1. Demand, production, and prices
Starting in the vicinity of $60 a barrel on Monday, oil prices closed at $63.56 on Friday for an increase of 6 percent -- after falling more than 10 percent the week before. There was little oil-related news behind the rally. Increased profits at two Wall Street firms lifted the stock markets. A weaker dollar, signs that China may be recovering, and a slightly optimistic Federal Reserve report contributed to the price rise.
Demand for oil products in the US and other OECD countries remains weak. Average OECD oil use during April was down by over 3 million b/d as compared to 2007. The American Petroleum Institute reported that total product deliveries in the US during the first half averaged 18.75 million b/d which is 5.8 percent lower than in 2008 and nearly 10 percent lower than the peak of 20.75 million b/d in the first half of 2005. The EIA reports US consumption is now running about 18.4 million b/d, down about 6.1 percent compared with last year. Most of the drop continues to be in diesel and jet fuel while gasoline consumption is down by only 0.6 percent as compared with last year.
It remains difficult to determine how much production has been shut-in by insurgent attacks in Nigeria as the government generally forbids the oil companies from confirming successful militant attacks. We do know that seven Nigerian crude streams are not producing contractual quantities and are under force majeure. Some of the problem may be due to attacks on facilities and pipelines supplying natural gas to Nigeria’s power stations. One local newspaper is reporting that total power generation is now down to 900 megawatts as compared to the 6000 megawatts that the government had planned to be producing this year. Power shortages anywhere near this size may be causing significant disruptions to the nation’s economy and oil production.
Longtime students of the oil market are of mixed minds as to where oil prices are going. A University of Calgary professor believes oil supply is still outpacing demand by 1 million b/d so that as soon as all available oil storage tanks are filled, prices will collapse to $20 a barrel. Others who agree with the over-supply thesis see oil falling to last winter’s $40 a barrel.
At the other end of the scale are Morgan Stanley analysts who forecast last week that oil prices will average $85 a barrel during 2010 due to an economic revival that will lift demand by 1.4 million b/d coupled with falling OPEC and non-OPEC production.
2. South Asia
Largely unreported in the western press are the devastating effects that electric power shortages are having on the Asian sub-continent, particularly in Pakistan and India. While the underlying cause of these shortages is insufficient investment to keep up with growing populations and economies, poor monsoons in recent years have led to drastic cuts in hydro-electric production. This, coupled with falling natural gas supplies and coal shortages, suggests serious consequences before year’s end.
Textile production, which accounts for over 60 percent of Pakistan’s exports, has been seriously harmed due to the lack of electricity to run looms. Many firms say they are close to closing down.
India likewise is suffering from the poor monsoon that is drying up agricultural production as well as cutting hydro-electric supplies. The country already has a shortage of 15-20,000 megawatts of electricity generation, is plagued with rolling blackouts, and faces a much worse situation as the year progresses. To compound the problem, India is faced with falling coal stocks, with some generating stations down to a few days’ supply.
3. China’s Growth
Many who are counting on a rapid economic rebound in China to lead the world out of the recession were cheered last week when Beijing announced a 7.9 percent increase in its GDP during the second quarter. The NY Times and Wall Street Journal hailed the announcement as evidence that Beijing has turned the corner, and by implication suggested the rest of the world could be on the road to recovery.
When the economic decline paced by falling exports began last year, China’s government responded with a $500 billion stimulus package that was to be spent quickly on improving infrastructure. Bank lending was increased and large quantities of industrial commodities were imported from abroad.
Some Chinese economists, however, do not see the underlying statistics as indicative of real growth but rather a bubble brought on by loose lending practices. These lending policies are likely to result in much wasteful spending and a big jump in non-performing loans. Exports are down by 25 percent and seem unlikely to increase in the near future while profits of large industrial enterprises are down 23 percent year on year in the first five months.
Average oil consumption in China in 2009 up to April is currently reported to be 6.84 million b/d, versus 6.92 and 7.29 million b/d in respectively 2008 and 2007. While this could increase later in the year, so far it is not suggesting that real economic growth is taking place.
Briefs (clips from recent Peak Oil News dailies are indicated by date and item #)
- OPEC countries will trim shipments by 0.8 percent to 22.55 million barrels a day in the four weeks ended Aug. 1, consultant Oil Movements said Thursday. (7/18, #2)
- In Iran, political turmoil ramped back up. Akbar Hashemi-Rafsanjani, Iran’s former president, on Friday threw his weight behind reformists and declared that the country was in “crisis” following the disputed presidential election. (7/18, #5)
- China moves on more foreign oil: China Petroleum & Chemical Corp., the country’s largest refiner, and CNOOC Ltd. agreed to buy a 20 percent stake in Angola’s offshore deepwater Block 32 for $1.3 billion from Marathon Oil Corp. Marathon, the fourth-largest U.S. oil company, will keep a 10 percent interest in the block. (7/18, #8)
- China is moving to strengthen ties with OPEC member Ecuador, part of a global trend in which the Asian giant is providing billions of dollars in financing to producer nations to guarantee energy supplies. (7/15, #9)
- The Algerian branch of al-Qa'ida has vowed to attack Chinese workers in North Africa in revenge for Beijing's tough measures to quell unrest among the Islamic Uighur people in China's northwestern region of Xinjiang. (7/15, #5)
- Nigeria’s release of rebel leader Henry Okah and his movement’s announcement of a 60-day cease-fire may not be enough to end the insurgency that has cut crude supply from Africa’s top oil exporter by a fifth. (7/16, #4)
- In Alberta, the expected economic recovery in developing the oil sands may start in late 2009 or early 2010. (7/16, #10)
- Venezuela's oil minister threatened to oust oil-industry employees who refuse to support President Hugo Chavez, or who do not embrace his socialist plans. (7/15, #8)
- In Alaska, the US Fish and Wildlife Service has rejected a controversial land trade that would have allowed oil and gas drilling in part of Yukon Flats National Wildlife Refuge. (7/18, #11)
- In the deepwater Gulf of Mexico, a successful appraisal well indicates that the Mad Dog field could soon become BP’s third giant field, joining Thunder Horse and Atlantis. (7/18, #12)
- Curbing speculation in oil prices is now a priority with the US Commodity Futures Trading Commission. Chairman Gensler has announced hearings over the next month to determine what the agency should do to check wild price swings like the ones we've seen in the last 12 months. (7/15, #14) Big speculators such as hedge funds and investment banks have sharply reduced their positions in oil futures in recent weeks, just as regulators are considering setting limits in energy speculation. (7/14, #13)
- Ukraine has promised to raise household gas prices and enforce payment of bills to strengthen its national gas company and help secure loans to avert a new gas crisis with Russia. (7/18, #15)
- Turkey, Austria, Bulgaria, Romania and Hungary signed the document to build the 3,300 kilometer natural gas pipeline called Nabucco. The project, estimated at $11 billion, will initially transport Central Asian gas by a new pipeline bypassing Russia, via Turkey to Austria and Germany through Bulgaria, Romania and Hungary. (6/16, #12)
- NYMEX natural gas futures, the worst performing commodity in 2009, may fall to seven-year lows as demand drops with the deepest recession in half a century. Inventories are 19 percent above the five-year average, industrial gas consumption is forecast to drop 8.2 percent this year, and total demand will slide 2.3 percent. (7/18, #9; 7/17, #12)
- The number of US oil and gas rigs rose to 920, an increase of four rigs from the previous week, according to oil field services company Baker Hughes. The number of gas rigs was down seven to 665 while the oil rig count rose to 244, up 10 rigs. (7/18, #14)
- Efficiency gains can help reduce agriculture’s dependence on oil. In the US, the combined direct use of gasoline and diesel fuel in farming fell from its historical high of 7.7 billion gallons (29.1 billion liters) in 1973 to 4.2 billion in 2005—a decline of 45 percent. Broadly calculated, the gallons of fuel used per ton of grain produced dropped from 33 in 1973 to 12 in 2005. But while U.S. agricultural fuel use has declined, in many developing countries, it is rising as the shift from draft animals to tractors continues (7/18, #17)
- The U.S. could spark an escalating international trade war if it proceeds with climate change legislation that would protect energy-intensive industries from imports coming from countries with less stringent emissions controls, a congressional study concludes. (7/17, #17)
- There is a building storm over China’s protectionist tactics to become the world’s leader in renewable energy. Calling renewable energy a strategic industry, China is trying hard to make sure that its companies dominate globally. (7/14, #9)
- China is unveiling plans to encourage consumers to get rid of their old automobiles and appliances by subsidizing trading them in for new ones. The aim is to stimulate new internal demand. (7/16, #8)
- Nissan says its electric car takes 14 hours to charge the lithium ion batteries completely on 110-volt power, but says a 220-volt charger will do the job in 4 hours. (7/17, #23)
- Natural gas liquids and condensate projects slated for start-up 2009-10 in some OPEC nations will add 2 million b/d to capacity at peak output. That’s according to the recently released Oil Market Report from the International Energy Agency. (7/14, #3)
- When the latest round of US airline capacity cuts takes effect in September, the seats on domestic flights will drop to 66.5 million — down 20 percent from its 1984 peak. (7/14, #14)
- In Ethiopia, many factories were forced to stop operating on orders from Ethiopian Electric Power Corporation (EEPCo) because they consumed large amounts of electric power which the EEPCo cannot afford. Many of them indicate that they are heading straight into bankruptcy which may lead into layoffs of thousands of employees.(6/13, #6)
- Japan’s electricity generation declined for the 11th straight month in June, falling 5.6 percent from a year earlier, on lower demand from factories. (7/13, #7)
- Siemens AG, Munich Re and 10 more companies plan to draw up blueprints for their $550+ project to harness the sun that beats down on the Sahara Desert to bring electricity to European homes. Years of designing lie ahead before the mostly German promoters can start addressing financial and political hurdles for a venture. (7/13, #10)
Quote of the Week
“In the big picture, we believe we're in a fundamentally positive market for oil in the 21st century. We say that because of all the things that have been discussed about declining size of reserves discovered; the fact that the large oil fields, for the most part, have already been discovered and are in decline; and the fact that, while we're experiencing a moderate demand reduction stemming from the global recession, we think the market will move back into a period of tightness in the next three years. With a tightening supply/demand balance oil prices will make a move back into the three-figure area.”
-- Art Smith, president Triple Double Advisors (Houston)