1. Oil and the Global Economy

Oil prices rebounded last Friday on better-than-expected Chinese factory data after six days of decline. At the close NY oil futures were up $2.75 a barrel to close at $105.97 and London crude was up $1.45 to close at $108.22. The IEA reported last week that global refining increased by 3.1 million b/d in June as new refining capacity came online and maintenance shutdowns at several big refineries concluded. Although Beijing reported a 9.7 percent increase in factory production during July over last year, there has been growing skepticism of late about the accuracy of China’s economic statistics which are not only reported very quickly, but have not been consistent with other indicators such as electric power consumption. The six day drop in prices – the longest this year – came among concerns that the Federal Reserve will start slowing quantitative easing in September.

US crude production in July increased to 7.5 million b/d, the highest level in 20 years. As US consumption of oil products is still weak, the EIA is forecasting that US domestic crude production will surpass imports for the first time since 1995. Net US oil product exports are expected to hit a record high of 1.54 million b/d in August as compared to 690,000 b/d a year ago. Refiners are expected to process 15.8 million b/d, the highest since August 2004, as more oil is getting to refineries along the Gulf Coast and US refinery maintenance has been completed.

US natural gas prices continued to slip on Friday, closing at $3.23 per million after the EIA reported rising inventories and forecasts of unseasonably cooler weather across much of the US. The cool weather is forecast to continue through the third week in August. Natural gas prices have now fallen to the point where they become attractive as an alternative to coal for those utilities that have the option to switch. The government approved exporting LNG from a third terminal last week. The US has now given approval to export up to 5.6 billion cubic feet of gas per day or about 8 percent of production. Nearly two dozen additional applications to export gas are still pending. Some lawmakers and companies who will benefit from the exports are complaining that the approvals are taking too long while others who fear the loss of cheap domestic natural gas are calling for a slower approval process.

2. The Middle East & North Africa

Iraq: The pace of the bombings seems to be increasing. Some 100 were killed and over 300 injured as 17 car bombs exploded across Baghdad and other cites this past weekend. An additional 50 were killed and 100 wounded in attacks on Tuesday. Oil production in June slipped to below 3 million b/d from an initial target of 3.7 million and various agencies are warning that more problems are ahead. Planned outages connected with rebuilding of export infrastructure are expected to reduce production below 2.5 million in September.

Coordinated bombings across the country made this the bloodiest Ramadan in years with more than 800 killed and a gridlocked government, which cannot even keep captured bombers in prison, unable to cope much less make progress.

The randomness of the violence is forcing the closure of cafes and sports events as people fear congregating anywhere that will attract bombers. The various political factions are not even talking to each other, much less reaching any agreements and the national polity is deteriorating rapidly.

Baghdad is planning to build a new northern export pipeline to Ceyhan, Turkey despite being unable to keep the current one running for more than a few days at a time because of terrorist attacks. There is nothing in sight short of return of US forces, an unlikely proposition, which can turn this situation around. There seems no other outlook than for oil exports continuing to slip.

Egypt: There has been little progress in the political standoff which has pro-Morsi supporters continuously in the streets and the new government threatening violence to clear the demonstrations. So far the government/army has exercised restraint and there have been few casualties.

Violence has been increasing in the Sinai in the five weeks since the Morsi government was overthrown. Insurgent groups are conducting nightly attacks on military and police installation and murdering those they do not like. The violence is starting to draw in Israelis who are concerned about attacks on the Red Sea resort of Eilat. Last week the Israelis conducted air strikes against insurgents allegedly preparing to fire missiles at Israeli territory.

Concerns are growing that the anarchy we are seeing in the Sinai will spread to the rest of Egypt unless there is a political settlement between the Islamists and the secularists.

Syria: The government is trying to consolidate its hold on the Damascus – Aleppo corridor. The rebels have started tearing up Alawite villages along the coast and the government is retaliating with aerial bombardment of Sunni villages. The government continues to lob large missiles in neighborhoods it believes support the insurgency. Moscow denies it has made a deal with the Saudis to back down on its support for the Assad government. There is little real progress in the situation—just increasing numbers of refugees and an ever growing body count. As the Jihadists pour into the country there are growing fears that it will become a center for terrorism in the years to come.

Iran: Newly sworn-in President Rouhani used his first news conference to call for serious negotiations to end the decade-old nuclear dispute. While these remarks appear to be seeking a settlement, it will take months of negotiations and concessions on both sides before we know how this is going to play out.

There is a new report that Tehran could start producing weapons-grade plutonium by next summer thereby complicating the dispute which has focused on enriching uranium with centrifuges.

Libya: Worker unrest at refineries and export terminals continues to restrict oil production and exports. Those who don’t have jobs want them, and those that do work for the oil industry want more pay. As best as can be determined from contradictory reporting is that exports are now about 600,000 b/d or about half of pre-unrest levels. Sporadic violence and assassinations continue across the country with no sign of a stable government in sight.

Yemen: The government said it uncovered an al Qaeda plot last week to seize port facilities and completely cut off exports of oil and LNG. The US and Britain have urged their nationals to leave the country as violence and threats increase.

The IEA in Paris reduced its forecast for the increase in global oil demand in 2014 by 100,000 b/d to 1.1 million b/d. Growth in demand for 2013 remains the same at 900,000 b/d. The cut in next year’s forecast is largely based on IMF economic projections which show China slowing and the US and EU stagnant. Global oil supply is believed to have increased by 575,000 b/d in July over June largely due to increased North American production.

OPEC production slipped by about 165,000 b/d in July due to the troubles in Iraq and Libya and despite an increase in Saudi production of about 100,000 b/d. This was the lowest OPEC production since March.

Global refinery demand increased by 3.1 million b/d in June, the largest monthly increase on record. At 77.2 million b/d, June processing was 2 million b/d higher than last year. Refining is expected to have increased further in July but to slow in August due to increased scheduled maintenance.

4. Quotes of the Week

“Iraqi supply is going backwards this year, when a lot of the market expected it to be delivering the biggest growth outside the US. That’s a big shock.” — Richard Mallinson, chief policy analyst at Energy Aspects consultancy

“There is no longer any credible scientific debate about the basic facts: our world continues to warm, with the last decade the hottest in modern records, and the deep ocean warming faster than the earth’s atmosphere. Sea level is rising. Arctic Sea ice is melting years faster than projected…. We can have both a strong economy and a livable climate. All parties know that we need both. The rest of the discussion is either detail, which we can resolve, or purposeful delay, which we should not tolerate.” — By William D. Ruckelshaus, Lee M. Thomas, William K Reilly and Christine Todd Whitman, past Administrators of the US Environmental Protection Agency

5. The Briefs