Airlines Going Down In Flames
Crude futures for May delivery traded briefly at $114.08 at 4:PM on Tuesday. This is another new record and you can expect the national average for gasoline to move over its record of $3.39 per gallon set this afternoon. The momentum players are pumping crude and the shorts are scrambling for cover.
Nymex crude options expire on Thursday and there is considerable open interest in the calls at the $110 strike. That appears to be current support and anybody short those calls or oil futures is feeling the pain.
The May crude futures contract expires next Tuesday and open interest in that contract is again many times the actual availability of crude. Those contracts will have to be closed by buying back their shorts and it appears the momentum funds have got those shorts in their sights.
Technically $115 "should" be resistance but we are already in breakout mode and $120 is looking more achievable every day.
The airline sector is bleeding money as the cost of jet fuel continues to climb. Spot fuel averaged $3.14 per gallon in March and that was 57% more than the $2 price last March. U.S. airlines burned approximately 15 billion gallons in 2007. At current rates the airlines will spend $17 billion more for fuel in 2008 than the $30 billion they spent in 2007.
The handful of profitable airlines each made only $500 million or less in profit in 2007. Absorbing an extra $17 billion in fuel costs is simply not possible. We heard on Tuesday that Delta and Northwest are merging to cut costs and try to survive this disaster. United and Continental are said to be in talks as well. U.S. Airways and American are going to be left out in the cold as these super majors begin aggregating passengers.
It is going to take a super major airline to survive the coming $150 to $200 per barrel oil by 2010. If they don't survive the government will have to nationalize air travel in order to keep planes flying. $37 billion in fuel costs this year, $57 billion next and $75 billion in 2010. There is no possible way the individual carriers can survive.
I have been writing about this coming disaster for three years yet most average consumers and even average investors have no clue what is in store. Those who have been reading my commentary have been waiting for this event since 2004. You can believe the mainstream press that Peak Oil is a myth or you can believe those of us who have been preparing for years.
Mexico, Russia and China
Crude prices rose to $114 on Tuesday on worries about supply and increasing demand. You can't go a single day without seeing some report saying demand is falling or demand is rising. Which is it?
Demand is always rising. The world has 6.5 billion consumers and 3 million new ones are born each week. The articles you see about falling demand growth are just that "demand growth." Recently demand for oil has been increasing about 1.4 million barrels per day each year. The initial estimate for demand "growth" was 1.8 million barrels per day for all of 2008. That would put the global demand for oil right at 88 million barrels per day.
The IEA said last week that their estimates for demand growth declined by 400,000 bpd to roughly 1.4 mbpd. That still means we have to have 1.4 mbpd more oil for every day in 2008 than we did in 2007. The estimate for 2009 is another 1.9 mbpd and so on.
While the U.S. may be slowing its rate of gasoline consumption because of the high prices the rest of the world is still filling their tanks. China and India have a combined population of 2.3 billion people. Only about 85 out of every 1,000 have a car. Recent surveys suggest just over 300 have plans to own a car. That would quadruple the energy demand from those two countries just for gasoline alone not to mention asphalt, tires and other automotive components made from oil.
The Chinese economy is expected to grow between 10.5%-11.5% in Q2. At the same time China's crude imports jumped more than 25% in Q1. Diesel imports surged more than 49% in March alone.
China is on a crash course to acquire oil assets of any kind. They are doing deals with the devils to acquire reserves. Those devils are Venezuela, Sudan, Russia and Iran not to mention deals with Canada for oil sands output and nearly every other oil producing country in the world. China has no choice. 1.3 billion citizens will not be denied their rightful place as global consumers. The Internet has shown them how everyone else lives and they are ready to grab more gusto as an energy consumer. Just a couple years ago the average Chinese citizen consumed less than 1 barrel of oil per year. That has now risen to 1.5 barrels per year and estimates suggest that could rise to nearly 3 barrels by 2010. That may not sound like much until you do the math. 1.3 million people increasing their consumption by 1.5 barrels per year equals 1.95 billion barrels per year. That is an extra 5 million barrels per day. That oil does not exist in the market. Even with all the new production coming online in 2008/2009 we cannot produce that much extra oil. China is going to be forced to take it away from somebody else either by paying for it or fighting for it.
Russia and China have been signing deals for the last year but since neither have a strong history of upholding contracts it remains to be seen if the deals will ever last. Russia has its own problems. For the first three months of the year Russian production fell 1% compared to Q1-2007. This is the first decline in over 10 years and it has been expected. The majority of Russia's fields are old, run down and badly managed. Many have been damaged by this bad management. Russia currently produces about 10 mbpd but experts say that number is about to drop fast.
New developments are not producing as expected and those older fields are going into steeper decline. Without some new projects fast they will go into permanent decline. The Sakhalin 1 project off Russia's east coast is being managed by Exxon and while it accounted for much of Russia's production growth in 2007 it will decline by around 25% in 2008. Russia, like Mexico and other "easy oil" producers are finding their golden goose is dying.
Mexico only has 9.2 years of reserves left on current discoveries. Without a sharp increase in exploration and production they will go bankrupt within the next five years. Pemex produces 42% of the budget for Mexico and exports are dropping fast. The president of Mexico has been trying for months to change Mexican law to allow third parties like Exxon or Petrobras to explore for oil but the congress will not allow it. Current Mexican law forbids any outside entity to own any part of Mexican oil. The president can't even get an agreement to let them explore as contractors for a percentage of the profits. Unless something changes soon Mexico will fail for lack of money. They already have no money left to explore on their own. They are trapped and sinking fast but the congress refuses to act.
Meanwhile the price of oil hit $114 on Tuesday and gasoline $3.39 per gallon. Both are new records but they will be wishful thinking 2-3 years from now. $3.50 gasoline will be like nickel cokes, a thing of the past.Jim Brown