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The Middle East seemed to be on the brink of war last week and oil prices fell. Was the market wrong?

Brent futures price closed at $90.45 per barrel on Friday, April 12 before Iran’s missile and drone attack on Israel (Figure 1). When markets opened on Monday, April 15, prices rose less than $1 before ending lower and closing at $90.02 on Tuesday. After Israel’s counter-attack on Friday, April 19, Brent rose from $86.96 to almost $91 only to close at $87.29.

Figure 1. Brent futures price fell -$3.16 (-3%) from $90.45 to $87.29 for the week ending April 19. Source: CME & Labyrinth Consulting Services, Inc.

This seems remarkable considering that oil flows through the Persian Gulf could have been disrupted. About 15.5 mmb/d (million barrels per day) of crude oil pass through the Strait of Hormuz (Figure 2). There’s an additional 5 mmb/d of refined products, and 10 bcf of liquefied natural gas.

Figure 2. Crude oil volumes that passed through the Strait of Hormuz in the first half of 2023. Source: Modified from @Nate Hagens with EIA data & Labyrinth Consulting Services, Inc.

There was a time when military outbreaks in the Middle East would have caused a sharp increase in world oil prices. Figure 3 shows a comparison of Brent price in the one hundred days following the 1990 Iraqi invasion of Kuwait and after the 2023 Hamas attacks on Israel.

Figure 3. Comparison of Brent price in the one hundred days following the 1990 Iraqi invasion of Kuwait and after the 2023 Hamas attacks on Israel. Source: Bloomberg and Labyrinth Consulting Services, Inc. — Figure 3. Comparison of Brent price in the one hundred days following the 1990 Iraqi invasion of Kuwait and after the 2023 Hamas attacks on Israel. Source: @johnauthers (Bloomberg) and Labyrinth Consulting Services, Inc.

It’s worth pointing out that there is no major oil production in Israel or in surrounding countries. The involvement of Iran in the recent conflict, however, makes these two events comparable at least in the last few weeks.

There are a slew of mainstream narratives for oil market’s phlegmatic reaction to recent attacks in the Middle East.

…click on the above link to read the rest of the article…

Oil prices aren’t the Fed’s biggest problem right now — American demand is, says an economist

April 24, 2024

Oil prices aren’t the Fed’s biggest problem right now — American demand is, says an economist

Inflation could see a resurgence in 2025, BlackRock strategists warned. Jonathan Kitchen/Getty Images

“I think what’s difficult for the Fed currently is actually the part of CPI that is being driven by demand, rather than the supply issues or the energy issues, which are perhaps easier to deal with,” Samy Chaar, the chief economist of Lombard Odier, told Bloomberg TV. The Swiss private bank managed 193 billion Swiss francs, or $212.8 billion, in assets at the end of December.

A key inflation metric for the Fed, the Personal Consumption Expenditures Price Index, was little changed in March over its 2.8% reading in February. Federal Reserve chair Jerome Powell highlighted the index earlier this week as he signaled that interest rate cuts may come later, rather than sooner.

The US economy has been strong, with job growth and retail sales also rising more than expected for the month of March.

“The problem with the US is the sticky part that comes from services. Services is demand, and that demand needs to come from somewhere — and that’s a robust economy,” Chaar told Bloomberg. A gauge from the Institute for Supply Management showed the US service sector expanded moderately in March.

“Consumers are consuming because they have jobs, because they have rising incomes,” Chaar said.

This means inflation is fueled by demand rather than oil supply, even if a rise in energy prices complicates the Fed’s job, he said.

The Fed is now trying to engineer a soft landing for the hot US economy without causing it to tip into a recession.

“I would say the biggest challenge here for the Fed is to manage the demand of the US economy,” Chaar said. “It comes from domestic America, not from the Middle East.”

Almost Everything is About Oil in the Middle East

April 21, 2024

Almost Everything is About Oil in the Middle East

Perhaps the most extraordinary part of Iran’s April 13 attack on Israel was that it was countered by a coalition that included Jordan, Saudi Arabia and the United Arab Emirates (UAE). It is also noteworthy that this was the first time that the United States engaged militarily in Israel’s defense.

The events of April did not begin with the October 6, 2023 strike on Israel from Gaza but have their origins decades earlier. It is now evident, however, that the catalyst for Hamas’ attack was the impending normalization of diplomatic relations between Saudi Arabia and Israel.

This would have had significant consequences for Israel’s oil supply, an important aspect of the present crisis that is rarely discussed by the press or politicians. Almost everything is about oil in the Middle East.

The Saudis were ready to join the Abraham Accords that in 2020 established ties between the UAE, Bahrain, Sudan, Morocco and Israel on regional security and trade.

As a direct consequence, Israel was officially moved under the U.S. Central Command (CENTCOM) area of responsibility in early 2021, shifting from its decades-long alignment with the U.S. European Command (EUCOM).

The timing of the Gaza incursion into Israel in October was designed to prevent Saudi Arabia from joining the Abraham Accords.

It is hardly a coincidence that Houthi attacks on shipping in the Suez Canal and the Red Sea started in November. Almost 9 million barrels of oil per day (mmb/d) pass through the Canal and the Bab al-Mandab Strait.

It’s worth recalling that the Houthis have been in an armed conflict with Saudi Arabia in Yemen since 2015, and were responsible for attacking the main Saudi refinery complex in 2019. Both Hamas and the Houthis, along with Hezbollah in Lebanon, are funded and largely directed by Iran.

…click on the above link to read the rest of the article…

Crude, Food Prices Jump As Looming Israel-Iran Conflict Spark 1970s Oil Shock Fears

April 5, 2024

Crude, Food Prices Jump As Looming Israel-Iran Conflict Spark 1970s Oil Shock Fears

Larry MacDonald of The Bear Traps Report penned a very informative note last month that outlined, “2023-2024 look a lot like 1973-1974.” He said, “We’re one event away from a 1970s-style stagflation explosion…” History books remind us that the 1973 oil embargo shook the global energy market.

We were reminded of MacDonald’s note because the global benchmark Brent is currently being subjected to a major repricing event of geopolitical risk as Israel makes preparations for a potential retaliation by Tehran after a precision strike in Syria earlier this week killed top Iranian commanders.

“The market now knows that some kind of retaliation from Iran will likely come, but it doesn’t know when and where and what, and that creates a great discomfort and nervousness,” Bjarne Schieldrop, chief commodities analyst at SEB AB, told Bloomberg.

On Thursday, UBS desk trader Alexander Gray outlined several bullish factors into Brent’s surge that has the benchmark around $91/bbl handle:

Rally / buying right into the 14:30 New York energy close – suggests heavy index fund prepositioning ahead of GSCI roll onset tomorrow where energy will be weighted in the index
Geopolitics – reports of potential attacks within Iran and also potential retaliation toward Israel following Monday’s airstrikes.
Bullish consensus and flow – a number of Street strategists have been out today talking about upside risk toward the $95-100 range in crude. Meanwhile, flows here have skewed toward upside buying in the options space
Technicals – Front-month WTI crude oil just completed a ‘golden cross’ technical formation with the 50- and 200-day moving average crossover. The front month is aimed at $88.58 above; $91.08 is key as the 76.4% Fibonacci retracement level in Brent… which is precisely where Brent is trading at this moment..

…click on the above link to read the rest of the article…

Israel Warns Iran Of Massive Regional War If Directly Attacked

April 5, 2024

Israel Warns Iran Of Massive Regional War If Directly Attacked

Update(1831ET): With Israel’s embassies around the world on a heightened state of alert, and extra IDF reservists called up, and home and weekend leave for all combat troops having been abruptly canceled Thursday, the Israeli population is anxiously awaiting a response – with some reports saying residents are already seeking the safety of bomb shelters.

Tehran has vowed that vengeance is coming soon for the Monday Israeli airstrike on its embassy in Damascus. Most pundits believe this will take the form of ballistic missiles raining down on Israeli cities. But Israeli leader Benjamin Netanyahu is reportedly vowing that if the Islamic Republic launches missiles from its soil it will ensure “a strong response” from Israel.

Israeli officials have told Axios late in the day that such an act would “take the current conflict to another level” — which most certainly would involve a direct Israel-Iran war and thus the eruption of a broader regional conflict. Axios adds the following observations:

Iranian proxies in Lebanon, Syria, Iraq and Gaza have attacked Israel but there hasn’t been an attack from Iranian soil.
A direct Iranian strike on Israel would be unprecedented and could lead to a regional war in the Middle East.

Netanyahu informed his security cabinet Thursday that Israel’s forces have already been engaged with Iran “both directly and via its proxies, and therefore Israel is operating against Iran and its proxies, both defensively and offensively.”

A statement issued by the prime minister’s office laid out: “We will know how to defend ourselves and will operate according to the basic principle of whoever is harming or planning to harm us — we will harm him.” The White House has meanwhile issued a statement shortly after Biden and Netanyahu discussed the Gaza crisis, saying “President Biden made clear that the United States strongly supports Israel in the face of those [Iranian] threats.”

…click on the above link to read the rest…

No water, no oil: How the parched western provinces could hamper the oilpatch

April 4, 2024

No water, no oil: How the parched western provinces could hamper the oilpatch

Water shortages could have devastating effect on oil and gas sector, says new report

Two black and red oil derricks are pictured in a field with snow. — Pumpjacks pull oil from the ground near Three Hills, Alta. Limited water supply could have significant effects on the production of oil and gas, warns a new report. (Kyle Bakx/CBC)

Persistent and severe drought conditions across Western Canada could have a devastating effect on the oil and natural gas sector, which has drilling operations in some of the driest areas, according to a new report by Deloitte.

Limited water supply could have significant effects on the production of oil and gas, the report warns, and the timing couldn’t be worse for the industry as many companies are wanting to increase production and drilling with new export pipelines and facilities nearing completion.

The past several years have been parched in parts of Western Canada, but there is extra concern this year because of the below average snowpack in the mountains.

“It’s not going to be as simple to just pipe fresh water in. You may need to move it and truck it to different locations,” said Andrew Botterill, an energy analyst with Deloitte Canada, in an interview with CBC News.

A pipeline to send water to southern Alberta? Ideas float to the surface in times of drought

In B.C., the provincial energy regulator has warned snowpack levels were only 72 per cent of the historical average.

Trucking in water and recycling water will both result in more “expensive and complicated” operations for companies, he said.

Water is shown with a skyline in the background. — The Bow River flows through downtown Calgary. Alberta is poised to start negotiations with major water licence holders to strike sharing agreements in three key provincial river basins, including the Bow. (Jeff McIntosh/The Canadian Press)

…click on the above link to read the rest of the article…

Oil Surges Over $90, Stocks Tumble After Israel Puts Embassies Around World On Maximum Alert

April 4, 2024

Oil Surges Over $90, Stocks Tumble After Israel Puts Embassies Around World On Maximum Alert

At this point Israel’s ties with key Gulf countries like the UAE are near breaking point, after only a few short years ago diplomatic normalization was hailed through Trump’s Abraham accords. But international and Israeli press reports are confirming the UAE has announced it is halting all coordination on humanitarian aid with Israel.

Further, as Israeli media reports: “The United Arab Emirates (UAE) has announced a suspension of diplomatic coordination with Israel in the wake of the death of seven World Central Kitchen humanitarian workers in Gaza.” Simultaneously, Israel is busy putting its embassies across the world on high security alert due to the “heightened Iranian response threat” in wake of Monday’s Israeli attack on the Iranian embassy in Damascus. All of this served to send Brent soaring in the last two hours, with Brent spiking above $90 for the first time since October….

… and sending stocks tumbling to session lows.

With Iran vowing that its retaliation is coming at any moment, Israel’s military is scrambling for readiness, with the latest measure being to pause all home leave for all combat troops.

“The IDF is at war and the issue of the deployment of forces is constantly reviewed as needed,” the Israeli military said.

President Biden is meanwhile is said to be “pissed” with PM Netanyahu over the killing of seven World Central Kitchen aid workers in Gaza, though Israel acknowledged that it was a “grave mistake”.

So far this sounds like more mere empty words of “concern” – a talking point that’s been on repeat from the White House even as its Gaza policy continues slowly fracturing the Democratic base – but Biden is said to have pressed Bibi for “an immediate ceasefire”.

The call readout further said ceasefire is needed to “protect innocent civilians” in Gaza and improve the humanitarian situation. Axios writes that Biden gave his Israeli counterpart an “ultimatum” as the US president “emphasized that the strikes on humanitarian workers and the overall humanitarian situation are unacceptable.”

Bye-bye Carbon

March 18, 2024

Bye-bye Carbon

Ours is a carbon based economy. On the other hand, carbon emissions are wrecking the climate; for proof just take a look at this short tour de force from Paul Beckwith. In related news UK emissions in 2023 fell to lowest level since 1879. But why is that so? Are we on a path to a green Nirvana, or something entirely different is going on? If you suspect that it is the latter, then this one is for you.

For starters, take a look at this chart, from the Carbon Brief article linked above. Wow, the UK is back to 1879 levels of emissions, when steam locomotives were all the hype, and we didn’t have neither airplanes nor cars! I mean, isn’t that shocking?! This is a precipitous, relentless fall, clearly signalling an end to an era.

There is one minor snag though: this has little to nothing to do with climate policies. And while the well researched and fairly objective Carbon Brief article admits so, it fails to name the elephant in the room. Beyond the many blips and dents what you can see on this chart, dear reader, is a textbook example on how peak carbon looks like. The UK has unwillingly provided us with a Petri-dish experiment on how the depletion of a finite energy resource puts an end to an era of economic, military and geo-strategic dominance together with rising living standards.

Missing entirely from the conversation around both emissions and economic growth is the fact that this is what happens when a country is running out of cheap and easy to access carbon, like easy to mine coal, or oil and gas gushing out from a well. Take a glance at the chart above once again…

…click on the above link to read the rest of the article…

EIA Confirms U.S. Producing More Oil Than Any Country in History

March 16, 2024

EIA Confirms U.S. Producing More Oil Than Any Country in History

In mid-December, I wrote here that the U.S. had set a new annual oil production record:

“The U.S. set a new annual oil production record on December 15, based on data from the Energy Information Administration. Although the official monthly numbers from the EIA won’t be released for a couple of months, we can calculate that a new record has been set based on the following analysis.”

I could project that new record based on the weekly production numbers from the EIA, but I noted that official confirmation wouldn’t come until sometime this year. On March 11, 2024, the EIA made it official: United States produces more crude oil than any country, ever.

The EIA analysis notes that not only did the U.S. break the previous record in 2023, but speculated that no other nation is likely to break it any time soon:

“The United States produced more crude oil than any nation at any time, according to our International Energy Statistics, for the past six years in a row. Crude oil production in the United States, including condensate, averaged 12.9 million barrels per day (b/d) in 2023, breaking the previous U.S. and global record of 12.3 million b/d, set in 2019. Average monthly U.S. crude oil production established a monthly record high in December 2023 at more than 13.3 million b/d.

The crude oil production record in the United States in 2023 is unlikely to be broken in any other country in the near term because no other country has reached production capacity of 13.0 million b/d. Saudi Arabia’s state-owned Saudi Aramco recently scrapped plans to increase production capacity to 13.0 million b/d by 2027.”

The EIA analysis noted that following nearly 40 years of annual production declines, in 2009, U.S. crude oil production experienced a resurgence, attributed to the widespread adoption of hydraulic fracturing and horizontal drilling techniques by producers. Since then, production has continued to climb steadily.

…click on the above link to read the rest of the article…

Israel, Gaza, and the Struggle for Oil

December 16, 2023

Israel, Gaza, and the Struggle for Oil

Aerial View of Haifa oil refineries. Photo: Meronim, CC BY-SA 4.0 Deed.

It was the sign that got to me. I was standing with protesters outside the Burlington (VT) City Hall at a rally organized by Jewish Voice for Peace. To my left I spotted a man, grim-faced and silent, holding aloft a piece of cardboard with these words scratched in black:

“Jews against Genocide.”

“So it has finally come to this,” I said to myself.

Why, I wondered, would Israeli Prime Minister Benjamin Netanyahu and the Biden administration risk their standing in the world and ignore calls for a ceasefire? Did they have an unspoken agenda?

As a chronicler of the endless post-9/11 wars in the Middle East, I concluded that the end game was likely connected to oil and natural gas, discovered off the coast of Gaza, Israel and Lebanon in 2000 and 2010 and estimated to be worth $500 billion. The discovery promised to fuel massive development schemes involving the US, Israel, and Saudi Arabia.

Also at stake was the transformation of the eastern Mediterranean into a heavily militarized energy corridor that could supply Europe with its energy needs as the war in Ukraine dragged on.

Here was the tinderbox waiting to explode that I had predicted in 2022. Now it was exploding before our very eyes. And at what cost in human lives?

Eastern Mediterranean, Oil and Gas Reserves

Map of the Eastern Mediterranean region showing the area included in the USGS Levant Basin Province assessment. Photo credit: USGS.

Reflections on the Israeli War on Gaza

The year 1975 was my last in beautiful, cosmopolitan Beirut, Lebanon, before it descended into 15 years of brutal civil war, killing 100,000 people.

…click on the above link to read the rest…

The Great Simplification Ahead

November 27, 2023

The Great Simplification Ahead

“Until debt tear us apart”

There is no denying that a major economic downturn is now in the books, and that lacking an energy miracle, the world economy is about to go through a major shift. After discussing the faulty nature of prevailing economic metrics (GDP) in last week’s essay, and understanding how economic growth has turned into stagnation 18 years ago already, let’s turn our eyes towards the future. What might the world economy look like after the onset of the coming crisis? How would world leaders react? Could gold or bitcoin save the day? Let’s dive in.

There is a yawning gap between real economic productivity and debt in the world economy. Despite the fact that GDP seems to be growing, real economic output (best measured by energy consumption) has been stagnating for almost two decades now. As a result Western nations have lost their dominance in the world economy, and now face a steep decline due to an ever worsening energy balance and their colossal import dependence.

You see, this is not a matter of money or the lack thereof. Governments all around the world had the chance to print all the money they wanted in the past two decades. There were two thing they could not conjure up, however: cheap raw materials and energy. Contrary to common wisdom, the green energy transition is not a miracle waiting to happen, only an expensive and utterly unsustainable addition to the existing fossil fuel energy infrastructure. Shale oil, the much heralded “solution” to peak oil, has also run its course and now is close to reaching its all time high… Only to embark on a steep decline afterwards. None of this is a monetary question, only a matter of geology and economics: resource depletion and the resulting cost increase. Printing money does not solve any of these issues, only creates more inflation.

…click on the above link to read the rest…

The Harsh Truth: We’re Using More Oil Than Ever

November 25, 2023

The Harsh Truth: We’re Using More Oil Than Ever

In this age of climate crisis, the world is consuming more crude than ever. Peak oil demand? Not yet. Maybe one day, perhaps even soon, around 2030. For now, however, the global economy still runs on oil.

It will take a while before governments certify it, but every piece of data points in the very same direction: In the past few weeks, global oil demand has surpassed the monthly peak set in 2019 before the Covid-19 pandemic.Expressed in barrels a day, the fresh record high in global oil consumption totals about 102.5 million, likely hit in the last few weeks in July and above the 102.3 million of August 2019. Picture this: We use enough crude to fill about 6,500 Olympic-size swimming pools every day. More than a third of those swimming pools would be needed to quench the thirst of two countries: the US and China.

It’s not unexpected. The International Energy Agency, which compiles benchmark supply and demand statistics, has anticipated it for months. It was just a question of timing, since oil demand surges during the northern hemisphere summer, when millions of European and American families guzzle gasoline and jet fuel during their holidays. The wholesale cost of refined products, such as gasoline, is surging too.

Granted, the new demand milestone is just one flimsy data point. Global oil consumption statistics are routinely revised, and a final figure probably won’t be set in stone until next year, or even 2025. The margin of error is relatively wide, too, probably at least 1 million barrels a day. But experience indicates that demand is typically revised higher, rather than lower.

…click on the above link to read the rest…

OPEC+ Considering Additional 1 Million Barrel Oil Production Cut Amid Outrage Over Gaza War

November 17, 2023

OPEC+ Considering Additional 1 Million Barrel Oil Production Cut Amid Outrage Over Gaza War

Two days ago, JPMorgan’s head of energy strategy Christyan Malek warned that amid the recent plunge in oil prices, driven as much by shorting CTAs (who today are in full-blown short squeeze panic mode) as the BIden admin, the oil market was underestimating the chances of deeper supply cuts during this month’s Nov 26 OPEC+ meeting.

“The market’s probably assuming very little chance of that happening, I’d say it’s much higher than that – not as a base case but as a scenario” Malek told Bloomberg in an interview, adding that deeper curbs would be “in order to get ahead of potential weakness in the first half of next year.”

“We may need to see” a cut “given where the balances are, particularly given the demand trending.” And while “there’s a view that Saudi is tapped out”, Malek said that he doesn’t believe that: “I think there’s more flex if they wish to cut. We could see them do sizable cuts from here; having said that, I think it’s more likely they’ll want to socialize them among their OPEC peers – a collective cut rather than one on their own.”

And so, from JPM’s strategist to OPEC+’s ears because moments ago the FT reported that what until recently was unthinkable, is suddenly all too possible and largely thanks to the (mostly) Arabic resentment at what Israel is doing in Palestine: according to the FT, not only is Saudi Arabia prepared to prolong oil production cuts well into next year but Opec+ is weighing further reductions in response to falling prices and rising anger over the Israel-Hamas war.

…click on the above link to read the rest…

The Sword of Damocles

October 15, 2023

The Sword of Damocles

An economic worst-case scenario for the Israeli-Palestine war (Free)

On Tuesday, I published a post on X (Twitter), which summarized an economic worst-case scenario for the Israeli-Palestine war. It included 10 points:

The conflict escalates into a regional war with the U.S. becoming directly involved.
OPEC responds with an oil embargo.
Iran closes the strait of Hormuz.
The price of oil reaches $300/barrel.
Europe succumbs into a full-blown energy crisis due to LNG shortage.
Massive spike in energy prices reinvigorates inflation with central banks responding accordingly.
Financial markets and the global banking sector collapse.
Debt crisis engulfs the U.S. forcing the Federal Reserve to enact yet another financial market bailout.
Petrodollar trade collapses.
Hyperinflation emerges.

In this entry, I go through each step.

History rhymes?

In October 1973, Israel fought the Yom Kippur War against a coalition of Arab States led by Egypt and Syria. As a result of this, the Organization of Arab Petroleum Exporting Countries proclaimed an oil embargo against western countries supporting Israel. In six months, the price of oil rose by nearly 300%, globally, and even more in the U.S., which at that time had become dependent on the Middle-Eastern oil.

In the current time, in the worst-case, Israel launches a major counter-offensive against Palestine leading to a declaration of war, to Israel, from Iran and Syria (others may join too). In this situation, the U.S. would be almost surely forced to respond and take part in the defense of Israel. The Ford carrier strike group (which includes world’s largest warship, USS Gerald R. Ford) has been dispatched to eastern Mediterranean and the Biden administration has been reported of considering sending another carrier strike group to eastern Mediterranean. There are also rumors of U.S. military cargo planes making routine trips to Israel.

…click on the above link to read the rest…

Our Oil Predicament Explained: Heavy Oil and the Diesel Fuel it Provides Are Key

August 4, 2023

Our Oil Predicament Explained: Heavy Oil and the Diesel Fuel it Provides Are Key

It has recently become clear to me that heavy oil, which is needed to produce diesel and jet fuel, plays a far more significant role in the world economy than most people understand. We need heavy oil that can be extracted, processed, and transported inexpensively to be able to provide the category of fuels sometimes referred to as Middle Distillates if our modern economy is to continue. A transition to electricity doesn’t work for most heavy equipment that is powered by diesel or jet fuel.

A major concern is that the physics of our self-organizing economy plays an important role in determining what actually happens. Leaders may think that they are in charge, but their power to change the way the overall system works, in the chosen direction, is quite limited. The physics of the system tends to keep oil prices lower than heavy oil producers would prefer. It tends to cause debt bubbles to collapse. It tends to squeeze out “inefficient” uses of oil from the system in ways we wouldn’t expect. In the future, the physics of the system may keep parts of the world economy operating while other inefficient pieces get squeezed out.

In this post, I will try to explain some of the issues with oil limits as they seem to be playing out, particularly as they apply to diesel and jet fuel, the major components of Middle Distillates.

[1] The most serious issue with oil supply is that there seems to be plenty of oil in the ground, but the world economy cannot hold prices up sufficiently high, for long enough, to get this oil out.

…click on the above link to read the rest…

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