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Market Strategists: Oil May Average $93/bbl in 2007 (and that's if nothing goes wrong...)
Posted by Prof. Goose on September 14, 2005 - 9:58pm
Technorati Tags: peak oil, oil, Katrina, Hurricane Katrina, gas prices
Oil may average $84 a barrel next year, $93 in 2007, and $100 in the fourth quarter of 2007, as demand outpaces supply, Canadian Imperial Bank of Commerce's chief economist said, jumping ahead of other analysts who are trying to catch up with surging prices.Rising consumption in China is straining supplies, and damage from Hurricane Katrina to Gulf of Mexico facilities will delay new oil projects in addition to cutting output now, Canadian Imperial's Jeffrey Rubin wrote in a Sept. 7 report. Global supply will be as much as 2.4 million barrels below projected demand by 2007, and the gap will only be closed as rising prices slow demand growth, Rubin wrote.
``We estimate that 1.8 million barrels per day of consumption must be squeezed out next year through the impacts of higher prices,'' Rubin wrote. The gap between supply and demand grows as much as 3 million barrels a day by 2008. Global oil needs are almost 84 million barrels a day now.
``About 42 percent of the growth in global demand is coming from China, where there is virtually no price sensitivity to demand,'' Rubin said in a separate phone interview. ``There's a huge relationship to income growth there, but a very uncertain relationship to price at all.''
Instead of adding nearly 600,000 barrels of oil a day by 2007, new fields in the Gulf may contribute just 300,000, according to Rubin's report.
``When you juxtapose that with the apparent insensitivity of the demand curve, then what happens is that even though it's a relatively small reduction in supply, you need huge price increases to rein in demand,'' Rubin said during the interview.
``You have had a very significant reduction in the growth of demand, something in the neighborhood of a 40 percent reduction in the growth of demand already,'' he said. ``Unfortunately it's taken huge prices to achieve that.''
Market Strategists: Oil May Average $93/bbl in 2007 (and that's if nothing goes wrong...)
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Market Strategists: Oil May Average $93/bbl in 2007 (and that's if nothing goes wrong...)
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http://www.mms.gov/ooc/press/2005/press0915.htm
Today's shut-in oil production is 842,091 BOPD. This shut-in oil production is equivalent to 56.14% of the daily oil production in the GOM, which is currently approximately 1.5 million BOPD. Approximately 35% of shut-in oil is as a result of problems with onshore infrastructure.
Today's shut-in gas production is 3.411 BCFPD. This shut-in gas production is equivalent to 34.11% of the daily gas production in the GOM, which is currently approximately 10 BCFPD.
The cumulative shut-in oil production for the period 8/26/05-9/15/05 is 21,375,721 bbls, which is equivalent to 3.904 % of the yearly production of oil in the GOM (approximately 547.5 million barrels).
The cumulative shut-in gas production 8/26/05-9/15/05 is 102.405 BCF, which is equivalent to 2.806% of the yearly production of gas in the GOM (approximately 3.65 TCF).
Open question: is it not possible that the intelligensia of the petro-industry believe that current refinery capacity is so near to their expectations of ultimate world raw crude output capacity?
Could it possibly be that the real reason no new refineries have been built over the past three decades in countries such as the US is that improved knowledge suggests they wouldn't be able to run them for long at anywhere near full capacity, if built?
I very much doubt that 10, 20 years ago the industry had this foresight, but it does seem to me that those who dole out billions on capital projects might also have the wherewithall (and desire and motivation) to look at the peak oil situation objectively and with self-interest properly at the forefront.
Imagine further that one or more of the larger integrated firms, or refiners, have concluded the peak isn't all that far off, and, faced with this, ask some basic questions as to capital allocation:
- uh, do I invest in a refinery that may only run for a few short years at anywhere near full capacity, or,
- do I invest in oil sands or some other unconventional upstream activity, or,
- do I just keep hoarding cash and ultimately pay it out to shareholders when oil is 100, 200$/bbl?
Refinery capacity maxing out is probably the easiest of all factors to predict, with some accuracy, 5, 10 years ago. Ample data exists to show demand growth is relatively constant. Eventually refinery capacity would smack up to 100% in the US... that was a sure bet.Faced with a sure bet, and, assuming there will always be ample oil to feed the refinery, surely some enterprising capitalist could find a way to fund a refinery, even if they are low profit cyclical beasts.
I do admit that the relatively low profitability, historically, of these beasts does provide a ready excuse as to why new refineries haven't been built. Faced with plunking down billions, there's always something more interesting to fund and get a return from.
But I keep wondering if concerns over the long term utility of investing in new refinery plant was the limiting factor.
I ask this because US refineries were running at +95% all year until recently (they were below this even pre-Katrina due to maintenance but of course we're far worse off now). In addition, is it the case that we (the US) will just import refined products in the future to offset our inability to deliver those products to American "consumers"? What about the costs of all that? Who's going to be making money here? As J has said, follow the money. This is a big bottleneck in our economy. But you're saying there's no real incentive to fix it. Recession city here we come.
In Canada "income trusts" are a booming business - take pool of capital and move what was once a growth biz, now a mature biz, into an income producing stream with generous tax treatment for investors and the company. Such a structure could easily fit and fund a refinery biz I'm sure. Relatively stable, if low, returns, provided the future includes running at near max capacity forever.
Finding billions to spend on energy is not a problem. Hundreds of billions will be spent in the Alberta oil sands alone. Clearly there is money out there to fund all sorts of things, including rigs which get routinely swept away in the GOM.
So... why haven't they invested in refineries, one of the sure fire easy-to-forecast parts of the biz. Its not speculative at all.
Prior to 1978, US refining had far more facilities and companies, but the facilities were smaller than today. Many of them were not really profitable, but the government subsidized them heavily, resulting in over-capacity. Two things changed: the government stopped subsidizing them, and price controls on gas and other oil products squeezed the margins on refining as crude prices rose. So lots of the smaller less-profitable refiners went out of business or consolidated between 1978 and 1985.
Massive investment has occured to modernize and expand existing facilities.
For roughly 20 years, refining capacity has increased every year as existing facilities expand to take advantage of the economies of scale. The best place for new refining capcity is in bigger facilities at the source, which for imported oil means the Gulf oil ports. Refining capacity is now almost as high as it was in 1978, even though there are many fewer refineries.
Take it a step further. The oil companies know we're closing in on PO, so they say, "Hmm. No point in building that refinery we won't need 10 years from now. And if no one builds refineries [note implicit collusion], supply will be tight, prices will go up, and we'll make lots more money. And we'll be doing the world a favor, really, since those high prices will encourage conservation and adoption of alternative fuels, which will make the peak less painful."
This is part of my contention, as I expressed in a longish post yesterday, that modeling worldwide peak and modeling the peak of only part of the world are radically different. When you're talking about world peak, and you assume that the powerful decision makers at key points in the economy know we're approaching the peak (a very reasonable assumption, IMO), there are very powerful incentives for them to take actions that will push prices up and consumption down pre-peak, slightly delay the peak, and slightly alleviate the decline rate post-peak.
I know everyone here is sick to death of hearing me preach about how we have to take as broad a view as possible of the energy situation, so I won't go into the whole shtick again. But everyone please remember that we're talking about an immense mosaic made of postage-stamp-size tiles, and focusing on just those few tiles right in front of us is recipe for misinterpreting the whole picture.
Raw crude demand therefore was always a given. Oil sands never would have been developed in Alberta, for example, if there were not folks looking out decades. When they were first being touted as investments, many short term thinkers dismissed it as a crazy science experiment.
That didn't stop the original investors from pushing forward.
As for refineries... never underestimate the profit motive. If regulations makes gas more expensive, then it will sell at a profitable price point. Capacity constraints raise prices but someone has to be a visionary and step forward to build the damn things.
The only reason you wouldn't build it is if you don't think you need it.
That might be an oversimplification... clearly there are some that have long wanted to build nuke plants but have been prevented from doing so.
Not for much longer I suspect.
And there's always uncertainty... You'd hate to spend 10 years and several billion dollars on a new mega-facility, only to have it come on-stream right when the economy goes into recession and demand is slacking.
There is of course a need to replace capacity to refine light sweet oil with heavy sour capacity though.
There is no global ban on new refinery construction. Check the EIA country reports at their website. Here's a section from the report on China:
Oil companies are spending lots to build new refineries in rapidly growing markets, and they continue to spend large sums to expand capacity in the US and other mature markets. Their behavior is not consistent with a beleif that no new refining capacity will be needed.
http://www.nytimes.com/2005/09/11/business/11refine.html
To amplify one point: the return will be affected not only by the investment, and the capacity utilization, but also by the timeline. Glenn McGinnis has been working for 6 years to get permits, oil supply, and capital for a new refinery in AZ, and he estimates a 10 year inception to first operation timeline.
Consider: we have no reliable consensus on future oil availability, and a refinery project faces 10 years of investment before the first positive cash flows, and interest rates will rise over that period of time. On the consumption side, half of the US airlines are bankrupt, and Ford and GM are junk bond status...the uncertainty does get to be a bit much.
So... lets see if Bodman's speach to the Canadian Council of Chief Executives is followed up with some other 'problem' solved... perhaps Softwood Lumber (which they can use the guise of Katrina to paper over the complaints of lumber producing protectionist states... gonna need a lot of lumber, cheap lumber, to rebuild)
We'll really know the crap is hitting the fan if deals like EnCana's latest start getting questioned on "security" concerns.
http://www.usembassycanada.gov/content/content.asp?section=can_usa&subsection1=trade&documen t=energy_091305
Not surprising, said Bodman, the U.S. Department of Energy "has a very strong relationship" with its Canadian counterpart -- Natural Resources Canada. "We meet regularly and are in constant communication at all levels throughout our respective departments," he told his audience. "Both departments are committed to exploring ways to expand cross-border infrastructure development and trade, and to ensuring the continued security of our integrated systems."
"In this time of energy-supply constraints, price volatility and political uncertainty in some parts of the world, it is reassuring to know that the United States and Canada can count on one another for continued energy-supply security and stability," he said. "If there is one message I want you to take from this meeting, it's that the United States values and depends on Canada as an energy supplier, a trading partner, a neighbor and an ally. And I want you to know that ... Canada can continue to depend on a reliable, open U.S. market for its growing trade and investment ties."
The energy secretary concluded his speech by paying tribute to an abiding friendship that has sustained both Canada and the United States for more than 200 years. "We are two separate, sovereign nations: different, yes, but in many ways alike," he said. "And considering all that we share -- a border, an environment, not to mention common energy, economic and national security challenges -- there can be no question that ours is a shared destiny."
A couple weeks later, it was lifted.
I also mentioned that I fully expected, in the fullness of time, the on-going softwood lumber protectionism and anti-NAFTA anti WTO countervailing duties etc to be lifted. Rather expected that to happen once Dick Cheney visited, but Katrina has got in the way of his visit.
However... I do recall mentioning that Katrina gave them a perfect excuse to lift the softwood lumber penalties and tell the US lumber producing states to sit on their objections.
Voila:
Washington weighing exemptions on Canadian softwood lumber duties
Officials say the notion of lowering duties on softwood to increase the flows for reconstruction following the devastation from hurricane Katrina is being seriously discussed in Washington.
Not only would that help in the shorter-term crisis but could move along stalled talks to resolve the softwood lumber trade dispute that threatens to poison relations between the two countries, says U.S. Ambassador David Wilkins.
http://www.canada.com/news/business/story.html?id=9ba1ddca-9045-4d67-8577-d60eb96b6742
I've no doubt Washington is fully interested in securing as much access to Canadian oil, now and long into the future, as is possible. "Solving problems" like this trade dispute allows them to gain support of the Canadian government for when a purchase attempt by interests not friendly to the US cause (say China) come along.
10 years ago we would not have seen the political maneuvering around oil that we see now (it was there, just not as obvious nor seemingly accelerated as it is now). One more sign that peak or peaking oil gets closer?
But the Administration has always tried to smooth the way for the oil companies, if only because Bush and Cheney are oilmen. If there's trouble with Canadian trade, and that affects oil, then you can bet that whatever industry is on the other side of the dispute is in trouble.
If Venezuela allowed substantial foreign investment and equity in oil, nobody in Washington would care if Hugo Chavez was cloned from Marx and trained by Che.
When one considers where to locate a refinery, it makes sense to place it where it can handle imported oil and send products via truck and train routes. This basically means a coastal location. Now, combine that with EPA and other regulations concerning wetlands, wildlife refuges, beaches, etc. and one can run out of land possibilities pretty quickly as well. That's why using an old army base makes no sense, but maybe a naval base would. Yet I would think the environmental issues would still apply, not to mention whoever takes on the naval base proposal would inherit liability for whatever the government had already dumped or contaminated at the base location. Based on armed forces records in that respect, the naval base option could have prohibitive hidden costs and substantial, up-front bio-assay costs.
Just some thoughts!
Market: Oil expected to average $64/bbl in 2007
-Negative demand shock: $39
-Anxious Market: $51
-Fundamentals surprise: $80
Key finding: there's wild disagreement, even from the same forecaster. Forecast at your own peril, and use any numbers at your own risk.
http://www.hattiesburgamerican.com/apps/pbcs.dll/article?AID=/20050911/NEWS05/509110304
I suspect that what is going on is that the price of light sweet crude (the benchmark that you always hear about when prices are quoted in the media) is in higher demand because the refineries need high quality crude to maximize output. Refineries could purchase heavy sour for much less than light sweet at the current spreads, but their output of refined products would drop with the lower quality crude inputs.
Any oversupply of a raw material due to processing bottlenecks should lead to a price drop. As for oil, it's a mystery.
My explanation is strictly psychological: both buyers and sellers on the market are aware that we'll soon have (and already heaving) an ever-widening supply/demand gap. And both sides are also aware that taking this in to the surface will cause panic, an oil spike, recession etc... That's why the so called "efficient market" reacts on news that have just a seemingly persuasive relation with the problem to justify the price increase necessary to settle the accumulated tensions (but of course the real reasons are quite different). On the other hand the ever optimistic media will be the last to publish news that threaten to reveal a long-term problem. That's why they expose and "swap" the long-term with the short-term ones. Scaring the investors is really bad for the business.
Come on - this is just another self-dilusion. The market reacts on psychology and fear is really a great factor. I really wonder... do the brokers check if the unit affected is for processing of light crude or sour before bidding higher? And also how could taking out of say 50 000 bpd unit somewhere in Texas (about 0.06% of the world consumption) cause a price spike of 3 or 5% in the world market?
perhaps this might explain why the borders between USA and Canada/Mexico are merely illusional in the very near future. Now, who's going to rebuild New Orleans? let me give you a hint......Illegal Immigrants.
From: Reuters By Deepa Babington in New York
September 14, 2005
THINK you are upset about high gas prices? Maverick British entrepreneur Richard Branson is so furious he wants to build his own oil refinery.
Like the rest of the airline industry, Mr Branson's Virgin Atlantic Airways has been stung by higher jet fuel prices and was forced to raise fuel surcharges for the second time in four months.
Hurricane Katrina sent oil prices soaring to $US70 a barrel because it shut several US Gulf Coast refineries, which turn crude oil into products like diesel, gasoline and jet fuel.
"If we don't start now to get more refineries built then fuel prices could literally rocket to $US100-$US200 (per barrel of oil) and the world economy would come to a grinding halt," Branson said in an interview on financial news network CNBC overnight.
Mr Branson did not say where he wants to put his refinery, but some analysts said he should not look to the US, where no one has built a refinery in 29 years.
"My immediate reaction to that is: Not in the US," said Paul Flemming, oil analyst at Energy Security Analysis Inc. "That's definitely more pie in the sky than anything."
Advertisement:
In the US, getting a permit could involve years of navigating local, state, and federal regulations and protests from environmental and community groups, analysts say.
But they note that people in other places would not be too keen to have an oil refinery in their backyards.
"If you're talking about a 400,000 barrels per day refinery next to a French Chateau in the Loire valley, the timeline is infinite," said Tim Evans, senior oil market analyst at IFR Energy Services.
"If you're looking at an industrialised part that already includes an oil refinery, it's much less of a big deal."
Mr Branson said plenty of places would welcome the jobs that a new refinery would create. "Some people will kick and scream, but they may be the same people screaming about the fact that they're having to pay enormous prices every time they get into the car."
But building a refinery to ease high fuel prices would be far from a quick fix: any refinery would take at least four or five years to build, if not longer.
And according to Energy Security Analysis' Flemming, another refinery would not ease record high crude oil prices as Branson suggests, since it would not increase actual crude oil production.
Mr Branson's idea does have some fans, however, among those concerned about the lack of competition in the refining industry, which is dominated by a few large companies.
"The oil companies themselves aren't interested in building new refineries and will tend to denigrate the chances of any new investors actually succeeding in their business," said Mr Evans of IFR Energy Services.
"They'll say, 'What does Richard Branson know about oil refineries?' He doesn't have to know about that part of the business, but he can easily see that oil refiners are making a margin far superior to what he's making in the airline business."
lets see how this plays out! hope he has deep pockets!