1. Production and Prices
2. The Falling Dollar
3. Venezuela
4. Energy Briefs

1. Production and Prices

It was a volatile week for oil prices. At one point last Friday, oil traded as high as $83.76 a barrel, just shy of the $83.90 reached the previous week. On Thursday oil gained $2.58 a barrel as hedge funds and other speculators entered the market. Oil ended the week only 4 cents higher than the previous Friday’s close.

The oil stocks report on Wednesday showed an unexpected gain of 1.8 million barrels in US crude inventories and gasoline inventories climbed by 600,000 barrels. This exerted downward pressure which was balanced by pressure from the falling dollar which forces oil prices up.

Gasoline prices remain puzzling. Most analysts feel that gasoline should be rising 10 to 15 cents a gallon to keep up with recent jumps in crude prices. Last week, however, oil prices increased by only 0.8 cents.

Many oil analysts are arguing that current $80+ prices are not supported by fundamentals which traditionally have oil dropping at this time of year. Currently there do not seem to be any abnormal geopolitical threats to oil supplies and with much of the hurricane season past, there are still no storms in sight to threaten Gulf oil production.

This leaves the generally tight world supply situation brought about by no increases in production and continued increases in consumption by Asian and oil exporting countries. Although there are fears that a credit crisis induced recession or worse may lie ahead, so far it has not materialized in a form that cuts the demand for oil. There may be new and far more powerful forces affecting the oil market than traditional thinking recognizes.

2. The falling dollar

The US dollar hit a record low against major currencies and gold reached a 27-year high last Friday. The dollar has now fallen 5 percent against an index of six major currencies since mid-August and the market is saying that the prospects for further rate cuts by the Federal Reserve and further growth outside the US are good.

Some believe the US has decided to abandon the dollar in an effort to prop up economic growth and the stock markets through interest cuts. If this is indeed the case, then the relationship between the dollar and oil is undergoing an unprecedented change. Heretofore, dollars earned by oil producers went largely into US dollar assets or investments. The Gulf oil states alone are estimated to have some $3.5 trillion in dollar reserves.

Observers now believe that proceeds from the current oil boom are no longer going into supporting the US currency to the extent they have in the past. There are simply too many better opportunities to invest in emerging markets or the Euro market. Given the uncertain  outlook for equities, many are seeing oil as an investment with little downside risk, which is now receiving funds diverted from other investments.

Taken together, all this suggests that we are witnessing a major change in the forces affecting dollar-denominated oil and that higher oil prices may be ahead. 

3. Venezuela

The state of Venezuelan oil production, of which about 1.4 million b/d is exported to the US, was back in the news last week when OPEC trimmed Venezuela’s production quota from 3.22 to 2.47 million b/d, apparently siding with those who say the founding member’s output figures are suspect. Following a two-month oil worker strike in December 2002, thousands of oil workers and managers were fired. Although the government claims that production has been restored to the pre-strike level of 3.2 million b/d, most outside observers hold current production at 2.4 million b/d. Venezuela is now claiming that the quota cut was a mistake and that OPEC has apologized for the error.

PDVSA recently declared an “operational emergency” saying they only had 112 drilling rigs, far short of the 193 needed to maintain or increase production. In a bizarre twist, last week the company announced that they can increase production by 250,000 b/d without additional drilling rigs by “repenetrating” old wells using a method known as “coiled tubing.” The lack of sufficient investment in new production coupled with the recent nationalization of the heavy oil facilities makes it likely that Venezuelan oil production will continue to slip despite the promises of assistance from China, Iran, and Belo Russia.

4. Energy Briefs

  • The world’s major powers agreed to delay a vote on tougher sanctions on Iran until late November pending reports by the IAEA and a European Union negotiator. The United States and France had sought swifter action, but agreed to wait while the International Atomic Energy Agency tries to clear up doubts about past nuclear activities.
  • Iran will sign a multi-billion dollar gas pipeline deal with Pakistan by the end of October. Apparently India will not be included in the deal.
  • The US State Department announced that Iraq’s national oil law will supersede Hunt Oil’s deal with the Kurdistan Regional Government. Hunt had been advised by the US State Department not to enter the deal before the Iraqi parliament passed a national oil bill.
  • Nigeria’s president said that oil production has been increasing in his country and attacks on oil workers have been decreasing as a result of the dialogue his government initiated with militants. Last week one foreign oil worker was killed and several captured during an attack on an ENI installation. The MEND, the main insurgent group which has announced it will resumes attacks, denied responsibility for this action.
  • Syria: Over 40 years of subsidizing fuel and other vital commodities have benefited the rich more than the poor, encouraged smuggling, and cost the state more than it can afford, say Syrian government officials. Increasing domestic consumption by a rapidly growing population, further swelled by the influx of around 1.5 million refugees from Iraq, is now putting unbearable pressure on state coffers.
  • Mexican output peaked at just over 3.4-million barrels a day in 2004. “I don’t believe we’ll ever see it that high again, no matter how much is invested,” said David Shields, an oil industry consultant in Mexico City.
  • Kuwait has allocated a budget of $14 billion for the construction of a new refinery at Al Zour, the state-run Kuna news agency reported Wednesday.
  • Kazakhstan’s parliament approved amendments to the subsoil law to let the government annul contracts with oil companies, as it pressures Eni SpA for a greater share of profit from the Kashagan field.
  • Record high coal prices and tight supply are pressuring electricity companies around the world. Prices for coal delivery in Europe have risen by over 50 percent this year. Many big coal users may be forced to scale down operations. Record demand from Asia has sucked in millions of tons originally destined for the Atlantic market.
  • OPEC will convene a leaders’ summit in Riyadh on Nov 17-18, the first such summit in seven years. The leaders will likely discuss the cartel’s mid- to long-term strategy to stabilize oil prices. Meetings of oil and finance ministers are also planned on the sidelines of the leaders’ summit.
  • The US Congress remains in a go-slow mode on energy legislation. The House Energy and Commerce Committee released proposed climate-change legislation that would add 50 cents a gallon to gasoline prices and put a $50 per ton tax on carbon dioxide. Chevron is starting an advertising campaign to press policy makers to open more of the oceans and wilderness to energy exploration.
  • India’s fuel consumption grew 3.5 per cent in August and crude oil imports soared 9.7 per cent as refiners imported more crude to export processed products.
  • US consumers are expected to pay record prices for heating oil, electricity and propane to warm their homes this winter, and low-income families will need government help to cover those bills, government energy officials said on Tuesday.
  • Interior Department’s efforts to collect billions of dollars annually from oil and gas companies that drill on federal lands are troubled by mismanagement, ethical lapses and fears of retaliation against whistle-blowers, the department’s chief independent investigator has concluded.
  • Soaring food prices, driven in part by demand for corn-based ethanol, have cut the amount of food aid the US buys to less than half the amount it did in 2000.
  • The US economy faces a 40 to 45 per cent risk of recession induced by the housing market downturn, the chief executive of Freddie Mac warned, as data showed sales of new homes hit a seven-year low in August.
  • BP said it has shut down the Baku-Ceyhan crude oil pipeline, which carries oil from Azerbaijan to the Mediterranean, following a fault at a pumping station in Turkey.

Quote of the Week

“The nuclear discussion is beyond reason. People are either for or agin it, and the facts sway them little.”
       —Anonymous, in response to the ASPO-6 brouhaha over nuclear energy