In this post last month, I described how the recent storage build might serve as a good proxy for describing a well supplied oil market. I also presented data suggesting that actual physical oil consumption may have been running 2 - 3 Mb/d beneath supplies.

In this post, I will present further evidence that oil markets have for some time been well supplied. Furthermore, it appears to me that both the run up last summer and the more recent run up in oil prices bear the hallmarks of an oil market now being heavily influenced by speculative forces.

As a result of these forces, I believe that there is a substantial chance that oil prices may again experience a rapid drop to perhaps as low as $30 barrel before Christmas. One reason I believe this is likely is based on my research with respect to US Oil Fund USO. In February USO held 100 000 WTI contracts (1 contract = 1 000 bbls), but this had dropped to 50 000 WTI contracts recently, as ETF purchasers increasingly switched to Natural Gas. Strange as it may seem, the sale of these USO contracts may be part of what is holding WTI prices up, and natural gas prices down. As the number of WTI contracts reaches a minimum, this influence may turn around the other way.

Two weeks ago I posted a review of an article with an optimistic view on the future availability of oil. Written by R. Aguilera, R. Eggert, C. Gustavo Lagos and J. Tilton and published in the Energy Journal of the International Association of Energy Economists. After a short correspondence Dr. Aguilera and his team have been kind enough to respond to the five points of disagreement I raised in my review. Their response is shown below. I hope our readers can react respectfully as to create a meaningful discussion.

Abstract of Aguilera et al. (2009)
"This study assesses the threat that depletion poses to the availability of petroleum resources. It does so by estimating cumulative availability curves for conventional petroleum (oil, gas, and natural gas liquids) and for three unconventional sources of liquids (heavy oil, oil sands, and oil shale). The analysis extends the important study conducted by the U.S. Geological Survey (2000) on this topic by taking account of (1) conventional petroleum resources from provinces not assessed by the Survey or other organizations, (2) future reserve growth, (3) unconventional sources of liquids, and (4) production costs. The results indicate that large quantities of conventional and unconventional petroleum resources are available and can be produced at costs substantially below current market prices of around US$120 per barrel. These findings suggest that petroleum resources are likely to last far longer than many are now predicting and that depletion need not drive market prices above the relatively high levels prevailing over the past several years.(Aguilera et al. 2009, page 141)"

In the last edition of the Energy Journal of the International Association of Energy Economists an article was published that concluded that the recent high oil price spike was just an aberration, as there is plenty of low cost oil out there waiting to be produced. This claim was made by a group of scientists from the Catholic University of Chili and Colorado School of mines, R. Aguilera, R. Eggert, C. Gustavo Lagos and J. Tilton. In this post I critically review this study showing that many important factors have not been taken into account by Aguilera et al. (2009), making it highly probable that their conclusion is incorrect.

Abstract of Aguilera et al. (2009) "This study assesses the threat that depletion poses to the availability of petroleum resources. It does so by estimating cumulative availability curves for conventional petroleum (oil, gas, and natural gas liquids) and for three unconventional sources of liquids (heavy oil, oil sands, and oil shale). The analysis extends the important study conducted by the U.S. Geological Survey (2000) on this topic by taking account of (1) conventional petroleum resources from provinces not assessed by the Survey or other organizations, (2) future reserve growth, (3) unconventional sources of liquids, and (4) production costs. The results indicate that large quantities of conventional and unconventional petroleum resources are available and can be produced at costs substantially below current market prices of around US$120 per barrel. These findings suggest that petroleum resources are likely to last far longer than many are now predicting and that depletion need not drive market prices above the relatively high levels prevailing over the past several years.(Aguilera et al. 2009, page 141)"