1. Oil and the Global Economy
New York and London oil futures went separate ways for most of last week as NY prices fell steadily until a burst of optimism on Friday stemming from seemingly better US job figures stopped the slide. Slowly rising London crude prices left the week's closes at $97.84 in NY, $114.58 in London, and the spread between the two widening to $16.74 a barrel. The weekly US stocks report showed inventories continuing to gain and demand for oil products continuing to slump with gasoline consumption at the lowest level since 2001. Inventories at Cushing, Okla. continued to increase, keeping pressure on New York oil futures.
Extremely cold weather in Eastern Europe last week forced a slowdown in Russian natural gas shipments to the west and added to upward pressure on European oil prices. There was little headway in settling the Greek debt crisis last week. Unless an agreement on the terms of the next loan to Greece is reached shortly, many believe a disorderly default on March 20th is inevitable.
The situation across the Middle East continues to deteriorate with bloodshed increasing in Syria as the uprising morphs into a full blown civil war. Moscow and Beijing continued to do their bit to maintain the Assad government in power by vetoing a UN resolution. Threats and harsh rhetoric associated with the Iranian confrontation increased noticeably last week and even Egypt appears to be descending into anarchy in the aftermath of a soccer riot and widespread fuel shortages.
US natural gas prices continued to fall last week as forecasts of warm weather in northern parts of the country continued. Prices closed Friday at $2.50 per million BTUs after falling below $2.40 at mid-week.
New York gasoline futures continued to climb, closing out the week at $2.92 per gallon, close to the recent highs hit last week. The average US retail price is now $3.47 a gallon, up 7 cents during the week, 28 cents in the last month, and 35 cents higher than at this time last year. Prices in high-tax states along the East Coast, such as Connecticut, New York, and the District of Columbia, continue to march upwards towards $4 a gallon.
New figures from China, India, and Germany showed unexpected gains in industrial production last week which helped buoy the markets for a while. After studying the details in last week's US employment report, many observers are saying that the headline "surge" in employment numbers reported for January did not actually take place.
Oil production in South Sudan remains at a standstill as the government argues with Sudan which controls the export pipeline over sharing of the revenue. About 350,000 b/d are offline, much to the chagrin of Beijing which takes most of the oil. Between Syria, Sudan, and Yemen oil production approaching 1 million b/d is now offline due to fighting and political disputes.
2. The Iranian Confrontation
The situation went down hill last Friday as Iran's supreme leader, Ayatollah Khamenei, added his voice to those seeking to push on with the uninspected nuclear program despite the growing pressures on his country. The Ayatollah, who is Iran's supreme authority and the only one who can reverse its nuclear policies, attacked the US and its allies for sanctioning and threatening Iran. He warned that any attack on Iran would be 10 times worse for the interests of the United States.
The UN inspection team that visited Tehran last week reported that the Iranians refused to answer their questions about evidence that the country is working on the trigger mechanisms for nuclear weapons. The team was also refused access to the facility where this work has been reported to be taking place. Although the inspectors are due to return to Tehran in three weeks, last week's developments indicate that the confrontation is likely to continue indefinitely.
As the Western sanctions continue to tighten around the Iranians, Tehran's major customers continue to scramble in their efforts to find alternative sources of oil and a method of paying for oil shipments from Iran. India is reported to have reached an agreement with the Iranians to pay for 45 percent of their oil purchases with rupees. They are also looking for ways to increase their exports to Tehran in order to repatriate the rupees.
Last week the US Senate banking committee approved a new measure aimed at cutting Iran off from the Society of Worldwide Interbank Financial Telecommunication (SWIFT). The measure is aimed at forcing SWIFT to ban Iranian banks from exchanging money with banks around the world. If fully implemented, this would be catastrophic for Tehran as it could no longer conduct foreign trade. Buyers of Iranian crude say it is already difficult to find ship owners willing to accept Iranian cargoes because of the web of sanctions already tightening around Iran's trade. There is currently a bill in the US Congress that would prohibit a ship from visiting a US port that has stopped at an Iranian port in the previous 180 days. The sanctions are already affecting Iranian oil shipments from the Egyptian port of Sidi Kerir which Tehran uses as a transfer point for oil going to European ports. Here the problem is insurance for the cargoes which is being withdrawn because of the EU's embargo.
There is no telling where all this is going. The Iranian economy is clearly being hurt by the sanctions in place already and it is likely to suffer still greater harm in coming months. Unemployment is increasing, businesses are closing, and prices are soaring. Exchange rates are collapsing so that the country is having trouble importing food for its 74 million people. With parliamentary elections coming next month, the government is trying to gain popular support by calling the crisis and hardships an American plot to control Iran's oil.
The Israelis continue to threaten an attack on Iran's nuclear facilities before they are moved underground. The Syrian situation, in which Tehran appears to be heavily involved, is another aspect of all this. The best that can be said for now is that the Iranian confrontation seems likely to support oil prices for the foreseeable future.
As gasoline prices in the US move steadily higher, gasoline consumption continues to drop, and refineries continue to close, it looks as if we are in for very high prices this spring that will likely have a major impact on the course of the November elections. This seems destined to happen even without any disruption to Middle Eastern oil supplies stemming from the Iranian confrontation. Average US gasoline prices are currently about $3.48 a gallon and are likely to break the 2011 average of $3.51 in the next week or so. In 2010, the average price of gasoline in January was $2.71 a gallon; by last year it had climbed to $3.09.
The average US price per gallon does not tell the whole story for there is a growing discrepancy between gasoline prices in the Midwest vs. those on the coasts. In the East, New York and Connecticut are already paying an average of $3.77 for regular, while the District of Columbia is not far behind at $3.70. In the West, the average price in California is $3.77, while in Colorado gasoline is retailing at about $3.07 a gallon -- more than 70 cents less. The reason for the discrepancy is the relative glut of oil in the Midwest which currently allows refiners in the region to pay about $70 a barrel for their crude feedstock. East Coast refiners are paying about $117 a barrel for their imported feedstock.
In about six weeks we are going start the annual switch from low-cost winter gasoline to the harder to make, low vapor pressure, summer grades which not all refineries are capable of producing. Unfortunately the refineries that will have recently closed by the time the transition to summer gasoline starts were major sources of summer gasoline. Knowledgeable observers expect this year's transition to be more chaotic than usual and result in even higher gasoline prices along the East Coast. Indeed we may be seeing some of these problems starting to push gasoline prices higher already at a time of the year when they are normally pretty steady.
For now, it seems as if the only factor that could keep gasoline prices from surging to record highs this spring would be a major reduction in consumption either from more serious economic problems in the EU than are currently expected or still less driving by American consumers. Looking at recent trends in US motor fuel consumption, which has been falling at an accelerating rate since October, it is difficult to see where all the headlines touting an improving economy are coming from.
If the prognosticators are correct that this year's average gasoline peak will be in the vicinity of $3.75 to $4.25 a gallon, it suggests that on the Coasts the prices for regular could be in the vicinity of $4.50 a gallon. This development will not only act as a major drag on the economy, undercutting all the optimism and high equity prices, but it will also set off a major political storm. The President of course can do little more than release a few symbolic barrels from the Strategic Petroleum Reserve which is likely to be more of a political gesture than a solution to very high gas prices.
The high prices caused by refinery closures and the general tightness of the global oil market are likely to coincide with some sort of turning point in the Iranian confrontation as the EU's embargo which starts on 1 July kicks in. Many are saying that any reduction in Iranian exports is likely to result in still higher prices.
4. In the Congress
The past week saw three bills passed by a Republican-controlled House of Representatives committee designed to lift as many restrictions on drilling as possible. The bills would open up offshore oil drilling, open the Arctic National Wildlife Refuge (ANWR) to drilling and increase efforts to exploit the kerogen in oil shale (not to be confused with the crude --"tight oil" also known as "shale oil"-- found in shale deposits).
Although the bills are unlikely to pass the Senate or be signed by the President, the Republicans are planning to attach these to the transportation bill which needs to be passed if many transportation projects and public transit systems are to keep moving. The bills, which would sweep away numerous environment restraints, will be used as bargaining chips to gain Republican support for the transportation bill. The bills are intended to raise revenue by selling oil leases that would be used to fund the $10 billion gap that is needed to maintain existing roads and bridges.
Major differences are opening in perceptions as to just what the new bills would achieve. Supporters argue that opening ANWR would bring in $150 billion in new revenue and produce 1.5 million b/d of domestic oil. Opponents of the measures say that it will be ten or more years before substantial amounts of revenue could possibly start to flow. The National Resources Defense Council called the bills "an inventory of the worst ideas they've had for the past two decades."
If, as seems likely, much higher gasoline prices come about in the next four or five months, many of these ideas seem destined to become law even though they cannot possibly have any influence on oil prices for many years. Politicians facing reelection this year could soon be desperate to pass anything that might be perceived by the voters as helping the situation.
A bill introduced in the Senate takes control of the Keystone pipeline decision away from the administration and approves the project straight away. To further confuse the issue House Democrats have introduced legislation requiring that all product from Canada that uses the Keystone pipeline be consumed in the US rather than being shipped abroad from Gulf ports.
In addition to oil production, the future of the wind industry in the US is facing a turning point as the Congress debates whether to extend wind subsidies this month. The recent decline in natural gas prices is making gas fired plants more competitive with wind. The wind industry is concerned that without a continuing subsidy technical expertise will move abroad.
Quote of the week
"...concerned analysts usually point to two basic facts. First, each year, the world's mature conventional fields produce about four million barrels a day less oil than the previous year, a gap that has to be filled just to keep global output constant. In only five years, that gap grows to 20 million barrels a day of production -- equivalent to twice Saudi Arabia's output, which is mammoth. Second, the world's cheap and easy-to-get oil is disappearing fast. So, on average, each additional barrel requires more work, more complex technology, more environmental risk to get and refine than the last."
-- Thomas Homer-Dixon
The Briefs (clips from recent Peak Oil News dailies are indicated by date and item #)