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 #)