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  • 1. Production and prices

    Oil started the week below $66 a barrel, jumped to over $70 on Wednesday on better economic news from Europe and Asia , and then fell back to close at $69.95 on Friday on weaker-than-expected US employment data. On Tuesday the EIA revised US demand for July down by 133,000 b/d to 18.77 million b/d – the lowest since 1996.

    For yet another week, US crude inventories grew by more than analysts expected to 338.4 million barrels. A growing chorus of oil analysts is saying that demand is too weak and inventories too high to support current prices.

    A Bloomberg survey shows OPEC production falling slightly in September. The cartel is still producing 1.2 million b/d above quota with only the Saudis and Gulf allies adhering to quota. Many of the rest are likely to be producing close to flat out.

    Although China does not formally release data on the size of its petroleum inventories, last week the Xinhua News Agency reported that end-of-August stocks were 17 percent higher than last year. The Agency published tables showing stockpiles to be higher than previously reported. This suggests that a lot of the increase in China’s oil as well as other commodity imports in the last six months have been going into inventory rather than being consumed.

    Since early September natural gas prices have risen from $3.50 per million cubic feet to a high of nearly $5 early last week. The steepest rally since 2006 now appears to be coming to an end as US underground storage is nearly full. US stockpiles are expected to surpass the record of 3.54 trillion cubic feet later this fall leaving producers no choice but to shut down wells or dump production on the market at cut-rate prices. The economic slump will cut US demand by 2.4 percent this year and we are a month away from the heating season. Last week a forecaster opined that little snowfall thus far in Siberia suggests a warmer than usual winter in the US.

    2. Oil and recession

    For the last six months expectations that the US and global recessions were nearly over has led to solid growth in the equity markets, and until recently, the oil markets. Last week there were a number of developments suggesting that the global economic situation may not be as favorable as widely reported in the media.

    On Wednesday, Beijing announced details of plans to reduce overcapacity in industrial production that has been made worse by the $585 billion in stimulus spending during the last year. Cutbacks are to be made across the board in nearly all heavy industries, many of which are seeing demand at only 60 percent of capacity. In recent months increases in China’s output have been hailed as rescuing the global economy despite the 25 percent drop in exports.

    The IMF reported banks across the world have still revealed only about half their potential losses from bad investments and warned that another downward lurch in the global recession was likely. As expected, the US automobile industry reported a major drop in sales after the cash-for-clunkers program ended, with sales at GM and Chrysler down 45 and 42 percent, respectively.

    The most ominous new information of the week was buried in the Department of Labor’s report on job losses for September. Although the headline job loss number of 263,000 was enough to unsettle equity markets, of more importance was the Department’s admission that the unprecedented scope of the current recession was causing the job-loss reporting model to break down. The Department said that in the first quarter of 2009, when the GDP shrank by 6.4 percent, the loss in jobs may be 824,000 more than previously reported. Much of this reanalysis comes from integrating payroll tax records with payroll information. Given that the reanalysis only carries us through March 2009, the accumulating distortions suggest that official unemployment figures could be on the order of 1.5-2 million too low by the end of the coming winter.

    This admission led some in the financial media to begin looking at the many other job loss measures reported by the government and independent analysts. The Labor Department’s own, but rarely reported, household survey shows employment falling by 785,000 in September as opposed to the headline 263,000 drop in payroll count. Alternative interpretations of the household survey suggest 995,000 fewer people were working in September than in August and that the number of people “not in the labor force” could have risen by 1.5 million during the month.

    If these numbers are close to correct, their consequences should be showing in all sorts of economic data this fall. The administration already is considering another round of stimulus spending.

    3. Iran

    Last year when oil markets were tight, Iran which produces about 4 million b/d, was largely immune from threats of economic pressures. Support from China, which is one of Iran’s main customers, and Russia, which is seeking markets and influence, has been enough to prevent meaningful sanctions. Now with so much spare oil production capacity, the balance is changing.

    In the wake of the revelation of a new Iranian nuclear enrichment facility, the US moved to assemble a package of economic sanctions. These include restrictions on banking services and embargos on oil field equipment. For now an embargo on selling gasoline seems to be off the table as unduly provocative. China is unlikely to support such a move as damage to Iran’s economy would be too severe.

    Last week Iran apparently agreed to inspection of its new enrichment facility and to sending its enriched uranium to Russia for conversion into reactor fuel. If these plans actually come to fruition and are not just a negotiating ploy or another deception, they could do much to relax fears over Iranian intentions.

    Tehran has been in ill repute following its violent and controversial Presidential elections. A nuclear-armed Iran would be such a destabilizing factor in the region, it is likely that China or Russia is quietly pressuring.

    4. China expands overseas

    Hardly a week goes by without a report of Chinese involvement in yet another oil deal somewhere in the world. Since last December, Chinese energy companies have spent at least $13 billion on overseas assets.

    Last week it was revealed that Beijing is making an offer to buy up some 6 billion barrels of Nigerian oil as licenses to western oil companies come up for renewal. The Chinese are said to be offering several times more than the Nigerians are currently getting for their oil. The deal could be valued at anywhere from $30 to $50 billion. As most of the oil blocks in Nigeria are already being produced by western oil companies, there are some interesting legal issues ahead in the Nigerians’ attempt to award them to the Chinese. The Niger militants have warned the Chinese to stay clear unless they are ready to settle with the militants.

    Three years ago, China gained rights to develop four oil blocks in exchange for a hydroelectric plant, a railroad, and a refinery. The new Nigerian government cancelled the agreements.

    In other developments, China is in talks with Uganda on joining into developing the fields discovered by Tullow. This would be Beijing’s first involvement with Ugandan oil. Beijing will also expend $1 billion in helping Kazakhstan expand its oil industry.

    The Iraqi government says it will ban Sinopec from further bidding on oil projects if it goes through with plans to acquire the Swiss-Canadian firm Addax which is producing oil in Kurdistan without Baghdad’s permission. BP, however, has given the Chinese National Petroleum Corp. a larger equity share in the project to develop Iraq’s Rumaila oil field that produces almost half of Iraq’s oil.

    There clearly is no let-up in sight for China’s efforts to convert its surplus cash into oil anywhere it can find it.

    Quote of the Week

    • “We’re using something on the order of 85 million barrels a day and it’s going to be difficult, in my view, to get that up much. We’ll use less eventually — it is a finite resource — so the real question is how well we anticipate that situation.” If we’re not ready, look for oil prices to spike. Buffett suggests embracing electric vehicles as a way to ween ourselves off fossil fuels.
      — Warren Buffet, investor, CEO of Berkshire Hathaway

    Briefs

    • Russia, the world’s biggest energy supplier, increased oil output 1.7 percent to a post-Soviet high in September from a year earlier. OAO Rosneft, Russia’s largest crude producer, brought a new field on line in August. Russian oil production rose to 10.01 million barrels a day from 9.84 million b/d last year. Total crude exports climbed to 5.47 million barrels a day, an increase of 4 percent from the same month last year. (10/3, #18)
    • BP said it has made another oil discovery in deep water offshore Angola, the nineteenth find in a cluster of fields that it plans to develop in groups. The Tebe discovery was drilled in 1752 meters of water and reached 3325m below sea level. The well results confirmed the capacity of the reservoir to flow in excess of 5,000 barrels a day under production conditions. (10/1, #7)
    • Mexico’s Pemex said the value of its crude exports during the first eight months of the year totaled $15.4 billion, 55.5 percent less than in the same period of 2008. (9/28, #8)
    • It will be very difficult for Mexican state oil company Pemex to produce more than 1.5 million b/d by 2017, independent Mexican energy analyst David Shields said. Production is currently just above 2.5 million b/d, down from some 3.4 million b/d four years ago. (10,2, #10) [Editors’ note: Shields will be speaking on October 13 at the ASPO-USA conference next week.]
    • Iraq’s parliament, still full of MPs who are wary of foreigners coming to “steal Iraq’s oil,” has obstructed progress by failing to pass the required laws. But with MPs in recess for the summer, technocrats in the ministry have quietly been taking some cautious steps towards turning Iraq into the global hydrocarbon giant it says it wants to be. (10/2, #7)
    • Brazil’s proposal to make Petrobras the only operator of some offshore oil fields may slow development of the region where the Americas’ biggest crude discovery in decades was made. Rio de Janeiro-based Petrobras is investing $174.4 billion in the five years through 2013 to boost output. About $29 billion will be used to develop the pre-salt fields. (10/3, #9)
    • Brazil’s pre-salt oil region may hold between 25 billion and 100 billion barrels of oil, the country’s cabinet chief said. (9/30, #6) [Editors’ note: we assume this is oil-in-place, which is a much different number from eventually recoverable reserves.]
    • Venezuela said it may sue ConocoPhillips for exercising an option to purchase PdVSA’s 50 percent stake in a refinery in Sweeny, Texas. ConocoPhillips says PDVSA failed to deliver heavy crude as required under contract to the refinery since the beginning of the year, while PdVSA says it stopped shipping 166,000 barrels of oil a day to comply with OPEC cuts. (10/3, #10)
    • Canada’s oil sands may take a daily beating in the international media and from environmentalists, but the arithmetic of US consumption and supply all but ensures a long, prosperous future for the dirty oil. (9/28, #13)
    • Greenpeace activists occupied two conveyor belts used to transfer bitumen from an open pit mine to a processing plant, demanding the closure of Canada’s vast oil sands. (10/1, #12)
    • Chevron, the second-largest U.S. oil company, asked a court in Ecuador to remove the judge presiding over a $27 billion environmental lawsuit against the company there, saying he is biased. (9/29, #10)
    • During 2008, oil companies drilled 85 exploratory wells in water depths of 1,000 feet or greater in the Gulf of Mexico but only announced 15 discoveries, a success rate of about 17 percent. At more than $100 million per well, the cost of dry holes adds up. Advances in the field of seismic exploratory technology by the University of Houston’s Arthur Weglein and colleagues shows promise of improving the odds. (10/3, #16)
    • Iran will be short around 200 million m3/day of gas this winter due to rapid growth in demand. Iran has bought its first diesel cargoes in six months to supplement gas it is burning in power plants. The country has failed to develop gas fast enough to meet domestic demand. (9/28, #5)
    • According to a report on global gas markets by Booz & Company, forecasts for falling industrial output in developed countries will reduce worldwide demand for natural gas in 2009 and 2010 – the first time in history—while potentially setting back the market for up to 10 years. The surplus on global gas markets may reach 15 per cent. (10/2, #15)
    • Unconventional natural gas accounts for more than half of U.S. production, even though the two new “rock stars” among shale fields — the Haynesville Shale and the Marcellus Shale — are just beginning to be significantly developed. The U.S. is leading the way in the search for unconventional gas, and developing technology that will be used around the world. (10/2, #14)
    • After months of deliberations, state environmental regulators on Wednesday released long-awaited rules governing natural gas production in upstate New York, including provisions to oversee drilling operations near New York City’s water supplies. The regulations do not ban drilling near the watersheds, but sets strict rules on where wells can be drilled and requires companies to disclose the chemicals they use. (10/2, #15)
    • EPA tests found that 11 of 39 water wells in Pavillion, Wyoming contained what it termed “contaminants of concern,” and that the natural gas industry may have a pollution problem on its hands. A spokesman for Encana said there has never been a documented case of fracking that has contaminated wells or groundwater. (10/1, #11)
    • The Rockies Express Pipeline is on schedule for completion November 1st. The 1,679-mile pipeline, costing $6.7 billion, extends from Rio Blanco County, in northwestern Colorado, to eastern Ohio. The 42-inch pipeline has a capacity of about 1.8 billion cubic feet per day of natural gas, enough to service 4.1 million homes. (10/3, #14)
    • Duquesne University Professor Kent Moors predicted that the price of natural gas is on the verge of increasing to a point at which it will become profitable for companies to begin drilling, especially in the Marcellus formation. (9/29, #12)
    • The number of rigs drilling for natural gas in the US increased to 712, according to oil services firm Baker Hughes. The natural gas drilling rig count is still down 54% since peaking above 1,600 in September last year. During July, the natural gas rig count bottomed at 665. (10/3, #15)
    • Power company Exelon Corp. last Monday joined a stream of companies quitting the US Chamber of Commerce over the chamber’s stance against federal climate-change legislation. (9/29, #11)
    • Supervisor Ross Mirkarimi commissioned a hearing on San Francisco’s Peak Oil Preparedness Task Force Report on September 24. Members of the Task Force discussed at length the effects of Peak Oil and Gas on the City and its implications for their way of life. (9/29, #14)
    • Based on Nissan’s kickoff event for its electric vehicle Leaf, EV World writes that Nissan is planning to price the car somewhere in the US$25,000-to-$35,000 price range (battery included), or somewhere comparable to a fully-loaded Honda Accord. The Leaf has an estimated range of 100 miles. Full consumer rollout is slated for 2012. (10/3, #21)
    • France launched the “battle of the electric car” Thursday, unveiling plans to invest heavily in infrastructure for the two million electric and hybrid cars it wants on the road by 2020. (10/3, #22)
    • China may have to put the brakes on the construction of nuclear power plants to ensure the plants are safe, the country’s top energy planning official told reporters on Sunday. (9/29, #10)
    • The US Government Accountability Office said ethanol-from-corn’s 45-cent-per-gallon federal tax credit is costing the Treasury billions of dollars in revenue, while advances in ethanol technology and a government mandate to boost production of renewable fuels make the subsidy unnecessary and redundant. (10/3, #13)