1. Oil and the Global Economy



Oil prices dropped once again last week with London’s Brent hitting the lowest in more than two years, closing on Friday at $97.11 a barrel. New York oil futures were more volatile, but closed at $97.27, leaving the WTI-Brent spread at $4.84. As has been the case for the last three months, generally weak demand and ample production has been overwhelming fears of supply disruptions stemming from the Middle East or Russia. Last week all the major report agencies – the EIA, IEA, and OPEC – reported that they had cut forecasts of global consumption for the remainder of the year and on into 2015.



The EIA reported that the US produced 8.59 million b/d the week before last, which was down a bit from the preceding week, but was 845,000 b/d more that during the same week last year. It is this continuing growth in US shale oil production that is keeping the markets well supplied and has cut US oil imports by about 6.8 percent from last year. Imports of Canadian oil into the US are up 27 percent from last year.



Last week’s US stocks report showed that while US refining was still relatively strong, inventories of distillates had increased by 4 million barrels and stocks of gasoline by 2.4 million. Total US fuel consumption was down by 6.8 percent to 18.6 million barrels, the least since June. China’s factory production fell to the lowest in six years in August. Beijing, however, has been taking advantage of the relatively low oil prices to add an unknown quantity of crude to its growing strategic reserves. This makes judging China’s consumption more difficult, but presumably lower factory production translates into less oil consumption.



US natural gas prices were up slightly for the week to close at $3.85 per million. Prices fell on Thursday after a government natural gas storage report showed inventories increasing by more than analysts had expected. Bernstein Research says it has cut its 2015 price forecast to $4 per million from $4.50. Bernstein says that US natural gas production will grow by 3 billion cf/d next year while demand, largely driven by the closure of coal fired power stations, will grow by only 1.2 billion. US natural gas production in the first half of 2014 grew by 4.1 billion cf/d over the first half of last year.



2. The Middle East & North Africa



Iraq : US airstrikes against selected IS targets in Iraq continued last week as Washington stepped up its efforts to build a coalition to defeat the Islamic movement. US pressure on Baghdad to form a workable coalition government continues. The Kurds have agreed to join, provided a lengthy list of demands is agreed to by the majority Shiite government. Iraq’s new prime minister has ordered his forces to stop indiscriminate shelling and bombing of Sunni civilian neighborhoods in areas controlled by the IS. Meaningful Sunni participation in the new government is still an open question.



Washington’s efforts to build a coalition to confront the IS is meeting mixed results; however, continued IS atrocities are drawing in more countries. A few are willing to aid in the bombing of IS targets, or supply special forces personnel as trainers and for limited operations while a few Arab states are willing to provide bases or humanitarian support. Turkey is obviously in the best position to support a war on the IS, but there are some 40 Turkish diplomats in IS hands and the Turks have concerns about the Kurds and their long-standing demands for a significant piece of Turkish territory.



For now oil supplies from southern Iraq seem safe from the fighting and it seems likely that the coalition forming against the IS will enable the Iraqis and Kurds to recover the northern oilfields and get them back into operation. The thorny issues of Kurdish control of the northern oilfields they occupied after the IS drove out Baghdad’s forces, and direct Kurdish sales of oil remain to be settled.



Libya : With very little foreign presence in Tripoli, the news is sporadic and contradictory. The Islamists who took over the capital several weeks ago are supposed to have ransacked the ministries and little work is being accomplished. The Islamists have set up their parliament in Tripoli, while the last elected one is hiding out on a Greek car ferry anchored at Tobruk near the Egyptian border.



The Libyan National Oil Company says oil production now has risen to 810,000 b/d. Libya’s prime minister, who is running around the Gulf trying to raise support for foreign intervention, claims the oil industry remains under government control and expects to increase production to 1 million b/d in October. For several weeks now there have been reports of major oil fields and export terminals reopening and the financial press seems to have seized on the notion that Libya is back in the oil business. The EIA acknowledges that while most oil fields and terminals have reopened, it is doubtful, given the turmoil, exports will regain previous or even significant levels in the near future.



What little reporting there is regarding actual exports as opposed to government announcements suggests that only the occasional tanker is loading and that exports are far from the hundreds of thousands of barrels per day that has made it into the financial press. Whatever foreigners are left in the country are trying to get out and there is little indication that normal financial transactions are continuing, although the central bank is said to be collecting the revenue for whatever oil is being exported. Over the weekend, the head of the central bank was fired by the parliament meeting in Tobruk.



Iran : Iran’s involvement with the world is becoming increasingly complex. Despite Tehran’s deep involvement in the fighting against the IS in Iraq and Syria, the West is refusing to let Iran be part of the anti-IS coalition because of its support for Assad, efforts to turn Iraq into a Shiite state, and intransigence over the nuclear issue. Iran’s President Rouhani says the new coalition will have no chance of success without its involvement. Tehran is providing the Shiite militias and the Iraqi army with arms, training, advisors, and pilots so that in many ways it is more deeply involved in the fighting than the US.



The most interesting news of last week was the rumor that Russia is about to sign a deal with Iran that could play a significant role in enabling Tehran to bypass the nuclear sanctions. Anxious to retaliate for the sanctions imposed on Russia over its actions in Ukraine, Moscow apparently has come up with a scheme in which it would barter Russian made goods for Iranian oil that would then be sold as part of Russia’s normal oil exports. Russia is also preparing to supply oil and gas equipment to Tehran and help it build more nuclear reactors.

Although the new pipeline that is to supply Iranian gas to the Iraqi electric power industry is complete, fighting in the region is delaying the actual shipment of gas.

Another round of the nuclear talks is due to begin on September 18th with the usual hopes that disagreements can be narrowed.



3. Ukraine



The US and EU widened their sanctions on Russia last week and for the first time targeted Moscow’s arctic and shale oil projects which is bound to affect the contracts between Rosneft and Exxon Mobil. The EU, however, did not ban the completion of existing contracts as the US did so EU firms are free to work on Russian projects if the contracts are already in place Other new sanctions, however, will further limit Western financing of Russia’s state-controlled companies. Russia’s largest bank, Sberbank, was targeted for the first time. The new sanctions will prevent Western energy companies from providing technology and services to Russia’s five major energy companies. The Western firms will have two weeks to disentangle themselves from Russian contracts. Moscow is said to be preparing to ban US and EU airlines from its airspace, but some have noted that a counter-ban on Russian aircraft in EU airspace would be a real hardship on Moscow.



The EU made a significant concession to Moscow in that it has agreed to delay implementation of parts of the new political and trade pact with the Ukraine. Moscow’s strong opposition to this pact, which it sees as unacceptable Western encroachment on a former piece of Russia, is seen by many as the reason behind Moscow’s actions with respect to Ukraine. After years of suffering what it considers the loss of status brought about by the collapse of the Soviet Union, Moscow, with its self-respect revived by high oil prices, seemingly cannot tolerate the idea of Ukraine as part of the EU or even NATO.



It was the rejection of the EU trade pact under Russian pressure that brought about the former president’s downfall and the current situation. The recent action by the EU which shows some sensitivity to Moscow’s concerns could eventually lead to some sort of settlement. For now, a shaky ceasefire remains in effect, and some Russian troops have withdrawn from the Ukraine after having halted the government’s offensive against the dissidents. Over the long run the new sanctions could have a major impact on the pace of further Russian oil development, but it will be years before there are noticeable effects.

4. Quote of the Week

“From severance tax proposals of 5-10% to legislation to retroactively impose a $3 million/well ‘fee’ for every well that has been drilled on state forest land, it appears that some elected officials want to scrap the effective policies and regulations that have allowed Pennsylvania to become the second-largest natural gas producer in the US in 5 short years.”

— Louis D. D’Amico, president of Pennsylvania Independent Oil and Gas Association

“With natural gas production at an all-time high, a reasonable 5% severance tax would generate over $1 billion in 2015.”

— Tom Wolf, Pennsylvania’s Democratic gubernatorial Nominee



5. The Briefs