1. Oil and the Global Economy
Brent crude, which is more susceptible to the Iranian sanctions and developments in the Middle East was up by some $5 a barrel last week to close just below $113 a barrel. NY oil, however, was only up a couple of dollars resulting in the Brent/West Texas spread widening to over $20 a barrel. The increase came despite a steady stream of bad economic news from much of the world. The shaky economic outlook led the IEA to reduce its oil consumption forecast for 2012 by 250,000 b/d to 89.6 million b/d.
Most of the numbers out of Beijing last week were bad, with industrial production, retail sales, and exports slowing more than expected. Some, of course, see China's low inflation rate of 1.8 percent as another chance for Beijing to stimulate its economy and jump start growth. With Europe slipping into recession, Spain on the verge of a bailout, and the US economy struggling to gain traction, few see much increase in the demand for oil ahead. Indeed, the IEA now is forecasting that global demand for oil will only increase by 800,000 b/d next year to 90.5 million.
The situation in Syria continues to overshadow the oil markets. As the fighting drags on, the possibility of a confrontation between Iran and other powers increases. Pleas for help from out-gunned insurgents are increasing and talk of western-enforced safe zones and "no fly zones" are increasing. Tehran seems to be increasing its commitment to the Assad government. It is easy to foresee increased trouble in the months ahead for Middle Eastern oil exports.
US gasoline prices continue to climb on a combination of higher crude prices, pipeline and refinery problems in the Midwest, and a refinery fire in California where retail regular is now over $4 a gallon. Prices across the country are up by 30 cents a gallon in the last month and are now higher than at this time last year. The overall burden on the economy during 2012 could be heading for a record despite a drop in gasoline consumption of roughly 4 percent this year.
US natural gas futures gyrated over a 30 cent range last week, but closed lower on forecasts that the unusually hot weather was coming to an end reducing the need for air conditioning. If the unusually warm weather were to continue into to the winter heating season the weakened demand for natural gas could go on for sometime, offsetting falling production.
2. The Oil Market Report
The monthly release of the IEA's Oil Market Report usually provides new insights into many of the issues bearing on the world oil situation. In addition to reporting the latest information on the global oil production, consumption, and stockpiles, the report digs into many of the major ongoing issues that will affect our oil supply in the months and years ahead.
Projections for the global GDP are reviewed monthly, as this of course is the most fundamental driver of demand for oil. This month the IEA, with the help of other international forecasting agencies, sees global GDP growing by 3.3 percent this year and 3.6 percent in 2013. OECD countries are seen as growing 1.3 percent in 2012 and 1.7 percent next year. These forecasts are down about 0.2 percent in the past month including a drop of 0.4 percent in China's economic growth due to lower industrial production and exports.
Given the size of the global economy, these numbers usually move slowly so a 0.2 percent drop in a month is substantial.
The IEA is still grappling with the statistical problems brought on by the addition of Chile, Estonia, Slovenia, and Israel to the OECD. As the IEA reports global oil, production, consumption, and stockpile numbers in terms of OECD or non-OECD membership, the change forces the revision of numerous statistical series going back many years.
The top issue in the global oil markets at the minute is the effectiveness and repercussions of the sanctions that have been imposed on Iranian oil exports and other economic activities by the US and EU in response to Iran's lack of cooperation over nuclear weapons. Iran's crude supply in July now is seen as falling to 2.9 million b/d from an average of 3.6 million in the last quarter of 2011. Preliminary data for July, the first full month of the sanctions, suggest that Iranian oil exports fell to 1 million b/d from 1.74 in June. These numbers are of course subject to revision. Several countries are moving to self-insure cargos of Iranian oil coming to their countries so that while exports may be below 1.5 million b/d this summer, they could rise in the fall. Given the pace of events in the Middle East, the sanctions may or may not be relevant in coming months.
Under pressure from a UN resolution, Sudan and South Sudan ostensibly agreed to settle their differences over transit rights that have shut-in about 450,000 b/d of South Sudan's oil production. The new deal results in an effective transit fee of $24 a barrel which South Sudan must pay for access to the sea through Sudan. Sudan had been asking $36 a barrel. Given the numerous problems involved in the relationship, and the damage done to the South's oilfields by the rapid shutdown, the IEA doubts that full production can be resumed anytime soon.
OECD petroleum stockpiles are dropping once again, likely due to lower Iranian exports and slowly increasing Asian demand. Although China does not report its petroleum stockpiles, considering the number to be a state secret, analysis of production, imports and refining suggests that Beijing is currently adding about 600,000 b/d to its strategic stockpiles.
A final note concerns the refining situation on the US's east coast. Last winter the EIA was warning that refining capacity could soon fall 450,000 b/d short of demand for refining products in the region and that it would be difficult to bring refined products into the Northeast. Since that forecast however, the Trainer refinery has been sold to Delta Airlines and will reopen this quarter, supposedly using cheaper US crudes from the Midwest that will enable it to turn a profit. A second refinery was sold and will remain open so that new estimates suggest that the region's refining shortfall will only be 50,000 b/d.
3. Ethanol and the drought
The Department of Agriculture on Friday cut its forecast for US corn production to 10.8 billion bushels down 13 percent from last year despite the largest corn sowing since 1937 -- 96.4 million acres. The precipitous drop in corn production once again raises the issue of the 13 billion gallons of ethanol that Congress has mandated as a substitute for gasoline this year. In an average year, about 30-40 percent of our grain crop is sent to the ethanol plants; however about a third of this grain is sold as high-protein fodder to the livestock industry. If the mandate is not relaxed, the US is on track to send 50 percent of the corn crop to the ethanol distillers. High corn prices have already led to the closure of a number of US ethanol plants so that production is now down to about 800,000 b/d vs. about 910,000 b/d in 2011.
Last week the UN called for an immediate suspension of the US's ethanol mandate in the face of rising corn prices which have climbed 50 percent since June and fears that a repeat of the food shortages seen four years ago could be in store. The issue is a contentious one as corn state farmers benefit from high prices. Cutting 900,000 b/d out of the nation's fuel supply could increase exports and drive up oil prices.
The US livestock industry is being seriously harmed by high prices so that several state governors are joining members of Congress in petitioning the EPA to waive the mandate. This will trigger a 90-day legal process that will force the administration to make a decision. Some analysts believe that a reduction of the mandate would be largely symbolic and would have little effect on food prices.
Quote of the week
Whether you're a businessperson, whether you're in government, whether you're teaching - this is affecting your daily life. And the more you know about it, the better prepared you'll be to deal with it."
- Kurt Cobb
The Briefs (clips from recent Peak Oil News dailies are indicated by date and item #)