1. Production and Prices
2. The Falling Dollar
4. Energy Briefs
It was a volatile week for oil prices. At one point last Friday, oil traded as high as $83.76 a barrel, just shy of the $83.90 reached the previous week. On Thursday oil gained $2.58 a barrel as hedge funds and other speculators entered the market. Oil ended the week only 4 cents higher than the previous Friday’s close.
The oil stocks report on Wednesday showed an unexpected gain of 1.8 million barrels in US crude inventories and gasoline inventories climbed by 600,000 barrels. This exerted downward pressure which was balanced by pressure from the falling dollar which forces oil prices up.
Gasoline prices remain puzzling. Most analysts feel that gasoline should be rising 10 to 15 cents a gallon to keep up with recent jumps in crude prices. Last week, however, oil prices increased by only 0.8 cents.
Many oil analysts are arguing that current $80+ prices are not supported by fundamentals which traditionally have oil dropping at this time of year. Currently there do not seem to be any abnormal geopolitical threats to oil supplies and with much of the hurricane season past, there are still no storms in sight to threaten Gulf oil production.
This leaves the generally tight world supply situation brought about by no increases in production and continued increases in consumption by Asian and oil exporting countries. Although there are fears that a credit crisis induced recession or worse may lie ahead, so far it has not materialized in a form that cuts the demand for oil. There may be new and far more powerful forces affecting the oil market than traditional thinking recognizes.
The US dollar hit a record low against major currencies and gold reached a 27-year high last Friday. The dollar has now fallen 5 percent against an index of six major currencies since mid-August and the market is saying that the prospects for further rate cuts by the Federal Reserve and further growth outside the US are good.
Some believe the US has decided to abandon the dollar in an effort to prop up economic growth and the stock markets through interest cuts. If this is indeed the case, then the relationship between the dollar and oil is undergoing an unprecedented change. Heretofore, dollars earned by oil producers went largely into US dollar assets or investments. The Gulf oil states alone are estimated to have some $3.5 trillion in dollar reserves.
Observers now believe that proceeds from the current oil boom are no longer going into supporting the US currency to the extent they have in the past. There are simply too many better opportunities to invest in emerging markets or the Euro market. Given the uncertain outlook for equities, many are seeing oil as an investment with little downside risk, which is now receiving funds diverted from other investments.
Taken together, all this suggests that we are witnessing a major change in the forces affecting dollar-denominated oil and that higher oil prices may be ahead.
The state of Venezuelan oil production, of which about 1.4 million b/d is exported to the US, was back in the news last week when OPEC trimmed Venezuela’s production quota from 3.22 to 2.47 million b/d, apparently siding with those who say the founding member's output figures are suspect. Following a two-month oil worker strike in December 2002, thousands of oil workers and managers were fired. Although the government claims that production has been restored to the pre-strike level of 3.2 million b/d, most outside observers hold current production at 2.4 million b/d. Venezuela is now claiming that the quota cut was a mistake and that OPEC has apologized for the error.
PDVSA recently declared an “operational emergency” saying they only had 112 drilling rigs, far short of the 193 needed to maintain or increase production. In a bizarre twist, last week the company announced that they can increase production by 250,000 b/d without additional drilling rigs by “repenetrating” old wells using a method known as “coiled tubing.” The lack of sufficient investment in new production coupled with the recent nationalization of the heavy oil facilities makes it likely that Venezuelan oil production will continue to slip despite the promises of assistance from China, Iran, and Belo Russia.
“The nuclear discussion is beyond reason. People are either for or agin it, and the facts sway them little.”
—Anonymous, in response to the ASPO-6 brouhaha over nuclear energy