1. Production and prices

It was another volatile week with oil prices pushing $82 a barrel on Monday and then, after wild gyrations, falling $2.87 on Friday to close at $77. As usual, the dollar and outlook for the global economy were behind the moves. Much of the action centered on the release of the preliminary (or as some say “guesstimate”) third quarter US GDP numbers which were reported to show a growth of 3.5 percent. The voices of those noting that the GDP “growth” was mostly due to “cash for clunkers” and “first-time buyer” stimulus payments were lost in the rush to celebrate the end of the recession. Oil surged $2.41 a barrel after the announcement. By Friday however, the reality of falling consumer spending set in and oil fell along with the equity markets.

With so much uncertainty in the wind, opinions as to where we go from here are all over the map. Some analysts believe declines in OECD demand for oil still will be overshadowed by increasing demand from China and India so we shall see $90 oil shortly. Technical analysis shows oil still in an uptrend. Others believe that $80 oil is too high for the state of the economy.

The growth in China’s demand for oil in September was up 12.5 percent year over year, the sixth increase in a row and the fastest growth since 2006. The fall of 2008 however was a low period for Chinese oil consumption which distorts the rapid growth.

Given the volatility of the markets, OPEC ministers are sending mixed signals about what will happen to production quotas at their December meeting. Some are saying $75 is enough to trigger a production increase while others are talking about $90-100 as the proper level. Still others, realizing that supply and demand is only one component of the recent price move, are back to blaming speculators and US fiscal policy as the reasons for high prices.

Despite several recent announcements of new deals with foreign oil companies to increase Iraq’s oil production, the worst car bombings in Baghdad in the last two years continue to raise concerns about the security situation as US forces take a lower profile.

2. West Texas Intermediate

Last week Saudi Aramco announced that it will abandon the West Texas Intermediate (WTI) benchmark and as of January will switch to the Argus Sour Crude Index for pricing oil sales to US customers. Aramco has been pricing its crude for sale to US customers on the basis of WTI since 1994. Prices to customers in Europe are based on Brent North Sea crude and for Asian customers on the average of Oman and Dubai crudes.

The impetus for the change, which has been under discussion for some time, came when lack of storage capacity and other perturbations at the Cushing, OK delivery site for WTI send WTI prices lower than their normal relationship to other crudes, thereby costing Aramco considerable money.

The Argus Index was launched in May and is based on daily transactions for three US Gulf Coast grades of crude. These crudes usually trade about $3 a barrel below WTI because of their high sulfur content.

The NY Mercantile Exchange plans to launch a contract for the Argus heavy crude prior to January. Many observers believe the switch in price basis will make little difference unless WTI again becomes distorted in relation to the world oil markets. WTI is a premium crude and will continue to trade several dollars above less desirable crudes.

3. Run-up to Copenhagen

Maneuvering prior to the international climate change meetings, which open in December, continued last week. In Europe, the EU announced that it had reached agreement on the Union’s willingness to contribute $74 billion a year, by 2020, to help underdeveloped countries pay for technology to reduce greenhouse gases. Agreement on how the $74 billion should be distributed among the richer and poor EU countries has yet to be achieved.

The Europeans are proud of their global leadership in the struggle against emissions, but the major European states that would bare most of the costs would prefer to wait for developments in the US and China before making specific commitments.

In Washington last week, the US Senate held three days of hearings on climate change legislation. While many hail the dramatic change in US climate policy from the Bush to the Obama administrations, they also are fearful that bills currently in Congress will stall, leaving the US without any meaningful negotiation position in Copenhagen.

Currently Republicans on the Senate Environment and Public Works Committee plan to boycott next week’s meetings in a move to forestall early passage of the bill. Many observers believe that, in its present form, the bill which calls for roughly a 20 percent reduction in carbon emissions in the next ten years is unlikely to achieve the 60 votes necessary to pass the Senate this year. The major issue remains as to whether the bill would cause significant job losses in the US and major increases in the cost of fuels. A few senators, still maintaining that there is no scientific evidence that the world is suffering from man-made carbon emissions, are opposed to the whole Copenhagen exercise.

In the meantime, the US and China say they will seek a “common understanding” on climate change during President Obama’s visit to Beijing in November. Recently China appears to have become more willing to rein in emissions, perhaps because there is a growing realization that their country could be harmed earlier and more seriously by global warming than many other nations.

Quote of the Week

  • “Last year, when oil was at $145, that killed the global economy. I worry that oil is going to go up above $100 for reasons that have nothing to do with the fundamentals of supply and demand. Oil at $100 would have the same negative effects on the global economy as oil did at $145 last year.”
    — Nouriel Roubini, professor economics, New York University

The Briefs

  • Russia, which has now surpassed Saudi Arabia as the world’s largest oil producer, expects to top record 2009 output next year due to production from new oil fields, the deputy energy minister said Tuesday. Output hit record highs of 9.9 million b/d in August. (10/28, #19)
  • Saudi Aramco will bring the Manifa oilfield on stream in 2013. Aramco has slowed work at the 900,000 b/d development as it looks to save costs on service contracts and as a slowdown in global oil demand makes capacity expansion less urgent. (10/28, #9)
  • A long-sought political consensus in Iraq over how to conduct crucial upcoming elections fell apart Tuesday over the issue of the oil-rich city of Kirkuk. The new snag came as an al-Qaida-linked group claimed responsibility for twin suicide bombings in the heart of Baghdad that killed at least 155 people. Many fear the political deadlock over the new law will delay elections, now slated for January, and open the door to renewed violence in Iraq. (10/28, #8)
  • Refiners are cutting back on production because the cost of the crude they convert to fuel has been rising fast, but demand for fuel remains relatively weak. Valero, the country’s largest independent petroleum refiner, said that it lost nearly $500 million over the past three months. (10/28, #11)
  • According to analysis by Jeffrey Brown and Samuel Foucher, annual production in Saudi Arabia has never exceeded its production in 2005 and they believe it never will. (10/28, #22)
  • Iraq will initial a draft agreement with a consortium led by Italian energy giant ENI next week to exploit the Zubair oilfield in southern Iraq, the oil ministry said on Thursday. (10/30, #7)
  • Qatar is looking to China to absorb some of the huge increase in liquefied natural gas (LNG) supplies as the world’s biggest LNG exporter nears completion of its plan to double production capacity this year. (10/30, #9)
  • Shell will fight any possible efforts by the Nigerian government to hand control of its oil fields to Chinese oil companies, the Anglo-Dutch oil major’s chief financial officer said on Thursday. (10/30, #11)
  • In Nigeria, less than 24 hours after it attacked three oil pipelines belonging to Shell, the Movement for the Emancipation of the Niger Delta (MEND) in the earlier hours of Monday hit another oil facility of the company. Following the attacks, the MEND announced an “indefinite cease fire” and talks to end the conflict. (10/26, #8,#9)
  • Exxon Mobil is studying a possible entry in the Tullow Oil Ugandan project as oil majors seek to expand into new African territories. (10/27, #4)
  • From the ASPO-USA conference: Although supply side analyses show that oil supply can remain on a plateau until around 2014 and would decline relatively slowly afterwards, the picture may change significantly because of the current disconnect between levels of debt in most economies of the world and the physical resource base. Several future scenarios could emerge as a result of this situation. (10/26, #16)
  • The Mackenzie Valley gas pipeline, a 760 mile line through the Northwest Territories, would tap gas fields in the Arctic, delivering as much as much as 1.9 billion cubic feet of gas a day to southern markets. Proponents include Shell, ConocoPhillips, Exxon Mobil and the Aboriginal Pipeline Group. This week it was announced that the project is likely dead. (10/28, #18; 10/30, #19)
  • Production potential from tight shales and other unconventional resources has significantly altered the world’s natural gas outlook, experts said Oct. 28 at a seminar on the evolution of global gas markets at the Center for Strategic and International Studies in Washington, DC. (10/31, #16)
  • Japan’s utilities paid 51 percent less for liquefied natural gas in September as demand and oil prices declined, government data showed. (10/30, #14)
  • Imports of liquefied natural gas to the US are expected to rise this winter as overseas production facilities come online, possibly keeping a lid on gas prices already pressured by a domestic supply glut and recession-weakened demand. (10/26, #11)
  • The EIA announced last week that it will report an almost 3 percent increase in proved natural gas reserves between 2007 and 2008. (10/29, #10)
  • Chesapeake Energy reports that it achieved record gross production from its four main US shale gas plays: the Barnett, Haynesville, Fayetteville and Marcellus. (10/30, #17)
  • Bowing to intense public pressure, Chesapeake Energy says it will not drill for natural gas within the upstate New York watershed, an environmentally sensitive region that supplies water to nine million people. (10/30, #18)
  • The world’s largest sellers of key fertilizers–nitrogen, phosphate and potash–are seeing an unprecedented crumpling of profit as farmers protest by temporarily weaning their crops from the energy-intensive and increasingly expensive fertilizers. (10/29, #3)
  • Iran wants major amendments within the framework of a UN nuclear fuel deal which it broadly accepts, state media said, a move that could unravel the plan and expose Tehran to the threat of harsher sanctions. (10/28, #6)
  • The US House Foreign Affairs Committee Wednesday passed the Iran Refined Petroleum Sanctions Act, a bill targeting Tehran and the firms conducting energy business with Tehran. The bill – part of a larger effort to halt Tehran’s nuclear enrichment program – gives the Obama administration stronger powers to sanction companies that provide Iran with gasoline, diesel and other refined petroleum fuels. (10/29, #5)
  • A US effort to pressure Iran into nuclear concessions by curbing gasoline imports may have little impact because the United Arab Emirates and other countries are willing to keep shipping fuel to the Islamic Republic. (10/29, #4)
  • The auto industry should stop selling its most gas-guzzling vans and minibuses in the European Union by 2016 or face fines, the EU’s executive arm said on Wednesday. (10/29, #16)
  • The number of oil and gas rigs climbed to 1,069, up 21 rigs from the previous week, according to data from oilfield services company Baker Hughes Inc. The number of gas rigs was 728, an increase of three rigs from last week, while the oil rig count was 330, an increase of 18 rigs. (10/31, #12)
  • In Venezuela, where citizens struggle with power cuts, 30 percent inflation, water shortages and collapsing public services, President Hugo Chavez’ message had been to turn out the lights, shorten showers, and buy a portable generator. Small citizen protests are starting to pop up, reflecting growing public discontent. (10/30, #12)
  • A small but growing group of academics say that the neoclassical mantra of constant economic growth is ignoring the world’s diminishing supply of energy at humanity’s peril, failing to take account of the principle of net energy return on investment. (10/30, #22)
  • The British economy shrank 0.4 percent between July and September – the sixth successive quarterly contraction. That hasn’t happened since such data were first recorded in 1955. UK GDP is now 6 percent smaller than it was this time last year. France and Germany are showing signs of growth but Britain remains locked in a deep recession – given the over-reliance on the service sector and financial services in particular. (10-26, #10)
  • Leaders of Alaska’s 12 Native regions said communities from Barrow to Adak, Shishmaref to Kodiak, are suffering under the weight of high energy prices. (10/26, #14)
  • A Swiss company says it has developed rechargeable zinc-air batteries that can store three times the energy of lithium ion batteries, by volume, while costing only half as much. The company says their technology overcomes the main problem with zinc-air rechargeable batteries–that they typically stop working after relatively few charges. (10/28, #25)
  • At a recent conference, EPA’s Office of Transportation and Air Quality Director said the Administration is considering whether a renewable fuel standard for cellulosic ethanol of something less than 100 million gallons/year might be the most viable option for next year due to the possibility that 100 million gallons of cellulosic ethanol might not be available in 2010. (10-26, #13) [Editors’ note: a keen eye for the obvious here.]
  • US defense and intelligence agencies, viewing the potential impacts of global warming, have concluded if they materialize it would become ever more likely global alliances will shift, the need to respond to massive relief efforts will increase and American forces will become entangled in more regional military conflicts. (10/30, #5)