Quote of the Week

The U.S. Geological Survey estimates the Chukchi and Beaufort seas hold 26 billion barrels of recoverable oil. “It’s probably fair to say, this [Shell’s drilling effort in the Chukchi sea] is the most scrutinized, analyzed project — oil and gas project — probably anywhere in the world. I’m actually sure of that. We can’t afford to have a problem here.”

Marvin Odum, CEO Shell Oil Co.



1. Oil and the Global Economy



The three day, nearly 30 percent, price surge which began the week before last continued through last Monday, then slowed as the week progressed with New York crude closing Friday up 1.8 percent and Brent down by 0.9 percent. New York futures settled on Friday at $46.05 and London at $49.61.



Among the most interesting developments of the week was the release of a new EIA report series based on direct surveys of oil producers. The first such report showed the Administration has been overestimating US domestic production by a considerable amount. US production in February, March and May was 80,000 to 125,000 b/d lower than previously reported and June production was 250,000 b/d lower than what the EIA had been estimating. The release of this information contributed to the continuation of the price surge on Monday, with some traders concluding that the oil glut would soon be over and that prices would be going higher.



The rest of the week’s news was mixed for oil prices with US rig count falling by 13 units, mostly wiping out six weeks of small increases; US employment figures coming in lower than expected; and the Chinese economy still not doing very well. The general sentiment seems to be that the drop in US domestic oil production will not be enough to offset the current pace of worldwide global production and the prospects for lower demand in Asia. The Saudis cut their monthly selling price for many of its customers on Thursday, suggesting that there is still pressure on the markets.



OPEC production in August was down from record production in July largely because of lower Iraqi exports due to Kurdish separatist attacks on the pipelines through Turkey. A Reuters survey shows OPEC output falling from 31.88 million b/d to 31.71 million, still way above the targeted 30 million. The Saudis and other Gulf states continued producing at high levels last month.



Some US private-equity firms are continuing to pump money into the US shale Industry despite the industry having lost some $18 billion in market value in the past year. These firms believe that oil prices will soon return to much higher levels and that current markets present a buying opportunity to participate in the next price rally.



The US Congress is preparing a bill to remove controls on US crude exports. The bill is expected to pass the House this month, but may have more trouble in the Senate. Last week the EIA released a new study on effects of removing the current restrictions. Proponents of the bill hailed the study as confirming their assertions that removal would be a net positive for the industry and for consumers who would have lower oil prices. Actually the study was more circumspect, concluding that the effect would actually depend on assumptions about prices and production and certainly is not as clear cut as proponents of removal are saying.





2. The Middle East & North Africa



Syria/Iraq : In the news last week were reports that Moscow is stepping up its military support for Syria. The main evidence seems to be increased activity at the Latikia airfield which is in the heartland of President Assad’s Alwaite region. Press speculation varies from increases in the numbers of Russian advisors and military equipment to the arrival of Russian ground forces to do battle with the insurgents. In Moscow, President Putin has denied that there has been any change in policy as yet, but says the situation is under review.



Russia and Syria have had a close military relationship for the past 50 years and many Russian women have married Syrians studying in Russia and moved to the country. This history is behind Moscow’s unprecedented support for the Assad government during the last four years of insurrection. Despite conflicts between the various insurgent groups, the whole insurgency seems to be slowly moving closer to driving the Assad government from power. While Syrian oil production currently is close to zero, the collapse of the Assad government is likely to trigger another round of instability; more refugees as Alwaites flee the country; and yet more Sunni-Shiite turmoil that threatens regional oil production.



The political situation in Iraq is becoming more confused with sentiment in parts of southern Iraq turning against the Iranian influence in Baghdad. Many Shiites are now blaming Tehran’s influence on the Maliki government for the success ISIL has had in taking over large parts of the country with little hope of driving the Islamic State out in the near future. ISIL’s success came after the remaining US forces were forced out of the country on Iranian advice; the firing of competent Sunni military officers and their replacement with loyal Shiites; and antagonizing the Sunnis in northern Iraq with needless confrontations. While at the time the Iranians saw these developments as beneficial to their cause, the rise of ISIL has galvanized and organized radical Sunnis, worldwide, into a force to be reckoned with for many years to come.



Iraq oil revenue in August was nearly $1 billion lower than in July. Part of this came from lower oil prices and part from reduced exports via the northern pipelines which are being sabotaged by Kurdish rebels in retaliation for Ankara’s new offensive against the PPK. A recent World Bank study shows that Iraq’s economy is shrinking as ISIL is disrupting much economic activity outside of the oil industry. Some are wondering if Iraq will have enough revenue to continue fighting the ISIL threat over the long term. While US and allied air strikes against ISIL targets continue, many are starting to question their efficacy in defeating the Islamic State as acceptable high-value targets for the strikes are becoming scarce.



Libya : The confrontation between the two Libyan governments over control of the oil revenues rolls on. Foreign buyers of Libyan oil continue to do business with the Libyan National Oil Company which has offices in Tripoli. The company seems to the taking in the oil revenues and disbursing them to employees of both governments. The Internationally recognized government in Tobruk is attempting to break this system by convincing oil buyers to make payments to offshore accounts controlled by Tobruk, thereby cutting off the Tripoli Islamist government from the revenue. The Tobruk government hopes that by cutting oil revenue to Tripoli, the government there will be pressured into joining the UN sponsored reconciliation talks that are going on in Geneva without much progress.



The issue is also wrapped up in the EU refugee crisis. The EU seems willing to put forces into Libya to prevent refugees from boarding boats to Italy and to keep the ISIL offshoot in Libya from gaining more strength. However European nations are unwilling to move into Libya until there is a single Libyan government that is willing to accept foreign troops. Until something breaks the current stalemate, we are unlikely to see much increase in Libyan oil production.



Iran : While the administration remains confident it has the votes to keep the nuclear agreement from being torpedoed in Congress, numerous individuals and groups keep announcing opposition or support for the agreement. Among the more notable voices of support last week were the King of Saudi Arabia, Iran’s Ayatollah Khamenai, and former Secretary of State Colin Powell. Senator Ben Cardin, top Democratic member of the Senate Foreign Relations Committee, became the third Democratic Senator to oppose the deal.



Iran’s Oil Minister Zangeneh said last week that his country will increase oil production next year by 1.5 million b/d to 4 million b/d – which is higher than when sanctions began. Many outside observers are skeptical that Iran can ramp up its oil production that quickly after years of sanctions and neglect of its oilfields. While European energy companies are rushing for a piece of the action after the sanctions are lifted, US oil companies say that US law still prohibits them from talking with Tehran. Decades of US-Iranian animosity make it unlikely there will be much US involvement in growing Iran’s oil and gas industries. Tehran is now talking about becoming a major supplier of natural gas to the EU by building a pipeline from the giant South Pars field through Turkey to the EU.



3. China