The crystal ball is murky today

There is a story in Bloomberg today about the rise in business for the very largest crude oil carriers (VLCC's) that shows how things can change rapidly. It was only last month that they were carrying stories about shipping from the Middle East and Gulf (MEG) being as cheap as it had been since 2003 because of the drop in demand relative to last year.

I saw, last week, that there were some 110 fixtures (as they call the contract for a trip) from the MEG, and today the number is reported to have risen to 119, with the likelihood that the additional volume will be of a sourer and heavier crude. I was going to say that this is only 7 tankers over the112 that were loaded this time last year, and then I did the arithmetic. 7 tankers at 2 million barrels each is 14 mb and divided by 30 gives us close to an additional 500,000 bd of oil over this month. So production is now clearly going up in the MEG. But it should be remembered that just recently it has been lower than expected, and so, overall, we may not yet have reached peak production levels that came from that region towards the end of last year.

One could be curious and speculate on where this additional volume is coming from. OPEC overall is credited with 30.08 mbd of production by Bloomberg, which is almost 200,000 bd less than the EIA reported . Part of the problem may be coming from Iraq, since the EIA report give a production of 1.9 mbd but they are getting some water cut in the product, according to a table footnote. In addition there was the story last month that they could only sustain an export level of 1.5 mbd for the rest of the year. To quote from back then:
Libyan Oil Minister Fathi bin Shatwan said Wednesday that news that Iraq's oil exports would flat-line at a low 1.5 million barrels a day for the rest of the year were a shock and made the supply-demand balance far more critical.

Iraqi Oil Minister Ibrahim Bahr al-Uloum said early Wednesday that the country's oil exports in the fourth quarter of this year would be virtually unchanged over its current 1.5 million barrels a day.

Shatwan told Dow Jones Newswires: "That's an extra 300,000 barrels a day less than we were expecting. It makes the situation even more critical."
So as the world moves into the peak demand section of the year, refineries are working at full capacity, oil is being shipped almost as fast as it can be, and for some countries reserves are high. In those cases, such as the US, one can expect that there will be enough to go around this year. Particularly if the continued high prices continue to restrict demand in places such as Indonesia and Thailand.

The big questions that remain continue to be Chinese and Indian demand. There has been a suggestion that the former might be holding back demand to reduce their visibility during the bid for Unocal, though I think that is perhaps a little bit of a stretch. The largest domestic producer just announced an increase of 2.1% in production – though that is not likely to match the increasing level of demand, even with Chinese prices up 45.9%.

As has been the case all year there are still too many unanswered questions as to whether we will hit the wall this year, next year or perhaps not until late 2007. But part of the doubt is because of the possibility of some demand destruction already happening.

The impact of increasing production costs (the rig costs for Sakhalin Island have now doubled due to increased steel and other costs) may also impact deliveries from some of the larger projects since, after all, there may be only so many billions to go around (sorry!).
Shell yesterday admitted that the cost of its huge oil and liquefied gas project on Sakhalin Island, off Russia's east coast, would double to $20bn (£11bn) and that the first deliveries would be delayed by six months to mid-2008.

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ah, you beat me to the punch and cited the PetroChina numbers.

397M bbl * 2 = approximately 34% of China's 2004 consumption. Its a sizable chunk and frankly if imports are down in China - yet we know their demand can't really be down all that much with exports up and shortages abounding - what makes more sense? Squeeze more out of the facilities you directly control.

In your own country.

For less $.

That, not reducing Unocal political visibility, seems plausible to me...

But here's more mud for the pot, and this might be interesting for the OilCast folks to look at too.

Analysts divided by IEA claim that Chinese oil consumption fell in second quarter

Shanghai. July 14 INTERFAX-CHINA - Some domestic analysts have expressed surprise at the figures released on Thursday by the Paris-based International Energy Agency (IEA), indicating that China's oil consumption actually fell by 1% in the second quarter of this year.

In its global demand forecast, the IEA said that China's oil consumption had fallen from April to June, mainly because of the discrepancy between high international crude prices and artificially low domestic retail prices, making refiners reluctant to operate at full capacity.

Zhang Jian, an analyst specializing in the petroleum and petrochemicals industry at China Securities, expressed his disbelief:

"I doubt the accuracy of the figure as both China's domestic crude production and crude imports are up by around 4% year-on-year in the first six months of this year," he said. "Moreover, oil product consumption in H1 was also growing."


Something else to note - overnight the natural gas contract did a complete about face, reversed all of Thursday's losses, and pushed to a new all time high (for the current contract).

murkier and murkier...

IEA's data is very questionable a couple of years ago they were going on about walls of oil "missing" barrels and they almost always underestimate demand.

Tanker rate's are not always a good indicator the rate's have been soft for quite a few month even though OPEC has increased production and the extra oil has been showing up in the EIA's import numbers. Tanker rates should be used as a guide only.

These guys have one of the best tanker sites

Our local small-town paper torments me with the conservative roster of Scripps-Howard columnists they run on the editorial page. Today James Glassman weighed in that there should be no opposition to CNOOC's bid for Unocal. He thought it was a good deal for Unocal shareholders and a bad deal for CNOOC's (which he admitted was 71% held by the Chinese Gov't). His reasoning: 1) oil prices are at an all time high and one is supposed to buy low/sell high, not the opposite. 2) oil is fungible, so it really doesn't make much sense for China to buy up oil companies when they can get the same thing on the open market. While this doesn't seem to be significantly far off from conventional wisdom, he takes pains to make the point that this wrongheaded approach is the result of central planners who, unlike wise and virtuous capitalists, are not capable of making correct economic decisions. (He then lumps in with the Chinese Communists the Congressional opponents of the deal.)

On the other hand, he really does distill what the Chinese must think, namely the converse of his belief: 1) oil prices are not at an all-time high, but going up. 2)oil ultimately is not fungible.

The issue of oil fungibility is analogous to that of the notion that higher prices bring out more oil supply.

Higher market prices do indeed increase oil supply in the short run, but the effect is limited in the long term by geology.

Similarly, when there's plenty of oil sloshing about, oil is fungible--country X decides for whatever perverse reason not to sell you oil. You just buy it from country Y, country X sells their oil to someone else, and the net effect on the market is zero.

But once oil supply is sufficiently tight, a country buying up and monopoliziing a part of the oil supply has a different meaning. They're locking in the supply at the price they paid, and if the oil supply falls and market prices rise, they can refuse to sell, causing a further supply/demand imbalance and more economic pain for the rest of the world.

[sarcasm]It's a good thing the Chinese aren't smart enough to have all this figured out, or it would be pretty obvious that they're placing an enormous bet on the imminence of peak oil.[/sarcasm]

It really drives me nuts how people (like the quoted columnist) who should know better than to paint all market conditions with the same insanely wide brush do it anyway. One of the first things economists learn is the critical importance of the phrase, "it all depends". I guess a lot of writers have forgotten (or never took) economics 101.

I'm not sure we can read into the courting of Unocal by the Chinese that they believe in peak oil.

What they do believe in is in growth and they plan to grow a lot. If they believed in peak oil or believed it was nearby, I don't think they'd be adding 1000 new private cars a day to the streets of Bejing (recent Chinese press report)

I see the Unocal bid by CNOOC as
a) a test of American political will,
b) if unsuccessful they will file that away and step up efforts elsewhere,
c) if successful, they get additional expertise,
d) if successful, an opportunity to get some control over Asian energy resources for future use

Of course, we'd like keep control over as much of world wide fossil fuel resource as possible. That's an undenyable administration (not just the current one) goal regardless of whether peak oil is driving it or not.

Conflict of some sort is inevitable; peak(ing) oil only makes it worse.

Oil Trader - thanks for the site. I ususally watch fixtures rather than rates, but it was the change in headline that caught my eye.