1. Oil and the Global Economy
Oil prices were little changed at the end of the four-day trading week. NY and London futures finished with small weekly losses after a surge of more than 9 percent in August. Brent closed at $114.25 a barrel and NY at $96.42. Much of the impetus for market moves last week came in anticipation of large government financial bailouts on both sides of the Atlantic. On Thursday, the European Central Bank announced a new bond-buying program aimed at keeping the Eurozone afloat until major changes in the EU’s financial structure can be negotiated. In the US, disappointing job numbers raised hopes that next week’s Federal Reserve meeting will announce another round of quantitative easing that will force down the dollar and send oil prices higher.
The weekly stocks report was affected by Hurricane Isaac which halted oil imports along the Gulf coast and production from many offshore wells. Imports fell by 10 million barrels from the previous week and commercial crude inventories declined by 7.4 million barrels.
MasterCard reported that US gasoline consumption in the two weeks leading up to Labor Day was higher than last year when a hurricane disrupted travel plans. This was the first year over year increase in gasoline consumption in the last 12 months. Gasoline futures continued to rise slowly last week closing at $3.05 a gallon. The US has experienced an unusual number of refinery outages recently due to fires, other mishaps, and Hurricane Isaac. The EIA reported that US gasoline inventories fell by 2.3 million barrels last week.
A diesel shortage is looming in the EU which cannot refine enough to meet its needs and must import from abroad. Refinery accidents in the US and Venezuela and refinery closures have tightened the global distillate market. Higher Russian export duties have added to the problem. High heating oil prices have caused many Germans to leave their heating oil tanks half full in hopes that there will be a warm winter. All this could lead to serious price spikes in the next few months.
US natural gas prices fell by some 20 cents per million last week as cooler weather set in and the EIA reported that US inventories jumped to a record high of 3.4 trillion cubic feet at the end of August. The increase was not quite as much as expected due to the closure of offshore wells during the hurricane and reduction in drilling new shale gas wells during the past year. Some analysts are forecasting a major increase in natural gas prices during the next two years.
The notion of “peak exports” is starting to make its way into the mainstream media. The fact that major oil producers are consuming an increasing share of their own oil production to the detriment of exports has long been discussed in peak oil circles, but rarely in the financial press. Last week Citigroup released a report pointing out that, if current trends continue, Saudi Arabia could become a net oil importer by 2030. Some already are wondering just where the Saudis will find the oil to import.
Much of the financial press has been euphoric over the prospects for increased supplies of tight oil from the Bakken and Eagle Ford shales, which could lead to US energy independence and a new age of reindustrialization. A handful of deeper thinkers, however, are starting to appreciate that the cost of drilling and fracking in shales and the rapid decline in production from these wells may not be a panacea as they have to be redrilled frequently to maintain production. Some observers are starting to point out that the capital and manpower for all this redrilling does not exist even if the geology cooperates. People who understand the realities believe that tight oil production may climb to 1.5-2 million b/d, but is unlikely to go much further.
2. The Middle East
The possibility of an Israeli military strike on Iran and spreading violence across the region remain the major threats to oil exports. Tehran seems to have given up on serious negotiation about its nuclear programs and is counting on being able to outlast or circumvent the sanctions. In the meantime, the Israelis continue to openly debate the pros and cons of attacking Iran’s nuclear facilities while Iranian generals and their friends in Hezbollah continue to talk of retaliation against American bases in response to an Israeli strike. Attacking American bases, of course, would be seen as another Pearl Harbor and seems like a sure-fired recipe for another decade of US military involvement in the region and serious problems in maintaining oil exports.
The Syrian uprising is setting off reverberations across the Middle East as 1300 year old Sunni/Shiite animosities come to the fore. With neither side seeming to have the strength for a knock-out blow in the immediate future, the situation seems destined to continue for a while. As indiscriminate bombings of civilians and other atrocities mount, refugees continue to stream out of Syria into Turkey, Jordan and Iraq. These three countries already have ethnic problems: Sunni-Shiite-Christian in Lebanon; Turks-Kurds in Turkey, and Sunni-Shiite in Iraq – that seem to be evolving into increased violence as the Syrian uprising continues.
Iraqi oil exports hit their highest level in 30 years last month at 2.56 million b/d. However, on Sunday, bombs exploded in 11 Iraqi cities, killing at least 44 and wounding hundreds, in an apparent effort by Sunni militants to undermine the Shiite government. If this gets much worse, it is difficult to imagine that Baghdad will fulfill its ambitious plans to increase oil production in the next few years.
Should this situation across the region continue to deteriorate, it is not difficult to imagine partitioning along tribal and religious lines much as happened when the British left India 65 years ago. Repartitioning of the Middle East and the movement of populations would likely be a lengthy and violent affair with oil production and exports suffering greatly.
3. The Eurozone Crisis
After weeks of buildup, the announcement on Thursday that the European Central Bank (ECB) would begin an unlimited bond-buying plan failed to stir the oil markets and ran into a storm of criticism from Germany, Italy, and Spain. Even the German Central Bank which is a key member of the ECB put out a statement saying the plan was tantamount to financing governments by printing bank notes. Italy and Spain were upset by the fine print of the offer which would demand harsh changes in economic policy in return for the loans and are unlikely to ask for them.
It is becoming apparent that the only long-term solution for Europe’s fiscal problems is some form of closer fiscal integration akin to that of the US where major economic issues are settled centrally and individual countries provide services somewhat akin to those provided by the American states. However this degree of integration among the 17 sovereign and widely differing members of the zone will be a very difficult if not impossible task.
For now, the economic situation is not good in much of the zone. Greek unemployment is above 24 percent, Spain cannot afford to refinance its debt, and a manufacturing downturn is spreading across the continent and much of Asia for that matter. In Germany, 75 percent of those polled say write off the Greeks and the German constitutional court will rule on the legality of the zone permanent bailout fund while a decision on an overdue Greek payment of €31 billion must be made next month. US companies are reported to be preparing for a Greek departure from the zone.
The complexity of all this makes it very difficult to see how the EU can avoid sinking into a deeper recession or worse in the next year. It is difficult to see just how much a recession would reduce the demand for oil. While industrial production would fall, Europe is already a very efficient user of oil which has been steadily reducing its consumption in recent years.
Quote of the week
"If Saudi Arabian oil consumption grows in line with peak power demand, the country could be a net oil importer by 2030."
- Heidy Rehman, Citigroup analyst
The Briefs (clips from recent Peak Oil News dailies are indicated by date and item #)