<Our World Is Finite: The Implications of Resource LimitationsThe Oil DrumDrumBeat: October 25, 2007>

174 comments on This Week in Petroleum 10-24-07

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Nate Hagens on October 24, 2007 - 4:14pm Permalink | Subthread | Parent | Comments top

1 reason is that the 'perception' of scarcity may cause a permanent increase in desired stockpiles.

Another reason is that there may be plenty of crude but the highest quality, light sweet is making up a smaller % of the total inventory than it used to

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Moe_Gamble on October 24, 2007 - 5:22pm Permalink | Subthread | Parent | Comments top

I wouldn't call it a "perception" of scarcity: oil stocks are at their lowest level since January 5. (http://www.bloomberg.com/apps/news?pid=20602013&sid=a5u8mxvWrbWI&refer=c...)

Gasoline stocks are at their lowest level since March.

In the meantime, China's been delaying filling its strategic reserves, waiting until the price fell for the season. And Asian airlines have been delaying hedging their fuel supplies, waiting for the price to fall.

So, there is plenty of pent-up demand to keep prices high.

In addition, Bodman is still filling the SPR in November, and reservations for tankers for November are still way below normal.

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westexas on October 24, 2007 - 5:24pm Permalink | Subthread | Parent | Comments top

WTI spot was over $89 this afternoon.

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Darwinian on October 24, 2007 - 6:56pm Permalink | Subthread | Parent | Comments top

Right, for the first three trading days following the experation of the old front month contract, the WTI Cushing spot and the WTI NYMEX front month furures are disconnected. The November contract expired Monday the 22nd. That means that Tuesday, Wednesday and Thursday (tomorrow) the futures close and the spot close is disconnected. But Friday, the futures must close at the closing spot price. (Don't ask me how the Cushing spot market and the NYMEX work this out because I haven't a clue. But those are the rules.)

At any rate today the Cushing spot closed $2.00 above the NYMEX December contract. Friday they will close at the same price. Anyone willing to guess at what that price will be?

That being said, this is the "off season." That is this is the lull between the hot summer and the cold wintea and also a lull in the driving season. This is a time when the demand should be lowest and supply should have no trouble keeping up. Yet this does not seem to be the case. Supply is falling way behind. There seems to be something going on here.

Ron Patterson

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Echelon on October 24, 2007 - 10:52pm Permalink | Subthread | Parent | Comments top

You have no idea what demand is. Nobody does. Supply is falling way behind?

Falling way behind what? How far is "way behind?"

There seems to be something going on here.

Yes, let me help you with that. You don't have any idea what is going on, but you are attempting to enlighten us anyway.

Start by admitting that there is no imaginable way to accurately/meaningfully measure current oil demand. That even in retrospect it is a guess based on estimates of available supply.

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sldulin on October 25, 2007 - 12:19am Permalink | Subthread | Parent | Comments top

Just a suggestion...you're coming off as arrogant and contemptuous. If you have legitimate argument with methodologies, premises, or conclusions reached here, there are plenty of big brains that visit this site who would be willing to consider and engage your ideas. Leading off with abuse just makes you look like an ass.

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Echelon on October 25, 2007 - 1:16am Permalink | Subthread | Parent | Comments top

I thought Darwinian was a Big Brain. I assumed his usual arrogance, contempt for those who disagree with him, and abuse of anything that he doesn't understand were proof of that.

I have a very legitimate argument. I have several. Which one were you interested in? And pertaining to what?

Did you want to know the price of crude tomorrow? The chance of War with Iran? What color to shade your perfectly symmetrical bell-curve showing oil-production dropping to zero within a few years?

Thanks for the advice. You know what would be cool? If you could write a few sentences admonishing this "Slippery Slope" fellow who responded to me just below, calling me a troll. Abuse? right?

For some reason, although, I can't forecast the price of oil tomorrow, I'll forecast that you won't be able to manage that.

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Slippery Slope on October 25, 2007 - 12:24am Permalink | Subthread | Parent | Comments top

troll, please go away

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ace on October 25, 2007 - 12:10am Permalink | Subthread | Parent | Comments top

There seems to be something going on here.

I agree, I think there's something going on here. OPEC thinks there is something going on here.

click to enlarge

The chart above is from OPEC's feature article "Oil price developments challenge market expectations" on page 3 of their Monthly Oil Market Report - October 2007
http://www.opec.org/home/Monthly%20Oil%20Market%20Reports/2007/pdf/MR102... (49 pages)

Quotes below are from page 3 of OPEC's report

In recent years, oil prices have tended to ease with the end of the driving season and the start of the autumn refinery maintenance (see Graph 1). This year, however, prices have exhibited unusual strength and high volatility even beyond the end of the driving season.

OPEC acknowledged strong prices, but it can't possibly be due to their inability to supply oil to meet demand, instead the high oil price is due to these factors

...fears of potential damage to oil installations in the Gulf of Mexico, as storm activity picked up during the peak hurricane month of September; a string of refinery outages particularly in the US market; and increasing geopolitical concerns in various regions. In addition, speculators, encouraged by a weakening dollar, rushed back into the crude oil futures markets, boosting the price premium and the potential for greater volatility...

In the wake of the recent financial turmoil, economic data have also been having an overly strong impact on short-term crude oil prices and volatility

Next, OPEC says that it is able to supply oil to the market if required

Overall, the current supply and demand forecasts predict that the market will be fundamentally balanced over coming
quarters. The Conference will meet in Abu Dhabi in early December to reassess ongoing developments and ensure that the market remains well supplied over the winter season.

Moreover, the upcoming Third Summit of Heads of State and Government of OPEC Member Countries, which will take place in November in Saudi Arabia, will provide long-term guidance to enhance OPEC’s stabilizing role in the market and ensure adequate future supplies to meet the growing energy needs for sustainable development.

I think OPEC is genuinely concerned about the oil price and that their inability to increase supply to meet demand could be exposed soon, especially if this winter is cold.

However, uncertainties remain large. Apart from geopolitics, the big wild cards remain winter weather and the extent of the slowdown in the US and global economy in the coming months. Equally important is the performance of non-OPEC supply, which experienced continuous downward revisions this year.

The last sentence is interesting "performance of non-OPEC supply". OPEC forecasts non-OPEC supply of oil (all liquids) to increase from 49.85 mbd in 3Q07 to 52.12 mbd in 4Q08. This is unlikely to happen and OPEC will say that our planned capacity was based on non-OPEC supply forecasts and the oil price went up because non-OPEC supply increases failed.

The other reason for the price increase in the chart above is that it more closely reflects the supply and demand pressures from crude oil and lease condensate production, not total liquids. OPEC, like the IEA, forecasts supply and demand using total liquids (includes NGPLs and ethanol). If the forecast supply and demand for crude oil and lease condensate (C&C) was used, the price increase, in the chart above, might well be justified by an increasing supply demand gap for C&C, even though there might be a much smaller supply demand gap for oil (total liquids).

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Echelon on October 25, 2007 - 2:00am Permalink | Subthread | Parent | Comments top

Do you still stick by your Saudi Arabia 8.2mbpd forecast for this coming spring? Or did you want to take this as an opportunity to either remain silent or "adjust" that?

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Byron Walter on October 25, 2007 - 6:36am Permalink | Subthread | Parent | Comments top

I'm pretty sure that the general consensus is that Saudi production is being constrained by Aramco in order to enhance the longer-term productivity. Likewise there's no reason not to believe that they can add 500 kbpd production this November and crank things up to around 9.1 mbpd for an extended period (my guesstimate). But do you really believe that they can push production up towards, say, 12 mbpd and hold that production level for perhaps half a year? Do you really believe that there is not a demand/supply imbalance that has a geological component?

So what's your point?

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Slippery Slope on October 25, 2007 - 8:37am Permalink | Subthread | Parent | Comments top

the point of a troll is to upset the community

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alistairC on October 25, 2007 - 8:04am Permalink | Subthread | Parent | Comments top

Sort of looks suspiciously like Ace's predicted Q407 price shock, as predicted many moons ago...

Will the Saudis boost production substantially to bring prices down? That depends on two things :

* the Saudis deciding that $100 oil is not in their long-term interest
* their capacity to do so.

It seems they are determined to remain inscrutable. If they do not substantially increase exports, and announce that they are comfortable with $100 oil, we're no further forward with knowing their true capacities. But the circumstantial evidence that they are past peak would be stronger...

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olepossom on October 25, 2007 - 8:32am Permalink | Subthread | Parent | Comments top

I still believe that the price declines right into November of both 2004 and 2006 had more to do with the interests of the House of Saud in keeping the GOP in power in DC than in market fundamentals. In line with that theory, I would expect Saudi production to being to ramp up again in march 2008, just like in March 2004 and march 2006, to bring down the price in WTI by November 2008.
There is nothing to demonstrate the truth of this theory, beyond the Saudi production statistics and the asynchronous movement of oil prices in the Spring and Fall shoulder seasons.

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alistairC on October 25, 2007 - 9:18am Permalink | Subthread | Parent | Comments top

You really think the Saudis are Republicans? Do you think they have been well-served by the GWB administrations?

I rather think the umbilical cord between Riyad and Washington has been cut, and the house of Saud is looking after number one, from now on.
If they are interested in maximising exports to the USA (in the hypothesis that they have spare capacity), then they might back the candidate who is most hostile to America's energy independence, probably the Republican. On the other hand, if the continuing solvency of the USA as a client is their main concern, they may take the opposite course and favour a Democrat.

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olepossom on October 25, 2007 - 9:47am Permalink | Subthread | Parent | Comments top

I would direct your first question to Bandar Bush. Perhaps it might be asked the other way round. I think at this point the Saudis have no choice but to be Republicans. Any American pullout from Iraq would leave the Shi'a in charge, which would mean Iran ascendant, which would trouble the preodminately Shi'a eastern provinces of KSA, which would threaten Ghawar, Abqaiq, et al., which would ... I think you get the idea by now.

For a short experiment, compare and contrast the conduct of the Bush administration with what a Gore administration would have done, not just in energy and environmental policy, but in digging into the backgrounds of 15 of the 19 highjackers on 9/11.

No, the umbilical cord between DC and KSA is tighter than ever.

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ChrisN on October 30, 2007 - 10:45pm Permalink | Subthread | Parent | Comments top

Not even hardly. KSA remains the top customer of US defense weaponry, and just three weeks ago they announced a new $631 million purchase of US weapons. Sounds like the same old deadly embrace to me.

--C

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mdsolar on October 25, 2007 - 8:29am Permalink | Subthread | Parent | Comments top

I suspect that China's 11.5% annual growth together with its approach to being the third largest economy, surpassing Germany, explains the emergence of a demand curve that does not have the seasonal shape of prior years.

Chris

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EthanS on October 25, 2007 - 12:15pm Permalink | Subthread | Parent | Comments top

Let's read between the lines here:

1. Refiners can't PROCESS any more oil right now - so they won't buy any more. In the near term, DEMAND is fixed - not supply! So OPEC can't sell anymore; excess capacity is truly excess. If Saudi flooded the market, crude prices would drop but refineries would still be at capacity - so end prices to consumers wouldn't change. All that would change is profits would end up in the refiners' pockets, not the producers'.

What OPEC's statement means is that the markets should not be responding to fears of a crude oil interruption. IF the world's refiners need 80 bbd (or whatever), and Nigeria shuts down, OPEC (Saudi) will respond by moving us back to 80 bbd. That's stability of supply.

2. OPEC expects that the Majors and non-OPEC NOCs may continue to expand output, taking profits on the high prices. This expansion of non-OPEC production will be faster than any coming expansions of refinery capacity. This will therefore require OPEC to reduce its own production in order to avoid a glut and keep prices high - and OPEC recognizes this. That's stability of price.

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