1. Oil and the Global Economy
Oil prices slipped a couple of dollars last week in the face of a torrent of bad news from Europe. At week's end NY crude was down to $96 and Brent to $112. With Athens unable to form a new government, another election looks certain. Talk of Greece leaving the Eurozone continues to increase as the Germans threaten to cut off all further aid to Athens should it fail to adhere to its austerity pledge.
The economic news from China shows its economy slowing and the IEA reports that OPEC production for April increased to 31.2 (Platts puts it at 31.7) million b/d even as stockpiles continue to grow around the world. All this news has combined to give oil prices their longest string of losses since 2009.
There was little news on the Iranian situation last week. IAEA officials are scheduled to meet with the Iranians this week, but little is expected until the six-power discussion resume. The IEA believes that Iranian crude exports fell sharply during April. Tehran keeps producing oil, but could be putting as much as 500,000 – 800,000 b/d into floating storage while awaiting better times.
US gasoline futures were steady last week around $3 a gallon. MasterCard reports that US gasoline consumption the week before last was down 5.8 percent from the same week last year. The EIA says that gasoline deliveries from refineries over the last month are down by 3.2 percent during the last month suggesting that gasoline exports from the US are continuing to be above normal.
The Syrian situation continues in deteriorate with UN observers able to do little to stop the violence. A major bombing in Damascus leading to bloody reprisals is raising the question of just who is involved in what is looking like a multiparty civil war. The uncertainty over just who is fighting the regime and why is leading to second thoughts about outside intervention as Jihadists from all over the Middle East are coming to Syria to take part in the action. There was fighting in Lebanon over the weekend and fighting between Syrian Shiites and Sunnis spread across the border. Talk is increasing over the possibility that, over the longer term, sectarian fighting could spread further across the region.
US natural gas prices continued to rise and coal production continued to drop last week as utilities burned a record amount of gas to generate power. The number of rigs drilling for natural gas fell to the lowest level in 10 years last week. The gas rig count is now down 36 percent since October. In contrast, the number of rigs drilling for oil in the US hit an all-time high of 1,187, up 45 percent in the last year. February natural gas production in the US slipped 0.6 percent from January to 420 million cu ft. per day suggesting that production could have peaked. Analysts point out that the natural gas associated with the increased drilling for oil, coupled with a mild spring, is unlikely to send prices much higher.
2. The EU at a crossroads
The political turmoil continues across Europe in the wake of last week's elections. With the Greeks unable to form a new government, it appears likely that new elections will have to be held – probably in mid-June. Polling shows that new elections are unlikely to be decisive and if anything will push Greece closer to default and out of the Eurozone. German patience with the Greeks is wearing thin and German bankers are openly talking of a Eurozone without Greece. In Spain there were massive protests against deteriorating economic conditions and high unemployment.
The fundamental issue for the EU is whether to adhere to more austerity and further budget cuts, or reverse course and increase deficit spending in an effort to foster economic growth. As the major EU economies are still in reasonable shape, the relationship between Germany and the new French President will be vital. Polls show German Prime Minister Merkel is likely to lose an important regional vote in Germany, adding to the confusion.
In the meantime, the IEA reports that oil consumption in Europe is in a "dire state." Greece, Spain, Italy, Portugal, the Netherlands, Ireland, Slovenia, and the UK are now in a "technical" recession and oil consumption continues to fall. The EU's oil consumption in March was on the order of 13.7 million b/d, down 640,000 b/d from March of last year and over a million b/d below the average of the last five years. This drop is due to a combination of economic stagnation and very high oil prices which has gasoline retailing in the vicinity of $8-9 a gallon in most of Europe.
All these problems are not going to sort themselves out anytime soon. The only issue is whether the Union will find ways to muddle along in the next year or so or whether a Greek default and departure from the Eurozone will lead to far more serious contagion which could spread to the rest of the EU and beyond.
3. China slowing
Last week brought a spate of new data showing that China's economy is slowing down. Nearly every indicator from exports and industrial production to retail sales came in lower than analysts had expected. Fixed asset investment dropped to its lowest level in ten years. Some analysts believe that China's economic growth has fallen below 7.5 percent, the government's official target.
Beijing's immediate reaction was to lower reserve requirements in hopes that doing so would spur lending to small and medium sized firms, but many believe this will not be enough. Announcements concerning major changes in fiscal policy are expected shortly.
In the meantime, China's net crude imports continue to fall with April up only 3.3 percent year on year. This compares with increases of 7.4 percent in January, 14.6 percent in February, and 8.7 percent in March. Analysts note, however, that the 2nd quarter is refinery maintenance time in China.
Beijing has been the economic engine that kept the world's economy growing for the last few years. However, with imports up by only 0.3 percent year over year in April as compared to the 12 percent expected by economists, there are clearly troubles ahead. With demand for raw materials, and possibly even oil slowing markedly, this decline is likely to be felt by many countries that have been feeding raw materials to China. Exports last month grew by only 4.9 percent year over year, or only half what was expected.
After China weathered the 2008 recession in better shape than the OECD countries, there was much talk of a superior Chinese economic system. Now many are not so sure. Some see China's problems as more political in nature as Beijing attempts to maintain a curious amalgam of capitalism and state control all under the leadership of a monolithic Communist Party than tolerates little dissent.
4. IEA's Monthly Report
In its May Oil Market Report, the International Energy Agency ruminates over an uncertain period ahead. With OPEC output up by 3 million b/d over April 2011 and demand across much of the OECD declining, the global oil markets are in better shape than earlier this year and stockpiles have resumed growing after Libyan production largely returned to the market.
The Iranian confrontation still tops the list of potential problems ahead. For now Tehran seems to be dumping the oil it cannot sell into its own tanker fleet at that rate of 500,000 to 800,000 b/d, but come July insurance sanctions may force the Iranians to deliver much of their oil in their own self-insured ships. The steady drop in demand from most of the OECD, the increase in OPEC production, and the slowing of China's growth may be enough to offset the on-going drop in Iranian exports without causing a price spike. This may be true despite the outage of 1 million b/d of exports from Syria, Yemen and the Sudans.
The bigger problem in the second half may be the rate of global economic growth. In its latest GDP projections, the IMF warns of the damaging impact of high oil prices – Brent is still well over $100 a barrel – and the future of the Eurozone.
Given all this, the Agency is still forecasting that global oil demand will rise by 800,000 b/d during 2012, or about the same as it was last year, and will be consumed at the rate of 91.1 million b/d in the 4th quarter. It should be noted that this is getting into the region that many have predicted will be the all-time high of global oil production.
Quote of the week
"There is a real risk that policymakers, wrongly convinced that surging supply has solved all US energy vulnerabilities, will neglect the demand side of the equation. But the basic reality hasn't changed: more supply can help, but to fundamentally reduce US vulnerability to the vagaries of world energy markets, we need to rein in our extraordinary (and economically self-damaging) demand."
- Michael Levi
The Briefs (clips from recent Peak Oil News dailies are indicated by date and item #)