Peak Oil Notes – May 14

Market uncertainty continues as US crude stocks decreased for the second straight week, but so did US refinery utilization. New York futures closed Wednesday at $60.50 a barrel and London at $66.81 — both up about a dollar from Friday’s close.  Leaving out Alaska, the EIA estimates that US crude production in the lower 48 grew by 16,000 b/d last week; however, the Administration now is forecasting that US shale oil production will drop by 86,000 b/d between May and June. This really is not much for a country which is producing 9  million b/d.
 
The weekly stocks report was mixed, with refinery utilization showing an unusual drop for this time of year; lower imports, which, of course, fluctuate with tanker arrivals; and stocks at Cushing down by 900,000 barrels last week. The IEA, however, continues to report that the market is over supplied. Goldman Sachs is warning of lower oil prices ahead and many analysts are saying that the upward momentum that pushed Brent crude up by 40 percent since the January lows seems to be coming to an end.
 
Much of the recent oil price increase was based on the rapid drop in the US rig count which led to the conclusion that US oil production would soon be dropping rapidly. Some analysts already are questioning the EIA’s estimates that that US oil production continues to climb.  Falling rig counts and preliminary indications from Texas and North Dakota that production has been dropping faster than Washington has been reporting are sited as evidence.  Actual production data from these states is delayed by six weeks in North Dakota and longer in Texas because of the policy of keeping some production “confidential” to avoid tipping off drillers competitors as how new wells are doing.
 
The OPEC Secretariat created a stir this week with a new report, seen by the Wall Street Journal, saying that oil prices were likely to stay below $100 a barrel for the next 10 years. The Secretariat sees US shale oil producers able to cope with low prices and continuing to produce substantial amounts of oil, thereby keeping prices low. The OPEC Secretariat, clearly feeling pressure from its members that they might have to suffer with low prices for the foreseeable future, has disavowed the Journal’s version of its report.
 
Reuters came up with some interesting insights into the oil markets this week. The wire service notes a sharp drop in investor participation in Exchange Traded (oil market) Funds is recent days suggesting that the oil is in for an extended period of weakness.  A Reuters columnist also suggested that one of the key forces behind the increase in oil prices during the last six weeks as been the unwinding of the large short oil market positions established by hedge funds during the rapid price drop last winter.
 
China came in for a bout of publicity this week for surpassing the US as the largest importer of crude despite its rather weak economy. The jump in imports has generally been attributed to Beijing’s filling of its strategic petroleum reserves at bargain prices.  Some observers are noting that Chinese government, acting as a single buyer of oil, is acquiring an unprecedented ability to manipulate the international oil markets.