By Tom Whipple
Oil rose to a record just below $112 a barrel last Monday and then fell precipitously in the wake of the turmoil surrounding the Bear Stearns buyout. Initially, the dollar fell to a record low against the Euro on fears that other firms might be in financial trouble, but later on Monday oil and most other commodities fell rapidly as traders tried to comprehend a shifting financial landscape.
From a high near $112 oil fell to $102 a barrel on Monday. Tuesday, Wednesday, and Thursday, in a short trading week, were equally as volatile with oil oscillating up to $109 and at one point getting as low as $99.59 a barrel before closing out at just below $102. Overall commodity prices last week saw their biggest drop since 1956.
As with nearly everything else about the financial markets, opinions are mixed as to just what is taking place. Some observers note that much of the drop in commodity prices came because speculators were forced to sell out profitable positions in commodities to meet new margin requirements associated with bailing out Bear Stearns. Others see the weeks events as a signal of tougher economic times ahead that will lead to reduced demand for all commodities.
Goldman Sachs sees oil prices slipping to circa $90 a barrel in the next two months due to seasonal factors and reduced demand. Others are impressed that a massive unwinding of futures positions has still left oil above $100 a barrel. The weekly US stockpiles report showed a less than expected growth in crude and gasoline stocks, while distillates continue to slide. Many are now observing that unless the report is wildly at variance with expectations, the US stockpiles report, which until recently drove oil prices, is getting lost in the financial news.
Most acknowledge that the US is entering a period of economic recession which, depending on ones point of view, may last anywhere from months to years. The key question for the oil markets is what will happen to the demand for oil as the US, and those that depend on the US as a market, decline. Last week the EIA reported that US consumption of petroleum products over the last four weeks is down 3.2 percent from the same period in 2007. Despite record prices, however, US demand for gasoline was down by only 0.1 percent in the same period.
Since speculation about the US entering a credit induced recession became rampant several months ago, conventional wisdom has been that a US recession would soon spread across the world and that demand for oil would slacken as it has in the past. For several months now oil prices have been falling on bad economic news and recovering on good.
During this time there has been much discussion as to whether the economies of Asia and the oil exporting states have become so large and powerful that a recession in the US and parts of Europe will no longer have the same economic impact that it once would. This decoupling is at the heart of the debate as to where oil demand will go in the next year or two.
While some US demand for oil products is already declining with a slowing economy plus record high prices for heating oil, diesel and jet fuel and gasoline, so far the reduction in demand is relatively small. Patterns of US oil consumption have changed from what they were 35 years ago, so opportunities and incentives for reduced consumption without major disruptions are few. Thermostats on oil burners can be dialed back, airlines can cut flights and ground inefficient planes, and discretionary automobile travel can be curbed.
However, short of the price induced conservation measures that have already started, we are probably still several dollars a gallon, or the beginning of actual shortages, away from serious cutbacks in US oil consumption. As the falling dollar has to a certain extent insulated Europe from the recent run up in oil prices, the situation there is basically similar to that of the US.
Over the weekend, a meeting of Asian central bankers issued a statement saying that while US imports may slow in coming months, growth in Asian intra regional trade will soften the blow considerably. All this suggests that it will take some very serious economic setbacks before the demand for oil will decline anywhere near as much as it did during the 1970s oil shocks.
For the fourth straight week, diesel prices climbed to a new high last week. At a US average of $3.97/gal, prices are now up by $1.29 over the same week last year. The demand for diesel and heating oil in the US is now down five percent from last year. Although crude prices slipped by $10/barrel last week and some are saying we will see lower prices over the next few months, the situation is volatile and there is no assurance that retail prices have peaked.
Distillate fuel inventories dropped by another 2.9 million barrels last week to 113 million barrels, and unlike crude and gasoline inventories, are near the bottom of the seasonal average range. Stocks usually fall at this time of the year as refineries undergo maintenance and there is still a demand for heating oil. Stocks bottom out in May somewhere above 100 million barrels and then start to build for the next heating season.
Underlying the rapid climb in prices is a slowly developing world wide diesel shortage. Chinese diesel imports hit a record of 6.1 million barrels in January. In February China imported 2.4 million barrels as compared to 219,000 in February 2007. It now appears Beijing will import at least 3.5 million barrels in March. Last week diesel shortages were reported across southeastern China for the second time in six months. Reports of electricity shortages suggest that once again factories will switch on backup diesel generators in order to remain in operation.
As the winter heating season in the northern hemisphere is nearly over, outright diesel shortages are unlikely to develop before next winter. Should spot shortages develop in the US, as they did last fall, environmental regulations on burning higher sulfur motor fuels are likely to be lifted. In the meantime the high prices are causing considerable hardships in the trucking industry and will continue to add inflationary pressure on the US economy.
As worldwide demand for diesel continues to increase, while supplies remain steady at best, it seems likely that debilitating diesel prices and shortages will soon begin to do serious economic damage to the industrialized countries.
Federal energy regulators approved a $700 million LNG terminal for Long Island Sound, a facility which is opposed by the state of Connecticut and other critics. The 1,200 foot long, 82 foot high terminal would be built by a consortium of Shell Oil and TransCanada Pipelines Ltd. (3/21, #14)
The U.S. Air Force wants to build a coal to liquids (CTL) plant at its Malmstrom base in central Montana as the first project in a nationwide network of facilities to convert coal into aircraft fuel. The high cost of CTL plants plus concerns that the process generates double the greenhouse gases of oil have raised doubts on Capital Hill. Electric utilities recently have scrapped at least four dozen proposed coal fired power plants over rising costs and the uncertainties about climate change. (3/22, #10)
Australian producer BHP Billiton has removed all personnel from its Neptune tension leg platform in the deep water US Gulf after inspections discovered anomalies in the facilitys hull. (3/22, #11)
In India, strong demand growth and high profit margins have given the country the leeway to absorb a part of input cost hikes in the past. But, as corporate earnings have slowed and economic growth is likely to soften, companies are running out of headroom to absorb further increases in crude oil prices. (3/21, #11)
Wood Mackenzie Consultants said OPEC will only need to increase its production by 2 to 3 million barrels/day by 2012. The rest of the projected increase (10 million barrels/day, barring a major recession) can be met by non OPEC producers and by gas liquids and non conventional supplies such as oil sands. They added that OPECs production is set to peak after 2012.
Pemex announced that Mexico's proven hydrocarbon reserves fell 5.1% last year to 14.7 billion barrels of crude oil equivalent. Pemex replaced proven reserves at a rate of 50% last year, compared with 41% in 2006.
In a year when domestic crude oil output continued to decrease and fuel demand in the domestic market climbed, Venezuelan oil exports were seriously hit, dropping 192,000 bpd (6.4 percent) to 2.78 million bpd in 2007.
ASPO USA and friends are inviting the Massachusetts state legislature and the general public to a special meeting on March 31 in the Massachusetts State House where issues of Peak Oil and its impact on Massachusetts will be presented and discussed.
In February world production of total liquids increased by 175,000 barrels per day from January, according to the International Energy Agencys latest figures. Total world liquids production hit 87.5 million b/d, which is the all time maximum liquids production. Average global production in 2007 was 85.41 million b/d. In the first two months of 2008 an average of 87.41 million was produced.