1. Oil and the Global Economy
Brent crude traded in a narrow range for most of last week between $98 and $100 a barrel as the markets reacted to generally bad economic news from Europe, China, and the US. On Friday prices moved higher to close at $102.40 after the US announced tougher sanctions on companies that have been helping Iran circumvent the sanctions. New York crude followed a similar pattern about $15 lower than Brent.
China’s inflation rate slowed to 2.2 percent in June and its rate of GDP growth slipped to 7.6 percent. Some see this as an opportunity for Beijing to stimulate its economy, while others see a period of deflation ahead as the outlook for China’s exports darkens. The news from Europe was not good and some see the Eurozone fragmenting faster than policymakers can find solutions to the multiple financial crises. The ILO is warning of major drops in employment in the EU due to new austerity measures being implemented in several countries.
It is interesting that many short term oil price jumps in recent weeks have been based on speculation that the Federal Reserve, the EU Central Bank, or Beijing will be able stimulate economic growth in the coming quarters.
US natural gas prices held steady for most of last week around $2.85 per million on forecasts that unusually warm weather will last through much of July. Drilling for natural gas in the US continues to decline but so long as gas remains below $3 per million, it remains a better option for many electric power producers. Seasonal increases in stored gas are coming in less than expected suggesting that the oversupply may be ending. Cheniere Energy announced that it has obtained $3.4 billion in financing to build a major natural gas export facility in Louisiana.
US crude inventories fell by 4.7 million barrels the week before last, but most of this went into larger inventories of gasoline and distillates which increased by 6 million barrels. US gasoline consumption continues to run about 4 percent lower than at this time last year according to the EIA and MasterCard retail records. Gasoline futures continued to climb last week. After falling from $3.15 per gallon in early April to a low of $2.45 in late June, prices have rebounded by nearly 40 cents a gallon to close Friday at $2.82.
2. The Iranian confrontation
The IEA reports that Iranian oil production in June was probably some 3.2 million b/d, about 100 million below May’s production. While the industry sources are telling the press that Iranian exports slumped in June, the IEA believes there was a surge in Chinese exports late in the month. The picture is likely to change in July however as sanctions tighten considerably. Iranian sources talk of cutting back on production which could damage some oil fields over the longer run. The EIA is projecting that Iranian production will fall by about 1 million b/d by the end of the year to circa 2.6 million and an additional 200,000 b/d in 2013 unless the sanctions are ended.
The US government granted China a waiver for sanctions in late June, presumably because Beijing agreed to lower its imports. This brings to 20 the number of countries that have stopped or lowered their imports of Iranian oil. Tehran has already played one of its best cards by turning off locator beacons, reflagging, renaming and in some cases repainting its large crude carriers in hopes that they can continue to deliver oil, undetected by the West. A one or two million barrel crude carrier is hard to hide, so this ruse is unlikely to be effective for more than a few weeks.
Domestic pressures continue to grow in Tehran and the government has warned its media against reporting on the impact of the sanctions. This is the first time the government has used the sanctions as justification for censorship. With the continuing deterioration of the situation in Syria and Tehran’s unswerving support for the Assad government, there are signs that many in Tehran are questioning whether this policy is tenable. In the meantime, Tehran is trying to put a good face on the situation by claiming that the sanctions are good for its domestic energy. Last week the Iranians announced that they have just discovered $50 billion worth of oil in the Caspian sea thanks to the sanctions.
In an unusual semi-public forum, the current head of MI6, Britain’s intelligence service, said that his agency is forecasting that Iran would likely have a nuclear weapon within two years. This, of course, adds fuel to the debate of whether Iranian nuclear facilities should be bombed.
3. The IEA’s monthly assessment
As the first half of 2012 comes to an end, the IEA reports that global stockpiles are again growing unlike in 2011 when demand outpaced production and stocks fell. The Agency notes, however, that only about 15 percent of the increase in stocks is taking place in the OECD countries and that the rest of the growth is in emerging nations, particularly in Asia. Outside of the OECD, however, stockpile data is scant so much of this assumption is based on estimates.
The IEA says that, according to the latest assessments of economic growth, global oil demand will increase by about 800,000 b/d in 2012 and another 1 million b/d in 2013. About 190,000 b/d of the increased demand for this year is coming from the oil-producing Middle Eastern states. Next year Middle Eastern oil consumption is expected to increase by another 200,000 b/d with 60 percent of the increase coming from Saudi Arabia.
The 2013 forecast represents an acceleration in demand following a 700,000 b/d increase in 2011 and an expected 800,000 b/d increase in 2012. Demand from emerging nations is likely to exceed that from industrialized nations for the first time next year. Even with GDP growth slowing, China should increase its demand by another 300-400,000 b/d in 2013. Increased production from North America and Brazil of about 700,000 b/d and an additional 500,000 b/d in additional crude and natural gas liquids from OPEC should be enough to cover the increased demand forecast for 2013.
US oil production (all liquids) in May was about 8.7 million b/d, up about 720,000 b/d over last year. Growth in production of tight oil from the various shale plays may increase by another 400,000 b/d in 2013 to 1.6 million b/d. A recent study has production costs for this oil varying from $68 to $44 a barrel and due to transportation difficulties, it is selling at a $10 to $20 discount to West Texas Intermediate prices. With WTI selling below $80 a barrel in late June, some of this tight oil may have been selling for below production costs. If this situation continues into next year there could be a decline in the fast rate at which tight oil production has been increasing.
Quote of the week
"Today's inflation data show that deflation could become a larger concern for China than inflation."
-- Ren Xianfeng, economist at HIS Consulting
The Briefs (clips from recent Peak Oil News dailies are indicated by date and item #)