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1. Prices and Production

An outbreak of very cold arctic air across much of the northern hemisphere was the main energy price driver last week. The unusual weather air brought extensive snows from the middle of the US across Europe to northern China, causing a jump in the demand for heating fuels. Starting below $80 a barrel on Monday, oil capped a 20 percent rally in the last few weeks to touch $83 a barrel on Wednesday and closed at $82.75 on Friday.

Despite the cold weather, the EIA reported that, contrary to expectations, US crude inventories rose by 1.3 million barrels the week before last. On Thursday, Beijing raised interest rates, suggesting that more credit tightening and slower growth may lie ahead. Most observers believe that Chinese demand for increasing amounts of oil was behind the 78 percent price increase during 2009.

On Friday, the US Labor Department reported that the US economy is still shedding jobs at a faster rate than expected. After the report’s release the US dollar fell, sending crude higher. The weak jobs report also sent natural gas futures lower due to fears of weaker industrial demand which accounts for 29 percent of US consumption.

Although the Iraqi cabinet approved the oil deals with foreign firms last week, it also banned 15 political parties with ties to the Saddam era from participating in the upcoming elections. The move could backfire if the disenfranchised turn to violence as US troops withdraw and the country starts a major effort to increase its oil production.

2. Gasoline Prices Rising

With the average price of gasoline in the US about $2.74 a gallon, an increase of nearly a dollar a gallon from January 2009, more worries about an economic recovery are starting to arise. Gasoline is already above the psychological barrier of $3 per gallon in California, Hawaii, and Alaska.

There is more to the story than simply the price of crude, which at $82 a barrel is getting into territory not seen since the price spike of 2008. The weak US dollar continues upward pressure on oil prices. The current outbreak of arctic air increases the demand for heating oil across the northern hemisphere. US refineries are operating at less than 80 percent of capacity as refiners attempt to increase the unusually low profits they have been making from refining operations. A handful of major refineries in the US and Europe are being shutdown permanently and many more are undergoing lengthy overhauls.

All this suggests that higher prices are still ahead. Another $10 or $15 increase in crude prices is likely to put the average US gasoline price above $3 a gallon. We are currently in the low-price season and, as usual, upward pressure can be expected in the next 6 months as gasoline is modified for summer driving standards.

Discussions are starting to arise as to the damage higher gasoline prices might do to the US economy. Every 10-cent rise in the price of gasoline takes about 14 billion more dollars from consumer pockets each year that are no longer available for other purchases. The US economy, with millions more unemployed, is in far worse condition to handle another gasoline price spike that it was two years ago. To add to the problem, analysts are starting to talk about increasing food prices this year due to droughts and unusually wet weather across the US’s Midwest last fall.

3. Venezuela

With oil prices above $80 a barrel, new pacts being signed for more Chinese investment each month and new-found friendship with Russia to keep the Americans at bay, one would think all is well in Caracas. Such is not the case. Last week President Chavez was forced to devalue the Bolívar by some 50 percent after Venezuela’s economy contracted by 2.9 percent and inflation hit 25 percent in 2009. Oil exports dropped from $95 billion to $61 billion between 2008 and 2009, due to lower world oil prices and sagging Venezuelan production. At the same time, other exports dropped from $6 to $3.3 billion.

A second major problem is a severe electricity shortage. Venezuela gets 73 percent of its electricity from the giant Guri Dam; at present it is the third largest hydro-electric plant in the world with 10,200 MW of installed generating capacity. Generation from Guri is suffering from a severe drought, and Caracas is scrambling to cut electricity consumption across the country to prevent the generating turbines from stopping completely. Water levels at the dam are reported as dropping by 1-2 feet a week and the rainy season is not due to start until May.

Thousands are being thrown out of work as factories and malls are closed to save electricity. Venezuelan unions are claiming that the government is concentrating the electricity cuts on privately owned establishment in order to undermine capitalism and eliminate labor unions in the country. Elections are coming up in December. Should the electric power situation continue to deteriorate, Chavez may be facing serious political problems and may have difficulty increasing or even maintaining current rates of oil production.

4. China Rolls On

Yesterday Beijing announced yet another surge in its economy with exports and imports in December growing much faster than expected. Exports increased by 18 percent from December 2008 which, however, was down 21 percent from December 2007. Imports were up by 56 percent from last December. Based on the trade data, it is likely China will report its industrial output grew by 25 percent in December vs. 2008 and its fourth quarter GDP growth was back up to 11 percent. Despite an increase in interest rates last week, President Hu was quoted as saying over the weekend that “moderately loose” monetary policies would continue.

The December growth spurt suggests that China will continue to increase its oil imports in coming months, keeping upwards pressure on prices. South Korea and Taiwan reported year over year export growth in December of 47 and 34 percent respectively, also suggesting increased demand for oil from these countries. The very cold weather and heavy snows across northern China could also increase the demand for oil and coal imports.

In the meantime, Chinese officials continue to search the world for more oil supplies. Last week the Foreign Minister was in Nigeria in an effort to convince their government that China could do a better job in developing the nation’s oil resources than the international oil companies. The Foreign Minister is also visiting Kenya, Sierra Leone, Algeria, and Morocco. PetroChina took a big position in Caribbean oil storage in an effort to get into oil trading in the region, and a Chinese delegation visited Antarctica in an effort to assess the continent’s potential for mineral resources. A senior Chinese official said last week that Beijing “will intensify the development of overseas resources to ensure ‘stable’ energy supplies for economic growth.”

Quote of the Week

  • “It seems to me that the possibility that Iraq may actually succeed in doing this… bring[ing] production up from the current 2.5mbd or so to 12 mbd over the course of the next 6-7 years… should be taken seriously. If it did succeed, that would act to delay the final plateau of oil production by a decade (ballpark), make that plateau be at a higher level (95-100mbd ballpark), and significantly moderate oil prices in the meantime.”

— Stuart Staniford, energy commentator, posting on The Oil Drum

The Briefs

  • The price of crude oil will likely be more volatile this year and range between $60 and $100 a barrel, the CEO of French group Total told newspaper Le Journal du Dimanche. The CEO added that crude oil was becoming more expensive to produce. (1/9, #6)
  • Floating oil storage: In late December, a total of 122 tankers were holding roughly 85.63 million barrels of oil products, mainly distillates – a category that includes diesel and heating oil – compared with 136 tankers storing 97.65 million barrels in late November. (1/9, #8)
  • A dispute between Iraq and Iran over an inactive oil well has become a rallying cry for Iraqi nationalists and exacerbated fears of excessive Iranian influence in Baghdad. Forces from both sides are now dug in a few hundred yards apart, the oil well between them, about 250 miles east of Baghdad. The incident has inflamed passions in Iraq over two deeply sensitive subjects: sovereignty and oil. (1/9, #11)
  • The oil market will remain under the influence of external factors including investment, environment and a possible depletion of crude resources but such fears are exaggerated, according to a BP official. Peter Davies, chief economist at BP, admitted that the world’s oil potential is limited but dismissed what he described as theories about peak oil. (1/5, #17)
  • By 2008, about 8% of global oil production (nearly 6 million b/d) came from deepwater fields. Many in the industry argue the new fields have expanded the limits of where the industry can find oil, potentially delaying a decline in global production. [But] Offshore projects are expensive, time-consuming and prone to failure. (1/5, #12)
  • Orders for offshore rigs placed in 2006-2008, near the top of the offshore rig demand cycle, will result in many rig deliveries over the next several years. Likely having peaked in 2009, the current rig construction cycle is one of the largest in the offshore rig industry’s history. However, with only a handful of orders placed since the credit crunch, the offshore rig order book is likely to continue to wind down. (1/9, #24)
  • Exxon is mulling over a deal with leading offshore rig contractor Transocean to construct a drilling rig ($1 billion) capable of operating in extreme Arctic conditions. (1/9, #10)
  • The US Environmental Protection Agency gave preliminary approval for Shell’s drilling exploratory wells off the coast of Alaska, one of the last remaining hurdles facing the company’s plans to begin drilling this summer. (1/8, #15)
  • Gas rigs operating in the US — now up to 781 — rose by 22 last week and have gained 17 percent since reaching a seven-year low of 665 in the week ended July 17. Gas rigs peaked at 1606 in September 2008. (1/9, #3)
  • A rise in US natural gas prices above those in Britain has helped coax incremental LNG cargoes to the United States in January as shippers look for the best netback in the Atlantic. Throughout last year prices favored delivery to Britain. (1/8, #11)
  • Surging productivity from US natural gas fields will end the need for natural-gas imports and provide enough additional fuel to run vehicle fleets and reduce coal-fired power generation, said consulting firm Bentek Energy LLC. Bentek, which tracks gas flows across the nation, predicted in 2008 that output gains could push Canadian imports and liquefied-gas cargoes sent by tanker ships out of the US market by 2020. (1/9, #20)
  • Predicting the timing of when US gas supplies will go into severe deficit is very difficult. Timing is affected by a host of factors such as the vagaries of economic activity, the weather and uneconomic production. Its occurrence, however, is imminent (2011). (1,9, #23)
  • Chesapeake Energy calls the proposed New York state regulations for the shale gas drilling industry unnecessarily onerous and likely to scare energy companies out of state. (1/6, #17)
  • Ultra Petroleum drilled 30 Marcellus horizontal wells in 2009, 13 of which were producing in late December. Initial production rates for the producing wells average 7.5 MMcfd, and preliminary estimated ultimate recoveries range from 3.5 to 4 bcf. (1/6, #18)
  • The size of the US car fleet dropped by four million vehicles to 246 million, the only large decline since the Dept. of Transportation began modern recordkeeping in 1960. (1/6, #15)
  • US gasoline consumption fell to the lowest level in more than 13 months as Americans drove less between Christmas and New Year’s Day, according to MasterCard. (1/6, #16)
  • Since early 2008 Mexico’s deficit has grown to unsustainable levels. Two major reasons for this escalation: a severe contraction in the economy and plummeting oil revenues. If its oil production continues to decline, the country could lose its status as a net exporter within five years — a change that would have devastate Mexico’s fiscal health. (1/6, #7)