<The Amazing Power of King Hubbert(...?)The Oil DrumDrumBeat: September 13, 2007>

69 comments on This Week in Petroleum 9-12-07

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LevinK on September 12, 2007 - 5:32pm Permalink | Subthread | Comments top

I have a question for those in the oil industry: do you feel the oil market is well supplied? Do you feel that this oil price is a result of scarcity or is it more of psychological factors?

I have a working hypothesis I'd like to discuss: refiners find the crude price too high and tend to postpone orders (as possible) until it gets lower. This further drives inventories down, bringing prices artificially higher.

Don't get me wrong, I am all into peak oil and the impending oil scarcity. But I think that if we cry wolf again and the price plummets in several months we could lose even more credibility. PO is not a couple of months event, it will unfold for quite a few years...

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westexas on September 12, 2007 - 6:02pm Permalink | Subthread | Parent | Comments top

A copy of my post on the Drumbeat thread (which I posted prior to today's EIA numbers):

I'm going to write a little missive for Graphoilogy on this topic, which I have addressed before, to-wit, refiners will not let their crude oil inventories drop below critical levels.

If refiners can't afford to bid the price of crude up enough to keep their inventories in a comfortable range, it stands to reason that they would reduce crude oil input, thus reducing product output.

So, I expect to see crude oil inventories more or less staying in a "comfortable" range (48 to 96 hours of supply in excess of MOL), with declining product inventories, and flat to falling refinery utilization numbers.

Crude oil inventories are at 80 hours of supply in excess of MOL. IMO, what the recent (five year) crude oil inventories show are just minor fluctuations within a narrow range above MOL, as the industry has gone to a Just In Time inventory system.

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Black_Dog on September 13, 2007 - 8:18am Permalink | Subthread | Parent | Comments top

Crude oil inventories are at 80 hours of supply in excess of MOL. IMO, what the recent (five year) crude oil inventories show are just minor fluctuations within a narrow range above MOL, as the industry has gone to a Just In Time inventory system.

Another reason for the continued increase in the price of crude might be that the temperatures along the northern tier states of the U.S. have been rather cold for this time of year. In fact, there have been many reports of record low temperatures, some below freezing.

If we see a colder winter than those of the past few years, how is the Just In Time system to respond, given that the source of any extra the supplies are several weeks away from demand?

E. Swanson

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ace on September 12, 2007 - 8:30pm Permalink | Subthread | Parent | Comments top

Hi LevinK,

I believe that the balance between supply and demand in the oil market is tight. The effective spare capacity of 2.85 mbd is comprised of undesirable 2.50 mbd heavy sour crudes from Saudi Arabia and Kuwait, and only the remainder of 0.35 mbd is desirable light crude (see IEA OMR June 2007 page 15, http://omrpublic.iea.org/omrarchive/12jun07full.pdf). The oil price is due mainly to supply and demand factors and to a lesser degree, psychological factors.

The chart below has been updated for 0.5 mbd OPEC quota increase and for IEA Sep 2007 OMR


click to enlarge

From the IEA OMR report:

World oil supply fell by 430 kb/d to 84.6 mb/d in August, on North Sea and Mexican outages, plus lower Iraqi exports. Forecast non-OPEC supply remains 50.0 mb/d in 2007 and 51.1 mb/d in 2008. Saudi Arabia underpins 660 kb/d of OPEC NGL growth next year. Risks to 2008’s broad-based growth are biased towards the FSU, project delays and extended field outages.

The average world total liquids production, for Jun, Jul and Aug 07, is only 84.6 mbd, according to the IEA monthly data. OPEC’s quota increase and end of summer maintenance should keep supply just over 85 mbd for winter. Note that the IEA OMR Sep 2007 indicates a demand of just under 88 mbd for the fourth quarter of 2007 (Oct 07 - Dec 07). The next four months could be extremely tight for supply and demand.

The 660 kb/d of OPEC NGL growth next year (from IEA quote) and the 500 kb/d from Saudi’s Khursaniyah project have the potential to keep supply above 85 mbd for 2008.

For the most recent full forecast update please click here

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davebygolly on September 12, 2007 - 8:37pm Permalink | Subthread | Parent | Comments top

The effective spare capacity of 2.85 mbd is comprised of undesirable 2.50 mbd heavy sour crudes from Saudi Arabia and Kuwait, and only the remainder of 0.35 mbd is desirable light crude...

Is this new, having so much of the spare capacity in heavy and sour? What's the history?

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ace on September 12, 2007 - 9:17pm Permalink | Subthread | Parent | Comments top

Much of the surplus heavy sour crude capacity was used from 2003 to 2006. The OPEC production cuts in late 2006 and early 2007 were mainly heavy sour crudes from Kuwait and Saudi Arabia. http://www.eia.doe.gov/emeu/steo/pub/3atab.pdf

In 2002 there was significant surplus capacity of both heavy sour and light crudes.

Here is a chart showing surplus capacity history.


click to enlarge

http://www.eia.doe.gov/emeu/steo/pub/gifs/Fig10.gif

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OilcoEx on September 13, 2007 - 2:48am Permalink | Subthread | Parent | Comments top

The simplest way to answer your question is to have a look at NYMEX futures for the next six months.

On 9/12 the close was as follows:

Oct 79.91
Nov 78.54
Dec 77.29
Jan 76.44
Feb 75.77
Mar 75.28
Dec08 73.39
Dec09 71.76
Dec10 70.76
dec15 69.93

The backwardation is pretty huge. No refiner in his right mind will buy "extra" crude above and beyond what they have to to keep things running. Holding it loses you $1.40/bbl vs. buying a future and swapping that for wet oil in a month. Not to mention the interest cost of holding wet oil vs just paying $5000/contract to buy a future as a place holder. Consider just how much those 330 million bbls of crude are worth in interest costs every year. At 6% I get $1.5 billion or so. Ouch.

So clearly the market is NOT well supplied. if it were, the market would have the contango shape where the front is cheaper than the back by the cost of storage, interest etc.

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