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1. Prices and Production

Oil prices spent the week in the vicinity of $82 a barrel. On Friday prices rose briefly to a two-month high of $83.16, then fell back on concerns about US economic growth. For the past six months, the oil markets have cycled between optimism and pessimism about the prospects for an imminent economic rebound. Increasing demand for oil in Asia continues to be the key prop under oil prices. The IEA reported that preliminary data shows apparent Chinese demand in January increasing by 28 percent year over year – albeit from a relatively low base. February data from China shows oil imports increasing to 4.8 million b/d from 4.0 million in January.

The weekly stocks report showed total US commercial petroleum inventories dropping by some 5 million barrels last week as there were large, unexpected draw downs of gasoline and distillate stocks. US gasoline demand remains steady at about 8.8 million b/d; prices increased by 5 cents per gallon last week and the national average is now $2.79 a gallon – nearly 90 cents a gallon more than at this time last year.

Natural gas futures fell to the lowest price in 16 weeks as forecasts of milder weather ahead is expected to lead to lower-than-normal demand this spring.

As oil prices seem unable to climb higher than the low $80s, analysts are beginning to wonder if we will see the traditional spring price jump. Every year since 2004, oil prices have increased anywhere from 34 to 119 percent from winter lows to summer highs as refineries increased production for the summer driving season. But this year OECD economies are all mired in significant economic difficulties, which raises the question as to whether demand will increase significantly during the summer driving season. OPEC has been slowly raising production to keep up with increased demand from Asia and the oil producing nations. The Saudis are reported to have increased output by 100,000 b/d in February to 8.25 million b/d. The CEO of Saudi Aramco reiterated last week that they have 4 million b/d of spare capacity that can meet increasing demand from Asia.

2. From the IEA

The Agency’s chief economist, Fatih Birol, said last week that the “era of cheap energy is over,” that oil supply is unlikely to keep up with demand, and that he expects oil prices to “stay on the high side” due to structural not cyclical changes.

Global oil supply increased by 900,000 b/d in February to 86.6 million b/d. OPEC members bound by a quota increased production by 80,000 b/d last month, putting the cartel 1.9 million b/d above quota. For now the Agency says oil markets are well supplied and that there is an element of geopolitical tensions in current oil prices.

In its monthly Oil Market Report, the agency once again increased its forecast for 2010 global oil demand by 70,000 b/d to 86.6 million b/d. This would be a gain of 1.6 million b/d from 2009 levels. The growth will come from non-OECD countries with Asia accounting for half of the growth. OECD demand for oil is now forecast to shrink by 120,000 b/d in 2010.

With the Chinese economy continuing to grow very rapidly, the IEA increased its estimate for China’s oil demand in 2010 by 130,000 b/d to 9 million b/d – an increase of 6.2 percent over 2009.

Non-OPEC production for 2010 is now estimated to be 51.8 million b/d, an increase of 330,000 b/d from 2009. Increased production from the North Sea, Egypt, Russia, Thailand and Columbia is projected to account for much of the increase.

3. China

Hardly a day goes by without major economic news coming from China. Last week’s reporting shows China continuing to grow at astonishing rates, leading some to say “too rapidly.” The official numbers are impressive: exports and imports up 46 percent year over year; industrial production up 21 percent and retail sales up 18 percent in the first two months of the year; oil imports up 800,000 b/d in February to 4.8 million.

There was of course a downside to all this “astonishing” economic growth. Consumer prices rose by 2.7 percent in February, year over year, and factory gate prices increased by 5.4 percent in February.

While clearly concerned, Chinese officials seem content to let the 2008 stimulus program, which is nearly over, run its course during the remainder of the year while cutting the pace of bank loans. These appear to have dropped by 50 percent last month from January levels.

Doubts about Beijing’s statistics are beginning to surface even in Chinese newspapers. While there is little doubt that the country is growing rapidly and that its strong demand for oil, coal, copper and iron ore continues to support world prices, some of the numbers being released seem too high and could be influenced by political concerns as happens in many other countries.

A major issue at the minute is whether China will allow its currency, the renminbi to rise against the dollar. So far Beijing has resisted US admonitions to revalue, but many see indications that such a move is in the offing.

It remains clear, however, that Chinese economic development, be it boom or stagnation, is likely to be the major factor influencing oil markets for the next year or so. Nothing outside of major supply disruptions in the Middle East is likely to come close.

4. CERA Week

This year the annual Cambridge Energy Research Associates conference, which traditionally is attended by many of the major personalities in the energy industry, seems to have focused mainly on the prospects for shale gas.

Speaker after speaker spoke ecstatically about the prospects for the natural gas industry: demand from the power industry will double gas consumption in the next 20 years; there is enough gas to power America for 100 years at current rates of consumption; shale gas will account for 50 percent of US gas consumption in 25 years. One speaker, however, pointed out that Europeans, with a more pristine landscape than the US, may be reluctant to let highly intrusive shale gas drillers have as much latitude as they do in the US.

The simultaneous growth of the global LNG industry and US shale gas is bringing so much gas to market, at a time when industrial demand is dropping, that it may be a while before prices recover to economic levels. Several speakers expect that the demand to replace coal with natural gas will quickly clear the current surpluses of gas and in the long run the challenge will be to find still more.

Speaking at the conference, US Energy Secretary Chu called natural gas a transitional fuel that will used until renewable sources such as sun and wind are more widely available.

Quote of the Week

  • “Carbon-based fuels, in their cleaner forms, must keep carrying the load. Renewables just cannot ramp up fast enough to replace them. Let’s consider what gas can mean for the future. The real future, not the pipe dreams of the hydrocarbon deniers.”

— James Mulva, CEO of ConocoPhillips

The Briefs (clips from recent Peak Oil News dailies are indicated by date and item #)

  • Kuwaiti scientists now say that global oil production will peak in 2014. The Kuwaiti study created its world model for peak oil based on 47 individual models for each major oil-producing nation. It also took a separate look at OPEC, which includes nations that control about 35 percent of the world’s oil reserves. (3/13, #7)
  • Nigeria’s controversial oil industry bill is expected to eventually pass but the government may find it tough to later shift gears as international oil firms targeted under the legislation scale back their investments. Last year about $8 billion was invested in Angola’s deep-water resources–more than twice as much as in nearby Nigeria. (3/13, #8)
  • Venezuela would continue producing crude oil even if its ailing electricity system were to suffer a collapse, the country’s oil minister said Friday. Oil accounts for more than one-third of Venezuela’s gross domestic product, more than half of government revenue and about nine-tenths of the country’s exports. (3/13, #9)
  • The Venezuelan government plans to increase its consumption of oil and natural gas by a third in 2010 to fuel power plants with which President Chávez hopes will overcome their electricity crisis. (3/10, #14)
  • Oil production in its aging fields is sagging so rapidly that Mexico, long one of the world’s top oil-exporters, could begin importing oil within the decade. (3/10, #25) [See the Commentary]
  • India’s biggest energy explorer, Oil & Natural Gas Corp., may borrow $10 billion over the next decade as it competes with rivals from China and South Korea to buy oil assets overseas to meet domestic fuel demand. (3/8, #14)
  • Iraq’s major coalitions were locked in a surprisingly close race on Thursday, in initial results from elections that deepened divisions across a fractured landscape. Candidates were quick to charge fraud, heightening concerns whether Iraq’s fledgling institutions were strong enough to support a peaceful transfer of power. (3/12, #11)
  • The storm brewing on OPEC’s horizon over future Iraqi oil output could engulf the producer group sooner than it would like. OPEC is unlikely to discuss Iraq at its meeting on March 17 but it may need to do so within a couple of years. The consensus among analysts is that it would take around 5 years for Iraq to boost output by 1-1.5 million b/d. (3/12, #12)
  • Saudi Arabia is pressing ahead with the biggest offshore oil development in its history, despite having about 4 million b/d of idle crude production capacity. Development of the supergiant Manifa oilfield, containing an estimated 10 billion barrels of reserves, is “on time and on budget.” Production from Manifa will start in 2013, two years before the project’s scheduled completion. Output is projected to reach 900,000 bpd of crude. (3/12, #13)
  • Petrobras CEO Gabrielli told a Houston group that, while operating in Brazil’s pre-salt region does require an array of technologies, a bigger challenge lies in meeting logistical demands for operating in deep waters offshore. By 2018, Petrobras is looking for 58 new drilling rigs, with 23 being delivered between 2009 and 2011, nine being charted in 2012 and the remaining 28 being built in Brazil between 2013 and 2018. Petrobras has budgeted $174.4 billion for 2009-2013 under their business plan. (3/10, #15)
  • Tullow Oil will keep half its big Ugandan oil and gas discovery, but it can’t afford to develop by itself the $10 billion worth of likely downstream and upstream investment. Hence the decision to sell one-third stakes to France’s Total and China’s CNOOC. (3/11, #12)
  • Exxon Mobil outlined plans Thursday that rely heavily on oil from tough to reach places, extracting it from the depths of the ocean, the frozen Arctic and the tar sands in Canada’s frozen tundra. But oil pumped in these places tends to be much more expensive than oil from more conventional sources. Exxon isn’t alone. Easily accessible oil is becoming harder to find, and nations that have it are demanding a bigger cut of the profits. The entire industry is confronted with drilling for more expensive oil. (3/13, #12)
  • Exxon Mobil is counting on natural gas to provide the bulk of its future growth. CEO Rex Tillerson is counting on a $28.8 billion acquisition of gas producer XTO Energy as well as new gas developments from the South Pacific to the Celtic Sea to counter a 6.7 percent drop in output in the past five years. (3/12, #23)
  • The newly built, ultra-deepwater drillship Discoverer Inspiration has started operations for Chevron in the Gulf of Mexico under a 5-year drilling contract. The drillship targets the drilling of wells up to 40,000 ft of total depth and can drill in up to 12,000 ft of water. (3/13, #16)
  • In Pennsylvania, about 1,000 shale gas wells have been drilled and state and local tax revenues from shale gas may reach $871 million this year, according to the Marcellus Shale Coalition, a Canonsburg, Pennsylvania-based industry group. Drilling is on hold in New York while state regulators complete rules to address environmental impacts. (3/11, #24)
  • Researchers at Texas A&M’s Global Petroleum Research Institute are testing a new “fraq-water” membrane filtration system to determine if it sufficiently cleans the drilling water to reuse or recycle it. (3/13, #20)
  • The International Air Transport Association said it expects the airline industry to incur a $2.8 billion loss in 2010. IATA also lowered its 2009 loss estimate to $9.4 billion. The improved forecast has been driven by economic recovery in the emerging markets of Asia-Pacific and Latin America. Worldwide passenger demand is forecast to increase 5.6% in 2010 and cargo is now expected to rise 12% this year. Revenues are half-way to recovery—$42 billion below the 2008 peak and $43 billion above the 2009 trough. (3/11, #8)
  • Shell said it has stopped gasoline sales to Iran, becoming the latest European energy company to scale back ties with Tehran as the threat of tougher U.S. sanctions against the country looms. Iran has little refining capacity and is forced to import as much as 40% of the refined products it needs at a cost of several billion dollars a year. (3/11, #10)
  • A senior Iranian oil official said increased gasoline rationing imposed late last year has failed to reduce domestic demand, an acknowledgment that reflects the OPEC nation’s economic struggles as it faces possible new sanctions. (3/9, #8)
  • Iran and China have signed an agreement to allow China to set-up an oil rig in the Gulf despite increasing international calls to enforce tougher sanctions against Iran. (3/9, #9)
  • China reaffirmed its position that dialogue and consultation were the best method of resolving the Iran nuclear issue and should not be abandoned lightly. (3/9, #10)
  • US Defense Secretary Gates arrived in Riyadh on Wednesday for talks with the Saudi royal family that senior defense officials said would be focused on Iran. His visit follows recent trips to Riyadh by Secretary of State Clinton as well as Gen. Petraeus and Adm. Mullen. Saudi officials are very concerned about Iran’s nuclear program. (3/10, #8)
  • Indian power companies are stepping up interest to secure coal resources in Indonesia and Australia to meet power needs. Coal demand in India could be 1.4 billion metric tons by 2020, exceeding domestic supply of 1.1 billion tons. Coal India, the nation’s monopoly producer, is looking at 10 proposals in Indonesia, Australia and the US for strategic coal alliances. (3/10, #19)
  • BHP Billiton, Anglo American, and Xstrata are shipping coal 10,000 miles to China from their Cerrejon mine in Colombia for the first time this year because of surging demand and rising prices in Asia. Prices 45 percent higher than in Europe make it worthwhile to transport the fuel to ports that are twice as far as European harbors such as Rotterdam. (3/12, #19)
  • Lithium-ion batteries are the favored type for electric and hybrid vehicles because they carry more energy with less weight than other materials and because they lose their charge more slowly. Bolivia, which has almost half of the world’s reserves, is building a pilot production plant and drilling exploratory holes. That Bolivia is a remote, unstable country often hostile to foreign investment has spurred serious interest in producing lithium in Argentina, Chile, Australia, Serbia, China, Finland, Mexico and even in the USA. (3/12, #26)
  • A growing army of Beijing residents is returning to two-wheeled transport, but this time around it is to electric bikes. The explosion in purchases of electric bikes helps buyers move around more quickly in an increasingly auto-congested city. (3/11, #26)
  • Saudi Aramco chief Khalid Al-Falih expressed worry about assumptions in the political realm that alternative energy sources could “transform the face of energy overnight”. The over promise and under deliver of such technologies could lead to “green bubbles” which could collapse and damage their potential for success in the long term. (3/10, #9)