1. Oil and the Global Economy
Oil prices climbed a bit through Wednesday fell on Thursday and closed largely unchanged for the week as various waves of optimism and pessimism swept over the trading community. This week, the optimism came on hopes that the EU would soon do something about the worsening situations in Spain and Greece and that the US Fed would unleash another round of quantitative easing. The drop on Thursday came after Fed Chairman Bernanke failed to announce or hint that any additional stimulus would come soon. Such stimulus usually lowers the value of the dollar thereby increasing the price of oil.
OPEC was reported to be producing 32.4 million b/d and with global demand stagnant, stocks are starting to grow. OPEC is meeting in Vienna on Thursday and there is talk of a production cut. With the EU’s sanctions on Iran coming into full force on July 1st, most think the Saudis, who really control OPEC production, would cut production until the full impact of the Iranian sanctions can be sorted out. Riyadh is well aware that any price spike resulting from cuts in Iranian oil exports would be disastrous to the global economy and would likely lead to substantial reductions in demand.
The EIA announced on Friday that US oil production is now above 6.2 million b/d, the highest since 1998, largely due to increased production of “tight” oil from North Dakota and Texas. This announcement triggered off a round of optimistic press stories that the US is on its way to energy independence. Lost in the hype, however, is any appreciation that tight oil from very- expensive-to-drill tight oil wells declines so rapidly that they must be re-drilled frequently to maintain production. The recent drop in crude prices is not helping the economics of tight oil and many of the less productive wells may be losing money.
US natural gas prices dropped further on Thursday after US stocks rose to 2.87 tcf, a record for the week. Despite a large reduction in drilling of new gas wells and increased use of natural gas by electric utilities, prices have fallen from $2.85 per million btu in mid-May to $2.30 last week. The debate over whether the US should start exporting LNG continues with many arguing that domestic demand with a rapid transition from coal to natural gas for electricity and increased use in trucks will be enough to increase prices to economic levels without exporting LNG.
2. Europe at a turning point
The European fiscal crisis continues to roll along with the EU committing €100 billion to bailing out Spanish banks over the weekend, bringing the total bailout for floundering countries to some €500 billion. Nobody is quite sure just where the €100 billion will come from, but for now the markets are calmed and a lasting solution is put off for a few days. Spain, of course is considered “too big to fail” so that the EU is forced to take whatever steps necessary to keep it solvent.
Next Sunday the Greeks vote again in an election that could have major consequences for the Eurozone and even the global economy. In the midst of a collapsing economy, the Greek voters seem to be turning back to the major parties who offer increasingly harsh austerity is return for some help from other EU states. The alternative leftist party sees Greece out of the Eurozone, come what may for the country, the EU and the global economy. In the meantime Athens says the economy is near collapse and will not have enough money to pay bills after this month. Power companies are threatening to turn off the lights and trading partners are wary of shipping anything to the country.
In three weeks, the harsher EU sanctions on Iran come into force. For now the consensus seems to be that increased OPEC and US oil production combined with falling demand will be enough to prevent any dramatic oil price increases this summer even with lower Iranian exports.
Three seems to be a slowly growing consensus that the only way out of all this is for the Eurozone’s members to agree to tighter fiscal integration and to give up part of their sovereignty to centralized management of their economies. This of course will be extremely difficult to achieve. In the meantime, the dimming prospects for Europe’s economies will continue to keep pressure on oil prices.
3. The Iranian nuclear talks
The situation took a turn for the worse last week, when negotiations between Tehran and the IAEA broke down over details of the inspections of suspect Iranian nuclear weapons sites. The new hardline position from Tehran, which includes vows to never give up nuclear enrichment, suggests the Iranians expect to gain little from the next round of talks due to begin in Moscow on 18 June and are willing to let the increased EU sanctions go into effect on July 1st. The selling price of oil coupled with cuts in Iranian oil imports by Tehran’s top customers suggests that oil revenues will fall by roughly 40 percent this year. Budget and subsidy cuts that fall most heavily on Iranian consumers are endemic.
The situation is complicated by the Israelis, who talk about bombing Iranian nuclear sites and possibly dragging the US into an unwanted war, and the situation in Syria which continues to deteriorate daily. Washington continues to send a stream of officials to Israel to assure the government that the western position on Iran’s nuclear weapons will ultimately prevail and that there is no call for precipitous action.
The Syrian situation remains a wild card in the confrontation with Iran. Last week fighting spread into parts of Lebanon and even Damascus as Syrian forces continue to shell residential areas and militias loyal to Assad kill unarmed civilians suspected of disloyalty. Moscow is calling on those Arab countries supporting the insurgents to halt arms deliveries to anti-Assad forces or the insurgency will become a civil war. Other than sharply reducing Syrian oil production, so far there has been little impact on oil exports, but with so many having an interest in the outcome of the fighting, that could soon change.
4. China faltering?
Reports of a major interest rate cut, low inflation, a 28 cent a gallon cut in fuel prices last week, recession in Europe, and a sluggish US economy had many analysts concerned that Beijing’s economy was headed towards a fall. Data released over the weekend, however, paint a more nuanced picture. While industrial production in May was up only slightly from the very weak April numbers, exports in May were reported as up 15 percent from last year and imports up 13 percent. Automobile sales in May were up 23 percent over last year to 1.3 million vehicles. Overall retail sales in May were up by 13.8 percent year on year.
The fall in inflation gives the government more room for stimulating the economy and numerous projects are underway or have been announced to counter the effects of problems in the US and EU. So far in 2012 most indicators say Beijing is still on course to achieve its goal of an 8-9 percent GDP growth this year and a roughly 5 percent increase in oil consumption.
Quote of the week
"Let's be honest, we still confront a situation of near triple digit oil prices… This is placing a huge burden on budgets."
- Maria van der Hoeven, IEA Executive Director
The Briefs (clips from recent Peak Oil News dailies are indicated by date and item #)
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