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Peak Oil Review -- February 4th, 2008

1. Production and Prices
2. The Next OPEC Meeting
3. Troubles in China Continue
4. Energy Briefs

1. Production and Prices

The International Energy Agency is reporting that worldwide total liquids production increased in December by 450,000 b/d to a new high of 87 million b/d. The US’s EIA estimates that October crude and concentrate production reached 74.1 million b/d which is still below the May 2005 production of 74.3 million b/d. The tanker-tracker firm, Petrologistics, reports that January OPEC production was 100,000 b/d higher than in December.

Once again, oil prices moved with prospects for a recession. Early in the week prices rose as traders hoped that the Federal Reserve would be able to halt or mitigate a recession through interest rate cuts. On Thursday and Friday, however, oil dropped 4 percent to settle at $88.96 as bad economic news and a jump in US crude and gasoline stockpiles overshadowed an OPEC decision to keep production at current levels.

The US stockpiles report on Wednesday showed that US refineries continued to decrease production to 85% of capacity for winter maintenance. This allowed crude stockpiles to increase, but resulted in lower production of gasoline and distillates. Gasoline imports were unusually high in January, but are likely to decline in February and March as European refineries close for maintenance.

Distillate production fell to 3.9 million b/d last week and imports were 277,000 b/d. This resulted in another decline in distillate stocks which usually fall at this time of year because of wintertime demand for heating oil.

2. The Next OPEC Meeting

Even before the February 1st OPEC meeting had taken place, attention had already shifted to the meeting scheduled for March 5th. Torn between strident calls from the OEDC for a production increase to lower prices and possibly forestall a recession and fears of what a recession would do to the demand for oil, the OPEC ministers simply did nothing. OPEC’s ability to increase production significantly and on a sustainable basis was obviously part of OPEC’s calculus, but such considerations are rarely mentioned in public.

OPEC seems more concerned about the possibility of a recession than Wall Street which recently has been ignoring a steady stream of bad economic news and rallying on the prospects of the Federal Reserve’s efforts to mitigate the situation. Oil prices now are down by more than ten percent from the highs of a few weeks ago. Some experts warn that the US economic problems may lead to more than a mild recession, suggesting that the current slowdown could evolve into worldwide economic problems lasting for many years.

Whether the situation will be clearer a month from now is impossible to say. The demand for oil from China, India, and from within the oil-producing states continues to climb rapidly. These countries should continue to grow for awhile no matter what happens in the US and the world economy. Even if the US is headed for serious economic problems, it may be many months before the demand for oil slows significantly in the major importing countries.

On the other side of the ledger, we are entering the period between the winter heating and the summer driving season when demand typically slackens and stocks typically build. During the next year or two, a number of new oil production projects are expected to come on-stream increasing the availability of oil. Taken together these forces leave the immediate future for oil prices unusually murky.

3. Troubles in China Continue

For a second week, the worst snow storms in 100 years across southern China remained the world’s top energy story. Over 100 million people have been affected by the electricity, coal, food, and water shortages. The government estimates that total economic damage caused by the storm totals $7.5 billion dollars. Over 1 million homes have collapsed or been damaged by the snow and 2.5 million people have been evacuated. The port at Shanghai is closed, stranding more than 1000 ships, and 8000 train trips have been delayed or cancelled.

It is too early to assess the implications of the bad weather on China’s demand for oil. Energy consumption has ground to a halt in much of the country as the power is off and nothing can move over snow-clogged roads. Coal exports have been halted and the major coal mines have been ordered to continue production over the Chinese New Year’s holiday.

While the direct effects of the heavy snows will only last a few weeks, the government is already raising concerns about serious crop damage in the south where much of the nation’s food is grown. Food is already in short supply and the government is saying that the CPI grew 6.5 percent in January. The government is moving to cap price increases for foods which may lead to more shortages.

China’s efforts to increase production of oil products in response to the shortages which arose last fall resulted in new highs for petroleum refining. Preliminary figures show that China processed 6.87 million b/d of crude in December surpassing the previous high reached in June 2007 by four percent. Despite the weather problems and the looming recession in the US, Beijing is still forecasting that China’s economy will grow by 10.5 percent in 2008 suggesting that the demand for oil imports will continue to grow.

4. Energy Briefs

(clips from recent Peak Oil News dailies are indicated by date and item #)

  • Saudi Arabia increased its output in December by nearly 2% from November to 9.206 million barrels a day, but reduced its exports by 2.2% or 161,000 barrels a day. The crude oil output figure submitted to the Joint Oil Data Initiative database is the highest reported by the Kingdom since August 2006. (1/31,#5)
  • Chevron cut its 2008 production forecast to 2.65 million barrels of oil equivalent a day from the 2.8 million barrels the company had been forecasting. The company still hopes to grow by 3 percent between 2005 and 2010. (2/2, # 3)
  • Pakistan has asked provinces and industrial firms to reduce energy consumption by 30 percent immediately. (2/2, #8)
  • Venezuela is seeking a $1 billion up-front payment for several large shipments of fuel oil in what may be a new sign of cash flow problems. (2/3, #11)
  • A rebel army entered the capital of Chad on Saturday and gun battles erupted around the presidential palace. On Sunday the rebels were driven out of the city and Exxon says oil production of 250,000 b/d has not been affected. (2/3, #9)
  • Iran's daily gasoline imports have fallen about 57 percent since the country introduced fuel rationing last June. Gasoline imports have fallen from 220,000 b/d to 94,000 b/d, allegedly saving the country $4 billion per year in import costs. (2/3, #7)
  • Iran confirmed that a new gas field with an estimated 11 trillion cubic feet in reserves has been discovered in the Persian Gulf off the coast of Iran. (2/3, #4)
  • Iraq has halted oil exports to Austria's OMV and to South Korea to protest oil deals with the self-ruled Kurdish region. (2/3, #4; 1/30,#5)
  • Nigeria’s President has called for the formation of a joint security force for the countries bordering the Gulf of Guinea to cope with the upsurge in violence in the Niger Delta. (2/2, #9)
  • Ecuador’s President Correa told the oil companies operating in that nation that they had three choices: sign agreements with the State for services, pay 99% of surplus income to the government, or end all operations 45 days from now. Later in the week he softened his demands, saying the companies could maintain their current deals during talks. Ecuador exported 9.21 million barrels in November, down 24% from the 12.15 million barrels shipped a year earlier. (1/29, #13; 2/2 #13; 2/2, #14)
  • Venezuela has reached an agreement with Total and StatoilHydro, stemming from the nationalization last year of their projects in the Orinoco. The government would not confirm the size of the settlement which was reported to be $1.1 billion. (2/1, #9)
  • Shortages of petroleum products hit Nepal last week. Most gasoline pumps in the capital were closed and citizens are having difficult finding kerosene and LP gas. Nepal Oil Corporation officials continue to assure the public that it would resume the smooth supply of petroleum products in a few days. (2/2, #17)
  • ExxonMobil announced that fourth-quarter profits rose 14 percent amid the biggest increase in crude prices in the 148-year history of the petroleum industry. Net income climbed to a record $11.7 billion from $10.3 billion a year earlier. Per-share profit was 16 cents higher than analyst estimates. (2/1, #12)
  • South Korea’s National Oil Corp. and Samsung Corp. have signed a deal to buy 16 Gulf of Mexico oil fields from Taylor Energy. The 16 fields currently produce 17,000 b/d of oil, but the amount may rise to 19,000 b/d in 2009. The oil is sold in the US market. (2/1, #13)
  • Pemex Director General Heroles said average daily production at Cantarell would drop by 200,000 barrels over 2008, increasing pressure to step up output at smaller oil fields. The decrease would be a drop of 16 percent from Cantarell's December 2007 output of 1.26 million b/d, its lowest level of the year. Yields at Cantarell declined 16 percent during 2007, slightly more than forecast. (1/31, #10)
  • Japan's gasoline demand fell 1.7 percent in 2007 prompting refiners to export record amounts of fuel. Exports of all refined oil-products rose 27 percent to 176 million barrels. Consumers, manufacturers and office-building owners have adopted energy-saving measures as record crude prices push up costs of running cars, air-conditioners, kerosene stoves, boilers and electricity generators. (1/31, #13)
  • Experts are predicting pump prices in the US, which jumped by almost a dollar a gallon in each of the last two springs, will spike again this year as refiners and gas stations switch from winter- to summer-blended fuels. The increases, starting as early as February in southern California, could push the average national price to a record $3.50 a gallon or more by June. (1/31, #14)
  • The US Department of Energy said it would ask for new proposals from companies seeking federal aid for capturing and storing carbon dioxide released by coal-fired power plants, thereby officially shelving the FutureGen Alliance project that the Bush administration had supported for five years. The decision would set back the timetable for carbon capture and storage technology that is considered essential for meeting targets for greenhouse gas emissions. (1/31, #15)

Quote of the Week

"OPEC remains concerned about a potentially deep recession in the US, which could reduce demand growth for energy and until this becomes clear the group is unlikely to make any significant policy shifts."
      —Oil analyst Andrey Kryuchenkov

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