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Oil Production Falling

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The 13 members of OPEC pumped an average of 32.47 million barrels per day in September according to a Platts survey of OPEC and oil industry officials. This is down -330,000 bpd from August and reflects output declines in Saudi Arabia, Iraq and Angola. That is still 507,000 bpd over their current production quotas. It looks like they are still trying to squeeze out that last buck on falling prices.

Saudi production fell by -170,000 bpd, and 100,000 bpd from Iraq and Angola. Iran and Ecuador also fell slightly. Libya increased production by 50,000 bpd. OPEC will meet again on Nov 18th to lower production targets again. It won't make any difference if they don't honor the new quotas any better than they honored the current quota.

OPEC ministers said they would not only weigh prices but also consider the potential impact from a global recession when they meet in November. Two more industry analysts raised their cost calculations on producing a marginal barrel of oil to between $80 and $100. That enforces the idea that we will see voluntary cutbacks by not only OPEC but other producers as well. They will just not be as well publicized.

Venezuela has the highest need for higher prices. It takes $97 per barrel for Venezuela to balance its external accounts according to Washington based PFC Energy. Iran, a perennial price hawk, is bleeding cash and also needs prices over $85 a barrel to keep the country running. Russia needs $70 per barrel to balance its books. It makes you wonder how they lived two years ago when oil was $60.

  

OPEC agreed to cut production by 500,000 bpd when they met in September and could easily agree to cut another 500,000 or more when they meet in November. That agreement is worthless without action. Saudi's Al-Hayat newspaper reported after the September meeting the kingdom did not intend to cut output unless customer demand fell.

PFC Energy said OPEC would need to remove at least one million bpd from the market by 2009-Q2 or face a stock build of 1.5 mbpd in Q2/Q3. If the price of oil continues to decline it is very possible that OPEC members will voluntarily remove production before the November meeting according to PFC. Fat chance in my opinion.

I am sure everyone has heard that demand in China is falling sharply due to global problems and post Olympics slump. Well those analysts were wrong as usual. China's imports rose +10% in September to 3.66 mbpd according to Customs General Administration of China. This was on top of a +11.5% increase in August. China is expected to continue to raise imports to take advantage of the current low price and build inventories.

In the U.S. gulf 43% of production is still off line from Hurricane Ike. More than 80 manned production platforms are still evacuated until repairs can be made. That is more than 600,000 bpd still offline. The government said it delivered 200,000 barrels to Placid Oil in Louisiana to offset continuing supply shortages from the hurricanes.

I continue to hear people say that the financial crisis has postponed peak oil for years. I do not believe this to be true. What it has done is reduce the capital available for investment into oil. It reduced the ability of energy companies to raise money with their deflated stock and reduced the number of investors with cash to chase oil prices. With the proverbial bubble now deflated it will take some time for the excitement to rebuild. That could be a year or more. Every day that passes with decreased investment brings the peak oil date closer while any decline in demand pushes it farther away. As I pointed out in the Monday newsletter the IEA is still projecting demand growth in 2008 and 2009 even in a recession. That growth will just be a little slower. Meanwhile depletion never sleeps and always increases. The clock is working against those projecting a later date for peak oil.

Jim Brown

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