Crude rose to $137.47 then fell to $134 before spiking again to an intraday high of $138.15 as opposing sides battled to determine where support and resistance will be ahead of Wednesday's inventory report. The news from Saudi Arabia's weekend meeting was greeted with a yawn as well as the potentially good news from Nigeria. It was simply an orientation day as traders moved into the August contract.
I have spent so much time writing about the Saudi meeting lately I have neglected reporting on some things happening around the world regarding energy. Without going into detail I will try to hit the highlights today.
Russian crude exports fell by 2.4% in the first four months of 2008. Their fields are in decline and lack of investment in infrastructure is taking its toll.
Iran has increased its insistence that it will never back down from its nuclear future despite growing sentiment that somebody will attack it over the next four months. Iran promised a blistering retaliatory strike if anyone dared attack them.
Israel's practice attack was seen as more of a push for the U.S. to take out Iran's nuclear capability rather than a threat to do it themselves. For Israel to attack Iran they would have to fly over Jordan and Iraq and require U.S. permission and logistics to enter Iranian airspace. Rather than let Israel mount an attack that would set off alerts long before they entered Iranian airspace it makes much more sense for the U.S. to do it from their position of strength in Iraq and the Persian Gulf. The warning time would be in minutes if at all considering the stealth capability of the U.S. planes. With a longer warning Iran can get people, as in the scientists responsible for the project, to safety. Replacing equipment could take a decade but replacing scientists could take a generation.
Output at Mexico's Cantarell field slipped again in May. Production is down 33% over May 2007. Total production is down -9.3% for the first five months of 2008 compared to the same period in 2007. This is a prime example of what happens to a field once it goes into permanent decline. As each of the giant fields around the world reach this point it requires an even larger amount of new production elsewhere to offset the decline.
Oil supply from non-OPEC nations (60% of the worlds total) appears to have plateaued and could begin its decline in 2008 according to the IEA.
The IEA reiterated its position that none of the oil stocks it manages for the 26 member nations could be tapped for price concerns alone. They will only allow those inventories to be drawn down in case of a emergency that impacts production like hurricane Katrina. There have been calls around the world for member nations to dip into their reserves in an attempt to lower prices.
By the end of June Shell, BP, ExxonMobil and Total will sign agreements with Baghdad to supply repairs and technical support in some of the countries largest oilfields. However, the Democrats led by Charles Schumer are mounting a campaign to block these no-bid contracts.
The U.S. House plans to vote next week on a new energy package that includes provisions to curtail energy market speculation. After Michael Masters testified again on Monday about the suspected impact of speculators on gasoline prices it seems almost a sure bet that the futures market is going to get a lot tighter. One potential bill will not let retirement funds invest in any commodity. Masters claims oil prices would fall to $65-$75 within 30 days of any change in the rules for speculators.
Another point in the proposed energy bill would require oil companies to drill on existing leases or pay escalating penalties until they drill or forfeit the lease. Oil companies bid on leases in order to build land inventory for future drilling. It takes a long time to stage a parcel for drilling. Surveys have to be completed, seismic data has to be collected and analyzed, potential drilling sites chosen and then plans made to create roads and infrastructure to support that drilling. Sometimes this can take ten year or more before the first drill bit touches dirt. Many times after the preliminary work is done the lease is abandoned as not worthy of being drilled. Not all oil leases are sitting on top of an oil field. With shortages of crews and equipment to do the preliminary work and a 4-6 year backlog of drilling rigs it is not a case of just bid, pay and drill. Now the government is going to put limits on how long you can own a lease before drilling. That may not be a bad thing but it will lower the value they get for future leases. If oil companies can't plan on drilling within the initial period they probably won't bid or will be a much lower amount knowing they will have to pay years of penalties.
The president and Congress are battling over ending the offshore drilling ban. Even if it was lifted today there are no drillships available for a minimum of five years. All existing ships and ships under construction are already booked for at lease five years and in some cases up to ten years.
The top ten U.S. airlines are now expected to lose more than $10 billion in 2008. This will be the biggest loss since the industry slump after 9/11.
The average price for gasoline in the U.S. reached $4.10 on Monday according to the Lundberg survey.
The Canadian Association of Petroleum Retailers said it expects the country will produce 4.5 mbpd within 12 years. That is double the current output. Last year the group estimated production would rise to 3.4 mbpd by 2015. They just cut that estimate to 2.8 mbpd due to growing problems with gas and water. There is a growing protest movement that is against using natural gas to heat the oil sands. They believe the gas is too valuable as a consumer fuel to use monstrous volumes of it to create oil. They liken it to burning $20 bills to liquefy the oil. With NatGas over $13 today they are getting close.
China raised gasoline prices by 17%, diesel by 18% and jet fuel by 25% last week. China subsidizes fuel in order to stimulate their economy. With the price of oil spiking so high they can no longer afford to take the hit. By raising prices they hope to cool the economy somewhat from its current +16% pace but analysts don't agree. With block long lines waiting for fuel before the prices went up many people took other means of transportation rather than wait for hours in line. With prices higher there will still be lines but they will consist of people better able to afford the price. No drop in consumption is expected. China's gasoline production in May fell from year ago levels and turned China into an importer for the first time ever.
In May U.S. gasoline demand fell -1.96% over the same period in 2007. For the period November through April Americans drove 30 billion fewer miles. This was the largest drop in driving since the Iranian revolution spiked gas prices in 1979-80.
Saudi Arabia announced they will finally sign a contract with Total SA to build a 400,000 bpd refinery in Jubail, eastern Saudi Arabia. The cost to build this refinery has risen from $6 billion to $12 billion as plans were completed over the last two years. The cost of the Conoco Phillips refinery on the Red Sea coast also increased to $12 billion. Saudi is paying up for the two installations because they will both process the heavy sour Saudi crude. That will turn their heavily discounted oil, sometimes as much as $20 per barrel below the price of light crude, into readily saleable gasoline and diesel.
There is a growing suspicion that the multiple oil discoveries made offshore Brazil by Petrobras could be one very large field. There are rumors circulating now that total expected reserves will dwarf the 33 billion leaked to the press several months ago. Brazil is attempting to contract 60 drillships for a mass drilling program to ramp into production as soon as possible. Brazil is buying a nuclear submarine to protect the field.
Bob Hirsch, an energy expert and author of the Hirsch Report for the Energy Dept in 2003 was quoted as saying, "We are racing towards a future that will be very difficult and we have to do what is necessary to avoid economic suicide."
Roger Blanchard was quoted as saying, "Desperate people do desperate things. As Americans become more desperate for oil, I expect that ANWR and offshore areas will be opened for development. It will be like burning the furniture to keep the house warm. It will be a desperate move that won't result in much."
Quote from Fawaz Al-Alamy, Saudi Deputy Minster of Commerce, "Although oil touched $140 per barrel last week, it is still one of the cheapest commodities worldwide. Today a barrel of oil is 52,000 times cheaper than a barrel of platinum, 2,350 times less than gold, 112 times less than IT products, 77 times less than silver and 30 times less than nickel. In fact a barrel of oil is still cheaper than a barrel of any soda drink, three times cheaper than a barrel of dairy products, five times cheaper than a comparable quantity of almost all known vegetables."
Quote from Fawaz Al-Alamy, "Saudi Arabia is currently drawing up plans for a $120 billion investment to increase oil production to 15 mbpd within the next decade." Editor note: When pigs fly this will happen. Saudi's highest production ever was 10.38 mbpd back in August 1981 when oil flowed easily from Saudi fields. In May Saudi Oil Minister Ali Naimi announced that the kingdom did not see any need to ever produce more than 12.5 mbpd. King Abdullah said Saudi would never produce more than 12.5 mbpd in order to leave oil in the ground for future generations. Amazing how $140 oil can change the course of a country.
Kuwait's Oil Minister Mohammad Al Olaim said on Sunday that Kuwait would expand its production capacity by 300,000 bpd in 2009. Kuwait is planning to spend $55 billion on energy projects including new drilling over the next five years. This is unexpected capacity from Kuwait. It is only 6% of the world's annual loss due to depletion but at least it helps. Now if only 16 more countries come up with 300,000 bpd each the peak in oil production will occur in 2011 instead of 2010.
Last but not least, Libya's Oil Minister Shokri Ghanem announced over the weekend it may "cut" production to prevent market oversupply. Despite Saudi's energy conference on supply and prices we believe there is plenty of supply in the global market.
Iran's tanker flotilla has shrunk from about 30 million barrels to 25 million but there are still no takers for their oil. This is the heavy, high sulfur crude and Iran can't seem to give it away despite offering it for up to $13 per barrel less than the going rate. If it were the light crude that is in short supply it would have been bought long ago. This is just another example of how words are misrepresented. OPEC says there is plenty of "oil" in the market. True, just not plenty of "light oil" in the market.