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Short term strength

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By Ed Crooks: June 17, 2016

This week has brought evidence of contrasting short-term and long-term trends in the oil market. In the short term, demand and supply are both turning out to be stronger than many had expected. The IEA revised up its forecast for oil demand growth this year in its monthly oil market report, but added that rising production would mean global oversupply could persist into 2017.

There are early indications of an upturn in activity in the US shale industry, still faint so far, but ominous for anyone relying on a sharp rebound in crude. And Iran said its oil production had reached 3.8m barrels per day, confirming the strong growth following the lifting of sanctions that was already visible last month. Iran’s oil exports have tripled since late 2015.

BP was reported to be one of the Western companies interested in investing in Iran’s oilfields to increase its output still further. The company is said to be reopening an office in Tehran this summer.

For the longer term, though, there were indicators of future weakness in both supply and demand. On the supply side, Wood Mackenzie said it had cut $1tn from its forecasts of oil and gas companies’ expected spending in 2015-20 on exploration and development, implying weaker production. Bloomberg suggested the comeback of Iranian oil production could already have reached its limits.

On the demand side, Volkswagen’s CEO said it planned a huge investment in electric cars, a commitment linked to its plans to cut costs following its emissions scandal. Steve LeVine at Quartz had a fascinating piece on the startups that might, perhaps, be on the brink of important breakthroughs in battery technology.

Climate scientists urged President Obama to rule out drilling in the Arctic in the new five-year leasing programme from the Bureau or Ocean Energy Management, which is expected to be published in final form in November.

ExxonMobil is fighting a legal battle against Massachusetts over a demand from the state’s attorney-general for documents relating to the company’s position on climate change, and its support for think-tanks and advocacy groups.

Filings in the bankruptcy case for Peabody Energy, the largest US coal producer, show it funded about two dozen groups that opposed environmental regulations and cast doubt on whether humans were causing global warming.

In the past, shifts from one energy source to another have taken many decades, as shown in this chart from Spencer Dale, BP’s chief economist. David Roberts of Vox suggested the transition to smaller-scale distributed energy resources could be faster.

How slowly does the energy industry move? The Tennessee Valley Authority’s Watts Bar Unit 2 nuclear plant started construction in 1973, and was connected to the grid this month, 43 years later. It is scheduled to deliver power to the grid for the first time later this summer.

The US Strategic Petroleum Reserve should not be used as “the Federal Reserve of oil”, argued Jason Bordoff of Columbia University’s Center on Global Energy Policy.

In a sign of how Saudi Arabia’s economy is changing, Dow Chemical has become the first company to be awarded a trading licence in the kingdom.

The world will within a decade reach “peak fossil fuels” for power generation, according to Bloomberg New Energy Finance.

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