1. Crude and the Credit Crunch
2. The Oil Market Report
4. Energy Briefs
After setting a new record of $78.77 on August 1st, oil prices declined steadily for 10 days as the credit crisis stemming from subprime mortgage lending engulfed more and more financial institutions in the US and Europe. The general rationale is that the credit crisis could lead to a general economic downturn which would sharply reduce the global demand for oil in coming months. Some of the sharp drop probably was caused by hedge funds and other speculators moving money out of the oil market to deal with more pressing issues.
Even an unexpectedly steep drop in US fuel stockpiles that was revealed in the Wednesday stockpile report was not enough to stem the decline. Some traders seized on a minor drop in weekly gasoline consumption as evidence that US consumption had peaked for the year. The week before last US crude and product imports dropped a bit as did refinery outputs. The result, coupled with higher demand in 2007, was a drop of 4.1 million barrels in commercial crude stocks and 1.7 million barrel decline in gasoline stocks.
The trends in consumption, refining, and imports are beginning to worry the EIA. Although US crude inventories remain above average for this time of year, they have dropped by 11 million barrels in the last two weeks. Should crude imports continue to average about 10.1 million barrels, as they have the last two weeks, and refinery runs stay at their recent levels, crude oil inventories would fall by an average of about 5 million barrels each week putting them back to average levels by the end of August. It may be this analysis that caused Energy Secretary Bodman once again to appeal to OPEC to increase production at the September 11th meeting.
Last Friday US oil prices slipped as low as $70.10, but then rebounded on news that a tropical storm was forming off the coast of Africa. Forecasters report that conditions are favorable for the storm to grow into a major hurricane that could threaten the US in about ten days.
It is still too early to understand all of the ramifications the subprime credit crisis will have for oil prices, production, and indeed the peaking of world oil production. Right now it appears that a $7 a barrel drop in oil prices certainly will not encourage OPEC to increase production, but two weeks from now a major hurricane thrashing around in the Gulf of Mexico could change the situation radically.
The urgent and extensive efforts by European and US central banking authorities to deal with the credit crisis last week give the impression that the situation is indeed serious and that talk of the possibility of major economic setbacks ahead is not out of line. Should the credit crisis grow beyond the ability of central banks to control, then oil production and costs could become subsidiary issues in a very serious economic situation.
In its monthly Oil Market Report released last Friday, the IEA paints an unusually pessimistic picture of the world oil situation in coming months. The Agency reports that in July world production increased by 1.1 million b/d to 85.3 million b/d, but this is expected to decline in August and September due in maintenance and seasonal factors.
Although OPEC increased its supply in July by 385,000 b/d, this was largely due to opening of shut-in capacity in Iraq and Nigeria and not from any policy decision to increase production. As OPEC is unlikely to increase supplies prior to the September 11th meeting, it would be the 4th quarter before increased supplies start to flow should OPEC decide to increase production -- a dubious proposition.
The IEA is still forecasting world demand as increasing to 86.0 million b/d later in 2007 and 88.2 million b/d in 2008. Some of this increased demand is due to the earthquake damage in the major Japanese nuclear power plant. Chinese oil demand is expected to average 7.8 million barrels a day in 2007, up 8.3% from a year ago.
Like the US EIA, the IEA is worried about shrinking stockpiles. During the 2nd quarter OECD oil stocks rose by 0.73 million b/d, which is below the 5-year average for the quarter. During the 3rd quarter, the Agency is forecasting a counter seasonal drawdown on OECD stockpiles at the time when they should be building for the winter heating season.
Although July was a good month for Nigeria with some of the previously shut-in oil back in production, the general political/security situation has taken a turn for the worse.
In the oil city of Port Harcourt gang rampages have been going on for the past week. Some 27 people have been killed and scores injured. Some merchants are fleeing the city. An American oil worker has been kidnapped and a foreign hostage died from lack of medical care. Troops are guarding government installations and residents are calling for a state of emergency. Over the weekend, the army claimed to have driven the gangs out of the city.
The Movement for the Emancipation of the Niger Delta, or MEND, hasn't launched any assaults on energy facilities for the past three months in hopes that Nigeria's new government would come up with a plan to help the tribes in the Niger Delta. Last week, however, the MEND announced that it was tired of waiting and has still not had the opportunity to meet with the new government. The group vowed to resume attacks on oil pipelines in the coming weeks.
During the past week, Nigeria’s new President announced a shakeup in the Oil Ministry and said he will take on the responsibilities of the Oil Minister with the help of three assistants.
All of this does not bode well for the future of Nigerian oil production. It is easy to see why the International Energy Agency forecasts little or no increase in Nigerian oil production in the immediate future.
“Peak Oil could constitute the greatest economic challenge since the dawn of the industrial revolution.”
— Richard Heinberg, author