I think Katrina and Rita got some folks attention
Posted by Heading Out on October 5, 2005 - 9:51pm
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</center> If one further looks at the numbers that the EIA site provides. There is a slight discrepancy between the tabulated data and that plotted, and it took me a minute to realize that the curves are showing the rolling four-week averaged data, rather than the actual weekly for the imported gasoline data (and presumably also for the rest). This is of significance since such an average, in this case with the changing situation, initially masks the fact that the imports for the past three weeks have gone from 0.938 to 1.207 to 1.423 mbd. One may assume (at least I am) that about 500,000 bd of this is coming from the 20 mbd of gasoline that was put up by the IEA partners in response to our request following Katrina. If this is the level of support that can be anticipated, then it will last some 40 odd days before that source is gone.
</center>(I compared numbers from the tables for the last week, and averages from the graph for the summer, since those numbers were consistent for a period.)
Since current production has dropped about 1 mbd , it appears that there will be an inevitable drawdown in our current stocks until the refineries come back on line. At that time some of the tankers that are now acting as a partial storage facility, since they cannot immediately unload the oil they have brought to the Gulf, will be able to return to normal commerce. The MMS report
Today's shut-in oil production is 1,299,928 BOPD. This shut-in oil production is equivalent to 86.66% of the daily oil production in the GOM, which is currently approximately 1.5 million BOPD.Today's shut-in gas production is 6.895 BCFPD. This shut-in gas production is equivalent to 68.95% of the daily gas production in the GOM, which is currently approximately 10 BCFPD.
The cumulative shut-in oil production for the period 8/26/05-10/5/05 is 47,756,987 bbls, which is equivalent to 8.723 % of the yearly production of oil in the GOM (approximately 547.5 million barrels).
The cumulative shut-in gas production 8/26/05-10/5/05 is 233.446 BCF, which is equivalent to 6.396 % of the yearly production of gas in the GOM (approximately 3.65 TCF).
And I almost missed this note from Rigzone which points out that the Saudi Arabian oil minister has commented that
The report, entitled "Saudi Arabia's Upstream and Downstream Expansion Plans for the Next Decade," says the net increase in crude oil production capacity of 1.5 million b/d to 12.5 million b/d by 2009 will be accompanied by similar increases in Saudi-owned refining capacity aimed at processing heavy crudes.I think that this may be saying that they are planning to increase production from Safaniya more than they had in the past, (which will require the offshore rigs that they are borrowing - although some of those were supposed to be developing deep water gas fields). It also appears that they are going to bite the bullet and put in a refinery to refine the Manifa oil.State-owned Saudi Arabian Oil Co. (SOI.YY) and its international refinery partners are planning from 2009 to have an extra 2.02 million b/d of capacity specifically tailored for processing heavy crude into high-demand products such as gasoline and diesel.
The leading member of the Organization of Petroleum Exporting Countries, currently producing 9.6 millionb/d, today has spare capacity of 1.5 million b/d in heavy crude, largely from the offshore Safaniya field, but refineries tend to shun the grade as it is harder to convert into high-demand products such as gasoline.
Aramco, the report says, may from 2009 develop the Manifa oil field, providing an extra 1 million b/d of heavy crude production, if extra refinery capacity is in place by then. Two other projects could add another 600,000 b/d of heavy crude, the report says.That is some good news, particularly with the increases in refining capacity that they are going to put in place, even though it may take a year or three before they are in place.
And to prove that this is a more than exceptionally interesting time you might also want to note the Rigzone articles that show Alaska getting tough about getting more oil from the North Slope, while Florida's Bush changes his mind about GOMEX drilling.
It might appear, to a casual observer, as though something has caught state government's attention.
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Does this apparent demand destruction account for the recent drop in crude and gasoline prices?
I'm not convinced that we know enough yet to say that the production capacity will or won't be back that quickly, but it seems that the traders are betting heavily on the "will" scenario.
To anyone who believes this, I've got some excellent (swamp)land in Florida I can sell you cheap...
I have never seen one iota of evidence on TOD that oil traders have any idea at all about realistic oil supply and demand issues and are able to see past the end of their noses... myopic would seem to be the word I'm looking for, meaning "lack of discernment or long-range perspective in thinking or planning". Generally speaking, those few that make money seem to be slightly anticipating the herd. And then, once and a while, the s*** hits the fan and they all say "whoops", times have changed. Then they go on playing the same shortsighted game.
One thing that we can be absolutely sure of is this: peak oil will never get solved through the markets. Any new energy sources would have to be heavily subsidized and there is no such thing as a trader's energy market "correction" until it's too late....
Imagine you're a wealthy institution (or individual) with some cash you want to invest. You could put it into 3-month treasury bills and make 3.5% (annual rate). Or, you could buy oil on the spot market and (at the same moment) sell a future contract for the same oil 3 months out. If the three-month future oil price is enough higher than the current price to cover the transaction and storage costs and still return more than the 3.5% annual rate of return, then obviously you want to buy the spot oil and sell the oil future.
Observe that it makes no difference what the price of oil actually is three months from now. You've locked in your rate of return right at the start.
In practice there are some extra costs and risks. For example, a hurricane might make it impossible for you to actually deliver the oil you've got sitting in your storage tank. Then your tank is tied up longer than the 3 months you'd planned (raising your costs) and you're in danger of defaulting on your delivery (if the market doesn't declare force majeure and say you can deliver later). But that just means that threshold where you make the trade is higher than 3.5%.
You can make the same trade the other direction--you have oil now and you need oil in 3 months. You can just store your oil for three months, or you can sell it now and invest the cash in treasury bills, while simultaneously buying a futures contract for oil for delivery in three months. As long as the future price is not so much more than current price that the interest on the treasury bill can't make up the difference, then the trade makes sense. If you would otherwise have to pay for storage, that's another plus to the trade.
The actual future price of oil has almost nothing to do with it. It's all a matter of interest rates.
And there is some information in the futures prices. When they DO move out of line with what you'd expect based on interest rates, it means something significant is happening in the physical markets, such as a risk of physical shortages severe enough that contracts for delivery can't be met.
I think you're right on the mark about short-term price moves. We're seeing an energy market that's warped beyond description by manipulation (the SPR/IEA flows, political pressure, as you mentioned) and exogenous events (hurricanes, wars). We shouldn't be surprised if the market is even less adept than normal at reflecting the underlying reality of supply and demand in the short run.
Oil in the low $50's for a while seems very likely, although I'm less sure about the outlook for gasoline prices. That's a critical detail, since stable, "high" gasoline prices will do more to promote conservaton and start the long process of reshaping mainstream attitudes and behavior than anything else could, particularly in the US.
I can't prove we'll go back, but saying we'll never do it seems like a pretty tough assertion to defend.
B. Most of these wells were only producing relatively small amounts
It will take a long time to make re-drilling these wells profitable. So until A gets resolved through more rig production or B that small amount becomes important, they are a straight up loss to us for the foreseeable future.
Geologically, I'm not sure what happens when you disrupt a well like that. Does it eventually lose pressure?
Fact: the environmental and disposal costs will heavily impact bottom line numbers. If the fields had been new, then a possibility might exist that the platforms could turn around their economics. But in an aged and depleting field, you cut your losses when you have total structural wipeout because your economics are completely different.
After a platform is toppled, you have to stop any pollution, provide remediation (with the EPA and Louisiana DEQ, this in itself could be more than the cost of a platform), cut off all wells at the mudline and re-enter them to plug them back, then remove the scrapped platform itself. If you have 20-30 wells, this is 20-30 million dollars at a minimum, just to plug the wells! Most of these platforms were only economical because they had been built in a cheaper era and paid out by the primary production before being purchased by a new owner at an adjusted (much reduced) price.
Even at $200 bbl oil, the economics do not work out because of the limited amount of oil left and the new, higher cost of extraction and facilities. Combine the additional plugging and environmental costs, and you have a nice loss to carry forward though...
Very poorly is the answer. Even in mid 2004, oil contracts for delivery one year or more were actually less than the price then - which was about $35.
It appears that oil traders just project short term trends into the future.
Alan Greenspan states that long term futures contracts show that our inflation expectations are low. He's wrong, it just shows futures traders, and Wall Street in general, can't think much beyond the immeadiate future - let alone understand the long term impact of PO.
http://www.mms.gov/ooc/Assets/KatrinaAndRita/Rita1.jpg
One can guess from the graphs that gas will get pricier over the coming months, even if we are in an irrational price decline at the moment. CNN has some discussion of how consumers are responding so far - carpooling, moving closer to work, doing without fresh fruits, trimming purchases, etc
http://money.cnn.com/2005/10/03/pf/reader_gas_prices/index.htm
Meanwhile, 40 odd days before that [IEA/SPR reserve] source is gone... and we're maybe up the creek without a paddle as far as I can see, despite lower demand. We'll see just how elastic demand truly is, won't we?
Perhaps more important than "how long" will demand growth remain in a down trend is "how long" before that down trend slows down - in the short term there must be fairly inelastic limits to how much demand can be chopped off - eventually the dip will bottom out; perhaps its already on the cusp:
Total product usage
19-Aug 21320
26-Aug 21505 185
2 -Sep 21329 -176
9 -Sep 20979 -350
16-Sep 20699 -280
23-Sep 20219 -480
30-Sep 19940 -279
The largest dip has been in gasoline; distillate and jet fuel have remained relatively constant -- in fact jet fuel usage was up last week over the week prior.
So, once Martha and the Muffins stop drivin to the corner store to buy lottery tix, where else will cuts come from to keep the trend going...
and again, if you look at that spike up and then down in gasoline stocks in recent weeks.. that should give you some clue that you should not overinterpret last few weeks of gasoline demand. still too much transient inventory restocking to infer a long term impact/trend.
So, we have to get through this winter with 8% less natural gas than we've been using. If we don't have a warm winter, there may be serious loss of life due to shortages.
I see the same thing here - about a week and a half ago, I could get D2 for about $2.95. Now it is $3.29. This is at a local station that isn't exactly known for having the lowest prices, but I drive past it.
I can get B100 for about $3.39. I guess that's good news.
It might be because they are starting to develop stocks of home heating oil.
Diesel is going up in PacNW as well, $3.09 at the local station, was $2.99 last week
This site shows the increase in prices from last week and last year. No explanation that I saw.
http://tonto.eia.doe.gov/oog/info/gdu/gasdiesel.asp
BTW: Why does B100 go up in lock step with regular diesel? Is this increased demand overwhelming a limited supply or is vegetable oil/grease increasing in price as well?
A further follow-up on diesel is provided via Treehugger (too bad they don't link to the original NYT article).
http://www.treehugger.com/files/2005/10/planets_align_t.php
I'll keep looking..
I recently saw this on an msn group site:
What happens when you drain a running engine of its lubricants? It creates more friction, overheats and eventually seizes up. One major difference from the age of the dinosaur hot house is that they became the cooling down the mantle of the earth allowing the ice caps to freeze... and water levels recede. There are two ice caps, north and south.
Could it be that the pure fact of removing oil from the ground over the past 150 years would upset the balance of the planet cooling itself? Combined with usage of oil, i.e. industrial age? I never really thought about it till now, but it kind of makes sense!
Or is he full of it?
The original text can be found here:
http://moneycentral.groups.msn.com/SquawkBox/general.msnw?action=get_message&mview=0&ID_Mess age=55669&LastModified=4675541876776355157
There are sooo many things wrong with his train of thought that I don't even know where to begin...
Now, along a different line of thought, the transformation of ancient materials into oil beneath ground IS a form of carbon sequestration, so the formation of oil represents the removal of CO2 from the atmosphere. I suppose that could cause some global cooling. Burning the oil reverses that process.
I'm a grad student in the life sciences and work in a biomedical research lab. We use an INORDINATE amount of plastic a month, from pipette tips, to petri dishes to culture cells and bacteria, to small and large tubes, you get the picture. As such, I'm a little more than just concerned about all the major polymer feedstock suppliers declaring force majeure in the past couple of weeks. I'm sure at the least, we're in for higher plastics prices, but might we be looking at a plastics shortage? Or can foreign producers pick up the slack?
Does anyone know how off-kilter the proportions of refined products are right now? Is whatever refining capacity we have right now going full-bore gasoline and jet fuel, at the expense of lubricants and other petro-products?
Any insights would be helpful.
It is ENTIRELY related to Peak Oil, so very relevant.
I think this is actually the first time this has happened historically.
That guy is nuts.
The mass of all the oil on the planet is mathematically inconsequential when compared to the mantle mass.
The most prolific oil deposits are much more recent geologically, than the dinosaurs...
Geez, i was wondering about that! Thanks for clearing it up!
Check out today's NY Times article On Wall and Main, Worries About Oil. The article goes on and on about how rising prices are killing the airlines, the truckers, etc. On Wall Street, prices fell for the third day in a row on fears that higher fuel prices are hurting the economy. And right there, in the middle the article, standing apart from everything, is this:Now, my understanding is that if you're looking for demand to ease, you've got to raise prices.
Is there an economist in the room?
It's just the opposite of what has happened over the past couple of years; the expectation of rising demand caused traders to push the price up from $30 to $65.
So my question now: Why do they expect demand to fall if they keep lowering the price?
Of course the above is a very simplistic explanation that ignores all the other news and events on the supply side that interact with demand to set the market price.
Thanks to all TOD posters who bring DATA sets to the discussion. You guys know where to look for the pertinent numbers.
Thanks also to the people dissecting the trading trends. I have been questioning since Rita hit why futures prices have not been on up trends. I think much of this has been covered in above posts now but I have to add my own extrapolation from recent events.
- I believe we have seen some demand destruction in transportation fuels because of the price spikes. Mostly this is car pools and not driving near the GOM. I don't see where there has been any reduction in natural gas usage.
- This has instantly reduced demand some measurable amount.
- At the same time that 1 & 2 above happened the government opened all the available storage capacity. This includes gasoline & diesel from europe and elsewhere, crude from SPR, Europe and the Middle east, and all available NG supply.
- The release of this stored supply has been greater than the instantaneous demand destruction in transportation. And has merely kept up with NG needs.
- This short term liquidation of stocks is masking the true nature of the supply reduction. Traders, in an open market, see a surplus in supply therefore the price goes down. They have very little or no knowledge of how the supply is being maintained, only that is sufficient or greater than instantaneous demand.
- The prices of oil, gas, diesel, NG are not reflecting what future supply will be like when we have liquidated a great amount of stored supply and can't replace it.
- At that point refined stocks will not meet demand and the price will 'correct' upwards. Demand will want to exceed supply.
- Assuming that a lot (but not all)of the refining capacity can get back up in a few months there is liable to be insufficient raw stocks, crude and NG, to run through the refineries at their brought back online capacity.
- At that point there will be shortage of refined stocks for two reasons. The reconstituted refining capacity will be less than before Katrina and Rita. And the crude & NG from the gulf will be much lower than before Katrina & Rita and won't meet even the reduced refining capacity.
- That is the point where we will have to have severe demand destruction, down and equal to our sustainable supply. Will this mean the markets will go to the roof on prices? Not if demand destruction balances supply.
As an engineering friend would advise me, when he couldn't predict what the outcome would be from exceeding the capacity or specs of equipment, "Bad things will happen". Well if we get to Number 10 above BAD THINGS WILL HAPPEN. I am not in a position to say what the bad things will be but it sure looks like we are setting ourselves up for severe shortage solely by not accepting reality of damage to the infrastructure.Now I don't know whether gov't SPR demand shows up in EIA reports or not, but if it does, it could explain a portion of crude demand destruction. Whether it does or not, when you look at the current pricing pressures, you should keep in mind that the SPR influence on price is not only from what they're releasing, it's from the release amount plus the amount they're no longer demanding.
If opening the SPR temporarily eases the price on crude, the Chinese may decide this is a good time to start filling their new SPR.
I have been looking at the "This Week in Petroleum" report since Wednesday and have been listening to the talking heads and read all the above comments in this thread.
NEVERTHELESS, I see something different in the demand numbers. If one looks at the weekly demand numbers, ignoring the 4 week average that appears to be skewed (perhaps the outlier will drop off next report), the gasoline demand for the past three weeks has been INCREASING. This does not represent demand destruction to me! And for the most recent week, the demand is approaching the demand last year at the corresponding period. So if weekly demand NOW is about the same as weekly demand LAST YEAR, where is the reduction in demand (other than the outlier week or weeks)?
Note that the chart uses the average number as pointed out in the thread's lead message and it is a 4 week average with the 4 week ago demand figure not shown
Considering that gasoline at the pump is about 40 percent more this year than last, why is there not a real reduction in demand?
Can someone please explain it to me in simple terms that even I can understand?
Thnx.
Am i helping?????:)
The market is pricing in huge demand destruction IMO and i am not sure its warrented yet but the market always over reacts.
The differential between the spot prices and futures is way to big. One is wrong.
I think the first blast of winter will quickly change this market.
I tend to ignore the pricing aspect since I personally believe that the price of oil futures are being manipulated to further the administrations goals.
I also agree that one weeks figures may be very noisy.
Nevertheless, the past three weeks shows increasing demand numbers. And the current week's demand is ABOUT equal to last years demand despite the 40 percent higher price.
So, by the Government's numbers, there is no substantial EVIDENCE of any demand destruction the past three weeks or year over year.
Understandable, when the purpose is to make people feel good, the 4 week average is a more attractive number to use.
Also Distillate demand is up on last year = more oil being used this makes sense as those that can fuel switch from NG will have, creating more demand for distillate.
If demand hasent been damaged we will see the numbers starting to correct over the next couple of weeks.
Another thing about the market comentators those that where right over the last couple of days get the most coverage So you end up with a retrospective not forward looking reports. And the longer they are right the more they get published.
Untill the market swings.
Are the refineries back up to a production level before the huricanes. If not, then what do they need with crude if they can not refine it into something that they can sell?
The difference between spot prices and futures is way to big someone has got it wrong.
Does anyone know how long a refinery can go without maintenance before safety guidelines are exceeded??
Just trying to piece this puzzle together.
That was september 2, and an initial reaction. Was this quantum of petroleum sent to USA increased to 500,000 barrels a day, as Stuart suggests? (I don't know - anybody...?)
When comparing periods, don't forget that this time last year the amount of petroleum available had been already reduced due to september 2004's hurricane Ivan, increasing price/reducing demand i.e. dropping inventories by ~13 million barrels over normalfor the period. Comparing this years use against last is comparing a significantly reduced use against a reduced use. Is this level of use 'atypical'? Perhaps not. Perhaps reduced consumption is the new 'normal'.
The other question is the effect of gasoline scarcity-pricing (short and long term).
At the same time as USA enters the European market to bid for petroleum, French refinery production experiences a strike-related hiccup. This may tip the balance of the product mix at French refineries (at least) to more diesel and less petroleum, as a large part of the French fleet of cars runs on highly fuel-cost efficient diesel motors. Other countries - Iran for instance - which have grossly insufficient refineries for self-sufficient petroleum supply are also bidding to meet an increased demand, but subsidise the pump price, killing any pricing pressure on consumers. In un-subsidised (and 'bizarro' subsidised!)countries, this demand has to be balanced against resistance due to price. In UK, for example, petroleum is the equivalent of US$6.92 per US gallon. But these high levels are relatively 'normal' for UK motorists. Will USA and others bidding for gasoline drive demand down further in Europe? I doubt it. Will higher petroleum prices drive demand down further in USA? For low income, yes, obviously. For middle income...unknown territory. On the European scale, at $US3 a gallon, petroleum is a bargain. Thus the ratio of low and middle income people in USA bears on the degree to which there could be - and might already be - a permanent drop in petroleum demand. Bear in mind low income people drive often gas guzzlers which they cannot sell for more economical models. The demand for older gas guzzlers is low. The capital for financing a trade-in is now there. They are locked-in to the worst possible deal.
Refineries in USA normally start switching production ratios to favor more fuel oil about now (and do some maintainance as they do so). The question I ask is - are they? Or are they hanging onto a long tail of gasoline production beyond the normal switch point? If they are retaining a higher ratio of gasoline production to heating oils, this is equivalent to betting on a warm winter in USA.
Finally, the IEA agreed september 2 to release 370,000 barrels a day of petroleum for 30 days - about 11 million barrels in that period. When did the period start? On the day of announcement or so after? If so, that supply is cut.
But that was Katrina response to a 1 million barrel a day refined petroleum shortfall. Deducting the assumed ~370K barrels a day from Europe, 630K needs to be found on the international market.
But what I am not clear on is the effect of Hurricane Rita on this requirement. Has the limited refinery damage made a substantive negative difference to USA petroleum refinery capacity? Are we looking at 630K, or a higher figure?
"The capital for financing a trade-in is now there"
should have been -
"The capital for financing a trade-in is NOT there"
Apologies