1. Oil amidst the financial crisis

The multi-trillion dollar coordinated government bailout of the world’s banking system boosted equity and oil prices for less than two days before a three-day plunge sent oil to $68 a barrel for the first time in 16 months. The $15 drop was enough to spur OPEC to move up its emergency meeting from after the US elections in mid-November to this coming Friday. The drop was precipitated by a drop in equity markets and an unexpected jump in US stockpiles. A rebound in the stock markets on Thursday combined with the prospect that OPEC will soon be cutting production resulted in oil prices climbing on Friday to close out the week at $71.85 a barrel.

The weekly US stocks report showed US gasoline and distillate refining coming back from the hurricanes and, combined with very large gasoline imports, resulted in US gasoline stocks increasing by 7 million barrels. Total US oil consumption over the last four weeks was down by nearly 9 percent from last year although some of this drop was due to the disruptions caused by the hurricanes. US gasoline consumption during the last four weeks was only down by 5.2 percent. As average US gasoline prices have now fallen by $1.12 a gallon since July, it will be interesting to see if gasoline consumption increases again during the next few weeks.

Preliminary reports show OPEC exports dropping anywhere from 350,000 to 600,000 b/d during September. Platts reports increasing signs that crude and products are becoming more difficult to sell on the world market, suggesting that an oversupply is developing.

The nearly 50 percent drop in oil prices during the last three months has been for the most part attributed to the belief that the recession will eventually lead to major reduction in demand for oil products. Some have blamed the decline on speculators being forced out of the markets, however, last week new reports suggest that additional factors may be involved. One report concludes that investors pulled $210 billion out of US hedge funds during the third quarter forcing the funds to dump assets, including oil, thereby forcing down prices.

Another new factor is the credit crisis which has reduced the availability of credit to oil traders and shippers all along the supply chain from the oil producers’ ports to the consumers. This has resulted in a drop in demand for oil by traders who can no longer get financing and has left the market largely in the hands of the major oil companies and very large retailers, such as WalMart, who have the size and liquidity to force prices lower. Lines of credit are being reduced to smaller traders and letters of credit that guarantee oil shipments are becoming difficult to obtain.

While in the short term the lack of freely available credit may be forcing prices down, it will not be long before the situation forces production cutbacks, shortages, and eventually higher prices.

2. The OPEC production cut

All eyes will be focused on the OPEC meeting that takes place in Vienna this Friday. With prices falling another $10 last week, some form of cut seems inevitable. At an average of $68 a barrel for OPEC crude prices are now below the level required to permit Venezuela and Nigeria to continue spending at current rates and are getting within $10-15 of what the Saudis, Iran and the UAE need. Caracas of course wants the Saudis and the smaller Gulf States to absorb whatever cuts are necessary to force oil back to $90-100 leaving the more populous states – Iran, Nigeria, and Venezuela – with the income to support current programs.

The financial world, however, has changed markedly. With a global recession looming and an all-to-real credit crisis threatening economic activity, it just might not be possible for the OPEC states to increase their income at the expense of others as it did two years ago during the last production cut. Many believe that forcing oil to higher levels will ultimately lead to inflation and worsen the situation.

To their credit, most OPEC members are currently talking about “stabilizing” oil prices in the $70 to $90 range. The key question is whether or not they have to power to do this in the midst of a global recession. Some analysts are already talking about oil falling to $50 or even $35 a barrel if the economic situation worsens. Some foresee the cost of exploring for and producing new oil dropping if the recession deepens; others are not so sure.

If it is clear that there is an oversupply, the Saudis will have no trouble cutting production especially as oil is currently selling for less that half of what it was last July. How much of a cut will be made on Friday, and more particularly who agrees to accept and actually sell less oil, will be interesting to watch. Currently a cut of 1-3 million b/d are being mentioned by various oil ministers, but as usual the Saudis are mum. If credit does not free up shortly, further cuts may be necessary to reverse what is sure to be further price drops. It certainly seems that world oil production is going move lower, perhaps much lower, in the near future.

3. The Russian meltdown

High energy prices have enabled Russia’s economy to expand at 7 percent a year during the past decade. In the last eight years the country has collected $1.3 trillion in oil and gas revenues. The good times, however, are coming to a halt. The invasion of Georgia and takeover of foreign energy projects has forced $30 billion in foreign investments to leave the country. Russian oil production is starting to drop and the rapid fall in oil prices is devastating earnings. As the global economy slows, prices for nickel, aluminum, and other minerals have been dropping, adding to the problem. Russia’s stock market has been falling so rapidly – down 73 percent since May — that authorities have been forced to temporarily suspend trading in recent days. Like their western counterparts, Moscow has spent $160 billion in financial bailouts.

So far the average Russian has not been troubled. Investing in stocks is largely confined to the capitalist elite and the state-controlled media has been suppressing news of domestic economic problems while publicizing those of the US and Europe. In the last few years, the Kremlin has been squirreling away the bulk of its oil revenues and has amassed a $531 billion reserve to protect the economy and banking system and to avoid abrupt cuts in government spending.

The economic growth rate for 2009 is currently forecast to drop to 3 or 4 percent; however. Should oil prices fall much lower, Moscow could easily burn through its currency reserves supporting the state budget and the growth rate could fall to zero.

Over the longer term however, Russia is still one of the largest oil exporters and is well on its way to developing a near monopoly over natural gas supplies to Western Europe. Moscow’s heavy reliance on oil, gas and mineral exports could, in recessionary times, leave it in much the same shape as its European neighbors.

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

  • Cuba announced there may be more than 20 billion barrels of recoverable oil in offshore fields in Cuba’s share of the Gulf of Mexico, more than twice the previous estimate. Drilling is expected to start next year by Cuba’s state oil company Cubapetroleo. The US Geological Survey estimates that Cuba has a significantly lower amount—up to 4.6 billion barrels of reserves in its territorial waters. (10/18, #8)
  • Mexico’s energy reform effort just got a shot in the arm. The financial crisis and tanking oil prices puts a premium on private capital to help shore up the struggling industry, dampening a nationalist backlash. Mexico will be importing crude within seven years unless it finds and develops new pools of oil fast. This would undermine state revenue and erase a main source of U.S. crude imports. President Felipe Calderon openly describes the reform as what is politically possible, but falling short of what the industry really needs. (10/18, #10)
  • Petroleos Mexicanos has put out tenders for a deepwater drillship and four jack-up rigs to help boost oil and natural-gas production in the Gulf of Mexico. Pemex is seeking a drillship able to work in waters 4,200 feet deep, one jack-up rig able to drill in 350 feet of water and three other jack-ups able to drill in 250 feet of water. Pemex is asking for the drillship to be on site on June 26, 2009, for three years of work. (10/17, #11)
  • The US will likely trim its drilling for natural gas by at least 20% next year, assuming an average natural gas price of $8/MMBtu, analysts with The Gerdes Group said Monday. (10/15, #13)
  • NYMEX natural gas prices in the 2007-2008 season from Nov. 1 to March 31 advanced 21 percent and averaged $8.327 per million Btu, according to data compiled by Bloomberg. Prices a year earlier averaged $7.346 per million Btu. (10/18, #2)
  • In Pakistan, unscheduled power outages are causing extensive damage to the country’s economy, with businessmen and industry suffering. (10/18, #5) The nation’s current power deficit is close to 5,000 megawatts. China will help Pakistan to build two more nuclear power reactors to help with its energy crisis. The two new units will produce about 680 megawatts. Pakistan’s (10/18, #8)
  • In India, around 5,000 Mw of gas-based electricity generation capacity is lying idle due to the shortage of natural gas in the country. The state electricity boards prefer incurring fixed cost on these idle plants over running them on expensive liquid fuels. (10/13, #15)
  • Nigeria has cut back its spending plans for next year as falling global crude prices erode revenue forecasts in the world’s eighth biggest oil exporter. Savings from its oil revenues have reportedly been depleted and what is left may not tide the country over any financial turn down should oil price fall below the budget benchmark of $62 per barrel. (10/14, #6, #9)
  • Venezuela’s state oil company PDVSA produced 3.2 million barrels per day in 1998, the year before Hugo Chavez won the presidency. After a decade of rising corruption and inefficiency, daily output has now fallen to 2.4 million barrels, according to OPEC figures. (10/13, #11) PDVSA has added 10,981 workers to its payroll this year, in what the company describes as its turn toward socialism. (10/15, #10)
  • US Democratic leaders say they plan to push a climate-change bill next year as a central tool for economic recovery, but the financial crisis may have arrested the political momentum necessary to pass such legislation. (10/18, #14)
  • A diesel fuel shortage has left numerous Western Canadian retail outlets without supplies. The shortages could last for several more weeks as refineries undergo maintenance. (10/18, #15)
  • Expect most Canadian oil companies to restrain their 2009 drilling, slow down expensive projects and spend only cash raised from operations. That would help them avoid the need to search for expensive and increasingly scarce debt funding. New oil sands projects may soon be modified or delayed by the drop in oil prices, along with other conventional oil projects (10/18, #16)
  • Alberta will not delay the introduction of its new oil and natural gas royalty structure, even as dramatic decreases in commodity prices and tight credit markets threaten to derail future projects. (10/17, #16)
  • Cash-rich oil majors will gain more bargaining power with national oil companies during these times of tight credit, as the latter are now less willing to deal with credit-starved smaller players. (10/18, #18)
  • The oil price drop comes at a time when new barrels are more expensive to discover and produce than ever before. A few of the most expensive projects, involving oil sands, are already below the break-even point and are likely candidates for delays. Natural gas producers in the U.S. have cut back recently due to weaker demand and problems securing credit. Offshore fields usually require oil prices to stay above $40 a barrel, compared with price supports as high as $90 or $100 a barrel for some oil sands projects. (10/17, #18)
  • Pipelines vital to Iraq’s oil exports are in such poor condition they could rupture at any time, choking off the supply of oil from the region and devastating the country’s economy, (10/16, #6)
  • Shell has failed to find viable oil shale reserves in Jilin province in northeastern China after three years of exploration and may be withdrawing from the project. (10/16, #10)
  • Chevron Corp. said it will spend almost $6 billion on Asian projects this year and the global financial crisis won’t derail expansion plans. The company will spend a quarter of the $23 billion allocated for global expansion in Asia this year. (10/16, #11)
  • Russia’s crude output declined 0.6% year-on-year in January-September to 2.7 billion barrels, the country’s top statistics body said on Wednesday. (10/16, #16)
  • To meet federal biofuels goals, an estimated 200-plus large-scale facilities to produce cellulosic ethanol are needed to meet the EPA’s standard — each capable of making about 6,500 barrels/day. A few dozen biofuel projects are on the drawing table across the country, almost all of them cellulosic. Those include 13 plants funded by the Department of Energy, and only four are commercial scale. (10/16, #18)
  • General Motors is preparing to shut two sport-utility vehicle plants two years earlier than previously announced. Sales of truck-based Chevy TrailBlazer, GMC and Saab SUVs have skidded in an economy whipsawed by a credit crunch and expensive gasoline. (10/15, #11)
  • Momentum is growing in Washington for a federal high-voltage power grid to spark growth of renewable energy supplies and decrease the country’s dependence on energy imports. Lobbyists and regulators are urging lawmakers to create a transmission system that they say would allow renewable projects such as wind and solar farms to flourish. (10/15, #14)
  • BP announced significant oil discoveries in the offshore Angola region plus the US Gulf of Mexico area. (10/15, #8, #16)
  • Even with most forecasts showing growing energy needs in the world, leasing of US federal controlled land in Colorado, Utah, and Wyoming for commercial oil shale development may still be many years away. At an oil shale symposium at the Colorado School of Mines, Shell’s Terry O’Connor said that finalizing leasing regulations could take 5-10 years with leasing starting toward the end of the next decade, (10/15, #19)
  • In Pakistan, a diesel and petrol shortage may cause a crisis if oil marketing companies struggle to overcome the liquidity crisis that could slash imports by 50% or more. (10/14, #7)
  • China, the world’s second-largest energy user, increased crude oil imports by 10 percent in September to meet rising demand from refineries. (10/14, #10)
  • The US Department of Energy said it will deliver 200,000 barrels of crude oil from the Strategic Petroleum Reserve to combat supply disruptions as a result of hurricanes Gustav and Ike. About 5.4 million barrels of emergency exchange oil from the SPR has now been released or delivered due to the two hurricanes. (10/14, #13)

Quote of the Week

  • “The credit crunch is putting on a brake at every level of supply. Levels of credit are evaporating, so producers and refiners are having a hard time selling -they want to make sure their customers are good for the money.”
    — Antoine Halff, deputy head of research at Fimat USA