Market Strategists: Oil May Average $93/bbl in 2007 (and that's if nothing goes wrong...)

Land of Black Gold with a valuable find: "Commodity Strategists: Oil May Average $93 in 2007".  (Snippets under the fold.)

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Oil may average $84 a barrel next year, $93 in 2007, and $100 in the fourth quarter of 2007, as demand outpaces supply, Canadian Imperial Bank of Commerce's chief economist said, jumping ahead of other analysts who are trying to catch up with surging prices.

Rising consumption in China is straining supplies, and damage from Hurricane Katrina to Gulf of Mexico facilities will delay new oil projects in addition to cutting output now, Canadian Imperial's Jeffrey Rubin wrote in a Sept. 7 report. Global supply will be as much as 2.4 million barrels below projected demand by 2007, and the gap will only be closed as rising prices slow demand growth, Rubin wrote.

``We estimate that 1.8 million barrels per day of consumption must be squeezed out next year through the impacts of higher prices,'' Rubin wrote. The gap between supply and demand grows as much as 3 million barrels a day by 2008. Global oil needs are almost 84 million barrels a day now.

``About 42 percent of the growth in global demand is coming from China, where there is virtually no price sensitivity to demand,'' Rubin said in a separate phone interview. ``There's a huge relationship to income growth there, but a very uncertain relationship to price at all.''

Instead of adding nearly 600,000 barrels of oil a day by 2007, new fields in the Gulf may contribute just 300,000, according to Rubin's report.

``When you juxtapose that with the apparent insensitivity of the demand curve, then what happens is that even though it's a relatively small reduction in supply, you need huge price increases to rein in demand,'' Rubin said during the interview.

``You have had a very significant reduction in the growth of demand, something in the neighborhood of a 40 percent reduction in the growth of demand already,'' he said. ``Unfortunately it's taken huge prices to achieve that.''

Not that I'm upset or anything, PG, but I posted that article in this post here today some hours earlier. Glad you brought it up front. It's always a good idea to see what people are saying in the various threads....
sorry Dave.  didn't go through the comments last night.  :(
MMS report for today shows negligible progress on crude recovery in GOM, a minor amount of progress in NG. Largely unchanged since Sept 7.

Today's shut-in oil production is 842,091 BOPD. This shut-in oil production is equivalent to 56.14% of the daily oil production in the GOM, which is currently approximately 1.5 million BOPD. Approximately 35% of shut-in oil is as a result of problems with onshore infrastructure.

Today's shut-in gas production is 3.411 BCFPD. This shut-in gas production is equivalent to 34.11% of the daily gas production in the GOM, which is currently approximately 10 BCFPD.

The cumulative shut-in oil production for the period 8/26/05-9/15/05 is 21,375,721 bbls, which is equivalent to 3.904 % of the yearly production of oil in the GOM (approximately 547.5 million barrels).

The cumulative shut-in gas production 8/26/05-9/15/05 is 102.405 BCF, which is equivalent to 2.806% of the yearly production of gas in the GOM (approximately 3.65 TCF).

And NG is rallying :-D
Certainly its become de rigeur to raise peaking oil in interviews:

"There is a looming problem with reserves replacement....demand is rising faster than expected and the finite nature of the world's remaining reserves are becoming very apparent," enthused Michael Wootton, chairman of the British Chamber of Commerce of the Philippines and former business development manager of Shell Philippines Exploration.

Open question: is it not possible that the intelligensia of the petro-industry believe that current refinery capacity is so near to their expectations of ultimate world raw crude output capacity?

Could it possibly be that the real reason no new refineries have been built over the past three decades in countries such as the US is that improved knowledge suggests they wouldn't be able to run them for long at anywhere near full capacity, if built?

I very much doubt that 10, 20 years ago the industry had this foresight, but it does seem to me that those who dole out billions on capital projects might also have the wherewithall (and desire and motivation) to look at the peak oil situation objectively and with self-interest properly at the forefront.

Imagine further that one or more of the larger integrated firms, or refiners, have concluded the peak isn't all that far off, and, faced with this, ask some basic questions as to capital allocation:

  • uh, do I invest in a refinery that may only run for a few short years at anywhere near full capacity, or,
  • do I invest in oil sands or some other unconventional upstream activity, or,
  • do I just keep hoarding cash and ultimately pay it out to shareholders when oil is 100, 200$/bbl?

Refinery capacity maxing out is probably the easiest of all factors to predict, with some accuracy, 5, 10 years ago. Ample data exists to show demand growth is relatively constant. Eventually refinery capacity would smack up to 100% in the US... that was a sure bet.

Faced with a sure bet, and, assuming there will always be ample oil to feed the refinery, surely some enterprising capitalist could find a way to fund a refinery, even if they are low profit cyclical beasts.

I do admit that the relatively low profitability, historically, of these beasts does provide a ready excuse as to why new refineries haven't been built. Faced with plunking down billions, there's always something more interesting to fund and get a return from.

But I keep wondering if concerns over the long term utility of investing in new refinery plant was the limiting factor.

God damn, mw, what you just said about investing in refineries actually makes sense! It would be very much akin to oil companies consolidating rather than investing in exploring new oil provinces and drilling dry holes. So, there is really no profitability in building new refineries? Are we that screwed? Is it really that bad? And, it would take years to build new refining capacity anyway.

I ask this because US refineries were running at +95% all year until recently (they were below this even pre-Katrina due to maintenance but of course we're far worse off now). In addition, is it the case that we (the US) will just import refined products in the future to offset our inability to deliver those products to American "consumers"? What about the costs of all that? Who's going to be making money here? As J has said, follow the money. This is a big bottleneck in our economy. But you're saying there's no real incentive to fix it. Recession city here we come.
This notion has been in the back of my mind for eons; but I am willing to accept that industry somehow got blindsided... but find that less credible than the other alternative I've put forward.

In Canada "income trusts" are a booming business - take pool of capital and move what was once a growth biz, now a mature biz, into an income producing stream with generous tax treatment for investors and the company. Such a structure could easily fit and fund a refinery biz I'm sure. Relatively stable, if low, returns, provided the future includes running at near max capacity forever.

Finding billions to spend on energy is not a problem. Hundreds of billions will be spent in the Alberta oil sands alone. Clearly there is money out there to fund all sorts of things, including rigs which get routinely swept away in the GOM.

So... why haven't they invested in refineries, one of the sure fire easy-to-forecast parts of the biz. Its not speculative at all.

The refinery thing ia half-myth.  Yes, there are fewer refineries now.  Yes, there have been none built in the US in 30 years.  But that's only half the story...

Prior to 1978, US refining had far more facilities and companies, but the facilities were smaller than today.  Many of them were not really profitable, but the government subsidized them heavily, resulting in over-capacity.  Two things changed: the government stopped subsidizing them, and price controls on gas and other oil products squeezed the margins on refining as crude prices rose.  So lots of the smaller less-profitable refiners went out of business or consolidated between 1978 and 1985.  

Massive investment has occured to modernize and expand existing facilities.

For roughly 20 years, refining capacity has increased every year as existing facilities expand to take advantage of the economies of scale.  The best place for new refining capcity is in bigger facilities at the source, which for imported oil means the Gulf oil ports.  Refining capacity is now almost as high as it was in 1978, even though there are many fewer refineries.

Yes, the are more efficient, but efficiency increases have largely stalled and thus a capacity bottleneck is here. This could be forecast simply enough 5,  perhaps even 10 years ago but I think post 1998 it was easy enough to see. Post 9/11 recovery - fuel demand didn't suffer that much and recovered quickly - should have been a big red flag to industry.
mw: As I've said here before, I think it's all but certain that energy companies have held back on the building of infrastructure, especially refineries, for exactly that reason--why build a bunch of very long-lived hardware that you won't need for more than a few years?

Take it a step further.  The oil companies know we're closing in on PO, so they say, "Hmm.  No point in building that refinery we won't need 10 years from now.  And if no one builds refineries [note implicit collusion], supply will be tight, prices will go up, and we'll make lots more money.  And we'll be doing the world a favor, really, since those high prices will encourage conservation and adoption of alternative fuels, which will make the peak less painful."

This is part of my contention, as I expressed in a longish post yesterday, that modeling worldwide peak and modeling the peak of only part of the world are radically different.  When you're talking about world peak, and you assume that the powerful decision makers at key points in the economy know we're approaching the peak (a very reasonable assumption, IMO), there are very powerful incentives for them to take actions that will push prices up and consumption down pre-peak, slightly delay the peak, and slightly alleviate the decline rate post-peak.

I know everyone here is sick to death of hearing me preach about how we have to take as broad a view as possible of the energy situation, so I won't go into the whole shtick again.  But everyone please remember that we're talking about an immense mosaic made of postage-stamp-size tiles, and focusing on just those few tiles right in front of us is recipe for misinterpreting the whole picture.

Michael Wooten "enthused"???!!!
This idea is not new, nor do I have a really hard time believing it, but how does it square with what Bubba and J (I think) have been saying about the industry being geared towards "$10 and $20/bbl" oil?  That doesn't sound like the mindset of an industry actively plotting for scarcity to me.
The site didn't put my comment below its proper parent, so I just want to make it clear that I was replying to the idea that oil companies have actively held off on building refinery capacity because of the peak.  In addition, isn't it possible that they just underestimated the capacity necessary?  After all, I have heard here and elsewhere that these things take up to a decade to come on-stream, and the meteoric rise of the Chinese and Indian energy appetites has been well within that margin, hasn't it?
Economic growth in China and India is no surprise to anyone who follows such things. Our own history - inefficient use of energy early on in major economic expansion - tells us what to expect from developing economies.

Raw crude demand therefore was always a given. Oil sands never would have been developed in Alberta, for example, if there were not folks looking out decades. When they were first being touted as investments, many short term thinkers dismissed it as a crazy science experiment.

That didn't stop the original investors from pushing forward.

As for refineries... never underestimate the profit motive. If regulations makes gas more expensive, then it will sell at a profitable price point. Capacity constraints raise prices but someone has to be a visionary and step forward to build the damn things.

The only reason you wouldn't build it is if you don't think you need it.

That might be an oversimplification... clearly there are some that have long wanted to build nuke plants but have been prevented from doing so.

Not for much longer I suspect.

Expanding a plant is much easier than building a new one. I dont think there is a single community in the country that wants one of these messy, polluting things. Licensing a new plant in 1975 was much easier than today.  
Apart from the EPA and the NIMBYs, expanding old plants is also faster and cheaper than building new ones.  It also allows you to scale capacity gradually up in response to market demands, ensuring maximum return on your investment.  

And there's always uncertainty...  You'd hate to spend 10 years and several billion dollars on a new mega-facility, only to have it come on-stream right when the economy goes into recession and demand is slacking.

If we are within just a few percentage points of peak extraction rates then surely there is little point in building extra refining capacity that just a few years after peak will be surplus to requirement.  In fact this fact alone should cut of the very top of the curve producing a plateau.

There is of course a need to replace capacity to refine light sweet oil with heavy sour capacity though.

The US has seen no new refineries constructed, but refining capacity continues to grow because the refineries themselves are growing.

There is no global ban on new refinery construction.  Check the EIA country reports at their website.  Here's a section from the report on China:

   After a period of consolidation in the Chinese refining industry, in which dozens of small refineries were shut down, the major Chinese oil companies are again seeking to add capacity.  CNOOC has a 240,000 bbl/d refinery project under development in the city of Huizhou in Guangdong province, which is expected to become operational in early 2008. Another current project is a $3.5 billion expansion of the Quongang refinery in Fujian, which will raise its capacity from 80,000 bbl/d to 240,000-bbl/d. ExxonMobil and Saudi Aramco signed a contract with Sinopec for the project in July 2005. CNPC also is planning a major expansion of the Dushanzi refinery in Xinjiang, which will be partially supplied by the new pipeline from Kazakhstan. A major issue for the Chinese downstream sector is the lack of adequate refining capacity suitable for heavier Middle Eastern crude oil, which will become a necessity as Chinese import demand rises in the mid-term future.  Several existing refineries are being upgraded to handle heavier and more sour grades of crude oil. With consumption of petroleum products rising so rapidly, some interest is being rekindled in the construction of more modern greenfield refineries.

Oil companies are spending lots to build new refineries in rapidly growing markets, and they continue to spend large sums to expand capacity in the US and other mature markets.  Their behavior is not consistent with a beleif that no new refining capacity will be needed.

Agree entirely. A nice recent article with some confirmation is

To amplify one point: the return will be affected not only by the investment, and the capacity utilization, but also by the timeline. Glenn McGinnis has been working for 6 years to get permits, oil supply, and capital for a new refinery in AZ, and he estimates a 10 year inception to first operation timeline.

Consider: we have no reliable consensus on future oil availability, and a refinery project faces 10 years of investment before the first positive cash flows, and interest rates will rise over that period of time. On the consumption side, half of the US airlines are bankrupt, and Ford and GM are junk bond status...the uncertainty does get to be a bit much.

Different topic, US/Canada ties. I think Bodman is delivering a slightly different message than the obvious. There's been a number of trade irritants of late between the two; Cattle at the border for one -- believe I made a comment that as soon as Tres. Sec. Snow visited the oil sands, and commented at the time that he thought the border should be open to Canadian cows again, within two weeks, it was.

So... lets see if Bodman's speach to the Canadian Council of Chief Executives is followed up with some other 'problem' solved... perhaps Softwood Lumber (which they can use the guise of Katrina to paper over the complaints of lumber producing protectionist states... gonna need a lot of lumber, cheap lumber, to rebuild)

We'll really know the crap is hitting the fan if deals like EnCana's latest start getting questioned on "security" concerns. t=energy_091305

Not surprising, said Bodman, the U.S. Department of Energy "has a very strong relationship" with its Canadian counterpart -- Natural Resources Canada. "We meet regularly and are in constant communication at all levels throughout our respective departments," he told his audience. "Both departments are committed to exploring ways to expand cross-border infrastructure development and trade, and to ensuring the continued security of our integrated systems."

"In this time of energy-supply constraints, price volatility and political uncertainty in some parts of the world, it is reassuring to know that the United States and Canada can count on one another for continued energy-supply security and stability," he said. "If there is one message I want you to take from this meeting, it's that the United States values and depends on Canada as an energy supplier, a trading partner, a neighbor and an ally. And I want you to know that ... Canada can continue to depend on a reliable, open U.S. market for its growing trade and investment ties."

The energy secretary concluded his speech by paying tribute to an abiding friendship that has sustained both Canada and the United States for more than 200 years. "We are two separate, sovereign nations: different, yes, but in many ways alike," he said. "And considering all that we share -- a border, an environment, not to mention common energy, economic and national security challenges -- there can be no question that ours is a shared destiny."

A while back I mentioned that Canada's oil was getting serious attention in Washington, and noted Sec Treas Snow had been up visiting the oil sands area a couple of months ago... while there, he commented on how the ban on Canadian beef ought to be lifted to allow cattle south into the US.

A couple weeks later, it was lifted.

I also mentioned that I fully expected, in the fullness of time, the on-going softwood lumber protectionism and anti-NAFTA anti WTO countervailing duties etc to be lifted. Rather expected that to happen once Dick Cheney visited, but Katrina has got in the way of his visit.

However... I do recall mentioning that Katrina gave them a perfect excuse to lift the softwood lumber penalties and tell the US lumber producing states to sit on their objections.

Washington weighing exemptions on Canadian softwood lumber duties
Officials say the notion of lowering duties on softwood to increase the flows for reconstruction following the devastation from hurricane Katrina is being seriously discussed in Washington.

Not only would that help in the shorter-term crisis but could move along stalled talks to resolve the softwood lumber trade dispute that threatens to poison relations between the two countries, says U.S. Ambassador David Wilkins.

I've no doubt Washington is fully interested in securing as much access to Canadian oil, now and long into the future, as is possible. "Solving problems" like this trade dispute allows them to gain support of the Canadian government for when a purchase attempt by interests not friendly to the US cause (say China) come along.

10 years ago we would not have seen the political maneuvering around oil that we see now (it was there, just not as obvious nor seemingly accelerated as it is now). One more sign that peak or peaking oil gets closer?

At a minimum, I think the Administration wants to ensure that Canadian oil remains available to the US market and doesn't get locked in a long term contract with China.  So this may be a response to the rise of "resource nationalism" that we've seen over the last few years.

But the Administration has always tried to smooth the way for the oil companies, if only because Bush and Cheney are oilmen.  If there's trouble with Canadian trade, and that affects oil, then you can bet that whatever industry is on the other side of the dispute is in trouble.

If Venezuela allowed substantial foreign investment and equity in oil, nobody in Washington would care if Hugo Chavez was cloned from Marx and trained by Che.

I read in an article a few years ago that one of the largest issues inhibiting refinery construction is that of liability. Apparently, courts have set legal liability precedents that effectively force the refining company to purchase any and all land which might possibly be contaminated by the refinery or affected by a refinery accident. This includes air-born contaminants as well. Apparently the larger refiners have been actively purchasing the surrounding lands to limit their liability in the last few decades as well.

When one considers where to locate a refinery, it makes sense to place it where it can handle imported oil and send products via truck and train routes. This basically means a coastal location. Now, combine that with EPA and other regulations concerning wetlands, wildlife refuges, beaches, etc. and one can run out of land possibilities pretty quickly as well. That's why using an old army base makes no sense, but maybe a naval base would. Yet I would think the environmental issues would still apply, not to mention whoever takes on the naval base proposal would inherit liability for whatever the government had already dumped or contaminated at the base location. Based on armed forces records in that respect, the naval base option could have prohibitive hidden costs and substantial, up-front bio-assay costs.

Just some thoughts!

Market Strategists: Oil May Average $93/bbl in 2007

Market: Oil expected to average $64/bbl in 2007

Some projections from 3 different CERA scenarios as of 25 August (pre-Katrina), for 4th quarter 2006:
  -Negative demand shock: $39
  -Anxious Market: $51
  -Fundamentals surprise: $80
Key finding: there's wild disagreement, even from the same forecaster. Forecast at your own peril, and use any numbers at your own risk.
Well, it looks like Vice President Cheney finally got on the stick -- he ordered Entergy to restore electrical power to the key Colonial Pipeline System, which moves oil and gas from Louisiana to the Northeast. All to the good. But he insisted on doing this, even though his action meant that rural hospitals in Mississippi were left without power for an extra day at least.. see below....

Can someone please explain to me the economic justification for refinery bottlenecks driving the price of crude up? I just don't get it (I've always been a bit slow). It makes sense to me that you could have $8.00/gal gas at $20/b or $100/b depending on the gasoline demand side. What doesn't make sense is demand for gas increasing the price for crude oil - when everyone understands that there is a refinery bottleneck...I don't know how many headlines I've read lately stating something to the effect of "Crude jumps on refinery problems" or "Crude up 5% on gas stock draw down". Please enlighten me. Thanks.
No, it doesn't make sense on its face.  

I suspect that what is going on is that the price of light sweet crude (the benchmark that you always hear about when prices are quoted in the media) is in higher demand because the refineries need high quality crude to maximize output.  Refineries could purchase heavy sour for much less than light sweet at the current spreads, but their output of refined products would drop with the lower quality crude inputs.  

Refineries that can handle either grade of oil may prefer light sweet, depending on the price spread. My understanding is that many refineries can't refine the heavy sour crude at all, as it takes additional equipment for pre-processing. So there is essentially a shortage of light sweet, and an oversupply of heavy sour.

Any oversupply of a raw material due to processing bottlenecks should lead to a price drop. As for oil, it's a mystery.

What do you expect? To see an article titled "Price of crude goes up because oil is running out?" :)
My explanation is strictly psychological: both buyers and sellers on the market are aware that we'll soon have (and already heaving) an ever-widening supply/demand gap. And both sides are also aware that taking this in to the surface will cause panic, an oil spike, recession etc... That's why the so called "efficient market" reacts on news that have just a seemingly persuasive relation with the problem to justify the price increase necessary to settle the accumulated tensions (but of course the real reasons are quite different). On the other hand the ever optimistic media will be the last to publish news that threaten to reveal a long-term problem. That's why they expose and "swap" the long-term with the short-term ones. Scaring the investors is really bad for the business.
My thought on this is that the refined product will still be required for use regardless of domestic refining capacity. So that just means it would have to be imported, and that even more crude would end up being required since a) worldwide you're still going to refine the same amount of crude, and b) but now you need a little bit more crude because it takes energy to transport the stuff that is being imported. So domestic refinery problem means overall worldwide increase in demand, which in turn causes prices of crude to rise.
Refinery bottle necks should drive up sweet light and reduce heavy sour oil. I could build a sweet light refinery in my back yard heavy sour is something else. Sweet light can go straight into your heating oil tanks with out refining. Thus when refining is tight sweet light is more valuable.
...and after the problem is resolved (often within days) the price margin goes back to normal and the price of sweet crude drops and of sour goes up? Right?
Come on - this is just another self-dilusion. The market reacts on psychology and fear is really a great factor. I really wonder... do the brokers check if the unit affected is for processing of light crude or sour before bidding higher? And also how could taking out of say 50 000 bpd unit somewhere in Texas (about 0.06% of the world consumption) cause a price spike of 3 or 5% in the world market?

perhaps this might explain why the borders between USA and Canada/Mexico are merely illusional in the very near future. Now, who's going to rebuild New Orleans? let me give you a hint......Illegal Immigrants.

Virgin plans oil refinery
From: Reuters By Deepa Babington in New York
September 14, 2005

THINK you are upset about high gas prices? Maverick British entrepreneur Richard Branson is so furious he wants to build his own oil refinery.

Like the rest of the airline industry, Mr Branson's Virgin Atlantic Airways has been stung by higher jet fuel prices and was forced to raise fuel surcharges for the second time in four months.
Hurricane Katrina sent oil prices soaring to $US70 a barrel because it shut several US Gulf Coast refineries, which turn crude oil into products like diesel, gasoline and jet fuel.

"If we don't start now to get more refineries built then fuel prices could literally rocket to $US100-$US200 (per barrel of oil) and the world economy would come to a grinding halt," Branson said in an interview on financial news network CNBC overnight.

Mr Branson did not say where he wants to put his refinery, but some analysts said he should not look to the US, where no one has built a refinery in 29 years.

"My immediate reaction to that is: Not in the US," said Paul Flemming, oil analyst at Energy Security Analysis Inc. "That's definitely more pie in the sky than anything."

In the US, getting a permit could involve years of navigating local, state, and federal regulations and protests from environmental and community groups, analysts say.
But they note that people in other places would not be too keen to have an oil refinery in their backyards.

"If you're talking about a 400,000 barrels per day refinery next to a French Chateau in the Loire valley, the timeline is infinite," said Tim Evans, senior oil market analyst at IFR Energy Services.

"If you're looking at an industrialised part that already includes an oil refinery, it's much less of a big deal."

Mr Branson said plenty of places would welcome the jobs that a new refinery would create. "Some people will kick and scream, but they may be the same people screaming about the fact that they're having to pay enormous prices every time they get into the car."

But building a refinery to ease high fuel prices would be far from a quick fix: any refinery would take at least four or five years to build, if not longer.

And according to Energy Security Analysis' Flemming, another refinery would not ease record high crude oil prices as Branson suggests, since it would not increase actual crude oil production.

Mr Branson's idea does have some fans, however, among those concerned about the lack of competition in the refining industry, which is dominated by a few large companies.

"The oil companies themselves aren't interested in building new refineries and will tend to denigrate the chances of any new investors actually succeeding in their business," said Mr Evans of IFR Energy Services.

"They'll say, 'What does Richard Branson know about oil refineries?' He doesn't have to know about that part of the business, but he can easily see that oil refiners are making a margin far superior to what he's making in the airline business."

lets see how this plays out! hope he has deep pockets!

If he wants to avoid the NIMBYs, maybe he should build it in space.  You know, right next to his hotel.