption will increase by 4.3 percent during the year as economic growth continues around 9 percent. China's demand for oil is expected to grow by another 400,000 b/d next year which is 40 percent of the projected increase in global demand. The growth in demand, however, could be higher should China decide to make major increases to its strategic petroleum reserves, which they seem to do during periods of weak prices.
Quote of the week
"Oil is expected to be the slowest-growing fuel over the next 20 years."
-- BP Energy Outlook 2030
The Briefs (clips from recent Peak Oil News dailies are indicated by date and item #)