1. Oil and the Global Economy
Oil prices fell 4 percent last Monday on bad EU economic news and then climbed slowly for the rest of the week largely on assurances from EU leaders that they will not let the Eurozone collapse. At week’s end NY oil was at $90.13 and London at $106.65, Bad news about the growth of the US’s GDP stimulated hopes that the Federal Reserve as well as the ECB will soon resort to quantitative easing again.
Last Monday’s selloff was largely triggered by fears that Spain will soon have to seek a full sovereign bailout by the EU. This sent the euro to a two-year low against the dollar, taking oil prices with it. The only economic bright spot of the week came on Tuesday when it was announced that Chinese manufacturing in July grew at the fastest pace in nine months adding to hopes that Beijing’s stimulus measures were having an impact. Other Chinese economic data released last week shows that while coal and electricity consumption continued to grow in the first half, the pace is nowhere near that seen in recent years.
US natural gas futures were volatile last week as the summer heat wave continued to envelop the US. At one point during the week natural gas futures traded in NY as high as $3.19 per million before declining to settle at $3.01. Some of this decline was related to the close out of the August contract. Drilling for natural gas in the US continued to fall last week with the “gas only” rig count falling to a recent low of 505 rigs. Some financial writers are foreseeing that a combination of natural gas replacing coal for electricity generation due to environmental regulations and the decline in drilling will soon have gas prices back in the $8 range.
MasterCard reported on Tuesday that US gasoline demand for the two-week period ending July 20 was 5 percent lower than the same two weeks last year. The decline came as US gasoline prices climbed by 10 cents a gallon – the first weekly price increase in 14 weeks. The EIA reported that crude, gasoline, and distillate inventories all climbed the week before last resulting in a 10 million barrel increase in total US commercial inventories. Gasoline supplied to US markets over the last 4 weeks was down 3.2 percent, but some of this may have been bound for export. The MasterCard data which reflects current sales in considered a more accurate indicator of recent US gasoline demand.
2. Middle East
The most disturbing development last week came in Iraq where a reinvigorated Al Qaeda launched a series of attacks killing and wounding hundreds, mostly Shiites, across the country. The number and size of the attacks, which Al Qaeda announced were in retaliation for Shiite attacks on Sunnis in Syria, raised concerns about whether the Iraqi government has the ability to control terrorism without the presence of US troops. This in turn raises questions about the country’s ability to achieve substantial increases in its oil exports in the years ahead or to avoid becoming engulfed by the centuries old Sunni/Shiite struggle. The focus of the Syrian uprising has shifted to Aleppo, the country’s largest city which has been partly taken over by insurgent forces in recent weeks. The Assad government is going all-out to retake the city, including the use of airpower, artillery and armored forces brought in from other areas. As the government’s most reliable forces are concentrating to control the major cities, much of the rest of the country seems to be slipping into rebel hands.
As hundreds of thousands of refugees flee the country, Turkey has closed its border to commercial activity thereby delivering yet another blow to what is left of Syria’s economy. Few think this situation can continue much longer, but with so many outside interests involved, the outcome of this uprising is difficult to foresee. Some are pointing out that the Syrian uprising and other regional conflicts are testing the national identity of the synthetic states that were carved out of the Ottoman Empire 90 years ago by the European allies.
There was little news of the Iranian confrontation and embargo this week. Tehran still says that the P5+1 talks which continued at the working level in Istanbul last week will remain active until they produce constructive results. The Iranians claim they have full control over the Straits of Hormuz, but have no plans to close it in retaliation for the sanctions. The Washington Post reports that Iran is rapidly gaining capabilities to strike at US warships in the Persian Gulf by means of hundreds of small fast boats armed with sophisticated missiles. This suggests that should open hostilities break out in the Gulf, they could easily escalate to a far bloodier and destructive conflict than many anticipate.
US Republican Presidential candidate Romney, who is currently visiting Israel, is putting out the word that his administration would “respect” an Israeli decision to attack Iranian nuclear sites. The Obama administration has been much more circumspect in its approach to the use of force against Tehran, emphasizing that military action should only be a last resort. Any attack on Iran could easily escalate to the level where oil exports from the region would be slowed leading to untold havoc in the world’s oil markets.
3. The Eurozone
It was generally a bad week in the EU with unsettling economic news balancing assurances from the ECB, Germany, and France that they would do whatever it takes to keep the Eurozone from collapsing. The situation in Spain was much in the news as interest rates soared to new highs – well above the level that Madrid can afford to finance its debt. Either a general bailout by the EU or a default seems inevitable.
The interminable Greek situation continues to roll on with Germany refusing to grant further extensions to Athens. While a Greek exit from the Eurozone would not be catastrophic, many fear that such a default would cause a chain reaction that would tear the zone apart.
Last week Moody’s moved the triple A members of the Eurozone --Germany, Netherlands, and Luxemburg -- to a negative outlook on concerns that a Greek default later this year would lead to consequences for even the economically strongest zone members. The UK economy contracted more than expected in the second quarter and has now contracted three quarters in a row.
The next two months could be critical for the future of the Eurozone and the stability of the global economy. Many Europeans vacation in August, leaving the markets vulnerable to think trading. The mass exodus of decision makers means that many accumulating problems will not be dealt with until September at which time it may be too late.
Some see September as a make or break month after two years of muddling through crises and just doing enough to push the various problems down the road. In September, a German court will rule on the legality of the new Eurozone rescue fund to which German taxpayers are making a major contribution. The anti-bailout Dutch will be having an election and another decision must be made on bailing out Greece just again or cutting it free. By the end of the year, the picture should be much more clear.
Quote of the week
"We must conclude that the key assumptions about reserve growth and its effect on decline rates in Maugeri’s report are muddled, speculative and unverifiable. And sprinkling those assertions with repeated declamations about how Peak Oil is a non-issue, insisting repeatedly that the only real constraints on his scenario have to do with political decisions and geopolitical risks, suggests that his report is more about grinding a political axe on behalf of the oil industry than offering a serious or transparent analysis."
- Chris Nelder
The Briefs (clips from recent Peak Oil News dailies are indicated by date and item #)