1. Oil and the Global Economy

In a week dominated by shifting economic news, oil traded in a narrow range ending up a dollar or so a barrel at week’s end with NY oil just below $105 and London just below $120. NY gasoline futures, which at one point were trading 40 cents a gallon below early April highs, recovered a bit to close out the week at $3.20, down about 20 cents from the recent highs. Natural gas futures climbed steadily during the week on a dose of colder weather in the US and the continuing reduction in drilling for gas. There has also been a surge in utilities and industrial users burning gas while it is still so cheap.

The weekly stocks report showed US crude inventories increased by 4 million barrels the week before last while gasoline and distillate inventories were down by 2.2 and 3.1 million barrels respectively. Total oil products supplied to the US markets are down by 4.2 percent from the same four weeks last year. Distillates supplied are up by 0.1 percent from last year suggesting that another round of heavy diesel exporting is taking place.

MasterCard’s SpendingPulse, which reports on gasoline consumption at the retail pump, says that gasoline sales the week before last were down 6.1 percent from the same week last year. SpendingPulse notes that gasoline sales show “exaggerated weakness on weekends” meaning that significant cutbacks in discretionary weekend driving. The service says that US gasoline demand for so far in 2012 is running about 8.5 million b/d as compared with 9 million b/d last year and 9.5 million b/d in 2007. This puts US gasoline demand this year at 5.5 percent below 2011.

The economic data was mixed last week which accounted for the uncertainty in the markets. On Monday Chinese manufacturing was reported as improving; however by Tuesday it was reported to be contracting for the sixth straight month. The Federal Reserve weighed in with a pledge to protect the economy by keeping interest rates low during the next two years and possibly resorting to increasing the money supply. Most of the concerns last week were focused on the EU where serious economic problems seem to be emerging once again.

The US’s GDP growth of 2.2 percent for the first quarter was a disappointment. This was a preliminary estimate and is likely to be revised when better data is available. Some hold that GDP calculation has become so heavily politicized in recent years that it is a poor reflection of reality. Certainly the continuing drop in domestic gasoline consumption over the past year does not suggest that much economic growth is going on.

2. The Iranian Confrontation

Although the confrontation was relatively subdued by recent standards last week, there were a number of developments. The Syrian uprising in which the Iranians are deeply ensnared continues to deteriorate as animosities rise with the body count and the UN observer presence does little to quell the situation. As the Syrian economy shuts down amid the turmoil, the Assad government is likely to turn to Moscow and Tehran for more support. This in turn adds considerably to the pressures on Tehran which is already beginning to feel the impact of the Western sanctions on their oil exports.

There was a brief flurry of excitement on Wednesday when Tehran’s ambassador to Moscow said that Iran is considering a Russian proposal to halt the expansion of its nuclear program in order to avoid further sanctions. Under the Russian proposal Iran would stop building centrifuges, mothball the ones not yet in use, and agree to more inspections. Washington’s reaction to the proposal was that the Ambassador is not part of the negotiations and that it will be Tehran’s actions that count.

Israel stirred the confrontation pot last week when the IDF’s Chief of the Staff told a newspaper that he did not believe that Tehran had as yet made the decision to build a bomb. This was followed by Israeli Defense Minister Barak’s statement that the chances appear low that Iran will bow to international pressures and halt its nuclear program. He also said that the world must swiftly and firmly stop Tehran from acquiring nuclear weapons or it will set off a Middle East arms race. The Israeli government tried to play down the appearance of internal disagreement, although the Army’s Chief of Staff opined that the Iranian government was run by rational people, while Prime Minister Netanyahu said he would not count on Tehran’s rational behavior.

Meanwhile, cyberwar flared when someone attacked the computers of Iran’s oil ministry. The ministry was reported to have all its facilities disconnected from the Internet in order to prevent viruses from spreading. While outwardly calm, some oil ministry officials are saying off the record that the attacks are a major problem.

The fussing over the effectiveness of the sanctions continued last week with India saying that the US has not yet threatened the country with sanctions and it will continue to buy as much Iranian oil as it needs. The position of China in all this is becoming more interesting. Beijing has cut back significantly on its purchases of Iranian crude. The question is whether it is trying to help with the sanctions or is simply trying to extract price concessions from Tehran as the Iranians become more desperate?

Washington, however, says that Beijing is playing a more constructive role in the talks over the nuclear confrontation, rather than just following Moscow’s lead as it has done in the past. China has a lot more to lose in the confrontation than do the Russians as a significant portion of its oil is coming from Middle Eastern countries and would likely suffer more than most should exports from the region be reduced.

On Friday an Iranian official denied that China had cut its crude imports despite Chinese data showing that imports of Iranian crude in the first quarter were down by one third from last year. The data shows that China cut its imports by 5 percent year on year in January, 40 percent in February, and 54 percent in March. Industry sources continue to say the cuts are due to contract disputes.

3. The EU’s crisis

Now it is Spain. With unemployment up to 24 percent, retail sales in the cellar, S&P downgrading government debt, and bad debts soaring, a government minister characterized the state of Spain’s economy as a crisis of huge proportions. The key issue across the EU is how harsh austerity budgets with government spending being to cut deal with the sovereign debt crisis will ever lead to a recovery. The popular reaction to these measures has been the fall of 16 EU governments since the start of the debt crisis. If French President Sarkozy is voted out of office on May 6th, he will be the first French President to suffer such a fate in 20 years.

Nearly all observers agree that the EU’s economy is going downhill and that there is no solution in sight. In the few countries that are still doing well, there is increasing resistance to bailing out those that aren’t. More radical solutions such as forcing some members out the Eurozone, abandoning the Euro entirely, or shifting economic decision making to Brussels are being discussed again. What seems sure is that some sort of radical change is likely in the next year or so. The concern is that the EU will slide into a major recession, widespread financial default, or worse.

The impact of such a development on the demand for oil would, of course, would be severe with effects rippling across the global economy. Next to the interminable problems in the Middle East, the EU situation is likely to have the greatest impact on the oil markets in the next two years.

Quote of the week

“… while slowly increasing US crude oil production is very important, the dominant trend we are seeing is that developed oil importing countries like the US are being gradually priced out of the global market for exported oil, as global oil prices doubled from 2005 to 2011, and as developing countries like the Chindia region consumed an increasing share of a declining volume of global net exports of oil.”

- Jeffrey J. Brown

The Briefs (clips from recent Peak Oil News dailies are indicated by date and item #)

• Global GHG emissions will nearly double by 2050 under current policies unless urgent action is taken, the International Energy Agency has warned. (4/28, #4)
• A Japanese deep-sea drilling probe has set a new world record for depth, reaching 7,740 meters (25,400 feet) below the sea surface. (4/28, #7)
• US oil and gas drilling activity this week declined by 27 units to reach 1,945 total rigs working. The rig count for the week ended Apr27th was up by 127 rigs compared with the same period a year ago. (4/28, #16)
• A group of energy companies has scrapped a $1.4 billion carbon capture and storage project, dealing a major setback to Alberta's efforts to reduce greenhouse gas emissions. (4/28, #17)
• A new study finds that the GHG emissions from palm oil production are significantly underestimated. And that palm oil biofuels could be more climate-damaging than oil sands fuels. (4/28, #22)
• Coal consumption by China's four major coal-consuming sectors grew at a higher rate that the country's coal output in the first quarter. (4/27, #9)
• The Exxon Mobil reported disappointing first-quarter earnings, saying net income dropped 11 percent because of lower production volumes and weak chemical profit margins. In contrast, Royal Dutch Shell, Europe's biggest oil company, said its earnings rose 15.9 percent in the first quarter from a year earlier because of new projects and higher prices. (4/27, #10, #11)
• US natural gas for delivery this fall is trading at a record premium, signaling the fuel may be poised to rebound from its worst quarter in two years because of production cuts and rising demand from power plants. (4/27, #12)
• Turkey started drilling for oil and natural gas off Northern Cyprus, threatening to further poison relations with Greek Cypriots in the latest chapter of a gathering row over ownership of potential energy riches in the eastern Mediterranean. (4/27, #16)
• Egypt's decision to cut off natural gas supplies to Israel threatens the countries' historic 1979 peace treaty and could crank up simmering tensions over disputed offshore gas fields in the eastern Mediterranean. (4/23, #9) (4/26, #10)
• Set to become the world's largest photovoltaic power plant, the Aqua Caliente project in Arizona reached the 100-megawatt milestone. (4/27, #17)
• The expected heir to Chinese Premier Wen Jiabao will seek to strengthen energy ties to Europe during an upcoming visit, Chinese Vice Premier Li Keqiang will make a stop in Brussels to meet with European Council President Herman Van Rompuy and European
  Commission President Jose Manuel Barroso during a five-day state visit beginning April 30. (4/26, #16)
• The possibility of an El Nino, a warming of the mid-Pacific Ocean, has forecasters predicting lower temperatures across the US this summer, which may mean less electricity will be needed to run air conditioners. (4/26, #18)
• Norwegian energy company Statoil said it was working to make oil sands production from its Canadian assets less threatening to the environment. (4/26, #19)
• The Nova Scotia government said it needs 2 more years to study hydraulic fracturing. No fracking will be approved until the extended review is completed. (4/26, #20)
• Iraq expects oil production to reach 10 million barrels per day within the next six years. (4/25, #7)
• Nigeria lost $6.8bn because of corruption and mismanagement of its controversial fuel subsidy program from 2009 to 2011, according to a report presented to the Nigerian parliament. (4/25, #9)
• The biggest-ever pipeline of copper projects is under threat as Chile, as the world's top producer struggles to contain rising opposition to new power plants. (4/25, #10)
• India's consumption of refined fuel products rose 4.9% last fiscal year, at its highest pace since 2007-08, due to a growth in vehicle sales and power shortages boosting diesel demand for running generators. (4/25, #12)
• India's March crude-oil output fell 2.9% while natural gas production declined 10.1%, falling for the 15th month in a row. (4/24, #16)
• Dhaka, the capital city of Bangladesh, faces severe water shortages, particularly during the annual March to May dry season. While the city needs 2.2 billion liters of water a day, it can only produce 1.9 million-2 billion. (4/25, #13)
• After dropping for most of the month, gasoline is now cheaper in much of the U.S. than it was a year ago. That hasn't happened in more than two years, and it could be part of a larger decline in gasoline prices that could lift consumer confidence ahead of the summer driving season. (4/25, #14)
• Carlyle Group's talks to buy a majority stake in Sunoco Inc.'s Philadelphia refinery show private equity is betting that the business abandoned by public oil companies may be poised for a long-term rebound. (4/24, #17) (4/25, #16, #17)
• A former BP engineer was arrested on charges of intentionally destroying evidence requested by the US about the size of the 2010 Gulf of Mexico oil spill, in the first criminal case arising from the incident. (4/25, #18)
• Italy's Eni and Rosneft are expected to agree to search for oil and gas in the Russian Arctic, Russia's second major exploration deal in two weeks after U.S. ExxonMobil partnered with the state oil firm. (4/25, #19)
• Britain's economy has fallen back into recession for the first time since 2009 after official figures showed that it unexpectedly contracted during the first three months of the year. (4/25, #20)
• Iraq's crude oil exports from its southern oil terminals jumped to record rates in April and theses rates are expected to be sustained for the rest of the year thanks to the opening of two new floating terminals. (4/24, #8)
• The Iraqi Parliament's oil and energy committee is resuming its efforts to push forward thenlong-delayed oil legislation – and as a first step, it has voted to set aside a draft favored by Prime Minister Nouri al-Maliki. (4/24, #9)
• Royal Dutch Shell agreed to buy Cove Energy after raising its bid to $1.8 billion, securing a stake in gas fields discovered off Mozambique. (4/24, #13)
• The Sudanese president Omer Hassan al-Bashir announced that his country will not allow its southern neighbor to export any of its oil through the its pipelines in the wake of the worst fighting between the two countries since they broke up into two last year. (4/23, #12)
• Cuba expressed support to Argentina for its decision to expropriate a majority share of Spanish-owned oil company Repsol YPF, saying it is lawful. (4/23, #16)
• An electricity crisis is looming in India as around 50 power stations have just days of coal stocks to fuel the plants. Several hours of power cuts are routine in most parts of the country and with shortage of electricity reaching 21,000 megawatt the situation is expected to worsen this summer. (4/23, #19)
• Drilling in the deep Gulf of Mexico is becoming robust two years after the oil spill that prompted a six-month moratorium on deep-water exploration, but more of the work now is left to large companies. Triple-digit oil prices are driving the activity, making it worthwhile to go forward even given the cost, risk and heightened government scrutiny of working in waters often a mile deep or more. (4/23, #21)
• The European Union has delayed a decision on whether to classify oil sands as a "dirty" form of crude oil, bringing praise from Canadian officials. (4/23, #26)
• China and Iceland announced a deal on the oil-rich Arctic region after Chinese Premier Wen Jiabao flew in to Reykjavik on the first stage of a four-nation European tour. (4/23, #27)