The Oil Drum

Concerns about a gap in crude oil demand/supply in the 2nd half of 2007 increased in the past months. The International Energy Agency (IEA) and it’s sister organisation, the Energy Information Administration (EIA), have both told the OPEC cartel that OPEC must increase supply to avert rising oil prices. Presently the agencies expect a crude oil demand/supply shortfall of 1 million barrels per day towards the end of the year. However the OPEC cartel is of the opinion that oil markets are well supplied and therefore there is no need to increase supply at the moment.

This discussion, as shown below, boils down to the expectation for non-OPEC supply and world demand in the 2nd half. If the IEA and EIA projections are correct, we will soon find out what is going on in Saudi Arabia with the production of the supergiant oilfield Ghawar.

This morning at 10:30 am EST, the Department of Energy released their weekly supply reports for crude oil and refined products. Gasoline stocks increased for the 7th consecutive week, and the build of 1.79 million barrels to 203.3 million barrels was higher than the market expectation of a 1.19 mb rise. Gasoline prices initially sold off 2 cents, paused for a while, then dropped sharply and spent most of the day down 5-6 cents. In the last 30 minutes of trading however, the prices rallied back to finish only down 1.5 cents on the day. Crude, after being down $2 at one point, closed down 75 cents.

Robert is on vacation so I'm posting the text of the report for those interested, along with some comments from a prominent Wall Street analyst, Paul Cheng, of Lehman Brothers. The TWIP (the text that accompanies the data released at 1pm), and some thoughts below the fold.

I was reading the story that Leanan had posted on the IEA estimate for oil demand, and it struck me that we are in that navel gazing part of the year where we try and estimate what will happen to oil supply and prediction. Since it helps to have data, let’s see what the crude oil and gasoline situation looks like, using the EIA data.

It is worth remembering, as we look at the history of crude stocks over the past year that, about twelve months ago we were looking into a future that was anticipating a second bad hurricane season, as well as the usual geo-political machinations and technical problems that would combine to limit crude oil supplies. In the end these were not as severe as we had expected, and the precaution of building oil stocks for the summer was not, this past year, needed as we had a more benign summer than usual.

When a refinery purchases crude oil, the key piece of information they need to know about that crude, besides price, is what the crude oil assay looks like. There has been a lot of discussion here at various times about “light sweet”, or “heavy sour”, and how these qualifiers affect the ability of a refiner to turn these crudes into products. So, I thought it would be good to devote an essay to this subject, and discuss how different types of crude can affect a refiner’s bottom line.

Let's compare light sweet oil to heavy sour oil by looking at a pair of assays:

Table 1. Comparison Between Assays of Light and Heavy Crudes

There is a pretty good piece on MSNBC that explains how gas prices are set. It is written in a "FAQ" format and does quite a good job of breaking this down for the layperson. I think some of the material may have actually creeped into a report on Friday's NBC Nightly News (link to netcast—not sure if it works).

Ultimately, the price of gas prices is set by the price of crude oil on the futures market, which (I believe) is out of the hands of grandstanding politicians. If this much gets through to the public, I'd say we've made progress. The problem however, is that, in the eyes of the public, we've just replace one mystery (gas prices), with another (crude oil prices).

The fact is that the futures markets is opaque. Sure, financial news services come up with narratives about why the futures do what they do, but they never really cite any evidence for them. Does anyone, even the wise readers of the The Oil Drum, really know the true reasons why crude oil prices are high? Is it because the supply of crude oil is diminishing? Anxiety over Iran and Nigeria? Mere speculation by investors? Chances are that it's all of these things. Investors do things for all kinds of reasons, and they certainly don't act as a monolithic block.

http://www.theoildrum.com/tag/gas_prices (this link will take you to all of our stories on gas prices which go in to a lot greater depth than this post...)

Update [2006-4-22 13:3:39 by Super G]: As pointed out in the comments, the switchover from MTBE to ethanol [as well as the annual transition from winter blend to summer blend] is also contributing to higher prices in the short-term.

The rest, in the same way as last time, follow below the fold.

To give a very rough number his overall projected increase in production, if all the projects now scheduled come on line on time and at current targeted capacities, is that production will go up by something less than 1 mbd a year over his last projection. To put this in context, back last October, estimating a 5% decrease in existing well production, and an average of around 1.75 mbd of increased demand per year would give an annual shortfall in production of around 3.2 mbd relative to anticipated demand in each of the next four years. He had anticipated that oil demand for 2005 would be 83.5 mbd, increased demand would be 1.4 mbd, while there would be an increase in supply of 2.4 mbd, of which non-OPEC would provide 1.5 mbd. Depletion would be at 4.2 mbd.

For those new to the site this is where, on weekends, I often post a small technical talk, explaining some of the aspects of the fossil fuel business, so as to help understanding of some of the topics on the site. There are now two main topic themes developed, those relating to oil, and those to coal. Since this talk relates to oil, at the end I will post the list of topics that relate. It is a very simple explanation, because of space, and those who wish to ask or expound a bit more are invited to do so through the comments.