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Oil Prices: where now?

On Webdiary we've gone round the the Peak Oil loop more than a few times over the last few years (eg here). A new point of interest has arisen over this week: for the first time in the last few years the oil futures price has come out of its persistent state of contango as it rose back over USD75.

What does this mean? Well, the short answer is, for the first time in a long while, oil futures dealers are not on balance convinced that the next move in the oil price is necessarily up. Does this mean the price may be going to stabilise at this point? Depends whether you think the oil futures market knows something about what they're betting enormous amounts of your pension fund on. In the real world, there's no evidence that they do - after all, when this last happened the contango persisted, so they were then betting on more up to come -  but the market consensus is nonetheless worth examining.

The slightly longer answer would have to acknowledge that the primary thought in dealer's minds here - most of them are parsimonious with their thoughts, and only hold one at a time, though it may be radically or even diametrically different from the thought they held a few minutes ago - is that the last time the price hit the $75-80 levels (in the middle of last year) it then went down again, so on balance this might be expected to happen again.

But what about the fundamentals? The International Energy Agency's Oil Market Report estimates that oil demand will rise to 88.2Mbd in 2008, and that supply will rise to just meet that increase. We need to remember here that the IEA is a persistent denier of the existence of any peak-oil problem on the horizon, so there is a strong chance that they're being optimistic. Even if they aren't, their forecast suggests at least a year or more of the current situation, in which the tightness of supply over demand means that any real or rumoured interruption to supplies will push the price up further.

As it is, if the crude price persists at the current level, Australian petrol prices will have to rise again - prevailing pump prices are below current terminal gate prices, and Singapore ex-refinery prices have upticked over the last few days, so the move up should be on the way right now. [Being right now where I'm paying 97.9 pence for a litre (AS2.34) is even more painful.] Screams about cartels and the poor bloody motorist will have exactly zero impact on this, which is the same impact as exhortatory statements from Costello.

Of course, if the Aussie dollar carries on up to US$1 and above, the impact of iternational prices will continue to be damped as they have been over the last few months - $0.88 represents a potential 10% cut in the AS price from the beginning of the year. Of course, on the other hand, a reversal of this would give a pretty immediate uptick in the pump price of about that amount.

Interesting times.

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Oil climbs to a record high

Oil prices have climbed to a record high of $78.71 a barrel amid worries about whether oil supplies can meet global demand.

As the price of oil continues to soar, with the plunging US dollar and  shaky stock markets, the next few months will be very interesting. Interest rates are set to go up, after the latest rise in the CPI figures. The cost of living for Howard's battlers will become a big issue in the election. If this is as good as it gets, prepare for the roller coaster down to as bad as it gets.

Howard's lack of action, has setup the economy for a tremendous downturn. If the cost of fuel is further increased by a carbon tax, interest rates will soar and many of the battlers will find themselves in sever financial difficulties. 

John Pratt "The cost of

John Pratt  "The cost of living for Howard's battlers will become a big issue in the election. If this is as good as it gets, prepare for the roller coaster down to as bad as it gets".

We are ready for it. The Keating years were good training for hard times.

Margo: Hi Alan. So you don't agree with Howard that Hawke/Keating laid the ground work for the boom? 

A golden age and no money being spent on infrastructure.

No refineries have been built in the United States in over three decades, because refiners say they are too costly. Instead, they have been expanding their existing refineries.

All this is happening as the industry goes through another golden age. After 20 years in the doldrums, the refining business has never been so good for oil companies. Refining margins — the difference between the price of crude oil and the value of refined gasoline made from it — have shot up as much as $25 a barrel for some types of crude oil, compared with about $5 a barrel just a few years ago.

In Australia our refineries are even older and the lack of infrastructure spending  is causing problems.

Despite an apparent stable appearance of present arrangements, it is almost certain that significant changes are likely to occur in the foreseeable future to the petroleum refining and marketing industries because of a number of emerging factors including:

     

  • present low levels of profitability of Australia's refineries deemed by industry commentators as unsustainable, brought about by competition from imports, aging infrastructure and small size

     

  • the necessity for substantial capital expenditure for refinery upgrades to accommodate production of cleaner, lower sulphur fuels due to increasingly tight vehicular emission standards. If all refineries were upgraded to produce the cleaner fuels, an investment of the order of $1 billion would be required.

Oil refineries in the US seem to making a killing, and their lack of infrastructure investment is making sure that demand will outstrip supply. So profits will continue to rise at the expense of motorists. Maybe the fear of peak oil and the move to fuel efficent vehicles are stopping the oil companies from investing in more refineries. Whatever the reason, higher fuel prices are certain to be the outcome.

Hinging on US shortages

Hi David,

It is interesting to watch the OPEC Basket (lower quality, heavier crude oil) close the price gap. It was trading around US$73 a few days ago, not far below Brent and WTI. Analysts think that motorists in the US and emerging markets are driving this surge.

Steep production declines are apparent in the UK, Norway and Mexico, along with project delays in Africa and South America. Nigeria and Mexico hold the most potential for price disruption, IMO, as they are prime suppliers of light sweet crude for the US gasoline market. Any shortages there will echo across the world.

There is no doubt that OPEC is in the driver's seat, and will increasingly be so in the future. Non-OPEC production will probably peak before 2015 (I take a reasonably long view for a peak oiler), as there is no discovery to speak of outside deepwater. Barclays Capital estimate new non-OPEC supply at 500,000bp/d for 2007 and zero for 2008.

OPEC will want to keep prices high for the future, as their domestic requirements are increasing, and vast investments need to be made if they are to meet IEA projections, so I would expect them to keep their fingers off the spigot. They will test what the world economy can absorb, I believe, to gauge the political ceiling. I doubt that they will offer a signal that they are willing expand supplies, as this would knock $10-20 off the price immediately.

Iraq, that jewel in Washington's oil production crown, is a complete shambles. It is down to 1.9mb/d and falling, from 2mb/d last year, well below the 2.6mb/d it was producing before the invasion. In Kirkuk they are injecting residual fuel oil back into the wells, because they have no way to store and transport the oil.

Additionally, the latest US GAO report indicates that the Iraq oil industry currently suffers from around 180 insurgent attacks a day, and oil is being stolen and siphoned off to fund criminal gangs and the insurgency. Radically raising the price of gasoline to Iraqis, and trying to push through an Oil Law that benefits international oil companies has only exacerbated the situation.

The scale of this US failure should not be underestimated. It is one of the primary factors that has helped drive up oil prices over the past decade, by destabilising the Middle East, igniting the "infidels on our soil" jihadist brigade, and driving the Sunni and Shiite moslems into territorial and religious conflict.

Check out this US House hearing on the failure of Iraq Oil Reconstruction at c-span (requires RealPlayer). Democrat Rep. Gary Ackerman calls the corruption and violence in the Iraq oil industry as "world class racketeering" and he is correct. It is worse than during the reign of Saddam Hussein.

House hearing on Iraq Oil Reconstruction
rtsp://video.c-span.org/project/iraq/iraq071807_oil.rm

The high Aussie dollar is a mixed bag. It's a trap and an attraction for credit junkies and holidayers, but is in some measure a market reaction to static interest rates. The only real cash is coming out of China, the oil exporting nations, Japan and some of Asia.

Cheers,

Ian

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"My father rode a camel. I drive a car. My son flies a jet airplane. His son will ride a camel." – Saudi saying

$80?

Hi Ian. I think it more likely that, if $80 is to be surpassed, it will be before T Boone's deadline. Even in the stable times the price has been moving up and down by up to $2 a day, and sits as I write (at closure of NYMEX last night) at $75.79 - with Brent crude its traditional $2-$3 above that. One bad day in the hurricane season could take Brent over, two bad days for West Texas - it's more likely now just a question of when that bad week happens and what triggers it.

Oil prices

Hi David.

 T. Boone Pickens says that oil will hit US$80 a barrel before his 80th birthday (about 11 months away). We're getting into prophecy here, but he sees the price going up, not down. Check it out on YouTube:

Boone Pickens on Oil & China

"My father rode a camel. I drive a car. My son flies a jet airplane. His son will ride a camel." – Saudi saying

Margo: Big hugs on your return to Webdiary, Ian. As the person who introduced many Webdiarists to the problem of Peak Oil long before it hit the mainstream media, and became very active in getting the facts out to people, you must feel vindicated. Congratulations! I'll publish your piece today. Welcome back!

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