Outmaneuvering America

Rodgers has no doubt that China understands peak oil and expects future supply disruptions, which is why it’s accumulating foreign assets and diversifying its import options.

Peter Dea, the president of oil and gas exploration and production company Cirque Resources LP, made the same point a bit more obliquely, rhetorically asking if China had no doubts about the future of oil, why would they have recently outbid Exxon Mobil for new drilling in Ghana?

Putting a finer point the difference between the strategies of the U.S. and China, Dea wryly observed that the U.S. has potential for offshore drilling for natural gas, but “it won’t be developed until the U.S. takes energy resource planning as seriously as China does.”

That doesn’t appear to be in the offing any time soon. Washington doesn’t seem to understand the commodity markets at all, Matthews said, nor the shrewd moves that China is making. While Japan already has a strategic mineral stockpile, and China is quickly amassing one, the U.S. is selling off its key minerals: “The lack of knowledge and concern over it in Washington is horrifying, and I can’t explain it,” he moaned.

Well, I have explained it: America has no energy plan, and we won’t have one until we give up our fantasies about energy independence or drilling our way out, admit that oil is peaking, and get serious about planning accordingly.

While America was busy with its hallucinated wealth meltdown and trying to raise some cash by selling assets at garage sale prices, just one of China’s three major oil companies, CNPC, secured 75 resource projects in 29 countries.

Another of the three, energy giant China National Offshore Oil Corporation (CNOOC), just bought oil assets in the US for the first time. The size of the deal for four deepwater exploration licenses in the Gulf of Mexico was undisclosed, but Norway’s Statoil, the seller, characterized it as “small.”

Still, the purchase is bound to make it more difficult for China to maintain a low profile as it snaps up resources.

Perhaps that’s why it has begun trying to cover its tracks: China OGP, an oil industry newsletter issued by Xinhua news agency, recently announced that it would no longer publish data on China’s stockpiles of crude oil, gasoline, and diesel. (As if that data weren’t hard enough to get already! Killin’ me.)

The lesson on China for retail investors should be clear: Buy domestic reserves while they’re cheap, and hold ‘em, hold ‘em, hold ‘em.

Until next time,

http://www.getreallist.com/

Tags: China, demand, PEAK OIL, supply

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For my final report on the 2009 ASPO peak oil conference, I must address the world’s new prime mover of commodity demand: China.

With flat-to-declining economic growth rates in most of the rest of the world, the Red Dragon has emerged as the dominant force driving global demand for natural resources.

Adam Robinson, a Vice President at RBS Sempra Commodities who gave an excellent talk on the oil trade and its relationship with the recession, noted that China’s willing to buy oil in size at $55 a barrel for its strategic stocks, providing a natural floor for global prices.

Steven Kopits, the managing director of Douglas-Westwood LLC, said China will overtake the U.S. as the world’s top consumer of oil by 2018. In fact if supply is available, he thinks it could double U.S. consumption by 2025.

Tom Petrie, Vice Chairman of Bank of America Merrill Lynch, essentially agreed. In his model, all of the growth in oil demand through 2030 comes from non-OECD countries, with China accounting for fully 43%. The IEA anticipates that absolute oil consumption in the OECD will fall over next 20 years by about 3 mbpd, while China’s increases by 9 mbpd.

Investors are looking at the convergence between falling OECD oil demand and rising demand in non-OECD, Robinson explained, and after taking monetary policy into account, the see commodities winning either way.

His reasoning is astute: Even if the Fed’s fiscal stimulus turns to drag, and we don’t get the recovery, then where does the dollar go? Down – which will be bullish for commodities. And if we have a V-shaped recovery, demand and prices will rise – again, bullish for commodities.

Voracious Demand

In his presentation on China’s oil and gas balance, Michael Rodgers of PFC Energy made one thing abundantly clear: China’s domestic oil production has nearly peaked, while its demand for oil is only going up.

China currently accounts for about half the total oil production of South Asia, Southeast Asia, and Australia combined.

The crude oil reserve balance for Asia went negative in the early 1980s, when the region began producing more oil than it was discovering. Like the rest of the world, most of its current production is from large reserves discovered in the 1960s and 1970s, supplemented by smaller discoveries since. The region’s current deficit is about 1.5-2 billion barrels per year.

After years of continuous increase, China’s oil production base is now in decline with overall depletion levels of 60%. Fields producing prior to 2000 are generally declining at rates of 5-7% per year, but mature fields are declining by as much as 16-20%. China expects enhanced oil recovery (EOR) technology to bring the overall decline rate to 6.7%.

New fields should allow it to maintain a production plateau around 3.6-4 mbpd for another 8-10 years in the PFC forecast. But then China will see a “catastrophic” drop in production as mature fields, accounting for 3 mbpd of production now, fall to about 1 mbpd by 2020.

Against a GDP growth rate of 8-8.5%, the stagnant supply picture means that China’s demand for oil imports will grow from 4 mbpd today to over 10 mbpd by 2020. China now constitutes 7.5% of global GDP and 9% of global oil demand, which will soon grow into the teens.

An appetite like that, Rodgers said, means China must do exactly as it has been doing: aggressively compete with the rest of the world to secure reserves, and export workers.

The picture for natural gas is slightly better, but also points to sharply increasing imports. China’s gas consumption is expected to rise from 7.6 billion cubic feet per day (Bcfd) in 2008 to over 30 Bcfd by 2030. Domestic production should keep up with demand until around 2014 — at which point imports will have to pick up the slack – and peak around 2020.

China is already building pipelines from every possible direction to import gas. I’m sure I’m not the only one who, looking at the following map, thinks “vampire squid.”

China’s demand for coal is just as astonishing: In just the last four years, Kopits observed, its increase in demand for coal was equivalent to the total U.S. coal demand.

Vince Matthews, director of the Colorado Geological Survey, rounded out the picture with some stunning facts on the demand for minerals and other commodities. China is:

The #1, #2 or #3 producer in the world for 15 of the most important commodities;
The #1 importer of copper, accounting for more than 40% of world demand;
Both the #1 producer in the world of iron ore and the top importer;
The #1 car manufacturer in the world, and the #1 car market. (Petrie later made a similar point: China is now second only to the U.S. in first-class interstate highways.)
Consider this little factoid: China built 70,000 new supermarkets in 2005 alone. For a little perspective on that number, the 2002 census counted about 150,000 “food and beverage stores” in the United States.

That voracious demand drove up prices across the board. Matthews ran down a list of price increases from various months in 2003 to the present:

Copper up 307%
Scrap iron up 559%
Molybdenum up 997%. Exports from the U.S. doubled, most of which went to China.
The average price increase of major metals was 379%, and the average price increase was 746% for 15 other industrial metals.
Although prices for many of the metals fell sharply in the commodity crash last year, they’re now staging a comeback, driven by Chinese demand.

Worse, most of these metals are bought via long term contracts, not on the spot market. When those contracts expire, Matthews expects spot prices to spike again.

Even cement demand was disrupted when China when began importing it in 2003, resulting quickly in price spikes and shortages in the U.S. China now consumes half of all the cement in the world.

The resources causing the most consternation, though, are the rare earth elements. As I discussed a few weeks ago, China has a virtual corner on the world supply of these crucial elements, which are used in wind turbines, solar equipment, parts for hybrid cars, and many of the other solutions for a post-peak oil future.

The U.S. now imports between half and all of its supply of the rare earths, putting it at China’s mercy for some of the raw materials that would be needed for a “Made in the U.S.A.” renewable energy revolution.

Indeed, Matthews believes that China intends to take advantage of its position by clamping down on its exports of rare earths, to bring world manufacturing to them.

But perhaps this should not unduly alarm us.

If China is clear-headed and deep-pocketed enough to invest in the energy solutions of the future while we are not, and they can build them faster and more cheaply than us, then maybe it’s time to stop worrying and learn to love our new Chinese overlords.

http://www.getreallist.com/

Tags: PEAK OIL, supply. demand. China consuption

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Crude Oil inventory surprisingly increased last week by 1,762,000 barrels to 337,676,000 barrels. Inventory is down 5,956,000 from 13 weeks ago and is now up 25,727,000 barrels from a year ago.

We are at the 87th Percentile in barrels in storage, and we are at the 96th Percentile based on the 23.91 days of usage in storage. Distillate inventory increased by 349,000 barrels, to 167,725,000, the 99th Percentile. We are up 6,108,000 barrels from 13 weeks ago and up 39,374,000 barrels from last year.

We currently have 47.34 days of usage in storage, the 98th Percentile. Gas inventory increased 2,560,000 barrels to 210,837,000 barrels, the 70th Percentile.

We are up 1,083,000 from 13 weeks ago and up 12,742,000 barrels from a year ago. Days of usage are at 23.84, the 72nd Percentile. The Crude Oil inventory will match last year’s level, in 11 weeks. Prices then were $46.47, $31 less than current prices.

In 15 weeks we will be comparing a Heating Oil price of 119.67 cpg compared to the current price 200.35 cpg, and inventory will be 26 mm barrels higher. In 7 weeks Gas inventory will be about equal to last year. Price was 84.40 cpg, a 108 cpg lower than now.

In a few short weeks inventories will be about the same as last year, if they do not change, and price if it does not change, will be extremely over priced. The market is at extreme risk for a sharp break on a comparative basis. If demand does not improve sharply and if production does not drop we have a problem headed towards us on price.

If we have inventories increase, and there is no demand increase, price will look more than very high, on a year over year basis. Distillate demand must increase and that is not happening. Production must drop sharply and that too is not happening. Ultimately, if these two things do not change we end up looking at a huge inventory, too much production and little demand.

A price collapseRefinery inputs fell again and we are now sitting at the 3rd Percentile this week, Distillate production is at the 71st Percentile with the HO Crack Spread at the 48th Percentile.

Gas production is at the 75th Percentile and the Gas Crack Spread is at the 8th Percentile. The Ho Crack Spread remains high considering production levels but the Gas Crack has dropped dramatically.

Production has not fallen much so the Crack Spreads have fallen. Over production, low demand eventually leads to price problems. Current demand levels warrant lower than the current production levels. The production levels we have seen dictate a demand increase of 10% ore more and that is not here.

HO and Gas production must be decrease. If, production compared to demand for products, remains at these levels price and processing margins will not hold these levels. We will see pressure on price and the potential for a price collapse is increasing.

Tags: demand, OIL PRICES, PEAK OIL, supply

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The International Energy Agency (IEA) released its annual World Energy Outlook (WEO) this week — a report I always anticipate eagerly. Hey, it’s like Christmas for energy geeks.
The IEA found coal in its stocking though, after a report the previous evening in the UK’s Guardian newspaper cited unnamed whistleblowers alleging the agency had been distorting its true view on peak oil in order to prevent public panic.
The internal sources claimed its analysts did not really believe that global oil supply could rise to the level in the official forecast, but that the agency had bowed to U.S. pressure to paint a rosier picture.
The quotes were unquestionably damning:
The 120m figure always was nonsense but even today’s number is much higher than can be justified and the IEA knows this. . .
Many inside the organisation believe that maintaining oil supplies at even 90m to 95m barrels a day would be impossible but there are fears that panic could spread on the financial markets if the figures were brought down further. And the Americans fear the end of oil supremacy because it would threaten their power over access to oil resources. . .
We have [already] entered the ‘peak oil’ zone. I think that the situation is really bad. . .
. . . imperative not to anger the Americans. . .
Peak oil analysts nodded their heads in agreement. It was hardly a revelation.
John Hemming, the MP for Britain’s all-party parliamentary group on peak oil and gas (yes, they actually have one — jealous?) was gruff: “Reliance on IEA reports has been used to justify claims that oil and gas supplies will not peak before 2030. It is clear now that this will not be the case and the IEA figures cannot be relied on.”
I’ve critiqued the reports of the Energy Information Administration (EIA) and the IEA many times over the years (here, here and here), and concluded that both agencies understood the reality of peak oil well enough, but somehow had been pressured to spin the story in the most optimistic way possible. Either that or they had some seriously schizophrenic people.
I have no doubt that a cohort of government and industry representatives from the U.S. and other OECD countries (at whose pleasure the IEA serves) have made their preferences known to the IEA leadership, and possibly reminded them who’s their daddy. After all, the agency was created after the 1974 oil crisis for a fundamentally political purpose: to safeguard the West’s energy supplies.
To be clear, my analysis of the agency’s data supports the allegations. Uncertainty has always been used to put an optimistic spin on the reports.
Several years back, it was the uncertainty around enhanced oil recovery and new discoveries, and the potential for higher prices to increase recoverable reserves.
When conventional crude flatlined at 74 mbpd in 2005, despite a tripling of prices afterward, the emphasis shifted to the unrealized potential for non-OPEC supply.
When that didn’t pan out, the potential for unconventional sources such as natural gas liquids, tar sands production, extra heavy oil, coal-to-liquids, and biofuels defined the optimistic gray zone.
There were also a few disturbing discontinuities along the way in which report summaries didn’t quite match up with the details in the later chapters. Various kinds of unconventional fuels began creeping into the “conventional crude” category.
The spin was absolutely detectable to a sharp eye.

Concealed Clues

At the same time, another transformation was taking place.
The edges between the solid data and the gray zone gradually became sharper. Over the last few years, the agency’s estimates for peak oil production fell from 120 mpbd to 105 mbpd, but oddly, their forecast for the date of the peak remained stubbornly around 2030. Curves were gradually flattened, but reached the same point. Simple head-scratchers like that.
The language of the reports also grew in clarity and intensity, alarming critics. By last year, it had become downright shrill: “The world’s energy system is at a crossroads” . . . “global trends. . . are patently unsustainable”. . . “the era of cheap oil is over”. . . “Time is running out and the time to act is now.”
This year, they admitted what many of us had already figured out: Non-OPEC supply has basically peaked. Despite this, IEA still forecasts global oil supply will rise from 84.6 mbpd in 2008 to 105.2 mbpd in 2030.
They then devoted fully half the report to a “450 Scenario” in which a vigorous global investment in efficiency, renewables, carbon capture, and nuclear power averts global disaster by keeping atmospheric CO2 concentration below 450 ppm, with a price tag of $26.5 trillion (in 2008 dollars).
The good news now is the situation isn’t quite as dire as we thought it was last year. Their cost forecast has come down from $35 trillion, and they now think the world will only need to come up with 45 mbpd in additional crude capacity (another four Saudi Arabias) not 64 mbpd (another six).
Indeed, the divisions between reality and fantasy in this report grew sharper still. They worry at length about the effect of the global financial crisis on investment in new energy supply, yet still imagine the world will spend about $1.5 trillion a year on new supply infrastructure.
While envisioning a massive investment in efficiency and renewables in the 450 Scenario, they observed that low oil prices, receding investment in cleantech in 2009, and general economic malaise could mean slower growth rates for the solutions.
They forecast that OPEC alone would come up with 17.5 mbpd in new supply—85% of the global increase—but expect the Middle East to spend only $1.9 trillion out of a global total of $25.5 trillion.
In an extremely dubious scenario, they see global natural gas supply growing faster than demand, eventually resulting in a massive glut. At the same time, they published for the first time a detailed, field-by-field analysis of nearly 600 major gas fields, accounting for 55% of global production. It showed an average 5.3% post-peak decline rate for the world’s largest gas fields, and a global production-weighted decline rate of 7.5% for all post-peak fields—very similar to the decline rates they published (again, for the first time) last year on oil fields.
While noting that nearly all of the growth in global energy demand will come from the developing world, and that much of the investment capital needed to obtain their 450 Scenario will need to be invested there, they also expressed significant uncertainty about those prospects.
Most telling, however, were the comments made in the press conference at the report’s unveiling.
When a reporter asked why they’re still sending a signal that the world will come up with another four Saudi Arabias of supply in their Reference Scenario when no one believes that is possible, IEA chief economist Fatih Birol tipped his hand:
This is not the scenario we think is — first of all — likely; this is not the scenario that we want to happen. . . This is the scenario that, if it happens, we are going to have an accident in terms of climate, in terms of energy security, and other things, and it is the reason why we are pushing the 450. . . We push the 450 not only for the climate change reasons. . . it is also for the energy security reasons. And it is the reason why our ministers in October have endorsed our work in general. . . We think this [report] is a driver for [developing policy around climate change].
Essentially, he admitted that they deliberately tilted the report toward climate change with an expressly political purpose: to motivate capital and policy in the direction of a decarbonized energy supply. And they did that because it was politically expedient, with all eyes now on the upcoming Copenhagen summit on climate change.
Finally, the agency’s highly-nuanced, limp denial of the whistleblower allegations was well salted with impassioned pleas to reckon with their 450 Scenario, reiterating that “the era of cheap oil is over.” Birol even emphasized that the IEA had decided to make their data on oil depletion available on its web site for the world’s free and transparent examination—a clue that was not concealed, but painted in fluorescent orange.
The Climate Change Stalking Horse

I have considerable sympathy for the IEA. It’s not easy to follow your heart and tell the truth for the benefit of humanity while the boss man is glaring at you and pulling a finger across his throat. Of course their report is politically distorted.
Yet, as I highlighted the key points in the report’s executive summary and mentally ticked off the articles I’ve written on each one over the last few years, I realized how far the IEA has really come. They may have no choice but to walk a tightrope in an intense global spotlight, but they’re backing into the truth as quickly as they think they can. For that fact alone, despite its flaws, this report gets my thumbs-up.
Regarding the IEA’s Reference Scenario, my view remains basically unchanged from what I said this time last year: “Here’s my prediction: their 2010 report will state that the new peak is only 95 mbpd, at a cost of over $30 trillion. And by 2012, they’ll admit that the peak was in fact in June of this year, at 87 mbpd. By 2030, fully 20 years past the peak, world oil production will likely be under 70 mbpd.”
As for the 450 Scenario, I continue to believe that climate change is a backwards approach to the problem. I have seen no serious rebuttals to the studies by Kjell Aleklett and David Rutledge calling into question whether the world can even get to 450 ppm when peak oil, and then peak gas and peak coal, are properly considered. (Currently, no climate change scenarios have any cognizance of fossil fuel peaking whatsoever.)

In e-mail correspondence this week, Aleklett told me that he will soon have two new newspaper articles published in his native Sweden (which will be translated to English) that demonstrate on scientific bases that all of the IPCC scenarios are wrong.
But even that is not important.
Climate change is merely a stalking horse for the IEA. Whether we focus on energy or on climate, the ends are largely the same. And the IEA has astutely recognized that there’s a whole lot more public momentum and investment money to be focused on climate change than there is on dour old peak oil.
What the 2009 WEO Really Means

I could go on for pages and pages, as I have in the past, pointing out the discrepancies and critiquing the scenarios. But that’s not really what this report is about.
Never mind the outlandishly optimistic oil and gas production scenarios. We can throw out the 450 Scenario, as well. They’re wrong, and we all know it—wink wink, nudge nudge.
The IEA doesn’t believe either one of its scenarios any more than they believe humans roamed the earth with dinosaurs. Some stories are meant to be read as parables.
The internal message of the 2009 WEO is clear: The world is facing an energy crisis of epic proportions. The path we’re on is precarious and unsustainable. (The word “sustainable” occurs 18 times in the report, which I’m sure is a record, and Birol repeatedly emphasized the phrase “energy revolution” in his comments.) There is a way to avert disaster, but it’s going to require the world to commit an incredible amount of capital to the energy sector for many decades to come. And if we fail to rise to the challenge, we’ll be dead in the ever-rising water.
That, of course, is our entire raison d’être here. To motivate capital, rise to that challenge — and make some cheese in the process.
Until next time,

Chris

Tags: demand, OIL PRICES, PEAK OIL, supply

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Editor’s Note: if you wish to view the figures mentioned in Mr. Foucher’s post, please go to http://www.theoildrum.com/node/5933

Standard economic principles have demonstrated that price is a function of supply and demand. The same is true for the recent  oil prices fluctuations we have witnessed over the last few years,namely the equilibrium between supply and demand. However, the following conundrum has not been resolved: are oil prices high due to greater demand or too little supply? This ambiguity allows for vastly divergent interpretations of the same data and depending on the agenda you are trying to push, will easily support either.

Lately, the concept of “Peak demand” has been suggested in a multitude of recent articles that unfortunately do not qualify their analysis of the status quo. Some suggest that we are willing to and capable of moving away from oil. Are we?

A few years ago, some analysts lectured us about the effect of oil prices on the creation of new oil supply. Now that this argument has clearly failed, they have decided over night that we don’t need oil anymore. In this debate, it is important to distinguish between demand (what you want or need) and consumption (what you get based on your ability to buy). Following this logic, consumption is “satisfied demand”. Conversly, we can define the “unsatisfied demand” or “excess demand” that has been suppressed. Below the fold, I’ll show that the key driver behind the priceincrease since 2002 has been excess demand combined with unresponsive supply.

OECD Demand

In this analysis, I follow an approach similar to the one proposed by Ye et al. (pdf) using a model defining a desired inventory level. The consumption trend observed between 1990 and 2001, when the market was well supplied, can be easily and accurately modeled by a linear trend taking into account monthly fluctuations: The fit result is shown as the magenta line illustrated on Figure 1 below. The above model will

define normal demand levels assuming low oil prices. The OECD consumption has strongly reacted to higher oil prices and is now almost 10 mbpd the level expected by my nominal demand model.

Figure 2. Observed OECD consumption and nominal demand model (monthly, total petroleum products),

volumes in million barrels per day (mbpd). data from the EIA.

Looking at the residuals Ct-Dt, the fall in consumption from the desired level is even more telling:

Figure 3. Difference between the nominal demand models and the observed consumption (monthly, total  petroleum products), volumes in million barrels per day (mbpd). Data from the EIA.

I make the following assumptions:

1. because oil prices were so low during the 1992-2001 period (i.e. virtually no excess

demand), I will call “nominal demand model” the linear model defined above.

2. The difference between nominal demand and observed consumption is an estimate of the excess demand: EDt=Dt-Ct

Plotting the excess demand against oil prices clearly shows why prices rose until the financial collapse last year. Before 2002, prices and excess demand were contained within a tight cluster around 20$/barrel – evidence that the market was well supplied and at equilibrium. The red line shows that prices increased by $20 per 1 million barrels per day of excess demand between 2004 and 2008.

Figure 4. OECD Excess demand versus oil prices (WTI).

One could argue that the nominal demand model defined above is not stationary and has been affected by structural changes in demand. Unfortunately, the only way structural changes in demand could be estimated is if the oil prices of tomorrow would go back to $20 a barrel for a few years within a pro-growth and healthy business environment. Only then could a new nominal demand model be estimated; those conditions won’t be satisfied anytime soon. Peak demand would suggest that the demand model would change over time, but then the level of unsatisfied demand would go down, bringing down prices with it. Actually, the severe recession we are currently in since the fall of 2008 has destroyed demand as a result of high unemployment rates and reduced credit availability. Looking at the price model on Figure 3, a return to the $70-

80 range is equivalent of a demand destruction of around 3 mbpd for all of the OECD.

What about Spare Capacity?

Spare capacity, mainly provided by OPEC, is the amount of oil that can be made available within

30 days and sustained for at least 90 days (EIA definition).  Looking at the available spare capacity and the excess demand estimate, it is obvious that OPEC spare capacity has become deficient since 2002, and that the surge in excess demand coincides with the increase in oil pricesas shown on Figure 5.

Figure 5. Oil prices (right axis) and estimated excess demand along with EIA estimate for OPEC spare capacity

(left axis).

So What is Causing High Oil Prices?

As an interesting exercise, I looked at the causation between oil prices and demand/supply indicators. Causal search algorithms systematically investigate patterns of conditional dependence and apply the Causal Markov Condition to reconstruct the graph of the data generating process (A good overview is available here). I define the following quantities:

P: Monthly oil prices

S: Monthly oil supply

C: OPEC spare capacity (EIA)

D: Excess demand

I used the remarkable TETRAD IV software (family of software for causal modeling originating with Peter Spirtes, Clark Glymour, and Richard Scheines at CarnegieMellon University) available online. I split the dataset in two periods: 1998-2002 period when prices where relatively low and 2003-2008.

1998-2002 period:

Figure 6. Graphical causal model for the period 1998-2002

Spare capacity is dependent on prices and excess demand. Prices and excess demand are independent unconditionally; but are dependent conditional on spare capacity. In short, OPEC spare capacity was playing a buffer role in order to absorb excess demand.

2003-2008 period:

Figure 7. Graphical causal model for the period 2003-2008

Price is dependent on supply and excess demand. Supply and excess demand are independent unconditionally; but are dependent conditional on prices. Spare capacity is independent of all the other variables at 5% significance.

Conclusions

Lower consumption does not mean lower demand, nor does it mean the increase in alternate sources of energy. If it did, it would be akin to saying that an alcoholic is sober implies he has effectively dealt with his addiction. It may be that he is sober because he has simply exhausted all of his options for obtaining additional alcohol.  Also, I think it is important to differentiate between  the following two causes of demand destruction:

1. Recession induced demand destruction (e.g. business going bankrupt, rising unemployment,

etc.), or

2. Long-term structural changes in demand (e.g. increase in the average car mileage, increase efficiency, etc.)

In my opinion, the latter cause of demand destruction is the approach to take and can be implemented through adequate government policies  (e.g. higher CAFE standards). When people are unemployed, energy efficiency is the last of their concerns. If we do not proactively implement demand side policies and instead wait for high prices to take their toll, social unrest and  higher government deficits are likely to make things more challenging, or even completely unmanageable.

Anemic supply growth, only a preamble to peak supply, was enough to create our present troubles. Wait until supply growth is negative! We have enough data from the OECD to draw the following conclusions:

1. Sluggish supply growth is the main driver behind the 2002-2008 oil price increase. OPEC spare capacity has become irrelevant or at least unresponsive.

2. Nominal demand is between 3 and 5 million barrels per day above  production capacity.

3. Prices are increasing by $20 for every million barrels per day of excess demand.

4. OECD consumption is very elastic to oil prices.

5. Non recession induced peak demand  is not supported by the data.

6. The financial collapse and the current economic recession has at least reduced demand by 3 million barrels per day for the OECD.

In my next post, I will look at the non OECD demand.

Tags: demand, oecd, OIL PRICES, PEAK OIL, supply

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3:2:1 Crack Spread:
The 3:2:1 Crack Spread was up 0.37 cpg this week, closing at 14.14 cpg. We rallied up to 17.13 cpg this week before we setback by weeks end. I am negative on this spread, especially after the rally we have seen over the past few weeks. The back months well above 20+ cpg and this is too high considering the supplies and demand. The premium in the back months gives us room for a sharp break if demand does not improve. Distillate inventory and demand should prove too much to overcome. This should limit the upside, until we see a change in the facts. The impetus for the change is usually price going down and going down sharply. Gas inventory is high, compared to a year ago and demand is running below a year ago. If inventory builds, we should expect downward price pressure to begin to be the rule. The question is what will make this spread improve from here. I still can see nothing that should be a driving force to cause this spread to move up, until inventory decreases or demand improves. We will have rallies, but they will not last long and they will not carry us up much. A drop to the record low at 1.51 cpg can happen if demand drops this winter. If something does not change in the supply and demand structure price problems should come back. If the Gas Crack weakens, it is almost impossible to think the Heating Oil Crack can move this spread to higher levels. The fundamental facts caused the collapse, and they will take time to reverse and correct the imbalances. Expect more weakness and lower prices. This may end up being especially true in the back months. They are trading at a sharp premium to the front months and this may attract continued selling. Unless we see a change in the demand levels, I doubt we can hold the premiums in the far out months. Either demand for products must improve, or production must fall sharply. If this does not happen, inventory will be building, and there will little chance for a sustained rally. We will then more than likely see another price collapse. The spread traders are going to continue to sell this spread every time it rallies, especially with the premium in the back months. The lack of demand in the distillate market, with a huge inventory, and if Gas demand drops, as it normally does at this time of year, is a major problem. If that is the case, expect downside price action in the spread. If we see Distillate demand increase, we can stabilize and/or go a little higher. If there is no demand increase, we probably have to go sharply lower. We cannot recover to higher prices until the refiners slow down the production. If demand runs the market, and there is no demand, price must generate the demand and that means lower prices. The Vol Price Indicator is at the bottom of its range for the 9th week in a row, and this is bearish. The % Total Count Indicator is 27%, rising and this is bullish. The other two Indicators are at 33% and 42%, both falling and this too is bearish. The Indicators and the facts remain very negative as of now.

Tags: BlackGold, gas demand, gas inventory, logi. oil prices, PEAK OIL

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logi Energy wants as many people as possible to read this article by Nouriel Roubina.

Dr. Nouriel Roubini, professor of economics and international business at the Stern School of Business at NYU and chairman of RGE Monitor, is perhaps best known for his prescient predictions of the financial market collapse in 2005.
Dr. Roubini will be the keynote speaker at IndexUniverse’s upcoming “Inside Commodities” conference on Nov. 4 at the New York Stock Exchange. We sat down with Dr. Roubini ahead of the conference to take his temperature on global markets, the role of oil (NYSEArca:USO – News) and gold (NYSEArca:GLD – News) and the impact of regulation.

Index Universe (IU.com): You’ve said that you’re worried we’re already sowing the seeds of the next crisis. Where do you see that most directly?

Dr. Nouriel Roubini (Roubini):Well in commodities, I look at oil prices. They fell from $145 last summer, came down to $30 earlier this year and now they’re back close to $80. But if I look at the fundamentals of demand and supply, demand is down to 2005 levels, supply and inventories are at all-time highs. In my view, the movement in oil prices is not fully justified by the fundamentals.

There are improving fundamentals. There is a global recovery. But that justifies oil going from $30 to maybe $50. I think the other $30 is all speculative demand feeding on it—speculators and herding behavior. Last year, when oil was at $145, that killed the global economy. I worry that oil is going to go up above $100 for reasons that have nothing to do with the fundamentals of supply and demand. Oil at $100 would have the same negative effects on the global economy as oil did at $145 last year.

Last year, when oil was at $145, the global economy was still growing. Right now it has collapsed, and is recovering. Oil pushing above $100 would have nasty, negative real trade effects and real disposable-income effects on all importing countries:U.S., Europe, Japan, China, India; all the countries that were hit by the oil shock last year. So that’s an element that is in my view totally speculative, and dangerous to the global economy.

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Tags: BlackGold, economy, logi Energy, OIL PRICES, PEAK OIL

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Dennis Mangan, Logi Energy, November 2:

Crude Oil:
This week we finally saw weakness return and closed down $3.50 at $77.00. We had a BUY SIGNAL and we have put on partial hedges at around the 25% level. Considering the current Crack Spreads, the Crude Oil is where we want to hedge. The Indicators changed direction and triggered a Buy Signal, but this week we will not hedge more as they have went to neutral. Fundamentally, I am negative on the market, but I never let my bias about market fundamentals stop me from following the mathematics of the market. Too many times, I have seen the Indicators end up being right. Thus, to ignore them over fundamental facts is not wise. The market has changed to a bullish scenario. The main, and the only reason I can see, is the continued weakness in the US $. This week we saw the $ stabilize a bit, but we will see how long that lasts. One week does not make a trend. When the US $ strengthens the market should head lower. Then a break to the $67.50-$72.50 level is probable. If dollar weakness reasserts itself, we will see higher prices until the weakness reverses. This week HO prices rose and the HO Crack rallied a bit. The 3:2:1 Crack Spread is holding above the breakeven price for refineries. This will lend support to Crude Oil as long as we hold at this level or higher. Crude Oil is susceptible to price weakness if the Crack Spreads again begin to fail. The Heat Crack Spread lost 9.82 cpg or 38%, as the Gas Crack dropped 27.02 cpg or 68% and the 3:2:1 Crack dropped 60% of its value during that break. Thus, we may be low enough for now on the Crack Spreads. That though can change in a hurry if inventory and demand do not act better going forward. The refiners are a little better than breakeven as of now and that must remain stable. We have had a number of Refiners shut down operations and if the spreads do not stay at these levels or higher more will also shut down. If we see weakness in the Crack Spreads, that should signal weakness to come in the Crude Oil. If the 3:2:1 Crack Spread weakens Crude Oil could have a severe break. Distillate Inventory is huge and we still have very small amounts of demand. A mild winter could easily trigger the Crack Spreads to go into a collapse. Crude Oil prices can go back down to $34 if demand falls apart. With a colder than normal winter, and with increasing demand, the higher margins should stop that scenario from playing out. The Vol Price Indicator is at the top of its range for the 8th week in a row, this is bullish. The % Total Count is 79%, falling and this is bearish. The other two Indicators are at 77% and 76%, both rising and this is bullish.

Heating Oil:
We fell back this week losing 7.04 cpg to close at 200.52 cpg. Last week we generated a BUY SIGNAL but because of the HO Crack spread, we are using Crude Oil for the hedge. This week the weakness turned us to a neutral signal. I expect to see weakness return to this market. The huge inventory and low demand are simply the facts. Production remains high relative to the demand, which is worse than poor considering the time of year. Inventory is 41 million barrels above a year ago, with the demand still in the lower 20% of the 10-year range. This has been going on for the last 28 weeks in a row. Production finally fell back below the 50th Percentile, which is good but it must continue. The facts, and the price action, have not been agreeing lately. As always, there is no reason to try to argue with the price action. The fundamental facts appear, and are, very negative. That said the price still has been going up. The Crack Spread must hold these levels or we will eventually see price problems. We have too much inventory. We have too much production. We have too little demand for product. Yet, as of now, the market does not care. When it does is anyone’s guess, but it more than likely will at some point down the road. If the US $ begins to recover then we will see weakness. I cannot see how weakness will not return in the weeks ahead. Over the last 63 weeks, we have seen only 4 weeks of increases on a year over year basis in usage. It would appear that the only way to decrease the inventory is by a cut in production cut. If the demand cannot increase, along with production decreasing, we cannot clear the huge inventory as we go through the winter. Then we go into the March timeframe with very high or record inventory and then we have storage problems and that spells price declines. If, that is what eventually happens, I expect to see a price collapse in both Heating Oil and the HO Crack Spread. I would a drop of 50-75 cpg in Heating Oil, and 15-20 cpg in the Crack Spread. This market has run up to 210 cpg from 115 cpg while the inventory increased from 145 mm barrels to 171 mm barrels. Thus, we can fall right back to where it began once the market turns over. If demand stays depressed, price will have a hard time maintaining these levels, and the price break could be quick and large. The Vol Price Indicator is at the top of its range for the 7th week in a row, this is bullish. The % Total Count is 75%, stable and this is bearish. The other two Indicators are at 74% and 73%, one rising and one falling and this is bearish.

Heating Oil Crack Spread:
We closed up this week gaining 1.29 cpg and closing at 17.19 cpg. The market rally appeared to have stalled last but this week regained its footing. We will now see if we can rise to, and above, the 17.50 cpg level. The huge inventory build caused the price break. That with the worst product demand in 10 years triggered the downside action. Thus, inventory building, with a demand collapse, drove us to record supply levels. The lack of product demand might allow us to maintain close to record levels of inventory for an extended period. How will we ultimately work this inventory down is the key question. Will we get into a literal storage problem if we cannot? The inventory and the demand should limit a huge price advance. The low is 5.10 cpg made the week of 5/29. The two major lows were the week of 5/29 and the week of 9/11 at 8.10 cpg. I think that these lows are going to be tested. If we take out the low of 5.10 cpg, expect the break to carry us down to the -2.00 to 2.00 cpg level. If we exceed the 17.50 cpg level, expect the run to carry us up to the 22.50-25.00 cpg level. Considering inventory and demand, the logical conclusion appears to be price weakness. Considering the market action of the last few weeks that would have been wrong. I think we have had a rally that was caused by the market being oversold, not a shift in the underlying facts. Distillate Inventory is at 99th Percentile. Production is at the 39th Percentile, Imports at the 20th Percentile and Product supplied is at the 17th Percentile. These facts are simply terrible. Especially the Products supplied number. If the refiners do not scale back operations, and inventory builds going into the winter, the Crack Spreads will collapse. If we do not see demand increase, with a drop in production, inventory will not drop to a lower level. If that is what happens over the next 5 months we have a huge price problem. Refining run rates need to go down to the 75% level. For now, I think inventory, production and demand levels put a cap on a large sustained price move up. The Vol Price Indicator is at the bottom of its range for the 3rd week in a row, this is bearish. The % Total Count is 49%, falling and this is bearish. The other two Indicators are 55% and 57%, one falling and one stable and this is neutral to bearish.

Tags: BlackGold, fuel, hedging, logi Energy, OIL PRICES, PEAK OIL

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logi Energy recommends this article by Nouriel Roubina.

Dr. Nouriel Roubini, professor of economics and international business at the Stern School of Business at NYU and chairman of RGE Monitor, is perhaps best known for his prescient predictions of the financial market collapse in 2005.
Dr. Roubini will be the keynote speaker at IndexUniverse’s upcoming “Inside Commodities” conference on Nov. 4 at the New York Stock Exchange. We sat down with Dr. Roubini ahead of the conference to take his temperature on global markets, the role of oil (NYSEArca:USO – News) and gold (NYSEArca:GLD – News) and the impact of regulation.

Index Universe (IU.com): You’ve said that you’re worried we’re already sowing the seeds of the next crisis. Where do you see that most directly?

Dr. Nouriel Roubini (Roubini):Well in commodities, I look at oil prices. They fell from $145 last summer, came down to $30 earlier this year and now they’re back close to $80. But if I look at the fundamentals of demand and supply, demand is down to 2005 levels, supply and inventories are at all-time highs. In my view, the movement in oil prices is not fully justified by the fundamentals.

There are improving fundamentals. There is a global recovery. But that justifies oil going from $30 to maybe $50. I think the other $30 is all speculative demand feeding on it—speculators and herding behavior. Last year, when oil was at $145, that killed the global economy. I worry that oil is going to go up above $100 for reasons that have nothing to do with the fundamentals of supply and demand. Oil at $100 would have the same negative effects on the global economy as oil did at $145 last year.

Last year, when oil was at $145, the global economy was still growing. Right now it has collapsed, and is recovering. Oil pushing above $100 would have nasty, negative real trade effects and real disposable-income effects on all importing countries:U.S., Europe, Japan, China, India; all the countries that were hit by the oil shock last year. So that’s an element that is in my view totally speculative, and dangerous to the global economy.

IU.com:Is that true elsewhere?

Roubini: I could make a similar argument for other commodity prices. In my view, rising commodity prices are not justified by the fundamentals.

There’s a huge bubble, because we have zero rates in the U.S., zero rates around the world and a huge carry trade. Everyone is borrowing at zero interest rates in dollars and getting a capital gain because the dollar is weakening, so they are borrowing at negative rates. And then they invest in risky assets:commodities, equities, credit. We’re creating a bigger bubble than before.

It’s going to go crashing down, in an ugly way. That’s the basics of the argument.

IU.com:Is there a regulatory solution to the speculation issue? Is the CFTC tightening and enforcing position limits a step in the right direction?

Roubini: I think it’s an idea worth considering. I’m not usually in favor of position limits, but I think the swings in the value of oil have been extremely dangerous for the global economy. Oil at $145 was the reason—more than Lehman or anything else—that the global economy tipped into the worst recession in the last 60 years. After the collapse of the global economy, oil collapsed to $30. At $30, there can be investment in new capacity. But now it’s back at $80 and soon enough it’s going to be at $100.

If position limits are going to be effective—and I don’t know that—I would not be against them. Because these swings in value of oil, on the way up and on the way down, are extremely damaging to global economic activity. They are dangerous. They are not justified. And if they can be controlled, so be it.

IU.com:You recently co-authored a report in which you and your colleagues ranked the U.S. third in world financial markets, after London and Australia. Was regulation a big component of that?

Roubini: The U.S. might have been No. 3 overall, but it was ranked No. 38 out of 55 in financial stability, because we’ve had a disastrous banking and financial crisis. That was in part due to poor regulation and supervision of financial institutions. That’s one of many factors and reasons why the U.S. was ranked so low on that particular pillar. Certainly there has been a massive failure of regulation and supervision of the financial system. But the regulatory failure was more in the direction of unwillingness by regulators to apply regulations. The Fed had all the powers to regulate toxic underwriting of mortgages, but they believed in laissez faire markets, and they created a disaster.

IU.com:How does this get fixed?

Roubini: I don’t believe in market discipline. It doesn’t work. That was the ideology of the last 10 years; self-regulation means no regulation. Market discipline doesn’t exist with irrational exuberance and reliance on internal risk management models that don’t work. Nobody listens to risk managers, because it’s risk takers that make the profits. The reliance on ratings agencies that have their own conflicts of interest, the reliance on soft-touch regulation, the focus on principles instead of rules—that particular regulatory philosophy has been a disaster, and we’ve learned it the hard way. We have to go to simpler rules, tougher rules and more binding rules. That’s the right approach.

IU.com:You’ve been clear that you think most assets are currently overvalued. Do you think there are opportunities for investors in certain asset classes or certain geographies?

Roubini: Well, there is a wall of liquidity chasing assets. That liquidity can chase those assets higher for the time being until the huge carry trade—the asset bubble and the wall of liquidity—comes crashing down. You can still have all the risky assets going higher. Of course, the higher they go, the more they diverge from fundamentals, and the riskier the situation becomes. But eventually, if the recovery of the economy is going to be anemic, sub-par, below-trend and U-shaped, there is going to be a correction. And therefore my view is to stay away from risky assets. Stay in liquid assets. I don’t know when the correction is going to occur, it could be a while longer, but eventually it will be a pretty ugly correction, across many different asset classes.

IU.com:When you say “stay away from risky assets,” many people hear that and think, “Aha, gold!”

Roubini: I don’t believe in gold. Gold can go up for only two reasons. [One is] inflation, and we are in a world where there are massive amounts of deflation because of a glut of capacity, and demand is weak, and there’s slack in the labor markets with unemployment peeking above 10 percent in all the advanced economies. So there’s no inflation, and there’s not going to be for the time being.

The only other case in which gold can go higher with deflation is if you have Armageddon, if you have another depression. But we’ve avoided that tail risk as well. So all the gold bugs who say gold is going to go to $1,500, $2,000, they’re just speaking nonsense. Without inflation, or without a depression, there’s nowhere for gold to go. Yeah, it can go above $1,000, but it can’t move up 20-30 percent unless we end up in a world of inflation or another depression. I don’t see either of those being likely for the time being. Maybe three or four years from now, yes. But not anytime soon.

Tags: BlackGold, economy, logi Energy, OIL PRICES, PEAK OIL

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Dennis Mangan, logi Energy, October 23

Crude Oil:

This week we again saw a rally of $1.97, closing at $80.50. We now have a BUY SIGNAL and should commence hedging. Considering the Crack Spreads, the best place to Hedge is in the Crude Oil. The Indicators changed direction and triggered a Buy Signal. Fundamentally, I am still negative view on the market but I never let my bias about market fundamentals stop me from following the mathematics of the market.

Too many times, I have seen the Indicators be right, and to ignore them is foolish. The market has changed to a bullish scenario after it could not break. The only reason I can clearly see is the weakness in the US $. As long as that continues the market probably cannot break dramatically. When, or if, the US $ strengthens the market should go back down and sharply. A break into the low $70’s, or high $60’s, is probable if we see the $ begin to rally. On the other hand, if dollar weakness continues to be the story we will see higher prices until the weakness finally reverses.

This week product prices rose causing the Gas Crack and 3:2:1 Crack to move higher. The 3:2:1 Crack Spread is above the breakeven price for refineries and this will support the Crude Oil as long as we hold here or higher. Crude Oil will be susceptible to price weakness if the Crack Spreads fail. The Heat Crack Spread dropped 9.82 cpg or 38% over the last 10 weeks as the Gas Crack dropped 27.02 cpg or 68% over the last 12 weeks. The 3:2:1 Crack lost 60% of its value in 10 weeks.

We may be low enough for now on the Crack Spreads but this will be determined by watching inventory and demand. The refiners are about at margins that are breakeven after 5 weeks of losing margins. A number of Refiners have shut down some operations but unless the spreads stay here or higher more will also have to go down. The break started the first week of August and they were making a profit of $7-$8 a barrel, now they are at breakeven and with a huge build up in inventory. Weakness from here in the Crack Spread should signal weakness in Crude Oil. If the 3:2:1 Crack Spread weakens Crude Oil could break severely. We have a lot of Distillate in Inventory and we have too little demand as of now. If we have a mild winter and the Crack Spreads collapse, Crude prices can go back down to $34. A cold winter with increasing demand and better margins will prevent that.

The Vol Price Indicator is at the top of its range for the 7^th week in a row, this is bullish. The % Total Count is 80%, rising and this is bullish. The other two Indicators are at 77% and 76%, both rising and this is bullish.

Heating Oil:

We jumped again this week closing at 207.56 cpg up 4.59 cpg. Heating Oil has showed strength over last 4 weeks. This week we generated a BUY SIGNAL but because of the HO Crack spread, we will use Crude Oil for the hedge. Fundamentally, I expect weakness to return, but as of now, the market looks strong. Currently the inventory is huge and demand is small. The Production levels remain too high versus the current demand. Frankly, the demand is simply pathetic. We have inventory 46 million barrels higher than a year ago. Demand remains in the lower 20% of the 10-year range for the last 27 weeks in a row, with production above the 50^th Percentile for 24 of the last 27 weeks. Eventually we will see a price problem and a large one if it does not change. Again this may not happen if the US $ remains weak. The facts and the price action continue not to agree, and there is no reason to argue with the price. The fundamental facts appear to be overwhelming negative, yet the price has been going up. The Crack Spread weakened this week but not by much. It must hold these levels, or go higher, or price problems will eventually develop. It all boils down to too much inventory, too much production and too little demand for finished product. This holds true if the US $ recovers more weakness will negate the facts for a while but probably not forever. I cannot see how weakness will not return in the weeks ahead but for now, we will not bet on it. Over the last 62 weeks, we have had only 4 weeks of year over year increases in usage. If Econ 101 is still valid, moving product will ultimately mean a price decrease. That is fine unless this is all the demand that there is. The only way to drop inventory may be a production cut, and a combination of the two will probably be the answer. At some point, it will become clear that if demand does not increase, with production dropping, we will simply not clear this huge inventory. If that plays out, we should expect a price collapse in the Heating Oil and in the HO Crack Spread. If that should happen, expect a decline of 50-75 cpg in Heating Oil and 15-20 cpg in the HO Crack Spread. Remember that this market ran up from 115 to 207 cpg and at the same time inventory built from 145 mm barrels to the all time record highs over 171 mm barrels. Thus, based on those facts, and terrible demand as of now, we can fall right back to where it began. We now have 25+ million barrels in inventory and we are up 92 cpg. If the demand function remains depressed, price will ultimately have a hard time maintaining these levels. When price does turn over the break could be very quick and very large. The Vol Price Indicator is at the top of its range for the 6^th week in a row, this is bullish. The % Total Count is 75%, rising and this is bullish. The other two Indicators are at 73% and 74%, one stable and one falling and this is neutral to bullish.

Tags: BlackGold, COMMODITY, ENERGY, GAS, LOGI, OIL, OIL PRICES, PEAK OIL

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