1. Oil and the Global Economy
Oil prices continued their month-long fall last week, just below $91 a barrel in NY and $106 in London. With few developments in the Iran confrontation or the EU debt crisis last week the markets fell on general concerns about Greece departing the Eurozone and weak demand. New data on Chinese industrial production show that its economy is not doing well in the first half of the year. A downturn in real estate and exports, and declining consumer confidence, have combined to create a "sharp slowdown in the economy." Some believe the economy which has been humming along at 9+ percent for several years is barely growing in 2012. The implications for increasing oil imports are obvious.
NY gasoline futures fell another 5 cents during the week to close out at 2.89, down some 60 cents a gallon since late March. Steadily falling gasoline prices gave a boost to the US consumer confidence index which usually moves opposite from gasoline prices movements.
Natural gas prices fell sharply on Thursday and Friday after a month of steady gains, closing down about 15 cents per million at $2.56 on Friday. This was due to milder weather forecasts reducing the demand for air conditioning and reports that electric utilities were becoming so overloaded with cheaper-than-normal coal that they will have to resume burning more coal again. Natural gas futures are still up by nearly 60 cents per million in the last month, however.
With retail gasoline prices now down to $3.65 a gallon (except on the West Coast where they are still about $4.25), MasterCard is reporting that US gasoline consumption is picking up a bit and is now down less than 1 percent from this time last year.
2. The EU Crisis
Greece's public finances are poised to collapse in the next week or so, as the debate over whether to create Eurobonds that would be used to bailout whoever needs bailing out across the EU continues. Since the elections many Greeks have stopped paying taxes and are withdrawing money from Greek banks adding to the turmoil. With the government out of cash, it may have to resort to short term borrowing to pay its staff and other bills. Public sentiment in the country may be shifting as the realization sets in that there will be anarchy unless they cooperate with the EU's austerity demands.
Things are little better in Spain where the government may use money from the ECB to finance a €19 billion bail out of Bankia, the country's third largest bank as the capital markets would be too expensive for the floundering bank. This move would violate ECB conditions for the loans which are supposed to be for short term purposes. In the meantime, lending to small and medium sized companies across Spain has nearly dried up.
Although the concept of issuing Eurobonds which would be backed by the treasuries of Germany and the credit-worthy northern European countries enjoys wide support, the Germans and the other potential backers remain vehemently opposed. The bonds would in effect use unlimited German money to bail out faltering Eurozone countries -- likely a non-starter.
It is little wonder that the OECD sees the ever growing euro crisis as a threat to world recovery and has slashed its Eurozone growth forecast. There seems little doubt that the EU's demand for oil will be weaker going forward.
The meeting in Baghdad last week between Iran and the Group of 6 is generally deemed to have been unsuccessful although another meeting is scheduled for Moscow on 18 June. Prior to the meeting, Tehran did agree with reservations that the IAEA could conduct additional inspections of some suspect weapons related areas, but over the weekend announced that it would not halt its 20 percent enrichment program, a key western demand. Until the announcement, the West believed that the offer to stop 20 percent enrichment was on the table as it is only useful for one aging medical reactor and as a step towards weapons-grade uranium.
So far the talks have been mostly jockeying for position and the need to save face before domestic audiences on both sides. Some say the talks have become so ensnared in Washington politics that the US is paralyzed so that the EU will have to take a leading role in working out a compromise.
Harsher sanctions are due to take effect on July 1st which is only another five weeks away. Until then we might no see much more progress. At some point it is easy to see the "war risk" returning to oil prices which will resume climbing.
4. Retail gasoline prices
Here are ten countries where high gas prices are the norm, according to British insurance firm Staveley Head.
1. Norway - $10.12/gallon
2. Turkey - $9.99/gallon
3. Netherlands - $9.13/gallon
4. Italy - $9.01/gallon
5. Greece - $8.95/gallon
6. Denmark - $8.82/gallon
7. United Kingdom - $8.76/gallon
8. Sweden - $8.70/gallon
9. Eritrea - $8.70/gallon
10. Belgium [¢G1.40/L] - $8.64/gallon
Quote of the week
"The return of low prices was taken, by some, as proof that oil will continue to be as cheap and abundant as ever. As a quick return to the triple-digit range for oil prices indicates, however, that's clearly not the case."
- Jeff Rubin
The Briefs (clips from recent Peak Oil News dailies are indicated by date and item #)