1. Production and Prices

Oil prices started the week at $52 a barrel, climbed to a recent high of nearly $55 on better economic news, and then fell to close back at $52 as the equity markets softened and natural gas prices dropped dramatically on Friday. The weekly stocks report showed an unexpectedly large 3.3 million barrel increase in crude stocks. The report also had total US oil consumption increasing by 2.2 percent to 19.2 million b/d and gasoline increasing by 1.6 percent to 9.1 million b/d. Some analysts are now saying that a new floor of $50 a barrel for oil prices has been established.

Demand for oil in 2009 is still an open question. While the “official” estimates from the IEA, EIA, and OPEC are saying that demand in 2009 will drop by 1-1.2 million b/d over 2008, others believe it is dropping faster. The Chief economist for Total said last week that his company expects a drop in global demand of 2 million b/d this year. Japan reported that its crude imports in February were down 14 percent year over year to 4.25 million b/d.

Early last week tanker tracker Oil Movements reported that OPEC exports excluding Angola and Ecuador will fall by 770,000 b/d in the month ending April 4th. If confirmed, this reduction would nearly complete the official OPEC export cut. Platts reported that rates for Very Large Crude Carries out of the Persian Gulf have fallen to a 4-year low. The number of ship loadings in March was reported as 82 as compared with 93 last November.

On Friday, however, a second tanker tracker, Petrologistics, reported that OPEC shipments in March will be about 1 million b/d above the official quota. This number is even higher than the 800,000 b/d above quota that OPEC announced in conjunction with its last meeting. This new report leaves the status of OPEC’s 4.2 million b/d production cut uncertain. If it is true, then OPEC still has a ways to go before reaching its goals, and this throws into doubt the idea that OPEC will be able to force up prices later this year.

With bad economic news from around the world continuing to come in, the outcome of the race between OPEC’s production cut and flat or declining demand for oil is still very much in the air.

2. Natural Gas Prices Continue to Fall

Natural gas prices fell by more than 16 percent last week, settling on Friday at $3.63 per 1000 cubic feet, the lowest close since September 2002. As the US economy contracts, the demand for natural gas has been dropping. Nearly 60 percent of US natural gas consumption is for industrial purposes or the generation of electricity. The EIA estimates that US industrial use of natural gas will be down by 5 percent this year and demand for electricity is at its lowest level since April 2006. US stores of natural gas rose by 3 billion cubic feet the week before last and now total 1.65 trillion, 20 percent above the five year average.

Drilling for more gas is falling rapidly. Last week the Baker-Hughes natural gas rig count fell to 810 rigs, down 50 percent from a high of 1,606 last September.

Despite the rapid drop in drilling, US gas production is expected to be up in the first quarter and then slide later in the year. The production of gas from shale fields has dramatically increased US reserves. Some of the new fields and exploitation techniques have proven to be very productive; many of the new wells produce more gas faster, thereby offsetting the effects of reduced drilling.

The US gas glut is likely to be felt around the world in the form of lower prices for LNG. Japan reported last week that its LNG imports were down by 9.5 percent year over year in February. Last week Barclays Capital reported that its technical analysts expect that prices will continue to fall to around $3 per million BTUs, putting further pressure on drillers to cut back production.

3. The Next Oil Price Spike

There is widespread agreement that a combination of falling investment in oil production and the ongoing OPEC production cut will eventually cause another damaging spike in oil prices. Last week Matthew Simmons told Reuters that “we are three, six, maybe nine months away from a price shock. We are not talking about three to five years away — it will be much sooner.” Other organizations share Simmons’ view that the lack of investment will lead to sharply higher prices, but generally see a price spike coming in the context of an economic rebound and increased demand for oil.

Last week the Deputy Director of the IEA, Richard Jones, told a London conference that more than 2 million b/d of new production, scheduled to come on stream over the next few years, has been delayed. Jones told the conference that “unless sufficient companies have the will and financial ability to invest through the down-cycle, there is a real risk that supply growth may lag the eventual rebound of demand, leading to substantial price increases – possibly as early as this year.”

Even Cambridge Energy Research Associates, the consummate oil production optimists, have turned more pessimistic about the prospects for further growth. Last week, CERA issued a report that cuts back projected growth in world “productive capacity” in the next five from 15 million b/d to 7.6 million b/d. CERA expects that a number of projects in the deepwater, Alberta oil sands and Orinoco heavy oil will be delayed or cancelled due to low oil prices. CERA did hedge its forecast with the caveat that if the economic recovery does not start next year as expected, there could be a “large surplus of production capacity for the next several years.”

It is not difficult to foresee a growth-threatening run-up in oil prices if the demand for oil begins to increase. The key issue is what happens to oil prices and investment in more production if the global economy continues to slip this year and next. We view such slippage as a very reasonable scenario.

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

  • Last week, the Russian government predicted 2009 oil output of 9.68 million b/d, a 1.1 percent annual drop. But a survey of 12 analysts puts the decline at more than twice that rate, with the most pessimistic predicting a slump of 7%. Moscow-based Alfa Bank reckons the annual rate of decline in production at Russian oil fields totals 15 to 17 percent, compared with a rate of 7 percent in 1998. The higher rate implies producers would need to bring 1.5 million b/d in new output on stream just for production to stay flat. (3/26, #17)
  • The CEO of Brazil’s Petrobras said the state-controlled firm will be one of the world’s largest oil companies by 2020, when it intends to produce 5.7 million barrels per day, or more than double its current output of 2.5 million bpd. (3/26, #9)
  • The number of very large crude carriers to be used as floating storage for Forties crude oil is likely to rise to four to five in mid-April from the current two to three. As many as eight were employed for storage in early February. One VLCC typically holds 2 million barrels. (3/28, #6)
  • Following the collapse in oil prices, Kuwait has plunged into a political and economic crisis, and projects worth at least $33 billion have been cancelled since December 2008. (3/26, #5)
  • In Nigeria, the national oil company’s CEO reported that oil revenues dropped from an average of $2.2 billion per month in 2008 to $1 billion in January 2009. He called for urgent measures by the government to protect the economy from collapse. (3/28, #8)
  • President Chavez said his government will create several state companies to replace oil service contractors now doing business in Venezuela. Chavez said oil contractors often “take a chunk of cash” for their work and, he asked, “Who keeps the big earnings?” (3/23, #9)
  • Venezuela’s PdVSA is offering oil service companies joint venture deals as a way of capitalizing billions of dollars in unpaid service bills. PdVSA is facing a cash crunch since prices for Venezuelan oil plummeted last year. As a result PdVSA has stopped paying for services at the well since August. (3/27, #9)
  • PdVSA has begun the gradual payment of outstanding bills to large oil contractors, some of which insist the oil company isn’t doing enough. PdVSA has paid a fraction of its debt—up to 7% to some—to a group of 56 oil-service companies and rig operators struggling to get paid by the cash-strapped government. (3/25, #10)
  • PdVSA has cut its investment this year by almost 40 percent to $12 billion. The remaining funds will go to projects that include the modernization of two refineries and further development of the Orinoco Belt. The government also announced a revised 2009 budget, as it was based on $60 oil. (3/28, #10)
  • Venezuela will increase its value-added tax from 9% to 12% and almost triple its debt to counteract a drop in the price of oil that is squeezing the government’s finances. (3/23, #5)
  • In Mexico, new production from the Chicontepec project will help compensate for declining output elsewhere in the country. In April, Pemex will start connecting new Chicontepec wells to the pipeline network. This should add 5,000 b/d in April, and a similar amount per month in following months. (3/26, #7)
  • Mexico’s February oil sales revenue plunged 56.4% year on year to $1.66 billion.(3/28,#11)
  • EnCana and ConocoPhillips are seeking approval from environmental regulators for a 120,000-barrel-a-day expansion of their joint Christina Lake oil sands project in northern Alberta. The companies aim to boost the project’s output limit to 218,000 barrels a day in three phases, using the Steam-Assisted Gravity Drainage technology. (3/28, #18)
  • In a report titled “The Beginning of the End for Oil?” Peter Hughes, a director of Arthur D. Little’s global energy and utilities practice, cites three converging drivers—climate change, politically undesirable price volatility, and questions about security of supply—that are likely to bring about changes in energy policy around the globe, perhaps resulting in an earlier-than-anticipated decline in demand for oil. (3/28, #20) [Editors’ note: talk is cheap.]
  • The Obama administration’s push to raise taxes on the oil industry is reigniting a battle the industry fought and won last year. Under pressure to narrow projected deficits, President Barack Obama’s 2010 budget proposal calls for raising more than $31 billion over the next decade by eliminating the oil and gas industry’s eligibility for various tax breaks. (3/27, #10)
  • New US fuel-economy requirements for 2011 cars and light trucks (combined) will increase 2 mpg. The standard for cars will average 30.2 mpg, up from 27.5 currently, and 24.1 for light trucks, up from 23.1 mpg for 2009 models. The new mileage standard marks the first increase for cars since the mid-1980s. (3/27, #12)
  • Tri-State Generation & Transmission, a Colorado-based electric power wholesaler, is going ahead with plans to build a 500,000-solar-panel (500 megawatt) project in northeast New Mexico, in part because their other proposal—building a coal-fired power plant in southeastern Colorado—represents too heavy a water use in arid Colorado. (3/27, #18)
  • US oil output was poised to increase by 8 percent this year to 5.4 million barrels per day — the first increase since 1991 after a six-year rally in prices fed exploration and production projects — according to the US Department of Energy. But the drilling spree has collapsed alongside a 65 percent slump in oil prices since last July, putting any increase in domestic output at risk and raising the specter of increased foreign dependence in years to come. (3/26, #12)
  • Drilling rigs have become cheaper and more abundant due to the oil price and demand slump, but the cost savings are little consolation to many drillers, since a credit crunch has made bank funding scarce…Small wells, also known as stripper wells, produce 1.4 million barrels a day in the United States, but their output is expected to decline by over 10 percent a year at current prices. (3/26, #12)
  • World airlines are set to lose $4.7 billion this year as a result of the global recession that has shrunk passenger and cargo demand, industry body IATA said. (3/24, #6)
  • Some US airlines hedged their price for jet fuel when crude oil was at $100 a barrel or higher in 2008, assuming that costs would keep rising. But oil maxed out in July at $145 a barrel, then tumbled 75% over the next five months as a global economic downturn took hold. Airlines were forced to pay peak prices for fuel even as the recession cut the number of passengers they served. (3/26, #14)
  • US oil refiners are required by law next year to start using at least 100 million gallons of cellulosic ethanol. But industry officials acknowledge they will not come close to providing enough of the fuel to meet that target or the targets for subsequent years. (3/26, #20)
  • Oilfield services company Weatherford International expects the US rig count to bottom out at about 900, down from above 2,000 last year, as drillers respond to a collapse in oil and gas prices. (3/25, #15)
  • Chesapeake Energy, the largest independent producer of U.S. natural gas by volume, has already cut its conventional drilling 75% over the last six months and plans to reduce it to 85% in the next 60 days. “You simply cannot make money in a sub-$7-and-$8 environment,” said CEO Aubrey McClendon. (3/25, #16)
  • A “perfect storm” of food shortages, scarce water and high-cost energy will hit the global economy before 2030, said the UK government’s chief scientific adviser, John Beddington, last week. (3/25, #20) [Editor’s note: “before 2030” could be uncomfortably soon.]
  • U.S. Navy researchers claimed to have experimentally confirmed cold fusion in a presentation at the American Chemical Society’s annual meeting. (3/25, #21,#22)
  • China called for the creation of a new currency to eventually replace the dollar as the world’s standard, proposing a sweeping overhaul of global finance that reflects developing nations’ growing unhappiness with the US role in the world economy. (3/24, #3)
  • China’s inventories of gasoline, diesel and kerosene rose by about 36 percent at the end of last month from a year earlier, the Beijing Times reported. (3/24, #15)
  • The world economic crisis is likely to cause only a “blip” in the “inexorable” growth in energy demand, said Grant King, chief executive officer of Origin Energy Ltd, Australia’s second-biggest power and gas retailer. (3/24, #5) [Editors’ note: we respectfully disagree.]
  • Tata Motors has started work on plans to launch the Nano, the world’s cheapest car, in the US by 2011-2012 . The Nano was launched in India on Monday with a starting price of U.S. $1,980 before transport charges and tax. Tata plans to sell a version of the Nano in Europe in 2011. (3/24, #18)
  • Suncor Energy of Canada is to buy rival Petro-Canada for C$19.6bn ($15.9bn), in a deal that will create North America’s fifth biggest oil and gas producer and accelerate consolidation in the Alberta oil sands. The largest deal in the oil and gas industry since 2006 comes amid troubled times for operators in the expensive oil sands. (3/24, #20)
  • The U.S. Air Force, with a staggering $US7.7 billion ($10.93 billion) spent last year on aircraft fuel alone, is the military’s biggest energy consumer. (3/29, #10)
  • Jeff Rubin, who quit as chief economist of Canadian Imperial Bank of Commerce Friday to promote his book ‘Why Your World Is About to Get a Whole Lot Smaller,’ said the coming oil scarcity will change the world more profoundly than any other crisis. (3/29, #18)

Quote of the Week

  • “The state of the airline industry today is grim. Demand has deteriorated much more rapidly with the economic slowdown than could have been anticipated even a few months ago. The relief of lower fuel prices is overshadowed by falling demand and plummeting revenues. The industry is in intensive care.”
    — Giovanni Bisignani, Director-General, International Air Transport Association