1. Crude and the Credit Crunch
2. The Oil Market Report
3. Nigeria
4. Energy Briefs

1. Crude and the credit crunch

After setting a new record of $78.77 on August 1st, oil prices declined steadily for 10 days as the credit crisis stemming from subprime mortgage lending engulfed more and more financial institutions in the US and Europe. The general rationale is that the credit crisis could lead to a general economic downturn which would sharply reduce the global demand for oil in coming months. Some of the sharp drop probably was caused by hedge funds and other speculators moving money out of the oil market to deal with more pressing issues.

Even an unexpectedly steep drop in US fuel stockpiles that was revealed in the Wednesday stockpile report was not enough to stem the decline. Some traders seized on a minor drop in weekly gasoline consumption as evidence that US consumption had peaked for the year. The week before last US crude and product imports dropped a bit as did refinery outputs. The result, coupled with higher demand in 2007, was a drop of 4.1 million barrels in commercial crude stocks and 1.7 million barrel decline in gasoline stocks.

The trends in consumption, refining, and imports are beginning to worry the EIA. Although US crude inventories remain above average for this time of year, they have dropped by 11 million barrels in the last two weeks. Should crude imports continue to average about 10.1 million barrels, as they have the last two weeks, and refinery runs stay at their recent levels, crude oil inventories would fall by an average of about 5 million barrels each week putting them back to average levels by the end of August. It may be this analysis that caused Energy Secretary Bodman once again to appeal to OPEC to increase production at the September 11th meeting.

Last Friday US oil prices slipped as low as $70.10, but then rebounded on news that a tropical storm was forming off the coast of Africa. Forecasters report that conditions are favorable for the storm to grow into a major hurricane that could threaten the US in about ten days.

It is still too early to understand all of the ramifications the subprime credit crisis will have for oil prices, production, and indeed the peaking of world oil production. Right now it appears that a $7 a barrel drop in oil prices certainly will not encourage OPEC to increase production, but two weeks from now a major hurricane thrashing around in the Gulf of Mexico could change the situation radically.

The urgent and extensive efforts by European and US central banking authorities to deal with the credit crisis last week give the impression that the situation is indeed serious and that talk of the possibility of major economic setbacks ahead is not out of line. Should the credit crisis grow beyond the ability of central banks to control, then oil production and costs could become subsidiary issues in a very serious economic situation.

2. The Oil Market Report

In its monthly Oil Market Report released last Friday, the IEA paints an unusually pessimistic picture of the world oil situation in coming months. The Agency reports that in July world production increased by 1.1 million b/d to 85.3 million b/d, but this is expected to decline in August and September due in maintenance and seasonal factors.

Although OPEC increased its supply in July by 385,000 b/d, this was largely due to opening of shut-in capacity in Iraq and Nigeria and not from any policy decision to increase production. As OPEC is unlikely to increase supplies prior to the September 11th meeting, it would be the 4th quarter before increased supplies start to flow should OPEC decide to increase production — a dubious proposition.

The IEA is still forecasting world demand as increasing to 86.0 million b/d later in 2007 and 88.2 million b/d in 2008. Some of this increased demand is due to the earthquake damage in the major Japanese nuclear power plant. Chinese oil demand is expected to average 7.8 million barrels a day in 2007, up 8.3% from a year ago.

Like the US EIA, the IEA is worried about shrinking stockpiles. During the 2nd quarter OECD oil stocks rose by 0.73 million b/d, which is below the 5-year average for the quarter. During the 3rd quarter, the Agency is forecasting a counter seasonal drawdown on OECD stockpiles at the time when they should be building for the winter heating season.

3. Nigeria

Although July was a good month for Nigeria with some of the previously shut-in oil back in production, the general political/security situation has taken a turn for the worse.

In the oil city of Port Harcourt gang rampages have been going on for the past week. Some 27 people have been killed and scores injured. Some merchants are fleeing the city. An American oil worker has been kidnapped and a foreign hostage died from lack of medical care. Troops are guarding government installations and residents are calling for a state of emergency. Over the weekend, the army claimed to have driven the gangs out of the city.

The Movement for the Emancipation of the Niger Delta, or MEND, hasn’t launched any assaults on energy facilities for the past three months in hopes that Nigeria’s new government would come up with a plan to help the tribes in the Niger Delta. Last week, however, the MEND announced that it was tired of waiting and has still not had the opportunity to meet with the new government. The group vowed to resume attacks on oil pipelines in the coming weeks.

During the past week, Nigeria’s new President announced a shakeup in the Oil Ministry and said he will take on the responsibilities of the Oil Minister with the help of three assistants.

All of this does not bode well for the future of Nigerian oil production. It is easy to see why the International Energy Agency forecasts little or no increase in Nigerian oil production in the immediate future.

4. Energy Briefs

  • For the past 8 years the “market consensus” guessed low on how high oil prices would go. On average, private oil price forecasters have undershot their target by 31 percent each year, according to a recent analysis by Deutsche Bank. In the past five years, the price of a barrel of oil has tripled. Few experts saw it coming.
  • According to a recent Penn State University study, the U.S. EIA’s annual price forecasts for natural gas were low in 21 of 22 cases analyzed, plus their annual gas production forecasts were low in 19 of 22 cases. Study authors report that systematic biases are built into the forecasts, causing them to err repeatedly in the same direction, and concluding that those biases can have “profound socioeconomic implications” in both the US and around the world.
  • Oil sands fever in northern Alberta shows no sign of slowing down. An eye-popping $38 billion in deals and development plans announced last week show skyrocketing construction costs haven’t dampened interest.
  • China’s oil imports to fuel its booming economy jumped to a new monthly high in July, rising 39 percent over the same month a year ago. China imported 103.8 million barrels of oil in July, or an average of about 3.4 million barrels a day.
  • Iran and Iraq signed an agreement to build pipelines for the transfer of Iraqi crude to Iran and oil products back. Under the deal, Iran would buy 100,000 barrels of Iraqi crude to be refined in the southern port of Bandar Abbas, then sell the products back to Iraq.
  • Investment within major OPEC members is at its highest level in two decades. OPEC says a total of 336 oil rigs were in operation within its member countries last year, an increase of 11.5 percent since 2005. Saudi Arabia, with 120 rigs operational, drilled 382 new wells last year, the highest number since 1980.
  • Mexican demand for refined oil products rebounded sharply in June as the country’s car fleet and airline traffic continued to grow. Total product demand rose 5.9% in June compared with June 2006. Gasoline demand rose 6.8%, and jet fuel and kerosene demand shot up 11%. Robust economic growth and increased access to credit has led to more car sales.
  • During a regional tour by Venezuelan leader Hugo Chavez through Argentina, Bolivia, Uruguay and Ecuador, he signed bilateral energy deals in all four countries he visited.
  • GM expects to have next-generation lithium-ion battery packs ready for its electric car by October this year. Road testing is to begin next spring, and the Volt may be in production by the end of 2010.
  • Natural gas in storage in the U.S. grew last week and remains about 16 percent above the five-year average for this time of year, a government report said Thursday.
  • Uranium prices, which have slumped by a fifth in the past 10 weeks, may fall as low as $95 (U.S.) a pound in the “next few months,” says Russia’s oldest investment bank. Uranium has dropped from a record $138 a pound in June, amid rising supply and the use of stockpiles by utilities.
  • Venezuelan President Hugo Chavez will try to change the law to allow him to remain in power indefinitely. Under the current constitution, Mr. Chavez will have to leave office at the end of his term in 2012. But he says he wants to remain in power for as long as Venezuelans continue to support him.
  • NOAA is still forecasting 13-16 named storms, 7-9 hurricanes, and 3-5 major hurricanes. The forecast team cites the lack of El Nino and sea surface temperatures in the western tropical Atlantic and Caribbean Sea well above average (+0.56 C) as justification for their continued forecast of much above normal hurricane activity this year.
  • Mitsui and Marubeni said they will receive 2 million barrels of crude oil as part of a loan repayment from Venezuela. The two Japanese trading houses announced in February they signed a 15-year loan contract with PdVSA for a combined $3.5 billion and would receive crude oil and oil products as repayment.
  • Despite the increase in oil exports by 13 percent in July, the political situation in Iraq continues to deteriorate as five more ministers withdrew from Iraqi cabinet meetings last week. Concerns are also increasing over the situation in the oil city of Basra as British forces pull out and are replaced by warring Shiite militias and criminal gangs.

Quote of the Week

“Peak Oil could constitute the greatest economic challenge since the dawn of the industrial revolution.”
       — Richard Heinberg, author