1. Production and Prices
2. The OPEC Meeting
3. The Venezuelan Election
4. Energy Briefs 

1. Production and Prices

Volatility was the watchword last week as oil started off on Monday by rising above $99 a barrel on concerns about cold weather and the falling dollar. By week’s end, oil had fallen below $90 a barrel for the biggest weekly loss in two and a half years. The underlying reasons for the decline were fear of a worldwide recession and rumors that OPEC will increase production when it meets in Dubai this week.

On Thursday, oil surged by more than $3 a barrel for a few hours after a pipeline explosion in Minnesota cut US crude imports by 20 percent. The EIA’s stockpile report on Wednesday which showed a smaller-than-expected drop in the US crude inventory and an increase at the key Cushing, OK terminal contributed to the subsequent continuing decline.

Starting November 1st, OPEC was scheduled to increase production by 500,000 b/d; however the UAE had previously announced that it was cutting production by 600,000 b/d for scheduled maintenance. Iraq apparently kept its northern export pipeline to Ceyhan, Turkey working during the month which could have added an additional 250,000 b/d to exports. The upshot is that tanker trackers are all over the map forecasting that OPEC production is up anywhere from 350,000 to 720,000 b/d or possibly dropped a bit.

Saudi Oil Minister al-Naimi announced last week that the kingdom’s production was now up to 9 million b/d from the 8.6 million b/d where it had been earlier this year. Spot charter rates for tankers moving oil to Asia spiked from $33,000 a day to $84,000 a day, indicating that more exporting is taking place. Some of this may be related to increased demand from China which has been beset by diesel shortages in recent weeks.

For the immediate future the course of oil production and prices will depend on the outcome of OPEC’s Dubai meeting this week and on US interest rate cuts. Wall Street seemed convinced that another rate cut, possibly by as much as 50 basis points, is coming shortly.

2. The OPEC Meeting

When asked if the OPEC meeting on December 5th won’t be more critical than past meetings, Saudi Oil Minister al-Naimi said “absolutely not…all OPEC meetings are critical.” In contrast with this view, however, a front-page Wall Street Journal story last Friday says “with prices at near-record highs and the U.S. facing a real economic slowdown, the consequences [of this meeting] are weightier now than they have been in years.”

Based on reports like the one from Dow Jones that a “token” 750,000 b/d increase is being discussed, oil traders seem to expect that the meeting will boost production. Indeed this thinking was a major factor in the $10 per barrel drop in oil prices last week.
In the last few days, however, several oil ministers have denied that any production increase is being considered. As usual Saudi Oil Minister al-Naimi, whose vote is critical to the decision, is not saying but seems to be hinting — “inventories are in a comfortable range” — that an increase will not happen.

Given that a 500,000 b/d increase in OPEC production has only been underway for a month, many believe that it would be extremely difficult for the Saudi’s, the only country that seems to have available spare capacity, to increase production of marketable grades of light oil significantly in the near future.

It is now universal Wall Street wisdom that further US interest rates cuts are coming soon in an effort to forestall a recession. Since such cuts are quickly translated into a falling dollar and higher oil prices, it is difficult to see that even if a token OPEC production increase is announced on Wednesday, it will influence oil prices for more than a few days.

3. The Venezuelan Election

In a surprising development, President Chavez who had won a second term last December with over 60 percent of the vote lost a referendum which would have allowed him to remain in office indefinitely. Chavez still has five years left in his current term and vowed to raise the issue again.

Despite the massive oil revenues, Venezuela’s economy has deteriorated badly in recent years. Inflation is now running at 21 percent and there are widespread shortages of basic foods. Oil production is still down by 1 million b/d since the oil workers strike in 2002 and, given the terms Chavez is offering, the country will have trouble attracting additional investment from foreign oil companies.

Chavez appears to be counting on support from China, Iran, and other friendly “socialist” states to take of the slack left in the wake of the withdrawal of several international oil companies from the Oronoco heavy oil projects.

Yesterday’s referendum may embolden the badly fragmented opposition to start resisting Chavez’s “road to socialism” more vigorously. In the meantime, sales of oil products from Venezuela to the US continue to drop and this trend is likely to continue or accelerate.

4. Energy Briefs

  • All but one member of a consortium led by Italy’s ENI that is developing the giant Kashagan oil field in Kazakhstan have agreed to transfer part of their stakes to the Kazakh state-run oil and gas company.
  • Domestic consumption of oil in countries that are members of OPEC should grow 4.4% to 370,000 b/d in 2008, putting the group behind only China in terms of growth in demand. More than 50% of this growth will be come in Middle East OPEC members, with Saudi demand increasing by 105,000 b/d.
  • Congressional negotiators reached a compromise late last week to boost fuel economy standards by 40 percent, clearing the way for a House vote on an energy bill. Automakers would be required to meet an industry-wide average of 35 miles per gallon for cars and light trucks, including SUVs, by 2020, the first increase by Congress in car fuel efficiency in 32 years.
  • Syria‘s oil production is expected to drop by as much as 20,000 b/d to a daily level of 360,000 barrels a day in 2008, according to the country’s oil minister.
  • Despite recent diplomatic clashes, Columbia will begin shipping 50 million cu ft of natural gas to Venezuela on January 1st.
  • Venezuelan sales of oil byproducts to the US decreased in September, from 192,000 bpd to 179,000 bpd, a 6.7 percent decline. So far this year, Venezuelan shipments of oil byproducts have plunged 22.2 percent, from an average of 296,000 b/d in January-September 2006 to 230,000 bpd in the same period this year.
  • Venezuela’s State oil company PdVSA, announced it now has 156 oil rigs running, roughly 16 more than it had early last month. The 156 oil rigs include the two new Chinese rigs the company received last week. The latest rig count, however, falls short of an original 191-rig goal for the year.
  • Public bus service in far-western Nepal has been shut down due to a fuel shortage.
  • Alaska has received five proposals to build a natural gas pipeline from the North Slope to southern markets. The state launched its competitive-bidding strategy for the $20- $30 billion project after decades of frustration over the failure to develop the North Slope’s natural gas fields.
  • Revised US oil demand for September was 0.8% below year-ago levels, at 20,385 million b/d and the lowest for any month since April 2006. September marked the fourth straight month of year-to-year declines in total oil demand.
  • Iraqi Kurds say they plan to produce one million b/d from their semi-independent enclave in northern Iraq. The region’s Oil Minister said the region had 15 oil deals with foreign firms and would continue signing contracts despite objections from the central government in Baghdad.
  • The Saudis have arrested over 200 members of al-Qaida involved in plots against oil facilities in recent months. The planned attacks were to take place in the eastern region of the country. The arrest of one eight-man cell led by a non-Saudi “pre-empted an imminent attack on an oil installation.”
  • China’s economic planning agency vowed to punish anyone spreading rumors about imminent fuel price hikes, following feverish speculation on the domestic futures markets. Experts have warned that expectations of fresh price hikes will worsen domestic fuel shortages as traders stockpile oil awaiting bigger profits. According to the planning agency, the fuel shortage will ease “very soon” because the government is requiring refiners to increase crude runs.
  • Vietnam will cut diesel subsidies next year as it continues its transition to a market-based economy. Prime Minister Nguyen Tan Dung said the US$625 million Vietnam spends on fuel subsidies each year would be used to support social welfare programs instead.
  • Ecuador‘s state-run oil company, Petroecuador, has lost nearly 19,000 barrels a day of production as a result of protests in Orellana province. Daily output is about 155,609 barrels down from 175,000 before the strike.
  • Honduras will start talks with Caracas next week to start importing all of its fuel oil needs from Venezuela. Fuel oil is used for electric generation. “The annual imports from Venezuela would be between $750 and $800 million.” Honduran oil imports in 2006 were around $1.05 billion.
  • Nigeria‘s current crude oil output stands at 2.2 million to 2.3 million b/d. Some 500,000-600,000 b/d remains shut in as a result of attacks on oil facilities. The country has upped production from offshore oil fields, in particular the Bongo and Agbami fields, to meet its current quota OPEC of 2.163 million barrels a day.
  • Duvernay Petroleum is to use the revolutionary Toe-to-Heel Air Injection (THAI) system developed at the University of Bath at its tar sands site in Alberta, Canada. The THAI system injects air into the deposit down a vertical well and then ignites the hydrocarbons. The heat generated in the reservoir reduces the viscosity of the heavy oil, allowing it to drain into a second, horizontal well that takes it to the surface. THAI is said to be very efficient, recovering about 70 to 80 per cent of the oil, compared to only 10 to 40 per cent using other technologies.
  • A falling dollar and a growing pile of oil revenue spurred Abu Dhabi to break with its low-key investing tradition to purchase a $7.5 billion stake in Citigroup.

Quote of the Week

“There are three sharks stalking the economy, the oil shark, the credit shark and the     housing shark.”
       —Torsten Slock, an economist at Deutsche Bank