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Peak oil notes - October 24

Oil prices continued to fall this week capped by the EIA stocks report on Wednesday which showed US crude inventories increasing by 5.2 million barrels last week and by 24 million barrels in the last five weeks. NY oil prices fell from circa $101 a barrel on Monday to as low as 96.16 after the report before closing at $96.84. London oil which had been holding relatively steady until Wednesday declined by $2.17 a barrel to close at $107.80.

A combination of lower tensions in the Middle East, increasing US production (up to 7.9 million b/d last week), and lower US demand, have been forcing prices lower. Even the inventories at Cushing, Okla., which have been falling all summer have now climbed for two weeks in a row showing the bottleneck there is not yet completely resolved.

Implied US gasoline demand fell by 3.1 percent last week to 8.8 million b/d, some of which was caused by the 16-day US government shutdown, but a generally weaker economy as suggested by a bad jobs report contributed to the decline.

The EIA released the first edition of its new Drilling Productivity Report on Tuesday in which it predicted that US oil production will increase by another 60,000 b/d in November. The Bakken formation is expected to increase production by 25,000 b/d in November to 960,000 b/d and Eagle Ford in Texas is expected to increase production by 24,000 b/d to 1.09 million. The report also predicts that per rig oil production will rise to 482 b/d from 459 b/d in the Bakken and to 404 b/d from 396 b/d in the Eagle Ford formation. The Wall Street Journal seized on this report to say that the US oil and gas boom shows no signs of petering out and that there is little evidence that the US is running out of good drilling locations.

Natural gas futures fell by nearly 25 cents per million to $3.61 in the past week as warmer weather is forecast for the next few weeks and inventories increased.

It has been relatively quiet in the Middle East this week except for the requisite bombing or two in Iraq. Tehran must be optimistic that the sanctions will be lifted soon as it has been sending out feelers to its customers about possible increases in their oil purchases. China and South Korea appear to be expecting that they will soon be relieved of US pressures against buying Iranian oil as they have already stepped up purchases. The financial strictures which have hobbled the Iranian economy are still a problem.

An early smog settled in on Northeastern China this week bringing several large cities with multi-million populations to a halt as airborne particulate matter soared to 20 times safe levels. Beijing is scrambling to implement new air quality regulations for its major cities. Unless this situation can be brought under control the Chinese economy is going to suffer badly in the years ahead not to mention the millions of premature deaths that will result. It is already nearing the point where anybody living in some parts of China who has the choice of not living there will be getting out.

Brazil held an auction for one of its major pre-salt oil fields on Monday, which can best be termed a failure. The only bid came from a consortium of Petrobras, Brazil’s national oil company, France’s Total, Shell, and the Chinese who will bid on any oil they can get their hands on. The companies agreed to give the government the minimum legal “oil profit” from the field, 42 percent, citing the lack of competitive bidders. The US oil companies stayed away from the auction possibly because of the uncertainties involved in extracting large amounts of crude profitably from ultra-deep “pre salt” fields. This suggests that a big surge in Brazilian oil production that many optimists have been predicting may not be that much of a sure thing.

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