1. Contango
Oil prices fell into the upper $30s early last week and stayed there. As it has for many weeks, the drumbeat of bad economic news and rising stockpiles competed with the OPEC’s efforts to cut crude supplies. For now, the sagging global economy has the markets convinced that demand for oil is dropping faster than OPEC can reduce supplies.
Oil storage is at a 25-year high as stockpiles continue to build. At the major US commercial stockpile at Cushing, Okla. stocks hit an all-time high of 33 million barrels. Estimates of oil in floating storage aboard charted tankers continue to increase. A Norwegian company estimates that 40 to 45 large tankers anchored around the world may currently be storing about 80 million barrels. Although world inventories are well above average, the IEA says that preliminary numbers for December suggest that OECD inventories contracted by 8 million barrels despite the large increase in US stocks.
Currently the oil markets are in a posture known as contango. While oil for February 2009 delivery is trading at $36 a barrel, oil for February 2010 delivery is trading for nearly $60 a barrel and for February 2013 over $70 a barrel. In this situation, the spread in prices far outweighs the monthly storage charges so that making money is a sure thing so long as one can find a place to store the oil. With little storage still available, the need to sell contracts to avoid taking delivery is forcing technical distortions into markets that tend to keep short term oil prices low.
Platts reported last week that OPEC production in December fell by 640,000 b/d while the IEA is saying that production slipped by only 330,000 b/d from November. Neither of these cuts is enough to clear the crude surplus and force an increase in prices. As Platts Global Director for Oil said last week, “the most important number to watch in coming weeks is OPEC’s actual production in January.”
2. OPEC’s progress
Raising prices by cutting back on global oil production is turning out to be more difficult than many imagined. Gone are the days when even a hint of a production cut would send prices surging, for after decades of experience with OPEC’s “cuts” many have grown skeptical of the cartel’s propensity to talk prices higher without suffering the pain of reduced revenue and lost markets.
This time the process has become even more difficult because an unprecedented drop in oil prices has left many OPEC members unable to pay their obligations and a major economic downturn is cutting the demand for oil at some unknown rate. Cartel members are piqued by major non-OPEC exporters such as Russia, Norway, Canada, and Mexico who are making no efforts to cut production yet will benefit when prices rise again.
It has now been nearly 5 months since OPEC began talking of and announcing production cuts. Given the nature of oil exports, which involve long-term contracts, tanker chartering, loading schedules, and long voyages, cuts may take several months to become effective. In a period when demand apparently continues to drop, this balance is difficult to perceive.
From all reports OPEC members appear to be making actual cuts. The Saudis are again leading the way by saying they will cut 300,000 b/d more in February than called for by their quota and Angola says its exports will be under its target by March. OPEC’s Secretary General claimed last week that there has been nearly 100 percent compliance with the production quotas.
In the last week however, there are indications that some OPEC members are starting to panic. Market observers now are talking of oil prices slipping into the $20s and staying there until a global economic recovery increases demand. Venezuela is reported to be nearly $1 billion behind in the payments it owes oil service companies such as Schlumberger and Halliburton. Even more interesting is the report that Caracas is making discreet inquiries to the hated international oil companies about the possibility of investing in its oil projects again.
Suggestions of an oil embargo to support the Palestinian cause in Gaza were quickly dismissed. The last thing the Arab oil exporters want is an embargo-sized drop in production possibly leading to worldwide economic chaos.
Talk of a fourth production cut at the March OPEC meeting is already coming from Iran, Venezuela, and Algeria and there are occasional suggestions that a special meeting in February might be in order if prices continue to fall. OPEC’s Secretary General said last week that we won’t know the effect of the current production cuts until February 15th.
3. Forecasts
As the global recession deepens, the agencies which prognosticate about future demand for oil are starting to back off on optimistic projections for 2009. The IEA which had been predicting an actual increase in the demand for oil in 2009 now says that production will fall by 0.6 percent or 500,000 b/d during the year. This estimate is based on the International Monetary Fund’s projection that the world economy will now grow by only 1.2 percent this year as opposed to its November estimate of 2.1 percent. The IEA now projects that Chinese demand for oil this year will still grow, but at only 1.1 percent for an increase of 320,000 b/d.
The US’s EIA however is more pessimistic seeing worldwide demand drop by 800,000 b/d during 2009 and then rebounding in 2010 when economic recovery is projected to begin. The OPEC secretariat is more optimistic than either the EIA or the IEA. They are estimating that total world demand for oil will only fall by 180,000 b/d this year.
There clearly is a major disconnect between the “official” estimates of only modest declines in demand and the popular perception, backed up by falling oil prices and growth in stockpiles, that the demand for oil is dropping rapidly. OPEC is believed to already have cut production by 2 million b/d from summer highs and appears to be in the process of cutting by at least an additional 2 million b/d. Yet the IEA says that global production was flat in December at 86.2 million b/d with OPEC production cuts offset by gains elsewhere.
4. Briefs (clips from recent Peak Oil News dailies are indicated by date and item #)
- An Israeli company announced that it has discovered what may be a deposit of over 3 trillion cubic feet of natural gas off of Israel’s Mediterranean coast. (1/18, #8)
- Approximately 48% of U.S. E&P chief financial officers believe that the world has reached its peak petroleum production rate or will reach it within the next few years, while another 52% disagree with that statement, according to a new survey by a Chicago-based national professional services firm. (1/14, #18)
- Fredonia College professor Gary Lash rocked the geology world when he and Terry Engelder of Pennsylvania State University reported more than 500 trillion cubic feet of natural gas lies within the Marcellus Black Shale that stretches from New York through West Virginia. New research suggests that amount is a drop in the bucket compared to what may exist. (1/15, #10)
- Scorpion Offshore, a drilling service company, canceled plans to build a $700 million rig that is to be leased for $485,000 a day by Brazil’s state oil company Petrobras after it was unable to secure financing. (1/16, #10)
- The American Petroleum Institute reports that America’s demand for crude oil during 2008 decreased by 6 percent, to 19.4 million barrels a day. API, the oil industry’s trade association, also said U.S. crude oil production last year dropped below 5 million barrels a day for the first time since 1946. That’s largely attributable to lower Alaskan output and disruptions caused by hurricanes Gustav and Ike. (1/16, #12)
- President-elect Barack Obama has vowed to axe greenhouse-gas emissions 80% by 2050, a feat that experts say requires putting a premium on controlling carbon dioxide and pumping hundreds of billions of dollars into energy sectors that aren’t yet competitive with crude oil and coal. (1/16, #13)
- As a result of having seven in-state biodiesel plants that can now each process 2,000 barrels/day, a year from now at least 2 percent of every gallon of on-road diesel fuel sold in Pennsylvania must come from biodiesel. (1/16, #14)
- US Rep. Roscoe Bartlett (R-MD) reintroduced a resolution to Congress that states it “should establish an energy project with the magnitude, creativity, and sense of urgency that was incorporated in the `Man on the Moon’ project to address the inevitable challenges of `Peak Oil’. (1/16, #15) (Editors’ note: the man is indefatigable; we salute his effort.)
- When oil was $20/barrel in 1999, deepwater rigs rated for 4,500+ feet of water were utilized at 85% of capacity. Today, deepwater rig utilization is 92%; and day rates for these rigs have risen from $122,000 a day to $376,000 a day — even as the supply of these rigs has increased. (1/16, #16)
- A detailed study by Mark Jacobsen, Stanford University, has ranked 11 types of non-fossil fuel alternatives to oil, according to their total ecological footprint and their benefit to human health. Jacobson says it would take 30 times more space to grow enough corn to power the US automobile fleet than would be needed to erect enough wind turbines to run it on electricity. Additionally, bioethanol would produce more greenhouse gases than wind power. (1/16, #18)
- Mexico is just getting started in its exploration of their deep water Gulf of Mexico. It expects to see its first barrels from fields in waters deeper than 1,640 feet in 2015. By 2017 the company forecasts 92,000 barrels a day in deepwater output, not nearly enough to offset declines it expects to see at the giant Cantarell oil field. (1/17, #10)
- The number of drilling rigs actively exploring for oil and natural gas in the US dropped by 21 this week to 1,568. Of the rigs running nationwide, roughly 80% were exploring for natural gas and 20% for oil. The rig total peaked at 4,530 in 1981, during the height of the oil boom. The industry posted several record lows in 1999, bottoming out at 488. (1/17, #15)
- Doubling the nation’s production of alternative energy in three years will be “extremely difficult” given the technological and financial barriers facing the industry, outgoing US Energy Secretary Samuel Bodman said Wednesday. (1/15, #9)
- Natural gas prices in New York fell to the lowest level in more than two years on signs of slowing demand from factories and power plants as the recession deepens. (1/15, #13)
- German Chancellor Merkel said there’s the risk that Russia will lose trust due to the current gas dispute with the Ukraine which has also disrupted gas deliveries throughout Europe. (1/15, #17)
- Transport Secretary Geoff Hoon has told MPs the government has approved controversial plans to build a third runway at Heathrow Airport. (1/15, #19) (Editors’ note: we think general lack of awareness of peak oil is most damaging to planning for long term infrastructure.)
- Tumbling oil prices are forcing many of the richest Persian Gulf states to record budget deficits and limit a critical source of investment for poorer Arab countries. Crude is now selling at below the budget break-even point for seven of the Arab world’s 10 top oil producers and Saudi Arabia, the world’s biggest exporter, is forecasting its first deficit in at least seven years. (1/14, #3)
- Chinese automakers looking to make the jump into the U.S. market are facing increasingly strong headwinds, including a global financial crisis that has slowed growth where they already sell cars and sapped the potential for partnerships that would ease their expansion. But BYD Auto Co. and Brilliance Auto are making China’s most prominent appearance yet at this year’s North American International Auto Show. (1/14, #13)
- Post Carbon Institute announced last week the release of “The Real New Deal: Energy Scarcity and the Path to Energy, Economic, and Environmental Recovery,” a proposal to the incoming Obama Administration. (1/14, #14)
- A corroded pipeline ruptured on Christmas Day at ConocoPhillips’ Kuparuk oil field in Alaska, causing one of the biggest spills—94,920 gallons—of oil-laced water at the field in years, the Alaska Department of Environmental Conservation said on Tuesday. (1/14, #15)
- Oil prices are likely to stay below $50 a barrel this year unless the U.S. economy rebounds, said Mohammed al-Rumhy, oil minister of Oman, the Middle East’s largest non-OPEC crude producer. (1/13, #9)
- China, the world’s second-largest energy user, increased crude-oil imports by 9.6 percent, the slowest pace in three years in 2008, as a slowdown in the economy cut demand for the raw material used to produce auto fuels and chemicals. (1/13, #11)
- A Democratic senator reintroduced legislation that would allow the US Justice Department to bring legal action against OPEC and others it believes collude to push up the price of oil. (1/13, #13) (Editors’ note: the world of Washington D.C. is never short of idiotic proposals that purportedly deal with our long-term energy problems.)
- Transocean, the world’s largest offshore oil driller, canceled a record $550,000-a-day rig lease and said a second vessel has been idled after the client ran out of cash. (1/13, #14)
Quote of the Week
- “I do not believe low commodity prices and rig counts will be here for long. Simply put, our industry rises and falls with the price of oil and gas, and two simple truths will provide upward pressure on prices for decades to come. Those truths: 1.) supply is finite, and 2.) the world population continues to grow at a tremendous rate.”
— David Kent, President of Rigzone
