Sunday, 5 January 2014

Predictions 2014

  As a reminder we are not living in normal times despite main stream media attempts to frame reality in such terms. The debt levels in the Western world are approaching a 200-year high, according to a new report by the International Monetary Fund. For six years the world’s central banks have been conducting an extreme monetary policy experiment. This cannot however continue indefinitely for there is no higher authority left to bail us all out, no central bank of Mars upon which to call. The final countdown has begun and the reckoning will come within our lifetimes.

These are the highlights of my annual predictions that I have been producing since 2008 the full document (19 pages) is available on request. 

Oil Production


The ending of sanctions could put something like 400,000 bpd back on the market.


Things are still a mess and are unlikely to get better anytime soon and while there will likely be fluctuations in both directions overall production will average the same as 2013.


Despite the early hype about Iraq’s potential post war production the reality is finally starting to bite as the country is close to agreeing to sharp cuts with major Western oil companies in production targets set out for them at some of its largest oil fields. Link Despite this I’m going for a rise of about 200,000 bpd due to new export facilities coming into operation.


As of 2011 earnings from the oil industry (including taxes and direct payments from PEMEX) accounted for 34 percent of total government revenues. The optimists would have us believe that the opening of the oil sector to private investment will bolster production to new highs. Much like Brazil I think most analysts will be disappointed and I see only marginal gains at most. whilst the steep decline in their super giant field Cantarell has been partially made up for by Ku-Maloob-Zaap (KMZ) the big plays are all tapped out. As production only tells part of the story I prefer to look at the total exports which is also a reflection of a change in domestic consumption.

Total Crude Oil Exports:

2008     1,403

2009     1,222

2010     1,361

2011     1,338

2012     1,256

2013     1,178

I think the trend is pretty clear with 2009 when the world economy and commodity prices crashed being the only anomaly. Expect a further decrease in exports in 2014.


The government has for several years diverted funds that were needed for maintaining the oil industry and have instead used them to prop up the government. I’m projecting a decline of around 300,000 bpd compared to 2013 by year end


Planned production additions amount to 200,000 bpd assuming they come on line in time.


I see some continued growth in shale oil production in 2014, but not any where near the 700,000 that some analysts expect. I’m going for a peak by the end 2015 at a level not significantly higher than 2014.

Oil Prices

As per last year’s predictions oil prices averaged $110 a barrel for Brent, but were higher for WTI than I expected (in fact the highest average price since 2008.) Here I’m taking a view ccontrary to the expectations of most analysts & I expect the average price of both Brent & WTI will rise in 2014 and will be closer to the 2012 all time (average) high. The spread between the two bench mark grades will further tighten as additional pipeline capacity eases the Cushing glut. In other words for all the hype about the US energy renaissance I don’t think even WTI will see any significant downward pressure over the year as a whole.

General predictions


Growth will again be downgraded from optimistic early estimates in the revised figures by year end. The municipal bond market will come under extreme stress as further cities are dragged through bankruptcy and student loan defaults will soar. The Fed taper will pass more or less unnoticed by the stock market, but yields on treasury bonds will creep upwards. The important point here is that the fed will not end QE in 2014 or 2015 or ever unless it is forced to do so by extreme circumstances and it will certainly not end it due to an improving economy.


Asia will be very much the focus of a new wave of crisis economically and politically originating in Thailand. Military tensions will continue in the south china sea with a new arms race building pace.


Australian manufacturing was in contraction for most of 2013 and mining peaked as Chinese demand stalled. The Reserve Bank of Australia has like so many others entered into the global game of currency debasement in an attempt to boost exports. I see a slowdown in exports to China hitting growth although not to the dramatic extent of 2009.


China has returned to strongman politics and will continue its aggressive stance into 2014 and beyond. The true state of the Chinese economy will remain opaque at best which is worrying as so much of the direction of the world economy will depend upon the actions of this single nation. China’s local debt has now risen to 17.9 trillion Yuan ($2.95 trillion) Link and now equals roughly 33 percent of China’s gross domestic product, up from about 10 percent in 2008 and almost nothing in 1997 Link. There will at some point be a slow down although exactly when is anybody’s guess.


The euro area will have another poor year in terms of economic fundamentals with growth being anaemic at best. Stress will begin to show in the bond market with rising yields. The rise of nationalist and extremist parties in Europe will become more prevalent. Look out for France as it will be one of the worst performers outside of Greece. What begun as an economic crisis is beginning to morph into a political one, there were the Pitchfork Protests in Italy and the Red Cap Protests France. In Spain Mariano Rajoy has been embroiled in a corruption scandal while a separatist movement takes hold in Catalonia. Maybe not in 2014, but at some point somewhere in the Euro zone a referendum on euro membership will be held. All it will take is one member to defect and then the cracks will start to appear in earnest.


It seems almost impossible to untangle the Gordian Knot that is Italian politics, but there is an interesting trend that is occurring in common with many other countries in the Euro zone and that is the rise of Euro scepticism. In this case represented by the rise of Beppe Grillo which caught many observers by surprise.


Unemployment is over 27% with youth unemployment over 50%. Much has been made about Greece’s current account surplus which EU accounting rules declare it to be a  €2.78bn surplus, but this is ignoring interest on bailout funds. Greece actually ran a primary deficit of  €2.86bn in cash terms for period Jan-Nov in 2013. The best thing I can say about Greece is that the pace of decline is slowing and this will likely continue into 2014.


Sadly Japan is in a mess and is not likely to improve anytime soon. The Fukushima issue has not been resolved and if anything things appear to be deteriorating with each new data release. Economically Abenomics has been a failure by any objective measure. inflation or should I stay stagflation is increasing slightly, but wages are not catching up. Should core inflation get anywhere near north of 2% Japanese bond yields will have to rise a disaster for a country as deeply in debt as Japan. Relations with China one of Japan’s biggest export markets shows no sign of easing and economically this is yet another nail in their coffin.

South America

Stagflation to various degrees with high food inflation & power cuts with be partially evident.


The economy will continue to be affected by the political crisis which will reach a resolution by the end of the year although much metaphorical and physical blood will be spilt before its all over.


In 2012 80% of the buyers of London property were foreigners and in 2013 £16bn of overseas money flooded into the London commercial property market. As far as London is concerned this bubble still has some legs and could be further buttressed if the crisis in the Eurozone bubbles more visibly to the surface as Euro zone citizens look to safe guard themselves against currency risk. For the rest of the country though things do not look as bright although the capitals overweight contribution to GDP will continue to mask the imbalances. Back in 2008 I warned about potential problems with the national grid and the nation’s electricity supply and its interesting that elements of this are now becoming main stream. A recent example of which  was the energy regulator Ofgem warning of possible power shortages by 2015. Link.

Monday, 16 September 2013

Oil Musings 16-9-13

There is much speculation that the recent run up in oil prices was not entirely down to the Syrian war premium, but also to tightness in the market caused by disruptions to Libyan production. None other than Goldman Sachs echoed this view in a report which stressed that oil risks were still dominated by Libya, not Syria. Link.

The New York Times went further with a detailed article which suggests that unrest has brought Libyan production to a virtual standstill taking almost 1.5 million barrels of high-quality crude oil a day off the world market. Link

In light of this news it comes as an absolute stunner that OPEC plans to cut production by half a million barrels a day at its next meeting in December. This is apparently “in order keep prices from falling below $100 a barrel.” Link.

In terms of average yearly prices oil is near its oil time high. To me this can only mean one thing OPEC expects a near time drop in production that has nothing to do with price maintenance and everything to do with enforced geological constraints.

Friday, 12 July 2013

Oil Musings 12-7-13

When you look at commodity prices on a daily basis over a period of several years your brain becomes attuned to the pattern of price moves at an almost intuitive level and you don't need to read the headlines to see a pattern forming or a trend line that is broken. 

On reading last week’s EIA weekly report the level of draw down made me blink and re-read it twice. Over 9 million barrels down. Still I thought it’s likely a one off aberration and we will see a smaller more normal draw down or even a slight build in the following week's report. 

However on reading this week’s report it was clear that this was something out of the ordinary. U.S. crude stockpiles fell 20.2 million barrels, or 5.1 percent in the last two reports combined, the biggest two-week plunge since at least 1982. 

This really had me scratching my head. Higher refinery utilization (92.4 percent) is a small part of the answer & so is a slight increase in demand. A bigger factor still might be the flooding in Alberta, but even all factors combined cannot account for such a big drop. 

Also of note is the narrowing spread between Brent Crude & WTI (West Texas Intermediate) It was $1.99 on the day of the report. It seems that is not the only unusual activity in the oil markets. 

Bloomberg reports that bookings of the largest oil tankers jumped to the highest for the time of year since at least 2007. In fact it’s the second consecutive month when bookings have been at the highest for the period. 

Traders and oil companies hired 126 very large crude carriers to load in July, The vessels each carry 2 million barrels. So that means we’ve got 252 million barrels arriving in July alone with a similar number being ordered in June. 

Yet there has still been a huge drawdown So much for US energy independence. Somehow it feels like 2008 all over again cue media calls to deal with the “evil speculators”. 

Update 18-7-13:

Another big draw down today although at 6.9 million barrels it's not as dramatic as the last two weeks. Interestingly there was a decrease in demand with gasoline consumption down 570,000 barrels a day, or 6.1 percent.

The refinery operation rate increased to 92.8 percent, up 0.4 percentage point from the prior week, but this says to me that there is a either a decrease in imports or a decrease in US production or both.

Thursday, 20 June 2013

How Much Do They Know? Part 2, The Rats Leave The Sinking Ship

Picture a four bedroom house made from local limestone with geothermal heat pumps, a 25,000-gallon underground cistern which collects rainwater, purifying tanks to filter waste water from sinks, toilets and showers. This "eco-friendly" house uses only 25% of the electricity that traditional heating and cooling systems utilize.

This believe it or not is a description of George W. Bush’s house back in 2001. Was he secretly a believer in climate change? A closet green perhaps? Personally I don’t think so, but it is particularly striking when you compare it to Al Gore’s natural gas heated twenty room mansion that uses more electricity in one month than the average American uses in a whole year. Link.

Hypocrisy from politicians is hardly novel, but it still begs the question why on earth would George W. Bush live in such a house?

If you haven’t already read part 1 do so now or this really won’t make a lot of sense. If you factor in peak oil then the oil man’s eco home becomes a lot more logical.

Not only do Bush’s & Cheney’s quotes show peak oil awareness, but it should be remembered that one of the most vocal supporters of peak oil and author of “Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy” was none other than Matthew Simmons who just so happened to be energy advisor to Bush’s father when he was president.

So if you thought that peak oil was imminent and that there was a possibility of an energy crisis wouldn’t you want to make your home a self sustaining as possible?

If you also thought that this might lead to an economic and social collapse wouldn’t you also want a plan B? Well now we need to delve into a bit of spurious conjecture that is never the less mentioned in news reports of the time.

Back in 2006 rumours began to circulate regarding his purchase of 100,000 acre (40,500 hectare) ranch in northern Paraguay. Link.

During a 10-day visit to the country by his daughter Jenna Bush she was seen by photographers from a Paraguayan newspaper who tracked her down to a restaurant in Paraguay's capital AsunciĆ³n, where she was seen flanked by 10 security guards, and was also reported to have met Paraguay's president, Nicanor Duarte, and the US ambassador to Paraguay, James Cason.

Reports in sections of the Paraguayan media suggested she was sent on a family "mission" to tie up the land purchase in the "chaco".

So you decide on a secret hideaway on a ranch in South America. What would be amongst your top two priorities? One would likely be water & it just so happens that the land has access to the Guarani Aquifer, one of the largest underground water reserves in Paraguay.

Next would be security, well obviously he would have his own personal security detail, but it’s also handy that since May 2005 four hundred American marines began to operate there in exchange for financial aid.

Sunday, 16 June 2013

How Much Do They Know?

Today I read an article in the Guardian newspaper which reawakened my curiosity regarding how much those in authority are really aware of both peak oil and how bad things really are beneath the surface. Whilst not the focus of the article the following paragraphs immediately grabbed my attention. Link.

Late last year, Rob Hopkins went to a conference. Most of the delegates were chief executive officers at local authorities, but it was not a public event. Speaking in confidence, three-quarters of these officials admitted that – despite what they say publicly – they could not foresee a return to growth in the near future.

"One said: 'If we ever get out of this recession, nothing will be as it was in the past,'" Hopkins recalls. "Another said: 'Every generation has had things better than its parents. Not any more.' But the one that stunned me said: 'No civilisation has lasted for ever. There is a very real chance of collapse.'"

As the largest consumer of oil in the world and still a major producer in its own right it would seem logical to assume that the American government would have some awareness of the issue and sure enough the Bush family with its oil ties would seem to be a good place to start.

In May 2001, George W Bush said “What people need to hear loud and clear is that we’re running out of energy in America.” Link.

A couple of years earlier in 1999 at a speech at the London Institute of Petroleum Autumn lunch Vice President Dick Cheney had the following to say “By some estimates there will be an average of two per cent annual growth in global oil demand over the years ahead along with conservatively a three per cent natural decline in production from existing reserves. That means by 2010 we will need on the order of an additional fifty million barrels a day. So where is the oil going to come from?." Link.

Fifty million barrels a day is more than half of the total daily world production. Whilst there is no direct evidence that the present US administration is aware of the issues involved I have heard anecdotal evidence that Steven Chu the former United States Secretary of Energy was fully aware of peak oil.

In 2010 a Joint Operating Environment report from the US Joint Forces Command said the following "By 2012, surplus oil production capacity could entirely disappear, and as early as 2015, the shortfall in output could reach nearly 10 million barrels per day," The report had a foreword by a senior commander, General James N Mattis. Link.

Also in 2010 a think tank linked to the German Military published a study that warned of a potentially drastic oil crisis. The team of authors, led by Lieutenant Colonel Thomas further warned of a decline in importance of the western industrial nations and of the "total collapse of the markets" and of serious political and economic crises. Link.

Two weeks prior to the German military report, a leak from the British Department of Energy and Climate Change (DECC) revealed that they are keeping documents secret. Link.

When I attended the 2012 ASPO meeting in Vienna Jeremy Leggett, the head of the cross party peak oil task force recounted a tale involving the former UK Energy Secretary Chris Huhne. From memory it went something like this:

He had set up a meeting with Chris Huhne and everything seemed fine, but when the press got a hold of the story it was promptly cancelled with Chris Huhne’s office denying that the meeting had ever been scheduled.

My conclusion is that numerous high level figures in various governments are acutely aware of the problem, but it is political suicide to mention this in public. Couple this with the fact any potential solutions will likely not favour the status quo and the official silence becomes inevitable.