1. Oil and the Global Economy
The re-election of President Obama and Democratic gains in Senate seats sent oil futures in NY tumbling by $4.27 a barrel Wednesday. Behind the selloff were concerns that a divided government could take the country over the “fiscal cliff” in January reducing the demand for oil. London oil fell by a similar amount on Wednesday. On Thursday and Friday, however, oil rebounded to close out the week about a dollar higher in NY at $86.07 and $109.40 in London. A report that US consumer confidence has climbed to a five-year high and pledges from both sides in Washington that will avoid sending the country into a recession through tax increases and spending cuts were the major factors behind the rebound.
Gasoline prices were unusually volatile last week as a second winter storm hit the NY region with snow, winds, and freezing temperatures knocking out still more electricity and setting back recovery efforts by several days. On Friday NY gasoline futures jumped 9.2 cents a gallon as a short squeeze developed amid expectations that the NY region’s gasoline distribution system would soon return to normal.
Natural gas futures were quiet last week with contracts trading between $3.50 and $3.60 per million BTUs. The EIA reported a somewhat smaller-than-expected increase in natural gas inventories and the weather in the northeastern US is forecast to be mild for the immediate future.
As was expected, last week’s EIA stocks report showed a 1.7 million barrel increase in crude and a 2.9 million barrel increase in gasoline inventory as the NY superstorm resulted in widespread power outages and several refinery closures – at least one of which will be out for an extended period. Of more interest in the weekly report was US crude production climbing again to hit 6.68 million b/d – the most since December 1994. Some analysts note that increasing US oil production and slowly falling prices – last week NY oil traded as low as $84 a barrel – could soon have oil selling for close to the cost of production in the Bakken and Eagle Ford shales. This number is thought to be around $70-75 a barrel, below which oil companies would have difficulty justifying more drilling. This would be similar to what has happened to natural gas from fracked fields which is currently selling for below the cost of production in many cases.
2. Middle East
Last week, Iran’s Intelligence Ministry published an analysis of the threats to the country posed by a military confrontation and pointed out the benefits of a negotiated solution to the nuclear weapons standoff. This piece was widely reproduced in the Iranian press suggesting that the government is again considering some sort of compromise. On Saturday it was announced that Tehran will return to talks with the IAEA in December. These talks have resumed several times before without much progress, so we shall have to see whether the US elections, the increasing pressure of the sanctions, and the precarious position of the Assad government will have an impact on Tehran’s negotiating position.
In the meantime, the Iranians took a shot at a passing US reconnaissance drone, again suggesting that hostilities, which could seriously threaten global oil supplies, are only a minor incident away. Iran’s Oil Minister once again raised the issue of stopping or reducing crude exports in retaliation for the ever tightening sanctions. Considering that there is plenty of oil available at the minute and OPEC is actually cutting back production, these threats seem somewhat hollow. The British are considering sending fighter aircraft to Abu Dhabi in response to a new Iranian military base established near the Straits of Hormuz shipping lanes.
The Assad government’s position in Syria continues to deteriorate, making it difficult to see how it can last much longer. On Friday some 11,000 refugees crossed into Turkey after rebel forces overran a government security post along the border. Assassinations and suicide bombings continue to take a toll on the regime and rebels even got close enough to the center of power to lob a couple of mortar shells at the Presidential palace.
Over the weekend, a new umbrella opposition group was formed with Western and Gulf State backing, that it is hoped will form the nucleus of a new government after Assad falls. It is widely feared that a collapse of the government could usher in a period of anarchy with chemical weapons and portable anti-aircraft missiles falling into the hands of jihadist groups. The British government is already suggesting that foreign military intervention may be necessary to secure the chemical weapons and keep sectarian fighting from spreading to neighboring states.
3. The Superstorm’s Aftermath
On Wednesday, a second winter storm hit the NY region putting 300,000 homes into darkness and stalling efforts to recover from the first storm. The gasoline distribution system was so badly disrupted by the two storms that on Friday New York followed New Jersey in initiating odd and even gasoline rationing in the affected areas. The storm brought out some major problems with the distribution system which is largely dependent on the electric grid continuing to function. Most of the retail gas stations branded with the names of major oil companies – Exxon, Shell, BP etc.—are franchises in which the oil company has little or no interest in the franchisee’s welfare.
Stations owned by regional chains such as Hess and Wawa enjoyed better corporate backing which ensured that emergency generators were available to keep the lights and pumps working. In the NY area, more than three-quarters of the regional stations continued to operate to supply fuel to citizens and emergency crews.
Concerns are rising that recovery from Sandy may take a protracted period of time, outside of decisions as to whether storm-surge prone areas should be rebuilt. It is now becoming apparent that many of the pumping stations, especially in New Jersey, that move gasoline and other products from pipelines and tankers to local delivery systems were badly damaged by Sandy. Electricity cannot be restored to tens of thousands of flood damaged buildings until safety inspections and critical repairs have been completed, a process that may take many weeks. Some analysts are suggesting that gasoline consumption in the region may not return to normal for many months resulting in lower oil prices this winter.
At least one publication noted that the turmoil in the gasoline system – long lines, rationing, fights, police stationed at working gas stations and blackmarketeers selling gasoline on eBay and the end of gasoline lines for unbelievable prices – is a premonition of what will happen when gasoline supplies begin to run short due to falling world oil production.
Most attention focused on Greece last week as the parliament debated the implementation of tough new austerity measures demanded by the EU as the price for further bailout loans. As hundreds of thousands of Greeks participated in a crippling 48-hour general strike, the parliament narrowly passed the first legislation necessary to satisfy Brussels. A second vote, Sunday, on an austerity budget passed the Greek parliament leaving the government convinced it has done everything the EU and IMF asked to insure the loan comes this week.
EU officials are scheduled to meet Monday morning with the Greek Prime Minister. The Germans, who have long been unhappy with the Greeks, say there will be no rush to approve Athen’s plans and release the €31.5 billion bailout. The BBC is reporting that it may be weeks before the loan is approved as it still needs to be approved by some national parliaments including the German. However, without the loan Greece could run out of money on Friday – which could trigger a collapse that some fear will spread to other countries. It should be an interesting week in Europe.
Quote of the week
"It has been my great honor to serve the constituents of the 6th district of Maryland for the past 20 years…” - Rep. Roscoe Bartlett
The Briefs (clips from recent Peak Oil News dailies are indicated by date and item #)