1. Oil and the Global Economy
Oil prices closed largely unchanged Friday after mid-week weakness on signs that the global economy is slowing and lower tensions in the Middle East. New York gasoline futures, while still a few cents per gallon below recent highs, rebounded after the week’s stocks report showed a substantial drop in inventories. New York oil futures closed at $102.83 and Brent at 121.81 on Friday amid analyst predictions that prices would soon move lower.
Reports that China’s 1st quarter economic growth fell to a 3-year low of 8.1 percent last quarter coupled with weak employment figures from the US, and increasing financial problems in Spain and Italy were a major factor keeping downward pressure on prices. Despite the resumption of talks on the Iranian nuclear issue, increasing turmoil in Syria and ever tightening oil sanctions kept a floor under prices.
New York natural gas futures continued their slide last week falling below $2 per million BTUs, the lowest level for this time of year since 1997. The ruinously low prices, which are only a fraction of the costs of producing shale gas, have resulted in a steep decline in rigs drilling for shale gas. Baker-Hughes puts the number of gas-only drilling rigs at 10 year low. Some analysts are saying the prices will fall in $1.85 per million in the near future. The warmest March in the US on record has pushed the inventory of natural gas to a record high for this time of year. Some are predicting that natural gas storage caverns will be out of space by July or August forcing curtailment of production.
Extremely low natural gas prices have many talking about a “manufacturing renaissance” in the US based on low natural gas costs. Others are talking about a massive LNG export industry developing in the US to take advantage of high LNG prices in Asia and Europe. Money-losing $2 natural gas is only a temporary phenomenon and given the short producing life of “fracked” shale gas wells is likely to lead to higher natural gas prices next year.
US gasoline prices fell about two cents a gallon last week leading to a spate of press stories about the end of the 2012 gasoline price spike. Most analysts believe that the price spike still has a ways to run as the annual spring changeover to summer gasoline blends is still underway. The IEA reported on Wednesday that gasoline stocks were down by 4.3 million barrels the week before last – likely due to the annual changeover. Stories that Delta Airlines was considering buying the shuttered Sunoco refinery near Philadelphia served as a reminder that the possible closure of the second and larger Sunoco refinery is only ten weeks away. Most analysts are skeptical that Delta could be successful in running an aging refinery in a region where Sunoco says it has been losing $1 million a day. Should the second Sunoco refinery close, many see serious problems in supplying refined oil products to East Coast markets in the second half of the year.
2. The Istanbul talks
The Iranian nuclear confrontation took a major turn last week with the opening of talks between the Group of 6 and Tehran in Istanbul. Initial reports say the first meetings were satisfactory to both sides, although no concrete proposals were tabled. An American participant noted that without concrete progress, the sanctions will remain in place. Another meeting is scheduled for May 23rd in Baghdad, with lower level meetings to take place in between.
For now, the word is “confidence building” measures. The West would like to see Tehran give up its 20 percent enriched uranium, open suspect weapons-related facilities to IAEA inspection, and close the underground enrichment facilities. For its part, Tehran would like to see a relaxation of sanctions on its oil exports and banking system.
Optimism that this round of talks may eventually lead to some sort of settlement without hostilities rose when Iran’s Supreme Leader Ayatollah Khamenei reiterated his fatwah against Iran’s acquisition of nuclear weapons saying that such an action was against Islam and a sin. Skeptics pointed out, however, that while Iran’s acquisition of nuclear weapons might be a sin, acquiring the capability to quickly assemble them if the state was threatened is another issue not covered by the fatwah.
Tehran’s concern may not so much in deterring Israel and the West from military strikes on Iran as it is with the consequences of introducing such weapons into the 1200-year old Sunni-Shiite dispute. If Tehran were to openly acquire nuclear weapons or the plausible capability to quickly assemble them, the chances are that we would see a nuclear arms race between the branches of Islam increasing the possibility that the Saudis, Egyptians, and others would feel impelled to join in.
Negotiating a solution to all this will be a difficult and drawn out affair. In the meantime the sanctions programs continue to move ahead with the IEA saying that Iranian oil exports could be down by as much as 1 million b/d later this year. Despite a ceasefire in Syria, the situation continues to deteriorate with Ankara outraged over Syrian forces pursuing dissidents into Turkey last week. With Tehran and Moscow deeply vested in the Assad government, the course of this situation is far from clear. Another round of UN observers is due to arrive shortly. As the casualties mount, however, pressures for outside military intervention continue to grow raising the possibility of still deeper Iranian involvement in the conflict.
Current plans foresee a series of step by step confidence building measures that will move forward at a pace sufficient to keep the Israelis from unilaterally striking Iranian nuclear facilities thereby triggering a major oil price spike. There so many variables in this situation that the shape of an outcome is nearly impossible to foresee.
3. The IEA’s Oil Market Report
The headline news in this month’s OMR was the IEA’s assessment that global oil stockpiles rose by 1.2 million b/d during the 1st quarter, thereby ending the slow drawdown of global stocks that the Agency has been noting since 2009. Much of the 1.2 million b/d increase in global stocks during the first quarter is due to stockpiling by the Saudis and Chinese. The Iranians are also putting into floating storage much of the 300,000 b/d they can no longer sell due to the EU’s sanctions. Unless there is a quick relaxation of sanctions, Iranian oil exports are expected to be down by 0.8-1 million b/d this summer.
With the Saudi and other OPEC producers increasing output, the Agency foresees a fairly balanced market in the 2nd half of this year, but recognizes the possibility that price spikes from Middle Eastern tension will still be with us.
Global demand for oil in 2012 is still forecast to increase by some 800,000 b/d reaching 91 million b/d by the 4th quarter. As expected, North American, and EU demand continue to fall while the rest of the world continues to increase consumption.
There are still many unknowns in the oil equation. If Japan can see its way clear to restarting some of its nuclear power plants demand could drop considerably in the next few months.
The IEA says that global oil supply dropped by 400,000 b/d in March with higher OPEC crude and NGL output offsetting unexpected drops in Non-OPEC production. Much of the lower Non-OPEC drop is due to troubles in the North Sea and breakdown of the equipment processing the Alberta tar sands. OPEC production increased by 135,000 b/d in March to 31.4 million b/d. The Saudis continue to produce 10 million b/d and tanker bookings suggest that this number will continue to increase in coming months.
The IEA estimates that spare capacity is now around 2.5 million b/d, but many outside observers are skeptical that it is this high.
Quote of the week
"… it would appear that at best oil production in the near future will be virtually flat, leading to more spiking of oil prices and greater world economic problems. Another possibility is that world production will begin to decline. The likelihood of decline would appear to be increased if more oil exporters encounter political disruptions, or if the world enters a major recession leading to an oil price decline."
- Gail Tverberg
The Briefs (clips from recent Peak Oil News dailies are indicated by date and item #)