I would agree with him, that "if" oil had peaked, it wouldn't take long for the price to go very high in a hurry. There would be some demand destruction, but the U.S., Canada, Australia, the EU, Japan, and China, among others, will bid oil much higher than it is now.
But oil has not peaked yet. In 3 years, maybe. But I have $1000 that says it hasn't peaked yet. So my money is where my convictions lie. I think Simmons has done a good job of being very cautious about calling peak, and I think this will come back to bite him.
If I am wrong, and we have peaked? I shudder to think about it.
Well we will peak sooner or later anyways, and probably fairly soon if it hasn't happened already. Humanity won't do squat until it is staring it straight in the face, so if peak is 2 years out we will just waste the extra time before it comes up from behind and bites the general public in the shorts.
My guess is that we are probably at a point where the world will want to consume a tad more than the world can produce in the summertime, but in the winter when demand is somewhat less the world can still keep up. It will be clearer this summer when demand is at peak again.
1. For the last few months, almost every month KSA has announced
production cuts. The decrease in production is now two times
what was mandated by their share of the OPEC quota.
2. They are unilaterally cutting oil supplies to Asian refinaries
and at the same time arguing that they are cutting production
because there is no demand for their crude oil :-)
3. Their oil production has been going down for 15 months now.
4. They have tripled the number of oil drilling rigs; this
indicates an intent to increase production; but the production
keeps falling which means that the decline is not voluntary.
5. They are massively expanding the infrastructure needed to
pump sea water in their oil wells. This again indicates an
intent to increase production which means that the production
decline is not voluntary.
6. Almost all of their major oil fields are more than 50 years
old.
And if KSA has peaked and Cantarrel is crashing and North Sea is declining at 7%, then the world has peaked.
For the last few months, almost every month KSA has announced
production cuts. The decrease in production is now two times
what was mandated by their share of the OPEC quota.
I think we will know something definitive later this summer. Right now, prices are headed back up, which should have them increasing production. However, crude inventories are still at very high levels and have lately been rising, so we may still be slightly oversupplied. When turnaround season is over in May, I think you will see Saudi production start to come back up (provided inventories have been pulled down some).
Robert, we see two sets of weekly numbers on U.S. inventories, and for obvious reasons KSA inventories [floating and otherwise] are pretty much opaque. Do we know if inventories in the rest of the world actually "very high?" This is an honest question. I don't what the answer, but would very much like to know. GJ
OECD inventories are known, and that gives a pretty good picture of a pretty large chunk of the developed world. But I haven't checked those inventories lately. I will do that tomorrow, but I am off to bed now.
Well, I stayed up a bit late because I was curious about OECD inventories. The last published information on OECD inventories was in September, and at that time they were at all time record levels and rising:
I think inventories really cloud the picture, because they indicate that the market is adequately supplied and therefore no additional production is needed. And the Saudis have mentioned their concern about high inventory levels. As I have said previously, if they have peaked, it certainly came at a convenient time for them: Right when demand suggested that their production should be lowered.
Not true. their production declined thru the spring and summer as prices peaked. Prices fell because world output did surge jul/aug, plus the goldman caper. SA cuts after nov 1 are legitimate only up to their allocated cut, but they recently announced output was around 8.5Mb/d, so output is now far less than the opec agreed level.
THey are not just increasing rigs 7x 04 levels but also hugely expanding their water injection facilities; recent contract expanding injection for two of Ghawar's six fields from 9Mb/d to 14Mb/d, and rising fast as production continues to fall. (If each of these two fields are still producing 1Mb/d, then the output will be 1Mb oil + 6Mb water for a 6/7 water cut.) Their horizontals, which did manage to maintain production as water level approached the gas cap, are fast watering out. All the fields are old, all in decline, no new fields, the great hope is to resurrect old abandoned fields.
THinking sa has not peaked requires a kind of religious faith, believing what you desperately want to believe and ignoring all evidence to the contrary. These guys are proven liars... last spring they said 'prices are too high', and 'nobody wants to buy our oil', as prices surged to record after record.
Not true. their production declined thru the spring and summer as prices peaked. Prices fell because world output did surge jul/aug,...
You, like many others, are focused on price and ignoring inventories - a very big part of the puzzle. What were inventories doing during that production decline? Not only were they are record levels, but 1). They were increasing; and 2). We were headed into turnaround season. So, as I said, very convenient for them that their production decline occurred just as we didn't need the oil. The cuts started when inventories were very full (as I demonstrated in my response to Jeffrey in our debate) and continued through falling prices. To date, they have made no production moves that didn't make sense in light of the inventory/pricing picture.
THinking sa has not peaked requires a kind of religious faith, believing what you desperately want to believe and ignoring all evidence to the contrary.
Just the opposite in fact. Religious faith sometimes requires one to ignore certain aspects of evidence that may happen to be inconvenient for the faith. You are ignoring certain aspects of evidence. Those who think Saudi has peaked need to point to some production moves that they have made that just didn't make sense given the market. For instance, if you can point me to either 1) Very low and falling inventories; or 2). Average inventories and rising prices; and KSA not increasing production, that would be support in your favor. But that's not what happened.
Absolutely I am focused on price... that is the point of the opec cartel, and all of its members. SA in particular is in great need of dollars, having run deficits for many years. That they were selling less and less as price rose to its peak is very telling to most.
But, you wish to focus on inventories rather than price. As an aside, the market tolerated high inventories because of the sea change to contango, or higher future prices, a previously very rare condition through the 100 year age of oil, and very sophisticated saudis were of course aware of this. But lets focus on your concern that sa cut because of a concern that inventories were too high: Around 2/10 US inventories did rise to 05 highs (1,025B - a level that did not trigger cuts by saudis in 05), then fell through mid april to 05 avg level (1,000B), and only got back to 1,025B in early june. Meanwhile, price was running amok, and sa output was steadily falling from jan. Regarding OECD inventories, which include the US, EIA was reporting last summer that inventories were at a ten-year low, and had fallen one day's cover from 05 levels. There is absolutely no basis for thinking that inventories were a saudi concern before they began to worry the market in aug.
It is true that from early june US inventories rose to a very high level, reaching around 1,090B in mid oct, only to fall back to 05 highs by dec. The reason for the final surge in inventories is now apparent, jul/aug were anomolous high production months... meaning that various producers had no problem selling more crude than they had ever done before, even as sa claimed to have no buyers for their oil.
It is absolutely clear that sa had no spare supply in 1H06 (probably thru oct), and that they were cutting involuntarily. Note that every other opec member was in fact encouraged by the cartel, meaning sa, to pump every barrel possible to control runaway prices. Indeed, that production was flat at 9.5Mb for so long, indicative to some that they had spare capacity, is now indicative to me that they may have been running down their own storage to capture very high prices.
This says nothing about what they will be able to do in the future. They are indeed making great efforts, albeit so far with no apparent result (but we might assume that in the absence of the great efforts, which began in late 04, production would be lower than actual). As WT says, Texas also made great efforts and were truly surprised that production fell anyway in the early seventies. Perhaps there is a growing acceptance at the higher levels in SA, obviously not elsewhere, which is as desired.
I would be more convinced of their future capability if they were developing new fields. Given that none are even on the horizon, the evidence at hand is compelling to me that we are in the twilight zone.
I noticed that you accept peak in 3 years, but not now. Geology and past production is what it is.
But, you wish to focus on inventories rather than price.
It is not one or the other. It's both. High price with high and rising inventories means production has to come down.
There is absolutely no basis for thinking that inventories were a saudi concern before they began to worry the market in aug.
Other than the facts that U.S. inventories were at record levels, and the Saudis actually mentioned inventory levels when making their cuts?
It is absolutely clear that sa had no spare supply in 1H06 (probably thru oct), and that they were cutting involuntarily.
No, it isn't. That is exactly the time period of record and climbing inventories. It wasn't in June. That business was going on in January. Check for yourself. I highlighted it in my response to Jeffrey.
It is true that from early june US inventories rose to a very high level...
Check earlier than that.
I noticed that you accept peak in 3 years, but not now.
That's not what I say. I say it might be in as little as 3 years. The picture is fuzzier beyond that. But supply/demand imbalances are likely to continue.
Inventories rise in this environment if large numbers of people believe it is cheaper to buy and hold today than to buy tomorrow. In short, inventories rise when supply becomes constrained as a means of hedging against further price increases. Look at the few airlines that have been doing this and their profitability versus competitors that failed to do this. Also this is typically the lowest consumption quarter of the 4 for the US, at least, and perhaps Europe as well. So if I was going to hedge, now would be a good time to hedge against the summer and fall months.
I don't think you can draw conclusions about whether we are at peak based on inventories, Robert. I don't think you can do that at all. In fact, the classic market prediction would be for rising inventories, at least initially post-peak, precisely to hedge until supply fell so far and prices rose so far that the hedges were wiped out. But immediately and with a very slow initial decline rate? I don't think so and I believe it is incumbent upon you to explain why this such atypical market behavior should be expected to support your conclusion.
I don't think you can draw conclusions about whether we are at peak based on inventories, Robert.
If inventories are at very high levels, and rising, production must come down. That was exactly the case when the Saudis cut production. It wasn't just that inventories were high, they were rising and the U.S. was going into turnaround season. Despite that, inventories continued to rise, which supports the Saudis decision to cut. There were ample supplies.
Occam's Razor. You are ignoring statements from multiple organizations that they are deliberately hedging against higher prices. The most obvious explanation of higher inventories even when going into turnaround season is exactly the one given - people are hedging!!
Note that hedging is a direct response to rising prices and does not directly take into account supply. Now of course supply ultimately affects prices but it's not the only (or even most direct) explanation for either rising or falling inventories.
It doesn't matter if they are hedging. If production is X, and inventories are increasing, then production must go lower than X as inventories continue to go up. The fact that inventories continued to rise even after the Saudis cut production is ample evidence that their cuts were warranted. And of course very soon after that prices did fall off by quite a bit. I think the preponderance of evidence supports the Saudi explanation. I have yet to see anything they did that didn't fit into the inventory/price picture.
It depends on what you see as the cause and what is the effect. Rising inventories could be the effect of dropping production, as GreyZone says, as a hedge against the continuing contango in the market. I doubt if data is good enough to tease out the difference between one and the other, but I don't see how one can unequivocally see it as production dropping because of inventories rising rather than the other way arouond.
Rising inventories could be the effect of dropping production
Inventories were rising before the production drop. This supports an inventory build as a hedge against further rise in price and the contango reflects the increased costs of carry.
I don't see how one can unequivocally see it as production dropping because of inventories rising rather than the other way around.
Where is the sell through? I run a cartel. I control my price as I control supply. If I see an inventory build then my supply has outpaced the market and the growing inventory threatens to disrupt the market by impairing my ability to exert control over supply and therefore price. If I see that I am giving up control is not my incentive to throttle back production?
Why is the market not in backwardation? Insufficient final demand likely due to a slow start to winter and the delayed impacts of prior high prices. Back in September I decided not to drive out to see Aunt Suzie because it cost too much.
A very interesting figure would be the amount of working inventory vs any past year increase in "speculative inventory," inventory additional to the normal supply chain.
During the past year we observed a steady ramp up in price.
Some portion of that price increase was organizations seeking to hedge against further future price increases by making purchases for inventory.
The supply chain was not prepared to meet both anticipated normal demand and the increased demand due to hedging activity.
The attempt to build inventory drove further price increases (which appeared to justify the investment in inventory) until such time as physical inventory reached capacity at which point demand returned to a lower level and the price fell to the clearing price.
Since the rising price had created the incentive for additional supply the market now found itself in surplus. This surplus would have been exacerbated by stocks released from inventory when market oversupply became apparent.
This seems to be a reasonable fit with the facts and it also satisfies Occam's Razor as we have no need to postulate a global conspiracy, KSA antipathy for Iran, or much else beyond straightforward greed. It is much the same play that is being observed in the housing market but in a different sector.
Would this agree with what you are trying to describe?
Cheers!
EDIT added Greyzone's name to avoid confusion with Robert's post.
I think its incorrect to look at OECD supply levels and assume that the market is well supplied if the market is in contango. I'd have to guess that most of the people in the oil business recognize that oil supplies are tight and any over supply for the foreseable future is temporary at best. They need only be aware of both Mexico and Iran not full Peak Oil. Robert maybe you could comment on the view from top insiders on the refining side of the industry.
I have to think that most people expect a long term contango market and if so they will keep supplies high basically forever. So the next time we have low oil supplies in the wealthy OECD countries we probably won't be far from real shortages and major price spikes
i.e 300 bbl oil.
I don't understand why anyone would expect supplies to drop ? I just don't see any reason at all for it to happen until we start hitting actual shortages.
If anything the fact that everyone is keeping their tanks full regardless of the recent price flux it should be a major warning that something is up.
Another insider piece of information that would be useful is how often have contract deliveries been missed lately which means probably that a purchase is made on the spot market.
Thus a number that might be very very interesting is how many of the spot contracts are actually used to take real delivery of oil ? And how has it changed over time.
If we are seeing a significant rise in the number of real barrels of oil sold on the open market then we know that we are having supply problems NOW. ( sorry for the caps )
I think this may be important.
Inventory is not important except in the broad sense that the market is in contango.
If we actually see dropping inventories and high prices ...
Oil is a slippery business, and inventory plays a very direct role in production - after you have filled the pipeline, the storage tanks, the tankers, the refinery storage tanks, the local gas station storage tanks, and your own gas tank, what now? Lower production is the only realistic answer.
This winter was as 'unanticipated' as the 2005 hurricane season. There was a lot of demand destruction, simply due to higher temperatures. To give you an idea, January 2007 in this region was 5° C (about 10° F) higher than normal - that is a lot of degree days heating sitting in various storage tanks (Germany is also a major user of heating oil on the world market - though it is attempting to reduce the amount as a matter of policy). Just yesterday, the region's natural gas distributor announced plans to reduce prices by approximately 50 euros over a year for a typical family soon - a lot of planning involving long term amounts/prices/storage has simply been ruined by what is happening outside the window.
And if the weather turns viciously, so that instead of 5° over normal it becomes 8° under normal in March, the system will gyrate again.
One of my reasons to believe we are at peak is how the whipsawing is becoming ever more difficult to explain without an overarching connection. There may be a number of reasons for Saudi Arabia's currently declining production, but none of the publicly available information from various sources seem to provide a coherent reason for various contradictory goals (prop prices up to help Iran? reduce production to help the U.S. economy? promise to flood the market 'soon' while consistently cutting production and actually providing less than contractually agreed to amounts?), unless you tend to believe that oil fields/regions go into a permanent geological decline at some point
And yes, economic demand, in part reflected through inventories, plays a role in production which has nothing much to do with price in terms of futures markets.
Oil production can decline faster than some theoretical maximum rate if the demand doesn't exist - full storage tanks tend to show that demand is not high enough at the moment.
The thing is, peak oil is not an economic game, it is a geological one - as the British seem to be waking up to. Regardless of British fiscal planning, those anticipated oil exports in 2008 are unlikely to happen, unless they reduce internal demand by a significant percentage, and then it do again year after year - geology meets economics, and as always, the economists will come up with a reason why it doesn't matter - substitution? new technologies? fairy fossil mother? Economists simply explaining away reality in a blizzard of terms, technicalities, and statistics is virtually a natural law itself.
Thus a number that might be very very interesting is how many of the spot contracts are actually used to take real delivery of oil ? And how has it changed over time.
Article in this weeks Business Week indicates that banks and hedge funds with storage capacity were this past summer purchasing for inventory and able to immediately sell forward for a 50% gain. If market was close to balance this diversion to inventory would have assisted in driving up the price.
Article is a little light on data but it also suggests that a hedge fund may recently have been in trouble and was liquidating inventory. If accurate this may have contributed to recent price weakness. Note that this form of market intervention (financial institutions purchasing for inventory rather than trading contracts) is relatively recent and would be disruptive to normal pricing mechanisms as the supply chain would not have anticipated such diversions to inventory.
KSA withdrawal of supply is curious and difficult to explain. It may be the case that KSA seeks to create room for alternate supply and avoid a degree of over supply that might collapse current price environment.
It may also be the case that they have become much more sophisticated in seeking ways to maximize revenue from what they know is both a non-renewable resource and their single source of earnings (excluding Hajj income).
I like the old Scots verdict - case not proven. But very interesting to watch.
I think its incorrect to look at OECD supply levels and assume that the market is well supplied if the market is in contango.
The market right now is well supplied. That may change 6 months out, but right now there is sufficient capacity.
I don't understand why anyone would expect supplies to drop ?
I think what would happen is that if KSA had peaked and taken a large amount of supply off market, combined with Mexico's peak, prices would start to climb back up as the supply shortfall was felt (they would scream upward if it was known that KSA had peaked) and at some point, suppliers are going to wonder why they are keeping such high inventories. That's a lot of money tied up in those tanks. Then, they allow inventories to be drawn down to historical levels. Now they are back to making their normal purchases. If supply is short, now is when you will see prices really climb, as the shortfall becomes apparent.
The simple question that always pops in my head when you say the markets are well or over-supplied, is this...Why is oil still hovering around $60 a barrel? It should be dropping like a rock in an over-supplied market. Or has it just become that much more expensive to suck out or refine a barrel of oil these days?
An imminent peak is not consistent with record high level of inventories. Inventories are the buffer between supply and demand and would be the first to melt before demand in case of faulty supply. Note that the stockpiles contain only 47 days of world consumption and would react pretty quickly to any significant disruption.
Note: something strange in the EIA spreadsheet, the sum of the columns does not match the number given in the total column.
My personal take on inventories is that it is a reflection of the contango in the oil futures. If you have storage capacity, you can currently lock in a 10% annualized return by buying spot and selling forward 9 months. This a pretty good return for basically a large cylinder of steel plates. I predict that inventories will enter a period where they are high by historical standards because easy money can be made.
Related to Simmons "Crossing the Rubicon", my gut feeling is that he is on target this time. I also feel that we have been and will be lucky in that for 2 winters there has been weakened demand that has masked supply shortcomings. We have very likely entered a logistical plateau that will merge into a geological peak. A slow squeeze until 2011-2012 when the bottom falls out....
Many don't realize the power of contango, always the case with gold but extremely rare in oil over the past century... it used to be that punters always were betting oil would fall, it is now reversed. Refiners can of course keep the tank full to sell at the higher price, but they are in the business of refining oil. Even more sensible to keep the tank full if you are convinced that the future price is higher, and some might even be wondering how high, even tho the futures supposedly have the answer. The far east is seeing their supplies curtailed, I wonder if they are beginning to think their tank should always be full, and maybe they don't have enough tanks. China, etc, are not just running around the world tying up future supplies, they are building their own spr's... many players look ever more doubtful of future supplies.
In the seventies concern about the availability of gasoline at any price prompted US motorists to keep the tank full; having all tanks 3/4 full instead of 1/2 full took supplies from critical to crisis. As we near peak we will see more in storage, not less. I see us going off the cliff with refiners' tanks full and prices so high that more and more motorists have theirs empty.
Everything at the moment is pointing to a nearby peak except price, and the latter is increasing its volatility; one must remember that volitile means both up and down. We are in new territory, the market will eventually get used to high storage coupled with high prices.
Still unusual... you are po aware, so are one of the hoarders. Our group is getting larger every day.
It used to be that I could go to my account and ask to view responses to my posts, but now I just get referred to the articles. Will we get the ability to see responses again at some point?
But I wonder...isn't hoarding something you'd expect to see at peak? That happened when there was a steel shortage a couple of years ago. Companies started hoarding it, for fear of price jumps or outright shortage.
The U.S. is increasing their SPR, and countries that never had them are creating them. Perhaps they aren't the only ones stocking up while the price is relatively low?
The first pricing signs of peak oil are here. The forward oil curve is in perfect contango. Some of the recent downside price action is due to unwinding forward rolling positions by institutional investors. In the good old days of backwardation, rolling forward was fine way to make money. Now is it a bet on volatility.
No opec member has ever cut production to increase spare capacity in the face of high and rising prices. At least thru aug last year all opec members were encouraged by the cartel (read sa) to produce every barrel possible to help control runaway prices.
Which in itself would be a point arguing that we were not at peak last summer.
In general, as we pass peak, people will -- I expect -- find all kinds of reasons to keep oil in the ground. And what they say and encourage others to do will have little relation to that fact.
No supplier outside the cartel has ever preferred to keep oil in the ground, and even in this case the individual member hardly 'preferred' to do so, but grudgingly did so only to encourage their partners to do so, too.
As for as last summer, we were at peak supply, certainly for a two-month period, jul/aug, which is what caused storage to go so high. Peak oil hardly means peak price, which can only come post peak. It is hard to say whether the highest inflation adjusted price will come shortly after peak, as the world becomes po aware and begins to adjust to falling supply (which does not necessarily mean falling stocks), or whether highest price will come later, with even less supply but more solutions.
No supplier outside the cartel has ever preferred to keep oil in the ground...
In a world of plenty, of course not. It made no sense.
Don't forget, the US peak occured in an oil-soaked world.
In a world of scarcity, everything changes. I read somewhere (don't have a link) that some Canadian companies were dragging their feet developing leases. And the analyst could not understand why.
To me it seems rather obvious.
Many have pointed out that many companies are not investing that much in new production despite having record profits. They could obviously can afford to invest more, much more
But it doesn't make economic sense. One can afford to just sit tight.
Each individual company has it's own peak and could be ultimately staring it's own death in the face. Don't believe for a minute they don't know it.
"Each individual company has it's own peak and could be ultimately staring it's own death in the face. Don't believe for a minute they don't know it."
A voice of reason... so sweet but so rare. My reading on most people is that they will believe whatever it takes to assure themselves that "this is not happening!". Some here even seem to believe that KSA will flood the market with $5/barrel oil to ruin Iran economically. And as a side effect gas will go under 98 cents per gallon... :-)
Do you happen to know when BP might be peaking based on their current contracts? I wonder if the development of their alternative energy business is based on a rather well understood winding-down scenario of their oil business?
Do you happen to know when BP might be peaking based on their current contracts? I wonder if the development of their alternative energy business is based on a rather well understood winding-down scenario of their oil business?
Can't help you there. Most of the company peaks I've heard quoted came from a single investment analyst/guru dude who was supposedly a peak oiler. I couldn't bring myself to trust him since he was clearly touting various stocks.
I recall that he thought Encana would peak (natural gas) in 2020 and that he thought most would crest sooner. He didn't run down a list of the majors and quote peaks for each. But he definitely acted as though he access to that info, the bastard.
I would agree with him, that "if" oil had peaked, it wouldn't take long for the price to go very high in a hurry. There would be some demand destruction, but the U.S., Canada, Australia, the EU, Japan, and China, among others, will bid oil much higher than it is now.
But oil has not peaked yet. In 3 years, maybe. But I have $1000 that says it hasn't peaked yet. So my money is where my convictions lie. I think Simmons has done a good job of being very cautious about calling peak, and I think this will come back to bite him.
If I am wrong, and we have peaked? I shudder to think about it.
Well we will peak sooner or later anyways, and probably fairly soon if it hasn't happened already. Humanity won't do squat until it is staring it straight in the face, so if peak is 2 years out we will just waste the extra time before it comes up from behind and bites the general public in the shorts.
My guess is that we are probably at a point where the world will want to consume a tad more than the world can produce in the summertime, but in the winter when demand is somewhat less the world can still keep up. It will be clearer this summer when demand is at peak again.
Robert, here is why I think KSA has peaked:
1. For the last few months, almost every month KSA has announced
production cuts. The decrease in production is now two times
what was mandated by their share of the OPEC quota.
2. They are unilaterally cutting oil supplies to Asian refinaries
and at the same time arguing that they are cutting production
because there is no demand for their crude oil :-)
3. Their oil production has been going down for 15 months now.
4. They have tripled the number of oil drilling rigs; this
indicates an intent to increase production; but the production
keeps falling which means that the decline is not voluntary.
5. They are massively expanding the infrastructure needed to
pump sea water in their oil wells. This again indicates an
intent to increase production which means that the production
decline is not voluntary.
6. Almost all of their major oil fields are more than 50 years
old.
And if KSA has peaked and Cantarrel is crashing and North Sea is declining at 7%, then the world has peaked.
For the last few months, almost every month KSA has announced
production cuts. The decrease in production is now two times
what was mandated by their share of the OPEC quota.
I think we will know something definitive later this summer. Right now, prices are headed back up, which should have them increasing production. However, crude inventories are still at very high levels and have lately been rising, so we may still be slightly oversupplied. When turnaround season is over in May, I think you will see Saudi production start to come back up (provided inventories have been pulled down some).
Robert, we see two sets of weekly numbers on U.S. inventories, and for obvious reasons KSA inventories [floating and otherwise] are pretty much opaque. Do we know if inventories in the rest of the world actually "very high?" This is an honest question. I don't what the answer, but would very much like to know. GJ
OECD inventories are known, and that gives a pretty good picture of a pretty large chunk of the developed world. But I haven't checked those inventories lately. I will do that tomorrow, but I am off to bed now.
Well, I stayed up a bit late because I was curious about OECD inventories. The last published information on OECD inventories was in September, and at that time they were at all time record levels and rising:
http://www.eia.doe.gov/emeu/ipsr/t15.xls
I think inventories really cloud the picture, because they indicate that the market is adequately supplied and therefore no additional production is needed. And the Saudis have mentioned their concern about high inventory levels. As I have said previously, if they have peaked, it certainly came at a convenient time for them: Right when demand suggested that their production should be lowered.
Not true. their production declined thru the spring and summer as prices peaked. Prices fell because world output did surge jul/aug, plus the goldman caper. SA cuts after nov 1 are legitimate only up to their allocated cut, but they recently announced output was around 8.5Mb/d, so output is now far less than the opec agreed level.
THey are not just increasing rigs 7x 04 levels but also hugely expanding their water injection facilities; recent contract expanding injection for two of Ghawar's six fields from 9Mb/d to 14Mb/d, and rising fast as production continues to fall. (If each of these two fields are still producing 1Mb/d, then the output will be 1Mb oil + 6Mb water for a 6/7 water cut.) Their horizontals, which did manage to maintain production as water level approached the gas cap, are fast watering out. All the fields are old, all in decline, no new fields, the great hope is to resurrect old abandoned fields.
THinking sa has not peaked requires a kind of religious faith, believing what you desperately want to believe and ignoring all evidence to the contrary. These guys are proven liars... last spring they said 'prices are too high', and 'nobody wants to buy our oil', as prices surged to record after record.
All the king's horses and all the king's men...
Not true. their production declined thru the spring and summer as prices peaked. Prices fell because world output did surge jul/aug,...
You, like many others, are focused on price and ignoring inventories - a very big part of the puzzle. What were inventories doing during that production decline? Not only were they are record levels, but 1). They were increasing; and 2). We were headed into turnaround season. So, as I said, very convenient for them that their production decline occurred just as we didn't need the oil. The cuts started when inventories were very full (as I demonstrated in my response to Jeffrey in our debate) and continued through falling prices. To date, they have made no production moves that didn't make sense in light of the inventory/pricing picture.
THinking sa has not peaked requires a kind of religious faith, believing what you desperately want to believe and ignoring all evidence to the contrary.
Just the opposite in fact. Religious faith sometimes requires one to ignore certain aspects of evidence that may happen to be inconvenient for the faith. You are ignoring certain aspects of evidence. Those who think Saudi has peaked need to point to some production moves that they have made that just didn't make sense given the market. For instance, if you can point me to either 1) Very low and falling inventories; or 2). Average inventories and rising prices; and KSA not increasing production, that would be support in your favor. But that's not what happened.
Absolutely I am focused on price... that is the point of the opec cartel, and all of its members. SA in particular is in great need of dollars, having run deficits for many years. That they were selling less and less as price rose to its peak is very telling to most.
But, you wish to focus on inventories rather than price. As an aside, the market tolerated high inventories because of the sea change to contango, or higher future prices, a previously very rare condition through the 100 year age of oil, and very sophisticated saudis were of course aware of this. But lets focus on your concern that sa cut because of a concern that inventories were too high: Around 2/10 US inventories did rise to 05 highs (1,025B - a level that did not trigger cuts by saudis in 05), then fell through mid april to 05 avg level (1,000B), and only got back to 1,025B in early june. Meanwhile, price was running amok, and sa output was steadily falling from jan. Regarding OECD inventories, which include the US, EIA was reporting last summer that inventories were at a ten-year low, and had fallen one day's cover from 05 levels. There is absolutely no basis for thinking that inventories were a saudi concern before they began to worry the market in aug.
It is true that from early june US inventories rose to a very high level, reaching around 1,090B in mid oct, only to fall back to 05 highs by dec. The reason for the final surge in inventories is now apparent, jul/aug were anomolous high production months... meaning that various producers had no problem selling more crude than they had ever done before, even as sa claimed to have no buyers for their oil.
It is absolutely clear that sa had no spare supply in 1H06 (probably thru oct), and that they were cutting involuntarily. Note that every other opec member was in fact encouraged by the cartel, meaning sa, to pump every barrel possible to control runaway prices. Indeed, that production was flat at 9.5Mb for so long, indicative to some that they had spare capacity, is now indicative to me that they may have been running down their own storage to capture very high prices.
This says nothing about what they will be able to do in the future. They are indeed making great efforts, albeit so far with no apparent result (but we might assume that in the absence of the great efforts, which began in late 04, production would be lower than actual). As WT says, Texas also made great efforts and were truly surprised that production fell anyway in the early seventies. Perhaps there is a growing acceptance at the higher levels in SA, obviously not elsewhere, which is as desired.
I would be more convinced of their future capability if they were developing new fields. Given that none are even on the horizon, the evidence at hand is compelling to me that we are in the twilight zone.
I noticed that you accept peak in 3 years, but not now. Geology and past production is what it is.
But, you wish to focus on inventories rather than price.
It is not one or the other. It's both. High price with high and rising inventories means production has to come down.
There is absolutely no basis for thinking that inventories were a saudi concern before they began to worry the market in aug.
Other than the facts that U.S. inventories were at record levels, and the Saudis actually mentioned inventory levels when making their cuts?
It is absolutely clear that sa had no spare supply in 1H06 (probably thru oct), and that they were cutting involuntarily.
No, it isn't. That is exactly the time period of record and climbing inventories. It wasn't in June. That business was going on in January. Check for yourself. I highlighted it in my response to Jeffrey.
It is true that from early june US inventories rose to a very high level...
Check earlier than that.
I noticed that you accept peak in 3 years, but not now.
That's not what I say. I say it might be in as little as 3 years. The picture is fuzzier beyond that. But supply/demand imbalances are likely to continue.
Inventories rise in this environment if large numbers of people believe it is cheaper to buy and hold today than to buy tomorrow. In short, inventories rise when supply becomes constrained as a means of hedging against further price increases. Look at the few airlines that have been doing this and their profitability versus competitors that failed to do this. Also this is typically the lowest consumption quarter of the 4 for the US, at least, and perhaps Europe as well. So if I was going to hedge, now would be a good time to hedge against the summer and fall months.
I don't think you can draw conclusions about whether we are at peak based on inventories, Robert. I don't think you can do that at all. In fact, the classic market prediction would be for rising inventories, at least initially post-peak, precisely to hedge until supply fell so far and prices rose so far that the hedges were wiped out. But immediately and with a very slow initial decline rate? I don't think so and I believe it is incumbent upon you to explain why this such atypical market behavior should be expected to support your conclusion.
I don't think you can draw conclusions about whether we are at peak based on inventories, Robert.
If inventories are at very high levels, and rising, production must come down. That was exactly the case when the Saudis cut production. It wasn't just that inventories were high, they were rising and the U.S. was going into turnaround season. Despite that, inventories continued to rise, which supports the Saudis decision to cut. There were ample supplies.
Occam's Razor. You are ignoring statements from multiple organizations that they are deliberately hedging against higher prices. The most obvious explanation of higher inventories even when going into turnaround season is exactly the one given - people are hedging!!
Note that hedging is a direct response to rising prices and does not directly take into account supply. Now of course supply ultimately affects prices but it's not the only (or even most direct) explanation for either rising or falling inventories.
It doesn't matter if they are hedging. If production is X, and inventories are increasing, then production must go lower than X as inventories continue to go up. The fact that inventories continued to rise even after the Saudis cut production is ample evidence that their cuts were warranted. And of course very soon after that prices did fall off by quite a bit. I think the preponderance of evidence supports the Saudi explanation. I have yet to see anything they did that didn't fit into the inventory/price picture.
It depends on what you see as the cause and what is the effect. Rising inventories could be the effect of dropping production, as GreyZone says, as a hedge against the continuing contango in the market. I doubt if data is good enough to tease out the difference between one and the other, but I don't see how one can unequivocally see it as production dropping because of inventories rising rather than the other way arouond.
Inventories were rising before the production drop. This supports an inventory build as a hedge against further rise in price and the contango reflects the increased costs of carry.
Where is the sell through? I run a cartel. I control my price as I control supply. If I see an inventory build then my supply has outpaced the market and the growing inventory threatens to disrupt the market by impairing my ability to exert control over supply and therefore price. If I see that I am giving up control is not my incentive to throttle back production?
Why is the market not in backwardation? Insufficient final demand likely due to a slow start to winter and the delayed impacts of prior high prices. Back in September I decided not to drive out to see Aunt Suzie because it cost too much.
A very interesting figure would be the amount of working inventory vs any past year increase in "speculative inventory," inventory additional to the normal supply chain.
Cheers!
Greyzone: I am not sure I follow your argument.
During the past year we observed a steady ramp up in price.
Some portion of that price increase was organizations seeking to hedge against further future price increases by making purchases for inventory.
The supply chain was not prepared to meet both anticipated normal demand and the increased demand due to hedging activity.
The attempt to build inventory drove further price increases (which appeared to justify the investment in inventory) until such time as physical inventory reached capacity at which point demand returned to a lower level and the price fell to the clearing price.
Since the rising price had created the incentive for additional supply the market now found itself in surplus. This surplus would have been exacerbated by stocks released from inventory when market oversupply became apparent.
This seems to be a reasonable fit with the facts and it also satisfies Occam's Razor as we have no need to postulate a global conspiracy, KSA antipathy for Iran, or much else beyond straightforward greed. It is much the same play that is being observed in the housing market but in a different sector.
Would this agree with what you are trying to describe?
Cheers!
EDIT added Greyzone's name to avoid confusion with Robert's post.
I think its incorrect to look at OECD supply levels and assume that the market is well supplied if the market is in contango. I'd have to guess that most of the people in the oil business recognize that oil supplies are tight and any over supply for the foreseable future is temporary at best. They need only be aware of both Mexico and Iran not full Peak Oil. Robert maybe you could comment on the view from top insiders on the refining side of the industry.
I have to think that most people expect a long term contango market and if so they will keep supplies high basically forever. So the next time we have low oil supplies in the wealthy OECD countries we probably won't be far from real shortages and major price spikes
i.e 300 bbl oil.
I don't understand why anyone would expect supplies to drop ? I just don't see any reason at all for it to happen until we start hitting actual shortages.
If anything the fact that everyone is keeping their tanks full regardless of the recent price flux it should be a major warning that something is up.
Another insider piece of information that would be useful is how often have contract deliveries been missed lately which means probably that a purchase is made on the spot market.
Thus a number that might be very very interesting is how many of the spot contracts are actually used to take real delivery of oil ? And how has it changed over time.
If we are seeing a significant rise in the number of real barrels of oil sold on the open market then we know that we are having supply problems NOW. ( sorry for the caps )
I think this may be important.
Inventory is not important except in the broad sense that the market is in contango.
If we actually see dropping inventories and high prices ...
Oil is a slippery business, and inventory plays a very direct role in production - after you have filled the pipeline, the storage tanks, the tankers, the refinery storage tanks, the local gas station storage tanks, and your own gas tank, what now? Lower production is the only realistic answer.
This winter was as 'unanticipated' as the 2005 hurricane season. There was a lot of demand destruction, simply due to higher temperatures. To give you an idea, January 2007 in this region was 5° C (about 10° F) higher than normal - that is a lot of degree days heating sitting in various storage tanks (Germany is also a major user of heating oil on the world market - though it is attempting to reduce the amount as a matter of policy). Just yesterday, the region's natural gas distributor announced plans to reduce prices by approximately 50 euros over a year for a typical family soon - a lot of planning involving long term amounts/prices/storage has simply been ruined by what is happening outside the window.
And if the weather turns viciously, so that instead of 5° over normal it becomes 8° under normal in March, the system will gyrate again.
One of my reasons to believe we are at peak is how the whipsawing is becoming ever more difficult to explain without an overarching connection. There may be a number of reasons for Saudi Arabia's currently declining production, but none of the publicly available information from various sources seem to provide a coherent reason for various contradictory goals (prop prices up to help Iran? reduce production to help the U.S. economy? promise to flood the market 'soon' while consistently cutting production and actually providing less than contractually agreed to amounts?), unless you tend to believe that oil fields/regions go into a permanent geological decline at some point
And yes, economic demand, in part reflected through inventories, plays a role in production which has nothing much to do with price in terms of futures markets.
Oil production can decline faster than some theoretical maximum rate if the demand doesn't exist - full storage tanks tend to show that demand is not high enough at the moment.
The thing is, peak oil is not an economic game, it is a geological one - as the British seem to be waking up to. Regardless of British fiscal planning, those anticipated oil exports in 2008 are unlikely to happen, unless they reduce internal demand by a significant percentage, and then it do again year after year - geology meets economics, and as always, the economists will come up with a reason why it doesn't matter - substitution? new technologies? fairy fossil mother? Economists simply explaining away reality in a blizzard of terms, technicalities, and statistics is virtually a natural law itself.
Article in this weeks Business Week indicates that banks and hedge funds with storage capacity were this past summer purchasing for inventory and able to immediately sell forward for a 50% gain. If market was close to balance this diversion to inventory would have assisted in driving up the price.
Article is a little light on data but it also suggests that a hedge fund may recently have been in trouble and was liquidating inventory. If accurate this may have contributed to recent price weakness. Note that this form of market intervention (financial institutions purchasing for inventory rather than trading contracts) is relatively recent and would be disruptive to normal pricing mechanisms as the supply chain would not have anticipated such diversions to inventory.
KSA withdrawal of supply is curious and difficult to explain. It may be the case that KSA seeks to create room for alternate supply and avoid a degree of over supply that might collapse current price environment.
It may also be the case that they have become much more sophisticated in seeking ways to maximize revenue from what they know is both a non-renewable resource and their single source of earnings (excluding Hajj income).
I like the old Scots verdict - case not proven. But very interesting to watch.
I think its incorrect to look at OECD supply levels and assume that the market is well supplied if the market is in contango.
The market right now is well supplied. That may change 6 months out, but right now there is sufficient capacity.
I don't understand why anyone would expect supplies to drop ?
I think what would happen is that if KSA had peaked and taken a large amount of supply off market, combined with Mexico's peak, prices would start to climb back up as the supply shortfall was felt (they would scream upward if it was known that KSA had peaked) and at some point, suppliers are going to wonder why they are keeping such high inventories. That's a lot of money tied up in those tanks. Then, they allow inventories to be drawn down to historical levels. Now they are back to making their normal purchases. If supply is short, now is when you will see prices really climb, as the shortfall becomes apparent.
The simple question that always pops in my head when you say the markets are well or over-supplied, is this...Why is oil still hovering around $60 a barrel? It should be dropping like a rock in an over-supplied market. Or has it just become that much more expensive to suck out or refine a barrel of oil these days?
For support to the discussion:
I ain’t seeing no Peak
An imminent peak is not consistent with record high level of inventories. Inventories are the buffer between supply and demand and would be the first to melt before demand in case of faulty supply. Note that the stockpiles contain only 47 days of world consumption and would react pretty quickly to any significant disruption.
Note: something strange in the EIA spreadsheet, the sum of the columns does not match the number given in the total column.
My personal take on inventories is that it is a reflection of the contango in the oil futures. If you have storage capacity, you can currently lock in a 10% annualized return by buying spot and selling forward 9 months. This a pretty good return for basically a large cylinder of steel plates. I predict that inventories will enter a period where they are high by historical standards because easy money can be made.
Related to Simmons "Crossing the Rubicon", my gut feeling is that he is on target this time. I also feel that we have been and will be lucky in that for 2 winters there has been weakened demand that has masked supply shortcomings. We have very likely entered a logistical plateau that will merge into a geological peak. A slow squeeze until 2011-2012 when the bottom falls out....
Many don't realize the power of contango, always the case with gold but extremely rare in oil over the past century... it used to be that punters always were betting oil would fall, it is now reversed. Refiners can of course keep the tank full to sell at the higher price, but they are in the business of refining oil. Even more sensible to keep the tank full if you are convinced that the future price is higher, and some might even be wondering how high, even tho the futures supposedly have the answer. The far east is seeing their supplies curtailed, I wonder if they are beginning to think their tank should always be full, and maybe they don't have enough tanks. China, etc, are not just running around the world tying up future supplies, they are building their own spr's... many players look ever more doubtful of future supplies.
In the seventies concern about the availability of gasoline at any price prompted US motorists to keep the tank full; having all tanks 3/4 full instead of 1/2 full took supplies from critical to crisis. As we near peak we will see more in storage, not less. I see us going off the cliff with refiners' tanks full and prices so high that more and more motorists have theirs empty.
Everything at the moment is pointing to a nearby peak except price, and the latter is increasing its volatility; one must remember that volitile means both up and down. We are in new territory, the market will eventually get used to high storage coupled with high prices.
I wonder if we'll see Cheech and Chong again, stealing gas by syphoning while smoking gigantic dubies.
I hate going to the gas station, so I used to wait until I was running on fumes to fill up.
But ever since Katrina, I keep the tank at least half-full at all times.
Still unusual... you are po aware, so are one of the hoarders. Our group is getting larger every day.
It used to be that I could go to my account and ask to view responses to my posts, but now I just get referred to the articles. Will we get the ability to see responses again at some point?
Nice graph.
But I wonder...isn't hoarding something you'd expect to see at peak? That happened when there was a steel shortage a couple of years ago. Companies started hoarding it, for fear of price jumps or outright shortage.
The U.S. is increasing their SPR, and countries that never had them are creating them. Perhaps they aren't the only ones stocking up while the price is relatively low?
The first pricing signs of peak oil are here. The forward oil curve is in perfect contango. Some of the recent downside price action is due to unwinding forward rolling positions by institutional investors. In the good old days of backwardation, rolling forward was fine way to make money. Now is it a bet on volatility.
Leanan wrote:
But I wonder...isn't hoarding something you'd expect to see at peak?
Absolutely. And so are production cuts in order to develop spare capacity. At least, by players with a long view.
BTW hoarding is deferred supply. And, it will tend to stablize prices medium term, in my view.
No opec member has ever cut production to increase spare capacity in the face of high and rising prices. At least thru aug last year all opec members were encouraged by the cartel (read sa) to produce every barrel possible to help control runaway prices.
Which in itself would be a point arguing that we were not at peak last summer.
In general, as we pass peak, people will -- I expect -- find all kinds of reasons to keep oil in the ground. And what they say and encourage others to do will have little relation to that fact.
No supplier outside the cartel has ever preferred to keep oil in the ground, and even in this case the individual member hardly 'preferred' to do so, but grudgingly did so only to encourage their partners to do so, too.
As for as last summer, we were at peak supply, certainly for a two-month period, jul/aug, which is what caused storage to go so high. Peak oil hardly means peak price, which can only come post peak. It is hard to say whether the highest inflation adjusted price will come shortly after peak, as the world becomes po aware and begins to adjust to falling supply (which does not necessarily mean falling stocks), or whether highest price will come later, with even less supply but more solutions.
No supplier outside the cartel has ever preferred to keep oil in the ground...
In a world of plenty, of course not. It made no sense.
Don't forget, the US peak occured in an oil-soaked world.
In a world of scarcity, everything changes. I read somewhere (don't have a link) that some Canadian companies were dragging their feet developing leases. And the analyst could not understand why.
To me it seems rather obvious.
Many have pointed out that many companies are not investing that much in new production despite having record profits. They could obviously can afford to invest more, much more
But it doesn't make economic sense. One can afford to just sit tight.
Each individual company has it's own peak and could be ultimately staring it's own death in the face. Don't believe for a minute they don't know it.
"Each individual company has it's own peak and could be ultimately staring it's own death in the face. Don't believe for a minute they don't know it."
A voice of reason... so sweet but so rare. My reading on most people is that they will believe whatever it takes to assure themselves that "this is not happening!". Some here even seem to believe that KSA will flood the market with $5/barrel oil to ruin Iran economically. And as a side effect gas will go under 98 cents per gallon... :-)
Do you happen to know when BP might be peaking based on their current contracts? I wonder if the development of their alternative energy business is based on a rather well understood winding-down scenario of their oil business?
Do you happen to know when BP might be peaking based on their current contracts? I wonder if the development of their alternative energy business is based on a rather well understood winding-down scenario of their oil business?
Can't help you there. Most of the company peaks I've heard quoted came from a single investment analyst/guru dude who was supposedly a peak oiler. I couldn't bring myself to trust him since he was clearly touting various stocks.
I recall that he thought Encana would peak (natural gas) in 2020 and that he thought most would crest sooner. He didn't run down a list of the majors and quote peaks for each. But he definitely acted as though he access to that info, the bastard.