Peak
Oil and Price Trends
By Andrew
McKillop
As
already noted, many times, the media finds it is not ‘politically correct’ to explain high
prices as due to oil – very simply – depleting and running
out. So they prefer to cite storms, technical problems, refinery
accidents, rebellion and wars in Nigeria, Chad and Sudan, the
Iraq war, al Qaida, Vladimir Putin and the ‘anti western Kremlin’ now
menacing pipeline routes in Georgia, the Kazakhs or Venezuelans
applying ‘resource nationalism’ to their oil reserves and demanding
higher taxes and shares of profits, the greedy and wasteful
Chinese importing too much oil, the Indians doing the same,
very hot weather (or very cold weather), and why not earthquakes
? – anything will do as long as NO mention of Peak Oil is made. It
is however politically OK to cite declining or shrinking
inventories as an explanation of why oil prices are high.
Why
are inventories declining? One reason is Peak Oil, driving
up prices and
making stock controllers
and managers run the smallest-possible or ‘just in time’ stocks. They can
and do hope that prices will fall before they have to re-order, but all
too often
they bet wrong. Oil refiners, too, have to regularly buy crude oil – at
whatever the day’s price is, and then cover this against vagaries of refined
product market prices through buying and selling ‘crack spread’ contracts. This
again is a market mechanism that – finally – transmits any
crude oil price rises or falls to downstream consumers.
Another
and the biggest reason is strong demand – the world car industry, with
a fast increasing Chinese segment, will produce about 65 million new cars in
2007, small private business jet plane sales increased about 25% in 2006-07 and
will increase about 30% in 2007-08, world container shipping movements will grow
at least 10% - 11% in 2007.
Strong
demand itself drives us closer and faster to Peak Oil because
the supply side can’t keep up.
So
it is OK to cite declining inventories as a cause of oil
prices rising.
To
the unitiated, the “big oil supply numbers” that are constantly being published,
might look like there is plenty of oil around, and the media likes to play on
that ignorance, but in fact oil stocks, almost worldwide, are low and falling.
What is needed is to compare like-with-like over time and between countries.
For this we use:
REAL
WORLD INVENTORY DATA
For
all the OECD countries this can be obtained from OECD’s IEA. For at least 4 or 6 months the IEA has warned that
oil stocks, in all OECD countries, are low, very low, or extreme low. Nearly
all are continuing to shrink, some very fast and others slower. This was ‘translated’ Claude
Mandil, outgoing director of the IEA, to a “call for OPEC to produce more”,
OPEC being the producer of last resort. For the USA and using EIA data released
September
26, 2007 the real decline of stocks simply jumps off the page into your eyes:
For
the USA and using EIA data released September 26, 2007 the
real decline of stocks simply jumps off the page into your
eyes:
US
OIL INVENTORIES M barrels (million bbl) Week ending 21 Sept 07
| Category |
Current
US stocks |
Current
US stocks |
| Crude
oil excl SPR |
320.6 |
325 |
| Finished
gasoline |
104.04 |
118 |
| All
gasolines |
191.3 |
214 |
| Distillates |
137.06 |
151 |
| Resid
fuel oil RFO |
37.9 |
43 |
| Heating
oil |
43.9 |
63 |
If we turn to US oil imports, the situation is in ‘permanent
danger’ territory. Here is the US oil import situation
as of Sept 21, 2007:
Crude oil only: 10.442 Million barrels / day•
Gasoline
imports: 3.321 Million barrels / day•
Jetfuel
imports: 0.268 Million barrels / day•
Distillate
imports: 0.314 Million barrels / day •
TOTAL
US DEMAND: 20.154 Mbd TOTAL US PRODUCTION: 5.054 Mbd
(apparent or gross imports, 15.1 Mbd, are about 1.6 Mbd
bigger than net imports)
This brings us to an easier-understood ratio or number:
DAYS AVERAGE CONSUMPTION / INVENTORIES RATIO
US inventories, we should note, are not exceptionally lower
than oil stocks of most other OECD countries – all
OECD countries now have low inventories expressed as stocks
/ days
average consumption.
For example, current US crude oil and gasoline, distillates
and other oil product stocks are equivalent to less than
20 days average demand in all categories. The much-touted
Cushing
Oklahoma crude oil stocks, cited by Bloomberg of 18.13
Million barrels in week ending 21 September are only equivalent
to
18.13 / 20.154 = 0.89 days (about 21 hours 30 minutes)
of average US total demand. Is this an ‘improving situation’ ? Net
commercial crude oil stocks (excluding Strategic Petroleum
Reserve, SPR, which cannot be extracted at more than about
0.8 Mbd, nor filled at more than about 0.1 Mbd) are 320.6
Mb as of 21 September. Relative to current total demand
this is
320.6 / 20.15 or 15.9 days average consumption.
Several other OECD countries, as already noted, have similar
or worse ratios for stock / days average consumption, for
example Portugal, France, Ireland, Spain, Sweden. If we turn
to the
emerging economies, and take the case of China and India,
their stock ratios are likely at or below 10 days average
total consumption.
Both want to build larger stocks – to do so they will
import even more oil. For many reasons – including Peak
Oil – this situation is almost certain to aggravate,
and ensures quick transmission of price increases through the
supply chain. In turn this will tend to drive volatility out
of the price system, setting some new and “very high” oil
price retrenchment floor from now on, perhaps 69 USD/bbl for
WTI. As I have already suggested in Juno ME internal research
notes, a new Peak Oil determined floor price range 67.50 – 70
USD/bbl for WTI, through the period Sept 07-Feb 08.\ is now
highly possible.
CrudeOil
- 
Source: Reuters
Andrew McKillop is Senior Energy Strategist in Juno Mother Earth Asset Management.
Petroleumworld not necessarily share these views.
Editor's
Note: This commentary was originally published in Juno Newsletter,
Oct. 05, 2007 by Juno Mother Earth Asset
Management. Petroleumworld reprint this article in the interest
of our readers.
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