Prices and production
The week started with oil prices falling on concerns that the swine flu would slow travel and economic activity. On Wednesday prices recovered after a greater than expected 4.7 million barrel draw on US gasoline stocks plus investor perceptions that the recession may be bottoming. The fall in gasoline stocks was mostly due to lower imports of gasoline as refinery utilization was down less than one percent and the demand for gasoline remains about half a percent lower than last year.
Total US demand for oil products continues to fall and is 6.8 percent lower than in the same four-week period last year. Chinese demand in the first quarter is reported to be down by a like amount.
US crude inventories rose another 4 million barrels to the highest level since September 1990 and the oil terminal at Rotterdam, Europe’s largest port, is running out of space to store crude. These facts surely will be noted by OPEC when the group meets on May 28th.
So long as oil remains in the vicinity of $50 a barrel, OPEC ministers say they are content to wait for a recovery rather than face the challenges of trying to implement another production cut. Another reduction in output would be unpopular among some of its increasingly hard-pressed members. Should prices drop by another $10 or $20 a barrel, as many analysts are saying would be justified by demand, OPEC might be forced into taking action.
Spending on future production continues to contract due to the relatively low price of oil and the availability of capital. Hardly a day goes by without reports of large, expensive projects being delayed or cancelled somewhere in the world. As could be expected, many of these are Alberta tar sands or deepwater projects that require a return upwards of $80 a barrel in order to be profitable. Earlier this week a partner in PFC energy said that deepwater production, which had been growing at 67 percent a year between 2005 and 2008, is on track to peak at 7.5 million b/d by 2013.
A report by Morgan Stanley says that deepwater projects are being postponed at such a pace that crude supplies could be reduced by 2.4 million b/d by 2011. Last summer the firm estimated that 139 new production platforms would be needed for deepwater projects in the next few years. Since then 57 platforms have been delayed or cancelled.
Even the well-off Arab states have cancelled or delayed several major refinery, petrochemical and production projects as demand fell.