Peak Oil Review: A Midweek Update – 20th Oct 2016

This week’s EIA stocks report gave a major boost to the oil markets by reporting that US crude stocks had declined by 5.2 million barrels while analysts were expecting an increase of 2.7 million barrels.  The markets ignored the detail that US crude imports were down by 6.7 million barrels from the previous week. It is possible that the hurricane that was thrashing around in the Atlantic couple of weeks back had something to do with the decline in imports. This is the time of year when the demand for crude falls as refineries perform maintenance. Refinery runs were down to 88 percent of capacity last week. Gasoline stocks were up by 2.5 million barrels in contrast to analysts expectations.  
 
New York oil closed at $51.39 and London at $52.48 after hitting a 15-month high.  Oil prices have risen by 15 percent during the three weeks since OPEC announced plans for a production freeze. The report that Chinese oil production was about at about 10 percent lower in September than last year helped spur the increase in prices. Beijing also announced that its GDP expanded by 6.7 percent in the third quarter.  Many analysts believe that the better-than-expected growth was due to a dangerous expansion of credit – mostly for real estate and state-backed infrastructure projects.  House prices in major Chinese cities increased by 25 percent in the last year, and there is much talk that this bubble could explode soon.
 
As the “discussions” over a production cut continue, Iran joined Iraq and Venezuela in protesting OPEC’s recent estimate of the size of their oil production.  Tehran maintains it is pumping 3.89 million b/d which is 300,000 b/d more than OPEC says it produced last month. It is hoping to hit 4 million b/d in the next two weeks. Bloomberg says Iran’s September production was 3.63 million b/d. OPEC members do not report than crude production directly to the OPEC Secretariat, so the organization has to rely on secondary sources such as tanker trackers or wire service surveys for it production estimates.
 
The Iranians are still hoping to raise $10 billion in new gas and oil deals by the end of March. Multinational firms have until November 19^th to submit their qualifications to develop Iranian oil fields. The Iranians say China already has invested enough in Iran and is no longer seeking more investment from Beijing. When the cabinet approved the new type of contracts in March, Tehran was hoping to attract some $50 billion in foreign investment each year. The $10 billion goal is clearly much more modest. Hardliners in Tehran have recently been tossing foreign nationals from countries they do like in jail for long terms. Such actions are bound to cause second thoughts among Western oil companies seeking to do business in Iran.
 
Fitch Ratings warned this week that disruptive battery technologies could set off a death spiral in the credit markets as the demand for gasoline and diesel melts way in the next few decades. Fitch says that as much as $3.4 trillion or one quarter of global corporate debt could be at risk if there is a widespread shift to electric-powered vehicles. Such a development could tip the oil market in contraction much earlier than is anticipated.
 
Venezuela has offered to extend the deadline for participating in its bond swap, which is a scheme to keep it national oil company from defaulting on $5 billion in bonds during the coming year. So far the number of borrows agreeing to participate in the plan is thought to be well below the 50 percent threshold necessary to implement the plan. If this scheme does not work, the likelihood that PDVSA will default in the coming year increases.
 
The lack of food and medicines has caused a dramatic increase in infant mortality in Venezuela and is now up some 50 percent over 2012. Some hospitals now lack running water and soap so that disease is rampant. Venezuela is moving closer to a total collapse all the time endangering its 2 million b/d of oil production.