1. Oil and the Global Economy
Brent oil fell on Friday after six straight sessions of gains that took prices from the vicinity of $111 a barrel to a six month high of $118.61 on Thursday before falling to a close of $117.31 Friday. As the Iranian situation was relatively quiet last week, most of gains were due to perceptions of progress in the Greek debt negotiations and very cold weather in much of the EU. The price drop on Friday came when it appeared that the settlement would not be satisfactory for the Eurozone finance ministers and a weaker Euro.
NY oil followed Brent higher last week and then falling to a close of $98.67 on Friday. NY oil continues to be plagued by a growing glut at Cushing, Okla. and very weak demand in the US. Last week’s petroleum stocks report showed total commercial inventories grew by 4.2 million barrels the week before last.
Gasoline futures in NY continued to climb last week, trading above $3 a gallon before selling off to close at $2.97 Friday. The average retail price for gasoline in the US is now above $3.50 a gallon with prices above $3.80 in NY, Connecticut and California which have gasoline taxes above 60 cents a gallon.
The spread between NY oil (West Texas Intermediate) and London’s Brent climbed back above $19 a barrel during the week raising fears that the spread could climb past the $28 seen last November. Stockpiles in the Midwest are climbing again thereby holding down crude prices in the region as compared to the London prices paid by coastal refiners for imported crude. The situation is likely to continue for a while as production in Canada and North Dakota increases faster than demand in the Midwest and London prices remain vulnerable to the Iranian confrontation.
Over the weekend Greece’s parliament approved a new austerity package which it is hoped will satisfy the other Eurozone members to the point where they are willing to loan Greece €130 billion in time to prevent a disorderly default.
2. The Iranian Confrontation
There was little movement in the Iranian confrontation last week. Tehran threatened to retaliate against any of their neighbors who aided in an attack on Iranian nuclear facilities; US Defense Secretary Panetta expressed concern over the possibility of an Israeli attack on the Iranian facilities by mid-year; and Iranian President Ahmadinejad said that he would be making a major announcement regarding Iran’s nuclear program shortly.
Iran’s parliament which has been threatening for the last two weeks that it would impose an immediate pre-emptive embargo on selling oil to Europe went into month-long recess without taking any action on the matter. An immediate embargo on shipments to Europe is a two edged sword. It would undoubtedly damage the precarious EU economy and drive world oil prices higher, but it would also cut Iranian oil revenues at that time when China is only buying half of the amount of oil it has been purchasing from the Iranians due to a contract dispute. Most other purchasers of Iranian oil are scrambling around trying to line up other sources or ways to pay Tehran for the oil and are unlikely to be interested in purchasing the oil that would have been going to Europe. In the end, Iranian leaders may have decided that an immediate cessation of some or all of the oil going to the EU may not have been a good idea.
Reports continue to arrive telling of the economic problems the sanctions on Tehran are already causing. The country imports about half the food eaten by its 78 million people. Most of this food is brought by small merchants who do business through normal commercial and banking channels that are being closed or disrupted by the sanctions. Several major shipping lines have announced that they no longer visit Iranian ports, greatly adding the Tehran’s problems in exporting oil and importing food and other goods. Although many commentators have expressed skepticism that economic sanctions will never be enough to pressure Tehran into changing its policies, Iran has elections coming up. Given the sanctions, the situation in Syria, Iran’s only true friend, and problems feeding its people, may all be more than Tehran bargained for when it decided that it would be nice to either be, or be perceived to be, a nuclear power.
3. The February Oil Market Report
The IEA once again lowered its forecast for global oil demand for 2012 in the face of less optimistic economic conditions. The new number is 89.9 million b/d, down 300,000 b/d from last month’s forecast. Non-OPEC supply fell by 200,000 b/d in January as outages in Syrian, Sudan, and the North Sea offset increasing tight oil and NGL production in the US. OPEC got its production in January up to 30.9 million b/d, the highest since October 2008 mostly because of increased Libyan production. This puts the cartel’s production 900,000 b/d above the 30 million b/d target agreed to at the December meeting.
Saudi production continues at about 9.85 million b/d, up by about 400,000 b/d from last October. Most of this recent increase in production is thought to have gone to China which has cut its imports from Iran as a negotiating tactic in drafting a long-term contract. Saudi Oil Minister Naimi went on record recently saying the country could easily increase production to 11.4-11.8 million b/d immediately and bring an additional 700,000 b/d into production within 90 days.
Iran has been exporting about 2.6 million b/d of late. The EU takes about 600,000 b/d of these exports; India and China about 900,000; and the rest of the world, primarily Japan, Korea and South Africa, take the rest. China and India have announced that they will not cooperate with the blockade; the EU must comply; and most other purchasers will attempt to find alternative sources of oil to avoid becoming entangled in the sanctions. Thus, the IEA believes that about 1 million b/d of Iran’s exports are likely halted by the sanctions. Although Tehran continues to maintain that it can easily sell this oil on the world market, it continues to threaten the Saudis and other potential suppliers against increasing production at the expense of Iran. While it is possible that the Chinese could take up the unsalable Iranian oil, at a deep discount of course, Beijing must be careful not to get too dependent on Tehran for its oil lest Tehran’s exports be halted.
A 2 million b/d increase in Saudi production should, in theory, be sufficient to cover the estimated loss of 1 million b/d of the 2.6 million b/d of Iranian exports that would be blocked by the sanctions. Alternatively, Angola, Libya, the UAE and Iraq and a variety of non-OPEC states are expected to be able to increase production by 1.85 million b/d during 2012. All this suggests it may be possible that there will be enough production around by the time the EU’s sanctions start on July 1st to avoid a major spike in oil prices – at least this is what Western policymakers appear to be hoping.
Quote of the week
“I think it’s better than 50%..."
-- John Hofmeister
former Shell CEO, on his prediction for $5 gasoline in 2012S
[ Note: “World Oil Supply: Looming Crisis or New Abundance?” - a debate between John Hofmeister & ASPO-USA Board Member Tadeusz Patzek is Tuesday February 14, 2012 in Madison, WI. More Info: http://madisonpeakoil-blog.blogspot.com/2012/01/debate-feb-14-world-oil-supply-looming.html]
The Briefs (clips from recent Peak Oil News dailies are indicated by date and item #)