1. Oil and the Global Economy



In volatile trade last week, oil prices rose about 5 percent to close at $51.64 in New York and $57.87 in London. The continuing drop in the number of rigs working in US oil fields and growing uncertainty over whether an Iranian nuclear agreement can be reached were the major factors behind the gains. Although the EIA continues to report small weekly increases in US oil production, most analysts are expecting that US crude output will stop growing within the next few months, if it has not done so already. Uncertainty as to just how quickly there will be slowing in the growth of in US shale oil production is the reason for the current volatility.



US crude stocks grew by 12 million barrels the week before last, the dollar has been stronger, and most analysts believe there still is an oversupply of 1-2 million b/d worldwide. These factors tended to keep a lid on markets’ general optimism that prices have to go higher, due to the falling US rig count. Many continue to ponder why the low oil prices are not stimulating more economic growth.



The Saudi Oil Minister said last week that his country was ready to help push oil prices higher through production cuts, but that the Saudis would not do it alone. He implied that there must be cutbacks in non-OPEC production, particularly in the US, which the Saudis see as responsible for the current glut.



US natural gas futures fell sharply last week as warmer weather collided with robust production leading to a larger-than-expected increase in natural gas stocks. At the close Friday futures were trading a $2.51 per million BTUs which is the lowest for a front month in the last three years.



2. The Middle East & North Africa



The overall Middle Eastern/North African situation continued to spiral downwards last week with heavy fighting in Syria, Iraq, and Yemen and lesser violence taking place in a half dozen other countries. The fighting in Yemen is drawing more countries, especially Gulf oil producers, into direct military conflict. US policy in the region has become schizophrenic with support going to both Sunnis and Shiites depending on the country involved. In the longer run the increasing violence, which is likely to last for years or perhaps decades, is bound to impact still more oil exports from the region.



Iraq/Syria : Violence increased last week, with ISIL forces making gains in Anbar province northwest of Baghdad and seizing a major Palestinian refugee camp just 10 miles from downtown Damascus. These gains are coming despite continuing air strikes by US and coalition forces. Baghdad’s forces are consolidating their capture of Tikrit after several weeks of siege capped by US airstrikes on key ISIL defensive positions in the city. The humanitarian crisis in Syria and Iraq continues to get worse with thousands fleeing their homes and cities that are rapidly turning into piles of rubble. The resilience ISIL is showing in the wake of months of continuing coalition air strikes suggests that this is going to be long struggle. Gains by ISIL and other rebel groups in Syria last week suggest that a turning point may be approaching for the Assad government.



Baghdad, however, seems to be having some success with its oil business. A long line of tankers is waiting off Basra to pick up oil shipments that have been delayed by bad weather. The Kurds report that they expected a $439 million budget from Baghdad last week and Russia’s Gazprom said it received its first payment in the form of a batch of oil from the Badra field that it is developing for the Iraqis. While the Iraqis are busy shoring up their relations with the Kurds and foreign oil companies, Iraq’s prime minister is expected in Washington this week to ask for more military equipment on credit to fight ISIL.



Libya : Scattered fighting continued across the country last week including an attack on the South Korean embassy that killed two local guards. So far as anyone can tell, oil production remains in the vicinity of 500,000 b/d with exports going to western countries. Most of the action at the minute deals with the internationally recognized government now in Tobruk/Beida efforts to gain control of the oil revenues which are still being deposited in Tripoli’s central bank, currently under control of the Islamists, as has been done for decades. The Tobruk government would like the revenue to go into an offshore account which it controls, something the oil companies purchasing the oil are unlikely to comply with.



The purchasers are not interested in negotiating new contracts with an entity other than the Libyan National Oil Company which produces and ships the oil. The central bank is currently distributing the oil revenues to government employees, which seems to include many if not most Libyan citizens on all sides of the three way war going on in the country. The Tobruk government has no access to the payroll lists from its small town in eastern Libya without which the whole country would stop and complete chaos would ensue. Most thinking Libyans would prefer to leave the current arrangements in place under which everybody gets paid from the oil revenue.



Foreigners continue to flee the country in the wake of the ISIL beheadings in February. So far some 50,000 Egyptian workers have left which is not doing much for the Libyan economy. Cairo continues to call for foreign intervention in Libya to stop the growing threat of ISIL-like terrorism.



Iran : The fate of the nuclear agreement, which could increase Iranian oil exports by as much as 1 million b/d adding to the oil glut and reducing the impact of any decline in US shale oil production, became cloudier last week. Most Iranians seem to be going along with the proposed framework for an agreement and criticism from hardliners in Tehran was muted last week. The open issues as to how quickly the sanctions would be lifted and just how intrusive the UN inspections of Iran nuclear facilities became more contentious when the Ayatollah said last week that sanctions must be lifted on signing of the agreement. The Iranians consider it an insult to their integrity that the West assumes they would not comply with any agreement and that the sanctions would only be lifted slowly after they fully demonstrate compliance with the terms of an agreement. Whether this is a showstopper remains to be seen.



Many opponents of the agreement, mostly in Israel and Washington, still believe that the proper course is to continue and strengthen the sanctions on Tehran until it knuckles under to foreign demands and gives up all efforts to development nuclear energy in any form. This hardliner position is something that Tehran is unlikely to do and likely will not sit well in Beijing and EU capitals causing the sanctions to largely unravel.



The Iranians were in Beijing this week attempting to involve the Chinese more deeply in the post-agreement development of their oil industry. The Chinese have already announced that they will finance the long-stalled pipeline that will move Iranian natural gas to Pakistan. Tehran likely sees the Chinese as more reliable future partners than Western oil companies in the development of their oil industry.



Yemen : Although the country produces only a small amount of oil, the implications of the Sunni/Shiite confrontation which is bringing in foreign powers in support of one side or the other is a bad omen for the region. Heavy fighting is now reported in Aden through which much of the nation’s food supply is imported. The Saudis continue to bomb Houthi forces, which in turn are seeking cover in civilian neighborhoods contributing to the mounting civilian casualty count. So far foreign intervention consists mostly of air and sea bombardment leaving various Yeminis factions to do the ground fighting. Last week Pakistan, a nation of nearly 200 million people and up to its ears in debt to Riyadh, turned down a Saudi request that it send ground forces to fight the Shiites in Yemen.



Although the situation has been cast as a Sunni/Shiite confrontation, tensions between the two religious groups traditionally have been much lower than elsewhere in the Middle East. In reality the civil war is more of a tribal power struggle than a religious conflict as is seen elsewhere. The Houthis, however, did open doors to Tehran when they seized the capital and there are reports of Iranian officers advising Houthi forces in Aden. This situation has further exacerbated relations between Iran and Saudi Arabia. Even the US is becoming involved with expedited shipments of weapons to the Saudis to aid their attack on the Houthis.



There is no clear political path out this complex situation. As Yemen imports some 90 percent of its food and the main seaport is mostly closed, a major humanitarian crisis possibly surpassing those in Syria and Iraq is developing in this nation of 24 million people.



3. China



Reports from across the country speak of slowing economic growth as the government tries to transition the economy from one dependent on debt-fueled apartment construction, massive infrastructure projects, and heavy industry to one based on consumer consumption. The drive to reduce deadly levels of air pollution, which seems to be taken seriously this time, is also slowing economic growth. Most observers believe Beijing will achieve a 7 percent GDP growth rate this year as compared to 14 percent back in 2007. This is likely to reduce the growth in demand for oil imports.



Some are calling the new Beijing-dominated Asian Infrastructure Investment Development Bank (AIIB) as the next step in China’s drive to dominate the world economy. The new bank which will act in a similar fashion to the IMF and World Bank will channel China’s massive foreign currency reserves into the global investment. In opposition to Washington’s wishes, France, Italy, Germany, and the UK will all be founding members of the Bank. Beiing has already pledged the first $50 billion of the bank’s $100 billion of start-up capital.



Beijing announced last week that the third phase of its strategic petroleum reserve program will bring the program’s total capacity to 232 million barrels or about 37 days of current imports. China has been purchasing low-priced crude to fill its new reserve of late, but there is no definitive word as to how far along they are or when imports will fall.



4. Russia/ Ukraine

A new economic phenomenon is causing Moscow still more economic grief. This time it is a strong ruble which is up 14 percent in the last month. As the ceasefire took hold in the Ukraine, extremely high interest rates reaching 17 percent have attracted more foreign investment which has driven the demand for rubles higher. As the price of Russia’s exports expressed in dollars has remained about the same in recent weeks, the value of those exports expressed in rubles has fallen.

Moscow is considering establishing its own credit rating agencies to escape the lowered ratings that the international firms such as Moody’s and Standard & Poor’s have been awarding to Russian businesses as its economy has weakened. In February Moody’s lowered its assessment on seven Russian financial institutions citing the expectation of a “prolonged recessionary environment” in Russia. At least one Russian bank is seeking a rating from a Chinese credit rating firm, hoping to be treated more fairly than what Western agencies have been saying about their prospects lately.