1. Oil and the Global Economy
The oil markets were flat last week, closing out at $107 in NY and $126 in London. The only excitement came on Thursday when a report emanating from the Obama-Cameron talks in Washington to the effect that the two had agreed to release oil from their strategic reserves sent prices down $3 a barrel. The report was quickly denied by official spokesmen, sending prices back up on Friday. US gasoline prices continued to climb, gaining another 5 cents a gallon during the week.
Natural gas prices in the US continued to fall, hitting a 10-year low of $2.20 per million BTU's on Tuesday. Unusually warm weather for March continues to more than offset the increasing amount of natural gas going to generate electricity.
There was little news affecting the Iranian confrontation or the EU debt crisis during the week. The euro strengthened, helping to support crude prices. Mixed economic reports were, as usual, interpreted by the markets as favorable for economic growth despite the continuing rise in fuel prices. Gasoline is now 30 cents a gallon higher than at this time last year.
A 38 percent jump in US crude imports from Saudi Arabia during the first 10 weeks of 2012 is causing a stir among oil analysts. The trend appears to be continuing with another 11 very large (2 million barrel) tanker loads scheduled for March and April. The jump in Saudi oil production to circa 10 million b/d has been well reported, but traders believed this increase was going to Asia and Europe rather than the US.
In its monthly survey of the global oil situation for March (the Oil Market Report), the IEA warned of troubles ahead noting that numerous supply problems around the world, resulting in a 500,000 b/d drop in normal production that more than offset the 315,000 b/d jump in OPEC¡¦s crude output. The Agency forecasts that the Iranian sanction program will cut its exports by 800,000 -- 1 million b/d when fully implemented.
The IEA expects to see non-OPEC production increase by 730,000 b/d before the end of the year. This, however, is 200,000 b/d less than predicted last month and the outlook for some of the projected increases is not all that good. The Agency also notes that OPEC's spare production capacity is getting very tight with the Saudi's now producing at a 30-year high and "official" spare capacity now down to 2.7 million b/d. This is close to the level that has caused sustained price increases in the past and many observers are skeptical that this "spare capacity" can actually be produced and sustained quickly.
Reading between the lines, the IEA seems to be saying that there may be more than just a "bumpy ride" in store for the oil markets.
2. The Iranian Confrontation
The major development last week was cutting off access for many Iranian banks from the global electronic funds transfer system known as SWIFT. This action will, in theory, prevent the Iranians from carrying out international monetary transactions through certain "blacklisted" banks. Opinion on the efficacy of this move is mixed. Some believe the country's economy will be devastated, while others, noting that the Iranians are masters at skirting around sanctions, say the country will find ways to keep functioning.
The sanctions, particularly the withdrawal of much of the world's tanker fleet from doing business with the Iranians, seems to be having an effect. Barclay's Capital says exports are already down by 300,000-400,000 b/d. Firms tracking tanker movements say that half the tankers scheduled to pick up loads at Kharg Island, Iran's main export terminal, failed to arrive last month.
Iran own 39 tankers which, if fully utilized, could handle on a sustained basis only about 1 million b/d of the 2.2 million b/d that Tehran normally exports. As much of the world's tanker fleet is already staying clear of Iran, it appears that chiefly the Chinese, if they chose, could import Iranian oil using their own tankers. The Saudi's continue to assure the US that they can and will make up for any loss of Iranian exports.
As the six world powers prepare for the upcoming negotiations with the Iranians next month, President Obama warned that the window of opportunity for a diplomatic settlement was "shrinking" and that the US and UK are determined to prevent Iran from acquiring nuclear weapons. A Reuters poll shows that 56 percent of Americans would support US military action against Iran if there were evidence of an Iranian nuclear weapons program despite the possibility of higher gas prices. Some 62 percent of Americans would favor backing an Israeli strike for the same reason.
3. Gasoline prices and the SPR
US gasoline prices were much in the news last week with Republican candidates and oil industry spokesmen attacking the President for his supposed failure to control the price rise. With a recent poll showing the President's reelection prospects being hurt by gasoline prices, he began a series of energy speeches noting the increase in US domestic production and the decline in imports in recent months and repeating his mantra that the US only has 2 percent of the world's oil reserves, yet burns 20 percent of its oil. The of course set off discussions of the "real" size of US reserves, "oil shale" which only requires higher prices to be exploitable, and the like.
New York gasoline futures closed at $3.36 a gallon on Friday. The EIA's weekly weighted average of all grades of gasoline sold in the US will be about $3.93 this week as compared to the all-time high of $4.16 touched in early July 2008. If gasoline prices hold up for the next few weeks, we could be close to new high ground by the end of April.
There seems to be growing recognition in the mainstream media that about the only thing the President can do to control gas prices in the short term is to authorize releases from the Strategic Petroleum Reserve. Thus much discussion ensued last week when a report, quickly denied, surfaced from the Obama-Cameron talks that an SPR release was under consideration. In addition to driving prices down for a day, the report inspired commentators to look at just how much a release from the reserve could affect prices.
The most interesting observations are those which point out how much oil flows across the US have changed since the SPR was designed in the mid-1970s. As much of the US oil supply in the Midwest is coming from Canada, the Bakken shale pipelines that once flowed north are being turned to flow south making it difficult to move large quantities of oil from the Gulf coast storage caverns to the upper Midwest. Although the SPR is intended to be able to release 4.2 million barrels a day to refineries, the last release in August 2011 was only able to move 740,000 b/d due to logistic difficulties.
How much a release would lower prices is also a subject of debate. At the time of the June 23, 2011 announcement of the 30 million barrel release from the SPR, gasoline was about $3.70 a gallon after having fallen from $4 a month earlier. Three months later it was only 5 cents a gallon lower. Time Magazine sees this week's SPR news as a trial balloon, indicating that the President is planning to make such a move timed for the November election.
As the closure of the Sunoco refinery near Philadelphia draws near, there is increasing recognition in the press that the supply of refined oil products for Northeast may be in a lot of trouble in next couple of years. Needless to say politicians and the unions are anxious to keep the plant functioning. People are already talking about waiving the Jones Act so that foreign tankers can keep the area supplied from the Gulf and even shipping in cheap Bakken shale oil by train and truck that would supposedly be cheap enough even after transportation costs to keep the refinery profitable.
4. Bunker Fuel
As the world's oil situation changes, a new problem seems to be arising -- shortages of fuel for ships. Just before you get to the bottom of a barrel of crude you find the residual fuels made up of very long molecules that are used in boilers and furnaces. It usually sells for 50-60 cents a gallon less than gasoline and diesel and therefore is not particularly popular with refiners. Now modern refineries have incorporated processes to upgrade the lower quality residuals into more valuable products -- and therein lies the problem. China's output of residual fuels fell by 2.7 percent in February to the lowest level in five years. Russian shipments are expected to fall by 7 percent this year due to higher taxes.
As the older refineries are replaced by new ones, there is less fuel for ships and thermal power plants coming on the market. In locations as diverse as Norfolk, Virginia and Japan these shortages are approaching crisis proportions. The new large refineries just opening in India do not expect to export any residual fuels. Korea used to be the largest supplier in Asia; now it produces next to nothing.
The problem seems most acute in Japan where the demand for residual fuel to make electricity skyrocketed as Japanese nuclear reactors were shut down. Japan increased imports by 19 percent in January and it is expected that demand from power plants will grow by 7 percent this year.
With demand for the fuel growing in Asia and "everyone destroying the capability to make it," prices have risen 25 percent so far this year in Singapore -- more than the 17 percent increase in crude. Container ships, which usually sail on fixed schedules, are hurting the worst because with so much over capacity, they cannot pass the costs on to customers. Bunker fuel prices are expected to average 11 percent higher this year and possibly be in short supply.
The cost of bunker fuel at Norfolk, VA hit an all-time high of $775 /mtw due to tight supply of low sulfur fuel which is now required to lower emissions in ports. Part of the problem stems from the recent closing of the refinery in the Virgin Islands that was supplying much of the bunker fuel coming to the East Coast.
With no solution to this problem in sight, it seems inevitable that shipping delays and higher transportation costs are in the wind. The problem of higher costs for residual fuel oil will also impact many places in the underdeveloped world that are dependent on the fuel to generate their electric power.
Quote of the week
"President Obama has to be honest with the public. There is no solution to high prices, other than a change in the behavior of our energy use ... Now, the Republicans are not going to make it easy for him, but I think the public will be understanding if they¡¦re told the truth. The days of easy oil are over. And drilling in the Arctic is never going to bring back cheap oil."
- Michael Klare
The Briefs (clips from recent Peak Oil News dailies are indicated by date and item #)