Friday, July 17, 2009

Crude Prices for the rest of the year

As the summer moves inexorably towards its close, debate still bubbles along on the future price of oil over the winter. Of course that brings in the question of what sort of a winter we’re likely to see, and that is also a bit controversial on the climate change front, but I’ll leave the arguments on that to the weekend. Suffice it to say that the current lower temperatures that we are seeing suggests that it is likely to be colder rather than not. If we look at the way the price of crude has varied, there are arguments which might suggest that it could go either way, over the next six months.

Crude oil price volatility.
If the world economy collapses much further then this can further reduce demand, and further slack can appear between available supply and demand. That surplus has been suggested to have the potential to be a “devastating glut”, with the potential to drive crude oil prices down to $20 a barrel. Is that likely? Well with all respect to those making such predictions, I don’t think so.

Certainly this all depends on the economy to a great extent, but we sometimes forget that this is the world economy that we are now discussing, and that there has been a general move to stimulate that economy, not just the efforts now finally starting to add money to the economy in the United States. And yes, suddenly, we are seeing some of that money appear. The pages listing opportunities for research in Energy are suddenly full of requests for proposals for very significant levels of support. And they are getting a lot of response.
The Advanced Research Projects Agency – Energy (ARPA-E) of the U.S. Department of Energy (DOE) completed the submission stage of its first Funding Opportunity Announcement (FOA) released April 27th, 2009. ARPA-E has received approximately 3,500 concept papers for the $150 million available as part of this FOA (DE-FOA-0000065).

The large number of submissions – “Concept Papers” - for ARPA-E’s initial FOA outstripped the expectations of industry observers and highlights America’s capacity for Energy technology innovation that can be applied to transformational research and development (R&D).

ARPA-E’s first solicitation is funded through the American Recovery and Reinvestment Act of 2009. The announcement is primarily aimed at prospective applicants who already have a relatively well-formed R&D plan for a transformational concept or new technology that can make a significant contribution if and when successfully deployed. Submitters of the most meritorious Concept Papers will be encouraged to submit Full Proposals. ARPA-E expects to provide responses to Concept Paper applicants by the end of the last week in July on whether a Concept is likely to form a basis of a successful Full Proposal. The deadline for Full Proposals is expected to be the end of August.

Given that illustration of the arrival of the stimulus monies by the end of the year, and presuming that it holds true also in other sectors of the economy, then there will be some cause for an underlying continuation of confidence. (As opposed to a sudden onset of fear that nothing is working). This will likely be sufficient to hold us away from a return to a collapse of the economy, and with that demand for oil and gas will not suffer much drop at the end of the driving season, and going into the heating season.

With relatively little change in demand the control on supply will reside in OPEC and given that they have been able to manage supply to get the price up to levels that they are comfortable with, I would expect that to continue. Now OPEC does not have instant control of prices, oil supplies take a certain time to get from supplier to user, and for oil to be refined, moved and sold so there will be some fluctuations, as transient imbalances along that route play into speculation and the like. Overall, however I still look to prices rising slightly through the fall.

There are, however, so many political strings to this that making a very confident statement of the future is a path paved with peril. The eventual fate of the Waxman Markey legislation may have an influence on public and industrial perception, depending on how it turns out. Further the degree of international cooperation that this Administration is able to achieve towards their goal, and in building and maintaining public confidence is going to also play a critical part.

I note, for example, that Secretary Chu is currently in China and has agreed to a joint research center on Clean Energy.
The Center would facilitate joint research and development on clean energy by teams of scientists and engineers from the U.S. and China, as well as serve as a clearinghouse to help researchers in each country. Priority topics to be addressed will initially include building energy efficiency, clean coal including carbon capture and storage, and clean vehicles. The U.S. and China together pledged $15 million to support initial activities.
However in the scheme of things, this is not a lot of money at the moment.

Rather, given the rising demand for fuel in Asia, because they are buying more cars and will drive them, and the stabilizing demand for gas elsewhere, I don’t see a sufficient drop in demand that can’t be controlled by OPEC, and I expect that they will continue, therefore to control price, for at least another year.

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