This Week in Petroleum 11-28-07

2nd Update

Crude was down sharply following today’s release. The AP explains:

NEW YORK (AP) — Oil’s rise to $100 a barrel, which seemed a done deal as recently as two days ago, was dealt a severe blow Wednesday when the government reported an increase in supplies at the Nymex delivery terminal in Cushing, Okla., which is closely watched by traders as a benchmark of oil inventory tightness.

Overall crude supplies fell during the week ended Nov. 23 by 400,000 barrels, in line with the 500,000 barrel decrease analysts had expected. But that decline was overshadowed by a 600,000 barrel increase in inventories in Cushing, Okla. Cushing inventories are up 13.4 percent in two weeks.

Activity at the Cushing terminal is studied closely by oil traders because it is the physical delivery point for Nymex crude. Falling supplies there are seen as a symptom of a tight market, and those concerns ease when Cushing inventories rise.

At this point, I think the only chance oil has of reaching $100 this year is if OPEC comes out of the meeting next week and really spooks the market. Of course every time I say that, oil runs up $8. But I do expect it to drop into the $80’s pretty soon.

Updated following the release

Crude inventories fell less than expected, but mostly in line with expectations. Refinery utilization is picking back up. The one thing to note is that crude imports are now up over the same period last year, and with the reports of more OPEC shipments headed this way, this trend is likely to continue. This is the first time in a long while that I recall imports being up year over year.

Summary of Weekly Petroleum Data for the Week Ending November 23, 2007

Some excerpts:

U.S. crude oil refinery inputs averaged nearly 15.5 million barrels per day during the week ending November 23, up 573,000 barrels per day from the previous week’s average. Refineries operated at 89.4 percent of their operable capacity last week.

U.S. crude oil imports averaged nearly 10.4 million barrels per day last week, up 534,000 barrels per day from the previous week. Over the last four weeks, crude oil imports have averaged 10.1 million barrels per day, or 144,000 barrels per day more than averaged over the same four-week period last year.

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) dropped by 0.4 million barrels compared to the previous week. At 313.2 million barrels, U.S. crude oil inventories are in the upper half of the average range for this time of year. Total motor gasoline inventories increased by 1.4 million barrels last week, and are below the lower end of the average range.

Nothing earth-shattering in this report. I think now it’s a waiting game until OPEC’s meeting next week.


Here is the expectation for this week’s report:

NEW YORK (Reuters) – U.S. crude oil stocks probably fell last week on lower imports, a preliminary Reuters poll of nine industry analysts showed on Monday.

Analysts called for an average draw of 800,000 barrels for crude oil stocks, a 1.4 million barrel drop in distillates, which include heating oil and diesel fuel, and a 1.0 million barrel increase in gasoline stocks.

However, the estimates were all over the place:

Phil Flynn of Alaron Trading in Chicago, however, predicted that crude stocks rose on higher imports. Crude imports had fallen 667,000 barrels per day to 9.8 million bpd in the week to Nov. 16.

Imports last week could have fallen about 300,000 bpd to 9.5 million bpd, according to an estimate by Tim Evans, analyst at Citigroup Global Markets in New York.

But Peter Beutel, president of Cameron Hanover in New Canaan, Connecticut, estimated crude imports could have risen between 250,000 to 750,000 bpd last week.

Generally, you would expect that a draw this week should push prices back toward $100. However, there are other factors pulling crude in the other direction. Given that one of the major factors that pushed oil up has been a widely held belief that OPEC had nothing more to give (or couldn’t back up their promised 500,000 bpd increase), news like this should give traders pause in the short term:

OPEC oil exports, excluding Angola, will rise by 720,000 barrels per day (bpd) in the four weeks to December 8, according to Roy Mason of tanker tracker Oil Movements.

The increase will be the biggest this year, with most of the extra supply heading to Western refiners. Mason estimated that seaborne exports from the 11 OPEC countries would rise to 24.54 million bpd from 23.82 million bpd to November 10.

Based on these observations, I think it is very likely that a new all-liquids peak will be set in November. In fact the IEA’s new production numbers for October (the full report is now available for free) show a (preliminary) new record. The total liquids production rate in October was reported to be 86.43 million bpd (see Table 3). That is up almost 2 million bpd over August, and 300,000 bpd above the previous July 2006 record of 86.13 million bpd (thanks to Stuart Staniford for providing that number). The IEA doesn’t break out just crude + condensate, but with all-liquids in that neighborhood, C+C should be near record territory as well.

The other big question is the upcoming OPEC meeting. All year I have been in the (lonely) camp that OPEC is setting on some spare capacity. I think that question has been answered, although they were certainly slow to open the taps. The questions now are 1). How much more capacity do they have?; and 2). Can Saudi get the production increase that they reportedly desire? I think there is a lot of risk out there for short-term bulls. Supply appears to be increasing, there are projections that demand will soften at these prices, and OPEC is about to discuss another production increase.

Yesterday’s OPIS Report also had a blurb on this:

The list of market watchers predicting $100/bbl oil is growing, putting more pressure on OPEC to boost production at its Dec. 5 meeting. “The market is still not pricing in production increases. I would have thought today would have been a little more give-back,” said one trader who expects OPEC will boost supply.

Oil has certainly run up higher than I thought it would this year. However, the factors that helped with the price run-up are starting to shift. The long-term bullish factors remain. Short-term, I would heed the signs pointing to a more favorable supply/demand situation.

11 thoughts on “This Week in Petroleum 11-28-07”

  1. I think your bet on $100 crude is safe.

    US gasoline consumption has flattened out. We are already 1 month into the Fall/Winter heating season. New York has expreienced only 7 heating days out of an average of 21. Consumers buy fuel oil in the month ahead. They haven’t had to draw down their stocks much . . . yet. Natural gas prices and supplies are holding. I don’t see anything on the US demand side that would drive up prices over the short run.

    We’ll see what tomorrow’s report brings.

  2. Well, the $100 oil crowd better look at today’s trading. Down $3. Obviously, one day does not a trend make. And Bush could still bomb Iran, or who knows what.
    But, my bet is that this is a generational peak. Right at or under $100 a barrel. There are political risks to be sure. But the pressure will be down, down, down.
    The big reason is that at these prices, demand is falling. The falling demand is not something that will reveerse easily. Oil demand is inelastic in btoh directions. Once conservation measures are introduced, they are not lost overnight.
    An insulated house stay insulated. A higher MPG car still sips gas.
    Check out oil consumption stta from the 1980s, on the BP website. No secrets here. Demand fell after the 1979 price spike, and did not recover for a full 10 years. When oil was cheap again.
    This time around, the doomers may be right that easy supplies are lacking (but for politicl reasons, bot geological). What that will mean is that prices will stay up — say above $60, perhaps $40 – but that also demand will continue to decrease.
    I call this Peak Demand. I think we are seeing it right now. At this price point demand will actually fall, and keep falling for a long, long time. Ultimately, new technologies will supplant the fossil-based systems, most prominently the PHEV. The PHEV promises radical reductions in oil demand. It will an interesting time. I am optimistic.

  3. Off Topic, but I think you’ll be interested;

    A better wind turbine design
    Construction began on the world’s largest production site for maglev wind turbines in central China on November 5, 2007. Zhongke Hengyuan Energy Technology has invested 400 million yuan in building this facility, which will produce maglev wind turbines with capacities ranging from 400 to 5,000 Watts. In the US, Arizona-based MagLev Wind Turbine Technologies will be manufacturing these turbines. Headed by long-time renewable energy researcher Ed Mazur, the company claims that it will be able to deliver clean power for less than one cent per kilowatt hour with this new technology. It also points out that building a single giant maglev wind turbine would reduce construction and maintenance costs and require much less land than hundreds of conventional turbines. The estimated cost of building this colossal structure is $53 million.

  4. i dont think oil demand is very elastic. i think we have to consume oil and use it to move goods and people regardless of the price of the commodity. demand may soften abit, but i like to calculate demand as a function of number of people on earth. if population rises, consumption rises. hard to put a ceiling on demand.

  5. CTA:

    Check oil consumption stats. Global fossil oil demand rose 3.1 percent in 2004, then 1.4 percent in 2005, then 0.7 percent last year. There is a pattern there.
    Check out the 1980s. Oil demand fell by 11 percent, after the 1979 price spike, from annual peak to trough.
    This is the Great Missing Link in oil reporting. Demand does react to price. It just takes time.
    We are at Peak Demand right now.
    From here, demand falls. To me, that says oil demand is elastic. It takes a while.
    As previously posted, the interesting thing about demand is that it is also short- to medium-term inelastic after supplies become plentiful, even turning to glut. You do not rip insulation out of your house. You do not rip out the engine from your more-efficient auto and put in a bigger one.
    Demand remains depressed for a long time after a price spike.
    Gievn that this price spike does not seem to be a result of thin supplies, falling demand may result in a huge price plummet. OPEC keeps saying there is plenty of oil. They may right. US supplies have consistently been running near 5-year highs.
    It is one of the most fascinating pages in oil history, what happens next. I suspect price goes down, and for a long, long time. I wish I knew when, and the details.

  6. CTA
    Go to the British Petroleum website, and then click on World Statistical Review. You can download tables and tables of info. but it is pretty easy to find global oil consumption…..the tables go back many years…it is a great resource….

  7. I don’t think believe that OPEC is sitting on some excess capacity is a lonely camp at all. It may be a lonely camp among those that follow peak oil closely, but everyone else thinks OPEC can pump a lot more oil whenever they want.

    Among the general public, believing in peak oil is a much lonelier position than believing OPEC has additional capacity.

  8. Yes, both sides of the oil market react sluggishly. It take years to put a new field into production, so the production side reacts to higher prices sluggishly.

    And many of the things people do in response to high oil prices are expensive, so it takes a while for them to be done, and once done they remain in place for a long time. They are capital expenditures and infrastructure changes, not minor behavior changes.

    As with any market with these characteristics, you get wide, slow oscillations, tight markets and high prices for years, followed by gluts and low prices for years.

  9. I see demand is down, which is good. At least for the present, the less-well-heeled portion of humanity may get a respite from high energy prices.

    But there’s one thing I have been wondering about with respect to decreased demand. Off hand, I can think of two ways to reduce demand. One is better efficiency. We’ll call that voluntary, because I suppose few people would desire not to save money by using energy more efficiently. The other is involuntary: people simply give up using as much energy as they’d like because they can’t afford it. Is there any way to know approximately what percent of the reduced demand is involuntary? It may seem like an academic question, but it’s a real-world problem for those people forced to reduce energy consumption involuntarily.

    And it affects the whole economy. For instance, let’s say people give up eating out, going to dancing lessons, or driving on long-distance vacations. They save money on reduced energy costs, but the restauranteurs, hoteliers, and dancing teachers who depend on people coming in their cars are hurt.

    So demand destruction is a double-edged sword. You can say, well, those people should drive more efficient cars, but for people who must give up driving in the first place, buying a new car is simply not an option. Or you can say, people with astronomical heating bills should set their thermostats lower and wear sweaters. But that only works up to a point.

    So, where does the solution lie? Posters here have a lot of good ideas, and I’d like to hear them.

  10. Speaking of improved production, improved heavy oil extraction system to be used in Alberta, Canada.
    Professor Greaves, of the University’s Department of Chemical Engineering, said: “When the Canadian engineers at the Christina Lake site turned on the new system, in three separate sections, it worked amazingly well and oil is being produced at twice the amount that they thought could be extracted.

    “It’s been quite a struggle to get the invention from an idea to a prototype and into use, over the last 17 years. For most of the time people weren’t very interested because heavy oil was so much more difficult and expensive to produce than conventional light oil.

    “But with light oil now hitting around 100 dollars a barrel, it’s economic to think of using heavy oil, especially since THAI™ can produce oil for less than 10 dollars a barrel.

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