Oil Markets
The effect of economic prospects has generally replaced the US dollar as the leading correlation with oil prices in recent months, as inventories continue to rise in all markets. Easy comps have driven strong YoY consumption rates in Germany, while tougher comps (extra storage plus stimulus) have hindered similar period comparisons in China. In general, developed market demand has fallen short of ‘recovery forecasts,’ while Asian demand has slowed after meeting 1H 2010 estimates. Sloppy demand and reduced perception of tightness, especially for refined products, have trumped the supportive effects of hot weather and deepwater moratoria. Meanwhile, early estimates of nonOPEC production for 2011 growth, at less than 400 kbd, are the lowest in a decade, for this time of year, and almost always start at the high end of forecasts and grind lower over time. On the other hand (believe it or not), Iraqi officials believe they can deliver 600 kbd additional oil by year end 2011. I’ll take the ‘under’ on that outlook. As widely noted, natural gas markets remain a mess — heavily oversupplied in the US, due to rising supply and weak industrial demand (despite very high oil/gas ratios), with LNG in excess outside North America. Little progress on the policy front, to encourage the use of natural gas in transportation or (greater share) as an electricity source.
Geopolitics
Numerous factors to watch over the next few weeks. These include:
a) A number of banks are marketing their ability to settle business transactions in Remnimbi. Is this a potential tipping point for Pac Rim demand/interest in the US dollar and other OECD currencies? If so, perhaps supportive of crude and other commodity prices.
b) ExxonMobil is in advanced negotiations to return to Russia as a joint venture partner on a specific project.
c) According to MEES (Middle East Economic Survey) Iran has apparently offered to build a gas pipeline through Iraq and into Syria, as its own LNG plans disappear under sanction pressure. An Iranian pipeline could provide much needed gas while gaining access to other key markets (Syria, Lebanon, Kuwait, Jordan, all desperately short of gas and electricity), while disturbing US interests in Iraq. Shell, on the verge of agreements to develop gas in Iraq, also a potential victim.
d) As noted, MEES also reports that electricity shortages continue – Lebanon demand is 150% of capacity. Shortages also in Jordan, Kuwait, Libya. Lebanon was importing from Egypt, which was forced to stop exports due to local demand.
e) The UAE now has long term plans to build 11 nuclear fired power plants by 2030, and has awarded the first contracts to a Korean consortium. Fifty six plants in construction, worldwide, with another 150 in the planning process.