1. Oil and the Global Economy
After a two week decline of nearly $10 a barrel, oil prices reversed last week and climbed a little on Thursday and Friday leaving NY oil at $92.19 and London at $112.39. Despite the steep decline in September, oil prices still registered the biggest quarterly increase this year on concerns that Middle Eastern problems could disrupt oil supplies. Higher gasoline prices also contributed to the increase.
Friday saw an unusual short squeeze on the closing October gasoline contract in NY which sent prices up 19 cents to close at $3.34 a gallon. The sudden surge was technical in nature as one or more traders scrambled to cover short positions before the contract expired. The November contract closed Friday at $2.92 up only 2.2 cents. Behind the move was the prospect of gasoline shortages in the Northeastern US as gasoline stocks in the region fell to their lowest level since record keeping began in 1990. Refinery outages in Canada, Wales, and the Netherlands have reduced shipments going into the NY area.
Higher gasoline prices are blamed for weaker US economic growth in September despite the first drop in gasoline and diesel prices in more than 3 months. The average retail price of regular gasoline was down 5 cents a gallon last week but was still 32 cents a gallon higher than at this time last year.
Natural gas prices rose more than 30 cents per million BTUs closing at $3.32 last week on reports that a “super glut” that would swamp storage capacity does not appear to be developing. A combination of a hot summer, less drilling for gas, and a switch by the power companies to natural gas kept the national stockpile at 3.6 trillion cubic feet or 84 percent of capacity, only slightly above the 80 percent at this time last year and well within the theoretical storage capacity of 4.2 trillion cubic feet. Nuclear power plant outages have contributed to the higher demand for natural gas.
Most of the US is expected to see cooler weather in the next week or two but it is too early for a solid forecast of what the winter will bring as regards to the need for heating gas.
Reuters is reporting that OPEC production in September was the lowest since January mostly because of reduced shipments from Angola and Nigeria. This may be due to shipping schedules and not indicative of falling production. Although difficult to track, Iran’s oil supply in September may have fallen by 50,000 b/d to 2.8 million. Saudi production was seen at 10 million b/d, but Libyan production was only 1.46 million vs. the 1.6 million the government was claiming. Iraqi production was up to 3.06 million b/d thanks to higher exports from the north.
2. The Middle East
Much of the action pertaining to the Middle East last week took place at the UN General Assembly meeting in NY where many of the world’s leaders gathered to air their concerns before a global audience. Most of the major decision-makers involved in the various crises showed up and many grievances were aired. President Obama, Prime Minister Netanyahu, and President Ahmadinejad all spoke on the Iranian nuclear crisis. The upshot seems to be that the US and Israel are back in some sort of agreement as to taking action against Iran and Israel seems to be saying there is no need for an attack on Iranian nuclear facilities at least until next year – well after the US election. The Israeli government leaked a report saying that Iran is being hard hit by the sanctions.
President Ahmadinejad played down the possibility of an Israeli attack, holding that the US would be responsible if the Israelis did strike, and that Iran’s economy is doing fine under the sanctions. He repeated many of his usual threats and bombast about a “third world war” and the destruction of Israel ensuing in the event of an attack.
In the meantime, the US administration told Congress that it had found that the Iranian Oil Company was so intimately involved with Iran’s Revolutionary Guards that it too should be considered a terrorist organization. Any entity doing business with National Iranian Oil Company would be subject to US sanctions – thereby increasing pressure on Tehran.
Fighting in Syria is becoming more intense with bombs going off at military headquarters in Damascus and fierce fighting taking place in Aleppo, where government bombs and artillery are turning much of the city into rubble. With winter coming and the country’s economy in disarray, it is difficult to see this uprising going on much longer. A major humanitarian crisis with still larger population movements seems to be in the offing.
Meanwhile, fears are rising that the Sunni/Shiite struggle in Syria is spreading into Iraq where suicide and car bombings on the rise. On Sunday some 25 people were killed in attacks on police facilities across the country raising the question of just when the increasing violence will affect oil production.
Baghdad is becoming concerned about the flow of refugees from Syria into Iraq and is said to be banning men of military age from seeking sanctuary lest they join in some sort of uprising against Iraq’s Shiite government. For now Iraq’s oil exports are doing nicely, but trouble may be brewing with the Kurds as Baghdad seeks to increase its control over security forces in the region.
The media is starting to grasp that much of Saudi Arabia’s much ballyhooed increase in oil production last summer went into domestic consumption to keep air conditioning working during the hot months and did not go for export. Concerns of systemic instability in Libya are also rising.
3. Slowing Economies
Hardly a day goes by without a pessimistic economic report from one or another of the world’s developed countries. In the US, consumer spending stagnated in August with purchases increasing by only 0.1 percent after adjusting for inflation. Higher gasoline and food bills, which preempt spending on other goods and services, are seen as responsible for the decline. Retail regular gasoline averaged $3.83 a gallon through September 27 as compared to $3.70 in August and $3.42 in July. The financial press is beginning to make the connection between high gas prices and weak consumer spending.
Concern is increasing about the gridlock in Washington over the deficit and the $600 billion in expiring tax cuts and government reductions that are scheduled for 2013. Any relaxation of the cuts will have to await the outcome of the November election. Until a new policy is set, businesses will have to plan for the worst by holding back on hiring and investment decisions and in some cases preparing for major reductions in force.
In Europe most of the activity centered on Spain, although demonstrations in Greece came in for a share of the attention. With borrowing costs rising sharply and capital fleeing the country, Madrid announced a series of reforms and cost cutting measures before formally requesting a bailout from the EU. The situation was further confused by a call for an early election in Catalonia, Spain’s most powerful economic region, which could turn into an unofficial referendum on splitting from the rest of the country. In Germany, business sentiment has dropped for the 5th consecutive month as did sentiment among EU-wide businesses and consumers. All this is interpreted by financial analysts that the EU is slipping into recession.
China’s manufacturing contracted for the 11th consecutive month as export orders continue to fall. With Beijing in the midst of its once-a-decade leadership transition, there is concern that the government may not be able to take the decisive action necessary to head off more serious problems in the future. Most observers agree that Beijing failed to anticipate the rapid fall in export orders that is currently taking place. The dispute with Japan over claims to some islands is also affecting China’s exports.
The oil markets are clearly aware of the simultaneous slowing of most of the world’s major economies and this is leading to frequent assertions that oil prices will be falling soon. The key question for the immediate future is how much the demand for oil will slow in response to reduced economic activity and the level of the perceived threat to Middle Eastern oil exports.
Quote of the week
“Oil on Greenland would be a disaster.”
- Christophe de Margerie, Total’s chief executive
The Briefs (clips from recent Peak Oil News dailies are indicated by date and item #)