1. Oil and the Global Economy
After falling by some $30 a barrel since early May, oil prices rebounded in the last 10 days reaching a high of $88 in New York and $102 in London last week. As has been the case for many months now the interplay between fears of a slowing global economy and possible disruptions of Middle Eastern oil supplies has been the underlying impetus for price moves. Late last week economic concerns came to the fore as a weak US jobs report combined with a gloomy IMF projections of global economic growth to trump an elevated level of saber rattling in the Middle East. The week ended with NY futures trading at $84 a barrel and London at $98 after having traded above $100 for much of last week. A weaker euro contributed to the price decline on Friday.
A 2-week-old oil workers strike in Norway which has taken about 240,000 b/d or 15 percent of Norway's production off the market contributed to last week's price rise. Negotiations over the weekend seemed to have reached an impasse. The oil companies are threatening to halt all production in hopes that the government will order compulsory arbitration, forcing the oil workers to return to their jobs.
The weekly US stocks report showed crude supplies up by 4.3 million barrels last week and gasoline stocks up by 200,000 barrels. Over the last four weeks US gasoline consumption has been running 4.3 percent lower than in 2011. MasterCard announced that its weekly Spending Pulse report on US gasoline consumption which it has been releasing since 2007 will ony be released every two weeks. This report usually gives a more precise picture of US gasoline consumption than does the EIA data as it measures gasoline sales at the pump rather than refinery shipments which may end up in storage or as exports.
US natural gas prices which have been climbing steadily since mid-June due to unusually warm weather briefly topped $3 per million last Friday before tumbling 25 cents to close at $2.77 -- still way below the cost of production. The EIA announced last week that natural gas is now fueling as much US electricity production as is coal. When natural gas falls below $3 per million it becomes competitive with coal for power generation. In recent months there has been a major decline in the amount of drilling for gas and an increase in its use by electric utilities. So much drilling has taken place in recent years, however, that inventories continue to rise. Some are already worried that generally higher temperatures will lead to reduced consumption next winter.
2. Economic growth
Christine Lagarde, the Managing Director of the IMF, announced on Friday that the Fund will soon be releasing a somewhat lower forecast of global economic growth than its current projection of 3.5 percent. Lagarde cited simultaneous cuts in interest rates by the EU and China as evidence that the global economy is in for more trouble ahead. Spanish and Italian bond rates jumped on Friday, raising doubts that the supposed "breakthrough" agreed by EU leaders two weeks ago will gain traction. A meeting is scheduled for Monday to discuss bailing out Spain's banks, a rescue package for Cyprus, and what to do about Greece.
The next IEA projection of global oil demand for 2012, which will be released on Thursday, will likely factor in the newest IMF assessment of the global economic situation and possible reduce projections for oil demand.
Meanwhile the US employment report released on Friday shows jobs growing at a "dismal" pace of 80,000 new jobs during June, the third straight month the number has been below 100,000. Economists say a job creation pace of 125,000 jobs is necessary to hold unemployment stable.
The bad economic news suggests to many that another round of "quantitative easing" will begin soon that usually weakens the dollar and increases oil prices.
3. The Iranian confrontation
The situation entered a new phase last week when the EU sanctions on Tehran became fully effective. So far Tehran's response has been confined to saber rattling as its oil exports have been dropping for months in anticipation of the July 1st deadline. Iran announced that the US and EU would be responsible if the embargo led to a global economic crisis and called for an emergency meeting of OPEC. It also spent three days last week firing off dozens of ballistic missiles and warning that the 35 US military bases within range of its missiles would be destroyed within "minutes after an attack" on Iran.
The Israelis hinted for the umpteenth time that Tehran had better get down to serious negotiations soon or there would be an attack on its nuclear facilities. Although the most recent high-level nuclear talks produced no results, talks at the "technical level" continued last week.
Some 100 members of Iran's parliament made a splash by claiming to have introduced a bill requiring the government to block the Straits of Hormuz in response to the EU embargo. As blocking the straits would be tantamount to a declaration of war on much of the oil-importing world and if implemented would almost inevitably lead to hostilities, Tehran quickly announced that no such bill had been introduced.
In the meantime, Tehran is losing about $3 billion a month as oil exports slump and the world price hovers around $100 a barrel. The pressure is clearly on Tehran as it is running out of space to store oil and may soon have to curtail production. The Iranian economy is beset with spiraling inflation and mounting unemployment. No relief to this situation, short of progress in the negotiations, is anywhere in sight. Last week Switzerland and Kenya agreed to curtail imports of Iranian oil under pressure from the US and the EU.
Secretary of State Clinton said last week the Iran will face increasing pressure from the economic sanctions. The US has been weighing additional measures that would make it still harder for the Iranians to conduct economic transactions with foreign countries.
Quote of the week
"There has been a "boom in oil production" of late, Monbiot says. Wrong. Global production has been essentially struggling along a plateau since 2004."
- Jeremy Leggett
The Briefs (clips from recent Peak Oil News dailies are indicated by date and item #)