OGPSS - A June TWIP, and the OPEC MOMR

The EIA has noted, in This Week in Petroleum that, for the first time, the sum of Non-OECD country demand contributed more than half to the total of liquid fuels consumed in the world.

Figure 1. Changes in the relative shares of liquid fuel consumption between the countries in and out of the OECD. (EIA )

It does, however, point out that the projections of the Short Term Energy Outlook are for the two curves to re-intersect at the end of 2014.

Figure 2. Projected changes in liquid fuels consumption, through 2014 (EIA)

The reality of that second assumption is, I rather suspect, more based on hope than reality. Once you start providing power, and all its benefits, to the general population you are on a slippery slope that it is almost impossible to back away from. Consider (as a small example) the problems that Egypt is currently having with the supply of subsidized bread to the general populace. Once you start supplying a commodity at a subsidized price it becomes very hard to change the equation, and too much of the non-OECD world is now living in an economy where energy use is subsidized. The problem that the above graph fails to recognize is that you cannot wean a culture from subsidies in the immediate short term and still expect their government to survive in its present condition.

Thus when the EIA project that global demand will grow to over 92 mbd in the next year, they are likely only being realistic. Their assumption that it may then decline is perhaps more in the nature of wishful thinking.

Figure 3. EIA anticipated growth in demand and supply over the near term (EIA)

There are however a couple of caveats to that last statement, the first of which is that the decline in demand may be more reflective of a lack of supply capacity (our raison d'être) and alternatively it may reflect, as a result of the first, that prices will rise to influence demand. Nevertheless we remain in a condition where the harsh realities that lie just over the horizon remain obfuscated by other events.

As with many other international agencies the EIA continue to anticipate continued growth in the North American supply of liquid fuels. Outside of that growth the increased demand for more than an additional mbd of liquid fuels seems more likely to be likely to be desperately hunting for an invisible savior.

Figure 4. Anticipated growth in liquid fuels supply over the next two years (EIA)

The decline in supply from OPEC in the two years ahead should be noted. It should also be remembered that this is likely to be as much a voluntary control, to ensure price stability in the face of increased North American production, rather than as a result of a short-term supply shortage. However the reality of continued domestic growth in demand in the Middle East, as Westexas has reminded us, is something that cannot be neglected. It has been noted that Saudi Arabia, although having less than a third of Germany’s population, recently surpassed it in terms of oil consumption. It will add several new oil-fired power stations including those at Yanbu and Jeddah. This will feed into an anticipated continued growth in Saudi domestic demand of 5.1% pa.

And this brings us to the OPEC Monthly Oil Market Report (MOMR) for June. OPEC continues to anticipate a global demand growth of 0.8 mbd this year, though they note that there will likely be a growth of 1.2 mbd in the non-OECD nations, requiring a reduction in OECD demand to match the overall forecast. Major growth in demand will continue to be in China (at 0.4 mbd and the Middle East at 0.3 mbd). On the other hand OPEC anticipate cutting their supply (to match anticipated need) by 0.4 mbd over the course of this year. OPEC, therefore, has slightly dropped their projection for year end, however it will still crest above 90 mbd.

Figure 5. Estimates of global oil demand (OPEC June 2013 MOMR)

A large part of demand projection is tied to growth in the global and individual nation economies, and that is a murky crystal ball to view. But OPEC anticipates that these economies will continue to grow at an increasing rate, while recognizing that this projection is in an area with a high level of risk in the estimate. The continued, and perhaps growing unrest in the Middle East continues to cast a further shadow over predictions over both supply and the reality of future demand in those countries. And, as one of the less frequently discussed topics, future output from Russia is not as assured as the average analyst appears to assume.

OPEC is anticipating a relatively strong growth in demand in the second half of the year to almost reach 91 mbd by the end of the year. Overall the growth in supply to meet this demand continues to come from North America.

Figure 6. Anticipated oil supply for 2013. (OPEC June 2013 MOMR)

OPEC itself is reporting a slight increase in overall production (by about 128 kbd) although, as always, there are differences in the numbers between those supplied by the countries themselves, and those reported from other sources.

Figure 7. OPEC crude oil production as reported directly (OPEC June 2013 MOMR)

There continues to be a significant disparity between the numbers reported from Iran and Venezuela, for example, when other sources are reported to the tune of around 1.5 mbd roughly. In the short term Iraqi production appears stable.

Figure 8. OPEC crude oil production as reported by others (OPEC June 2013 MOMR)

With the continued global reliance on increased production from North America, and, in turn, that reliance on improved production from tight formations, I would be a little more confident of the future were it not for plots such as this, which I recently found.

Figure 9. Chesapeake typical well decline curve (Eagle Ford Forum)

It is a curve that I rather suspect continues to be optimistic.

OGPSS - The weather, corn, ethanol and oil production

News of the future was, in my youth, something that one found by crossing the palm of a lady in a dark tent with a piece or two of silver (or the modern equivalent) at one of the fairs that came to town. Such opportunities still exist, with all the caveats that existed back then likely still being in force. However projecting the future, whether of the weather, the likely corn crop this year in the United States, or the production of crude oil by the nations of the world has become a much bigger business with copious tables, graphs and theories replacing the rather worn pack of cards or crystal ball of my youthful experience.

Our part of the world underwent a drought last year severe enough to kill several trees in our yard, for example, as well as hurting the corn crop. This year, corn plantings have been severely impacted by the heavy rains and cold weather, so that decisions on crop plantings have become more complicated and delayed, with follow-on impacts on the ultimate yield in a number of Mid-Western states. Corn yield apparently falls at an average rate of 2.3 bushels per acre per day of delay in Northern Wisconsin. These changing conditions make it difficult to assess how much ethanol, for example, will be available to meet demand, although the latest EIA TWIP holds out some optimism for this year.

The impact of the drought on corn prices, and the consequent fall in ethanol production, as production costs rose, are directly visible from their plot of the two over the last year.


Figure 1. A comparison of corn prices and ethanol production in the USA (EIA TWIP )

However, with the weather impacts still being assessed it is already being concluded that the US corn crop is unlikely to reach the record level of close to 14.6 billion bushels that were earlier projected. It still, however, has the potential to reach around 12.3 billion bushels, which would satisfy the just under 5 billion bushel need for ethanol, as well as other demands of the market. By May 12th only 28% of this year's expected crop had been planted, in contrast with a normal year where 65% would be in the ground. Thus even the relatively short-term projections of the EIA could yet be in trouble for this year.

Moving to the slightly longer-term the nations that form OPEC must try and estimate global demand for their products, and the amount that other non-OPEC nations will produce, so that they can balance supply and demand at such a level that will sustain prices at a level they are comfortable with. Their estimates come out as Monthly Oil Market Reports and in the latest (May) version they continue to expect global demand to increase by 0.8 mbd over 2013, but are beginning to hedge that bet, as the global economy continues to appear anemic, with Russian and Asian economies slowing. Yet by the fourth quarter of the year they anticipate that global demand will reach 90.9 mbd.


Figure 2. Global oil demand by region (OPEC MOMR)

OPEC anticipates that, with the major increase coming from the Americas, that non-OPEC oil production will increase by just under 1 mbd to reach an a level of 54.41 mbd in the fourth quarter of the year. The majority of that growth (some 0.59 mbd) will come from the United States, with the Permian, Bakken and Eagle Ford being cited as the anticipated source of these gains. OPEC, having looked at current rig counts, project that these numbers may be revised upwards over the course of the year. And yet it is worth noting this:

On a quarterly basis, US oil supply is seen to average 10.62 mb/d, 10.67 mb/d, 10.62 mb/d and 10.61 mb/d respectively.

The sustained gain in North American production comes about because:

On a quarterly basis, Canada’s production is anticipated to average 4.02mb/d, 3.97 mb/d, 4.02 mb/d and 4.12 mb/d respectively.

Russia is expected to continue to lead in oil production over the course of the year, although it is not longer expected to increase production above current levels.

On a quarterly basis, Russian oil supply is seen to average 10.45 mb/d, 10.43 mb/d, 10.43 mb/d and 10.43 mb/d respectively.

And this brings us back around to OPEC as they try and balance their production against the gap between global demand and non-OPEC supply. As has been the case for a while, OPEC produced two separate tables showing production, as reported by secondary sources, as well as those directly reported by the countries themselves.


Figure 3. OPEC member production as reported by secondary sources (OPEC MOMR)


Figure 4. OPEC member production as reported directly (OPEC MOMR)

It would appear, with Manifa coming on line, that Saudi Arabia is increasing production again, while Venezuela and Iran would have you believe they are producing more than they are, and Iraq, which is now producing above 3 mbd, is directly reporting less (though that could be because some of that production is coming from the north, and there are some communication problems between there and Baghdad).

As long as OPEC has available reserves it can continue this balance to keep enough oil available at an acceptable price to allow the world economy to continue at its present pace. And with that ongoing adjustment available, their projections for this year of a relatively stable price would seem fairly founded, absent some major change in one of the larger producing states.

Iraq overtook Iran as the second largest producer in OPEC last year (according to secondary sources) and expects that with production from Majnoon, it will increase production capability by upwards of 200 kbd by the end of the year. Ultimately the goal is to achieve a target production of 1.8 mbd. However, as overall production levels increase, Iraq may join with the Kingdom in controlling production to maintain price.

Yet even with those abilities OPEC is becoming cautious over predicting that their estimate of the demand:supply balance numbers for this year will be accurate over that time interval.

With these uncertainties in even short-term projections of future production whether it be corn, ethanol or crude it is perhaps wise to continue a somewhat cynical view of projections over a longer time period. Although the bounding bar of a decline in existing field production continues to exist and will continue to require an offset in increased production from new wells to offset. Perhaps that lady in the tent of my youth may prove as prescient as some of the more optimistic forecasts that we continue to see.

OGPSS - Happy New Year, or perhaps not!

It is the beginning of a New Year, and, belatedly, I hope that all readers find this new period to be one of prosperity, health and happiness. It would be encouraging if the portents for our Energy future would point in that direction, but unfortunately I can’t see nearly as much optimism in that regard as do others who are similarly reviewing where the global energy supply numbers are going. This week the EIA's ”The Week in Petroleum” is illustrative of the optimistic vision.

Figure 1. Recent projection from the EIA on American Oil Production (EIA TWIP Jan 9, 2013)

This plot is from the new Short-Term Energy Outlook from the EIA, which projects the numbers through to 2014, at which time: the Agency anticipates that US domestic production will rise to 7.9 mbd, the highest since 1988. Growth is expected to extend beyond just the Bakken:

In particular, drilling in tight oil plays in the Williston (which includes the Bakken formation), Western Gulf (which includes the Eagle Ford formation), and Permian basins are expected to account for the bulk of growth through 2014. Williston Basin production is expected to rise from an estimated December 2012 level of 0.8 million bbl/d to 1.2 million bbl/d in December 2014. Western Gulf Basin production rises from an estimated December 2012 level of 1.1 million bbl/d to 1.8 million bbl/d in December 2014. Within the Western Gulf Basin, roughly 0.4 million bbl/d of the oil production is outside of the Eagle Ford formation. The Western Gulf Basin accounts for more than half of the onshore domestic liquids production growth due to a comparatively large amount of liquids coming from both oil and gas wells compared with the other key production basins. The Permian Basin in West Texas, which includes plays such as Spraberry, Bonespring, and Wolfcamp, is a third key growth area. EIA estimates that crude oil production from the Permian Basin reached 1.2 million bbl/d in December 2012. Permian Basin production is projected to increase to 1.4 million bbl/d in December 2014.

The overall global concerns for production include a relatively small potential for production growth from the larger oil producers in the world (with the possible exception of Iraq), while there remains an increasing turmoil that began with the “Arab Spring” and continues to spread with ongoing and growing impacts that are likely on Middle Eastern oil production. But it is the story of American production that continues to gnaw at my worry bead string.

In context it should be remembered that, when The Oil Drum was first produced in 2005, national attention was briefly caught by the TV movie “Oil Storm” in which a plausible series of events – a hurricane in the Gulf, a ship collision in the Houston Ship Canal, and a terrorist attack on the Saudi oil terminal at Ras Tanura combined to raise the price of oil to a peak of $130 a barrel, and gas reached a final price of over $7 a gallon, with all sorts of terrible consequences. The day was finally saved when Russia shipped the US a few tanker loads of oil, after the US outbid the Chinese for that oil.

Since then there have been pundits who tell us that these things would never happen. During the real price rise to $147 a barrel (without the disastrous causes) we were reassured that prices would fall again to the $20-$30 a barrel range, though they have not – and those same pundits are now again parading before the media as they reassure us that the US can soon cast off the shackles of oil price control by foreign oil interests. Of the roughly 10 million bd that the US imported in October, some 4.2 mbd came from OPEC, Saudi Arabia sending 1.25 mbd, and Venezuela 0.95 mbd. Outside OPEC Canada supplied 2.68 mbd, Mexico 1.06 mbd and Russia 0.55 mbd. KSA has shown itself adept and willing to adjust flows to ensure that OPEC oil prices remain adequate, and there is no indication that they need or intend to change their approach. Any global increase in supply is likely to be more than offset by increases in demand from China and India, though the reality will be that as US demand declines (if it does) that displaced supply will transfer to meet Asian growth – and it will not then be available were the US projections to fall short, and the country have to increase imports again.

There are some troubling signs on the horizon that suggest the future US supply is not as robust as has been proposed. Chesapeake Energy, who have been a flagship for the development of natural gas, is in sufficient trouble that Aubrey McClendon, the CEO, will not get a bonus this year, amid a number of changes. Shares have dropped nearly 30% and as Art and others have noted, the economics are not as encouraging as the pundits would suggest.

The news from the Arctic is somewhat worse. Shell have been able to recover their drillship, which ran aground after losing its tow in a 70-knot storm with 40-ft waves, and it has now been moved to a safe harbor. The vessel must now be assessed and the program will be delayed. (This is particularly true as the investigations begin to line up, first was the Coast Guard, and now Interior.) The Alaskan Pipeline flows were averaging just under 583 kbd in November (December numbers are late), and that is up from the overall yearly average of 544 kbd, but is running at a 6% decline rate bringing problems in as little as 8-years. Although with monthly flow changing to improve conditions in the winter months, there may be more of a problem than is currently discernable, particularly if future supplies to keep the pipeline flowing are now threatened by the future losses of potential production from the Chukchi and Beaufort seas.

And speaking of pipelines the cancelling of plans for the Bakken Crude Express Pipeline for lack of customers tells more about the anticipated future demand than all the predictions from Dr. Yergin at Cambridge. Energy Research Associates. This also foretells that the Adelman prediction that technology will always return us to cheap oil, as touted by Phil Verleger is likely to continue to be proven false – not that these real events stop those who survive by predicting the future. Fortune tellers have been a facet of society throughout history, only the shape of their crystal balls has changed with time, and the size of their credulous audience.

Whether real or overly optimistic, the US potential increases in fossil fuel production is likely to impact to the potential for US renewable and bio-generated fuels, where the future production levels seem also to be losing their lustre. There is some talk of Dr. Chu leaving the Department of Energy in part perhaps because of this change in focus. However, among the names being floated are those of John Podesta, the founder of the Center for American Progress, who have just ranked their top ten Energy and Environmental Priorities for the first four years of President Obama’s time in office, as follows:

Figure 2. Priorities as quoted by the Center for American Progress.

And most recently the Secretary has been encouraging women and minorities to look at the wind energy industry as an opportunity for employment.

One other candidate is apparently Bill Ritter, the past Governor of Colorado, although the list, at this point, seems to be growing rather than shrinking.

Whether under either individual, or some alternate choice, the next four years of President Obama’s Administration will likely see many more changes than anticipated as occurred during the first term. It is, however, discouraging that there are so few possibilities for realistic optimism for that future.

OGPSS - Iran and the new EIA and OPEC Reports

With the possibility that demand for Iranian oil may fall below 1 million barrels a day (mbd) as sanctions continue to bite, Iran has announced that it wants OPEC to cut back production to the agreed quotas, rather than the overall additional 1 mbd that is actually being produced, and sold. Such a move would, of course, ,make it more difficult for those customers who have found a way of replacing Iranian oil, and perhaps incline them more towards disregarding the embargo.

OPEC has just released their December Monthly Oil Market Report (MOMR) in which they anticipate that earlier projections for 2013 oil demand growth will still be valid, at 0.8 mbd. (Though they note that December 2012 growth y-o-y was at 1.0 mbd as the US economy continued to improve). They expect that all of this increase will be met by non-OPEC increases in supply, and that demand for OPEC oil may even drop 0.4 mbd. Part of that projection continues to rely on increased US crude production, and the EIA TWIP of December 5th had the latest chart showing that projected growth, based on the newly released Annual Energy Outlook 2013.

Figure 1. Projections of future growth in US crude oil production. (EIA TWIP) from Annual Energy Outlook 2013)

As a footnote to that graph the Alyeska pipeline pumped an average of 582,755 bd in November, which brings the annual average up to 544, 625 bd. It is clear from looking at that plot that the gains in production are all assumed to come from increased production from the "tight" oil deposits that have produced the overall gains achieved to date. The optimism of this projection goes a little beyond the levels that I anticipate being achieved.

Coming back to the MOMR their projections do not include the recent news that Venezuelan President Chavez has had to have a fourth operation for cancer, and has named a successor, although the operation was apparently successful. This may complicate the decisions on how much to allocate among the OPEC partners, especially since all continue to need higher priced oil.

OPEC also give the price of various commodities in their report, and before going on to discuss country production, those prices are informative. (And can be read more easily by clicking on the table to get a better image). At present, with the decline in overall global demand, metal prices in particular seem to be continuing to slide.

Figure 2. OPEC report of commodity prices for November (OPEC December MOMR)

Equally informative is the demand that OPEC anticipates from the various regions of the world for oil in 2013.

Figure 3. OPEC estimates for regional oil demand in 2013. (OPEC December MOMR)

In total OPEC anticipates that global demand will reach 90.83 mbd by the fourth quarter of 2013, with the greatest growth continuing to be from China and the other Asian nations.

Looking at where this oil might come from, the main increase is still anticipated to come from North America.

Figure 4. Non-OPEC supply projections for 2013 (OPEC December MOMR)

The conflict in Syria is now reported to have led government forces to withdraw from the Omar and Al-Ward fields in the Deir Ezzor region, where much of Syria’s exports were produced. However the rebels do not, as yet control any of the refineries or export terminals and the result is that oil production is estimated to have fallen from 380 kbd to 160 kbd over the past few months. The regime is making up the shortfall in its needs by importing from Iraq.

Which brings us back to OPEC production levels. (Note that this is for crude oil and does not include the roughly 6 mbd in NGL that are currently being produced).

Firstly, this is what the various governments are reporting that they are producing:

Figure 5. OPEC production from official sources (OPEC December MOMR)

The total shows, among other things, how Libyan has recovered from their “Arab Spring.” In contrast with the official figures OPEC also posts the values from “secondary sources”.

Figure 6. OPEC production from secondary sources. (OPEC December MOMR)

The difference between the two figures for Iran is at around 1 mbd. Overall OPEC production is declining with the increase in non-OPEC production, so perhaps Iran won’t have quite as difficult a time persuading their colleagues to drop production a little more, to help them out. That won’t be at the latest meeting of the OPEC Ministers, which was held in Vienna on December 12th, where it was decided to maintain the current ceiling of 30 mbd.

The meeting was largely distracted by debate over who should be the new Secretary General, with this being “kicked down the road” for a decision at the end of May.

On the other hand, while Malaysia had promised to halt imports of oil from Iran last March, the IEA is reporting that they increased crude purchases from Iran in November. Whether this is oil ultimately destined for that country, or whether this a convenient transshipment point from Iranian tankers bringing in crude, which is then transferred to other carriers and a second purchaser is not clear, although a Chinese oil trader appears to be involved.

A move to make US natural gas available to NATO allies has begun in the Senate, with the intent that perhaps this could wean countries like Turkey from their use of Iranian and Russian natural gas. Whether this will ever amount to much is not clear, since Senator Lugar, the initial author, was defeated in the primary to the last election and thus leaves the Senate at the end of the term.

OPEC in disagreement, the Saudi dilemma

OPEC Ministers, meeting in Vienna, have apparently had one of their more divisive discussions of recent times over the question of raising pumped volumes.

Saudi Arabia, Kuwait and the United Arab Emirates wanted an increase to dampen an oil price that has gained 25pc since tensions erupted in the Middle East this spring while Libya, Algeria, Angola, Ecuador, Venezuela, Iraq and Iran wanted to keep production unchanged.

The two camps are reported to be so far apart as to threaten the structure of the organization. While the lack of agreement (for the first time in 20 years) officially means that there will be no increase in the quotas of the different countries, Saudi Arabia may, unilaterally, move to increase production in order to meet growing demand and stop the steady increase in price. In the short term, however, the lack of agreement has had the immediate effect of increasing prices.

The proposed increase in volume was 1.5 mbd, which is roughly in agreement with the OPEC projection made through their Monthly Oil Market Reports, of a 1.4 mbd anticipated growth in demand this year. That estimate of demand growth recognized the 0.5 total drop in demand from Japan, though offsetting this with greater growth from China, and anticipating repair of the Japanese refineries. (The next report won’t be out until Friday). Given that we are now in the summer driving season for the largest customers, where demand has normally risen, the move, proposed by Saudi Arabia, would at first sight seem a rational step to keep prices under control.

But given the lack of agreement, the question remains as to whether Saudi Arabia (KSA) and its allies at the OPEC table will increase production in defiance of the rest. Bear in mind that should they have the increase, and prices fall, then those countries that don’t (or can’t) increase production lose money as the price falls. However, if the price rises too much, then the world could be kicked back into recession, and global demand could fall, making everyone lose money on smaller volume.

One has only to look at the latest gas prices in this week’s “This Week in Petroleum” to anticipate how this question over the available supply of crude may well kick the graph back into an upward trend.

US Gas Prices (TWIP )

Demand for gasoline flickered when the price peaked, but then despite the price, and with vacation time beginning, demand has returned to last year’s numbers and may well continue to increase over the next six weeks, following that curve. That depends on how the price changes. Any indication of more oil may hold it at current levels, but without that, as demand grows globally, then without supply to meet it the price will rise until a new balance is reached.

Demand for Gasoline in the USA (TWIP )

But this brings us back to the question as to how great a price increase the world can stand, and concurrently, whether OPEC could sustain a 1.5 mbd increase in production. This really (in terms of a significant step) throws the ball back into Saudi Arabia’s court, since they are the one nation that could provide the increase in volume. And certainly in the short term there are enough wells and fields that could have production increased to give the extra volume.

Life is, however, not that simple. To bring additional complexity to the discussion Goldman Sachs has been suggesting that OPEC production will top out next year, and then begin to dwindle. Since OPEC are sensibly the only folk capable of increasing production significantly to meet growing market demand, that prediction had already roiled the market a little. Non-OPEC production has risen 0.8 mbd in the first quarter, y-o-y, but the gains from the US may be over, at the moment.

US Production of crude (TWIP)

However Saudi Arabia will not over-produce in the short term to hurt the long term production from their fields, thus gains in production in the out years will have to come from new developments. Manifa is the most immediate answer as to where the additional oil will come from, according to the new (2010) Aramco annual review. But with that oil requiring special refineries to process that aren’t anticipated to be available until 2014 for the first, and the second still not finalized, that only gets the increase to 0.4 mbd. There is some additional production that is anticipated from Safaniya, another heavy crude source, but that is directed towards planned refineries at Yanbu and Jazan, but the former is scheduled for 2014, while the latter won’t be ready until 2017. The four new oil fields (Namlan, AsSayd, Arsan and Qamran) that Aramco announced will also take time to develop. As a result the increased production that will come from Saudi Arabia are unlikely to rise much above that available from the recent development of Khurais and Khursaniya, which totals some 1.7 mbd. Some of that new production will concurrently have to offset some of the declining production in older fields

Overall production will be limited to 12 mbd, acknowledged as the maximum sustainable rate for the country, but that number includes domestic use, which is already at 800 kbd and rising.

Unfortunately the 1.5 mbd proposed for the OPEC increase will likely also include any offsetting increased production to compensate for countries in turmoil in the MENA. So, as none of those countries is looking as though stability has yet been conclusively re-established, the combined picture was not really looking that good before we got the news from Vienna.

Gas prices and oil supply in light of EIA and OPEC monthly reports

I paid $50 to fill my tank at a gas station in Maine this morning, at a cost of almost $4 a gallon. When the Actress muttered some comment of protest, I told her that she had better get used to the price, because it is hard to see any normal reason for a decline in that price in the near future.

The EIA TWIP today was discussing the transportation fuel market this summer, and begins by noting:

Regular-grade gasoline retail prices, which averaged $2.76 per gallon last summer, are projected to average $3.86 per gallon during the 2011 driving season. The monthly average gasoline price is expected to peak at about $3.91 per gallon by mid-summer. Diesel fuel prices, which averaged $2.98 per gallon last summer, are projected to average $4.09 per gallon this summer. Weekly and daily national average prices can differ significantly from monthly and seasonal averages, and there are also significant differences across regions, with monthly average prices in some areas exceeding the national average price by 25 cents per gallon or more.

Well right now, before driving season starts, the price was $3.97 for regular – but the EIA have the “out” that this is after all Maine, which is at the end of the delivery line. Ah, well!! But I suspect that the EIA is still being a tad optimistic, and may regret that $0.25 error bar by the end of the season.

Their estimate, and the rationale for it are given in the new Short-term Energy and Summer Fuels Outlook with the price of West Texas Intermediate (WTI) at $112 (it has since fallen $5) . The EIA is expecting the market to tighten, based on the turmoil in the Middle East and North Africa, and “robust” growth of demand. But they only increase the anticipated average price of WTI to $106 this year, and $114 next. And in this I think that they are being rather too optimistic given the times. And that includes their estimate that the price of gasoline will still be below $4 (at $3.80 average) through the end of next year. (Though they do add a caveat that there is a 33% probability that prices could get over $4 on average this July).

And in an aside (since the topic today is mainly crude oil) it is worth noting relative to my post on the EIA World Gas Shale report that the EIA are projecting that the Henry Hub price for natural gas will remain around $4.10 per kcf in 2011 i.e. below the 2010 average, and it will only rise to $4.55 per kcf in 2012 – which doesn’t make those gas shale drilling balance sheets look any prettier.

The oil supply problem itself is sufficiently worrying. As with others they are still predicting a global increase in demand of 1.5 mbd this year, expecting that it will rise an additional 1.6 mbd in 2012. OPEC (whose daily barrel is currently at $117) expects that with the tragedy of the earthquake and tsunami in Japan, that there won’t be quite as much growth as previously expected, and thus are only anticipating a growth in demand of 1.4 mbd this year. As their April Monthly Oil Market Report notes, they do not expect countries outside of Japan to be affected, and thus they continue to anticipate a world economic growth of around 3.9%.

As I mentioned in an earlier post there were a number of Japanese refineries which were damaged, and the country which was refining about 4.5 mbd had an immediate drop to 3.1 mbd. That has now been partially restored as some refineries have increased production, and others have been repaired. However the country as a whole is still reported to be about 617 kbd short of the pre-earthquake figure. (And there are three coal-fired power plants Haramachi Tohoku, Kashima Ibaraki, and Hitachinaka Ibaraki that are still off-line and 9 of 210 hydro-electric plants were damaged. )

Nevertheless Middle Eastern suppliers stopped some of the shipments to Japan, and this may well be what is being seen as a short-term decline in demand. (OPEC saw a drop of around 0.5 mbd in tanker shipments in March). However OPEC anticipate that there will have to be substitution for the loss in Japanese nuclear power, since that cannot be restored or replaced with equivalent new nuclear power stations in less than several years. As a result they expect that the demand for oil as a replacement fuel (the loss could be made up by about 200 kbd of oil equivalent fuel) will increase later in the year.

OPEC expects that 0.6 mbd of the overall global increase in demand will be supplied by non-OPEC countries, with Brazil, the United States, Canada, Colombia and China increasing production, while the UK and Norway will show the greatest declines. That leaves the rest for them, and bearing in mind the loss from Libya, and other potential losses around MENA, though OPEC itself only expects to see demand for its oil increase about 0.4 mbd. (Which arithmetic doesn’t quite compute – but never mind – I am assuming that the rise of 0,4 mbd includes the offset to cover the losses in production within OPEC, and that with the 0.4 mbd OPEC increase, and the 0.6 mbd non-OPEC increase, that the world will only be 0.4 mbd short – which might come from NGL increases). Incidentally OPEC anticipates that Chinese demand will grow 0.5 mbd to 9.5 mbd.

There is an interesting comment in the OPEC report relating to the poor performance of natural gas prices (as I have been discussing).

Nevertheless, a sustained upward trend in HH natural gas prices may appear if there is a radical change in the US energy policy regarding nuclear production, which seems unlikely at present. According to Barclays, in order to rebalance the US natural gas market via higher demand, it would be necessary to shutter a large amount (13-26%) of total North American nuclear capacity.

Well I have to confess that is one answer that I hadn’t thought of applying in order to get the shale drilling companies off the hook.

TWIP, STEO and the prediction of natural gas and oil numbers

A quick glance to see what is new with this week’s “This Week in Petroleum” (TWIP) reminds me that this is the time when the EIA put out a new Short Term Energy Outlook (STEO), which gives their forecast for the happenings the next couple of years. Most particularly it looks at the way supply and demand will play out.

The first thing that caught my eye was the projection that natural gas prices will be (Henry Hub) $4.02 per million Btu (which is as near as need be a thousand cubic feet, which I will use for ease of comparison). This is $0.37 lower than the 2010 average, though they expect it to rebound to $4.50 by 2012. With the bitter cold in parts of the country at the moment (including here) natural gas is currently at $4.55, with $4.53 reported for February futures. It should be remembered that this is not the spot price – which was $17.04 in Florida on Wednesday. Contrast this with the $3.40 price from the Kern River pipeline that goes from Utah to California.

The concern with this relatively low price, going forward, is that it underscores the fragility of the companies producing natural gas from the gas shales around the country. For while there is a constant barrage of optimism about the amount of natural gas that is present in those fields, companies have to make a significant profit over the cost of production if that gas is to reach the market. I don’t see that ability in this sustained price.

There is currently a bit of a row going on in the UK about the state of preparedness of the UK Government for this very cold winter. The lack of proper precautions is being blamed on a forecast of a mild winter by the British Met Office, which is now trying to scramble out from under that prediction. (And apparently they are still guessing at how much that energy cost will be.) This is relevant also to the USA, since I note, at the top of the Natural Gas section of the STEO, this prediction:

EIA expects total natural gas consumption to decline by 0.9 percent in 2011. Projected residential and commercial consumption fall by about 2.7 percent in 2011 partly because of the forecast of 1.3 percent fewer heating degree-days during the winter months this year compared with last year.

Hmmm, temperatures in Tampa Bay are 15 -20 degrees below normal, as I write, and a cold spell, caused perhaps by the North Atlantic Oscillation, continues to make its presence felt across a lot of the country. The season is not, perhaps, turning out to be as warm as the EIA appears to have predicted. They are also projecting that next summer will be a normal one, rather than with the excessive warmth of last summer. As a result they foresee the quoted decline in natural gas use this year, although it will pick back up by 20102.

Total natural gas consumption grows by 1.6 percent in 2012 to 66.5 billion cubic feet per day (Bcf/d). While projected commercial and residential consumption decline by a slight 0.2 percent from 2011 to 2012, the electric power and industrial sectors drive growth with projected increases of 3.6 and 1.6 percent, respectively.

The decline is predicated on the drop in rig count, itself a victim of the lower prices.

While the EIA also sees world demand for oil increasing by 1.5 mbd per year, for the next two, they only project that 0.1 mbd of this growth can be met by countries outside of OPEC. And it is interesting to note that the growth in overall fluids production by OPEC is split almost evenly between crude and other liquids. (The increasing role of NGLs is discussed in more detail at Crude Oil Peak) Most of that growth in demand will come from outside the OECD, with China, the Middle East and Brazil as leading consumer growth. And on the down-side a combination of declining production from Mexico and the North Sea will take more than 500 kbd out of global supply. Alaskan production will fall 50 kbd in 2011, and an additional 20 kbd in 2012 – further slowing the oil flow down the pipeline and increasing the risks from shutdowns. It also foresees a decline of 220 kbd in GOM production in 2011, and a further drop of 180 kbd in 2012. Thus although there is some increase in other domestic fields, by the end of 2012 the decline will total around 150 kbd. And in another Ouch! Russian production, which has been rising, is anticipated to fall slightly this year, and then drop by 230 kbd in 2012.

With those sorts of numbers the power of OPEC can only be expected to grow over these two years. And within OPEC the countries that can increase production are similarly limited in number. That is not to say that OPEC has not, already been somewhat responsive to increased demand. Production overall was raised by 170 kbd in December, according to Platts. Most of this (130 kbd) came from Saudi Arabia, which is now producing some 8.35 mbd. It will be interesting to see how the numbers look a year from now. But I would personally doubt that the prices that we will see will be as low as the EIA predict, while the volumes may not reach the levels forecast – but time will tell.

Looking at the TWIP itself, crude inputs to refineries continued to run about 1 mbd above this time last year, but are set to dip down as demand drops based on the season. In line with that expected fall, both gasoline and ethanol production have also declined a little.

Resources, Reserves - the EIA - coal gas and oil for the future.

One of the significant issues that can get folk argumentative, is the role that price plays in determining whether a fuel source still buried in the ground is called a resource or a reserve. For example I have exchanged opinions several times with David Rutledge on his view of the declining reserve base for coal. Most recently he has written in The Oil Drum pointing to the latest paper he has written on the topic, which is available at his website. Part of my rebuttal comment inferred that as the price of the product increased (likely through the lack of other reserves to be able to sustain the energy supply need of countries around the world) so coal will be recognized more and more as a reserve, which will be used, rather than a resource that will not.

The argument is also made that as price goes up the viability of resources that would cost too much to produce would change a significant volume of those resources back into reserves. That holds true for crude oil, in just the same way as for coal, except that with so much of the world’s cheap crude having already been produced, the availability of the resource volume that will convert over as price rises is not necessarily that great. I bring this up because in this week’s TWIP, from the EIA, they address this problem in regard to how much increasing the price of crude in 2009 increased the amount of crude (including condensate). Their answer was 9% for crude and 11% for natural gas.
(And as 1 of 2 UPDATES to the story, Russia has stated - whether because of exploration or increased value is not clear - but that it fully replaced its oil and gas reserves this year (h/t Leanan).)

Gain in Oil reserves (EIA)

Gain in Natural gas reserves (EIA)

The gas gain, as the EIA note, occurred at a time where gas prices were suffering from the additional volumes made available from the shale deposits of the country.

Domestic production of crude has stabilized at around 5.6 mbd, while imports are running at around 8.5 mbd, and refinery input within the US continues to rise. Gasoline production continues to mirror, roughly, last year at this time, while demand is running around 300,000 bd more than last year. This time last year distillate production was reducing, this year it continues to increase, although demand, which dropped precipitately for the last month, is now stabilizing at about last year’s level. And ethanol production continues to creep upward.

Biodiesel production is a little harder number to come by, there is a plot through 2008:

Biodiesel production (National Biodiesel Board)

There are reported to be `173 companies engaged in producing biodiesel (from a number of sources and in a number of ways). If all of them ran at full production it would generate an average of around 175,000 bd, which is not yet much of a significant figure. Additional companies planning to get into production might raise production by 15% but this remains still only a small fraction of what is going to be needed.

UPDATE: I have been pointed to the note earlier this year that the EPA had slashed the cellulosic ethanol mandate for next year:

Cellulosic biofuel was 250 million gallons, now 6.5-25.5 million gallons
Biomass-based diesel was 800 million gallons, and stays there
Advanced biofuel was 1.35 billion gallons, and stays there. . . . . .

“We first considered whether it appears likely that the required biomass-based diesel volume of 0.8 billion gallons can be met with existing biodiesel production capacity in 2011…we believe that the 0.8 billion gallon standard can indeed be met…Of the remaining 0.15 bill gallons, up to 0.026 bill gallons would be met with the proposed volume of cellulosic biofuel. Based on our analysis as described in Section II.C, there may be sufficient volumes of other advanced biofuels, such as imported sugarcane ethanol, additional biodiesel, or renewable diesel, such that the standard for advanced biofuel could remain at the statutory level of 1.35 billion gallons.”

(end of update)

Which brings me back to my original point which is that a change in the perceived selling price of the product (I say that because of the gas situation) has led to significant investment that has raised the reserves of a commodity that is recognized to be getting into short supply.

However, to put this in perspective, the gain in oil reserves was 3.69 billion barrels. The United States uses around (rough number) 20 mbd of oil, or 7.3 billion barrels a year. The gain in reserves will thus provide the equivalent of a 6 months supply, and while production will be spread over a number of years, it really doesn’t change the arithmetic that much. What is forgotten in the discussion, however, is that the equivalent change in reserve size is also occurring in other parts of the world. And while many of these places are, like the United States, in an era where their fields are now depleting, the increased value of the product is likely to slow that decline somewhat.

Coal, which is also where the discussion started, is in an even more robust situation. Coal price is still driven by the cheapest producer to the world market. It is not practical to consider opening a new mine in, for example, Montana, if the power companies around the country are already being adequately served by local deposits and by trains from the Powder River Basin. No-one will put up the investment capital to open new mines without a market, and with the current transient switch to natural gas, that incentive does not exist in the United States.

However the rest of the world is somewhat different. Bear in mind that the prices that oil and gas will reach, in the non-too-distant future, will be significantly above what many nations can pay. If they have indigenous sources of energy – vide coal – and enough of it then they will start building coal-fired power stations. They don’t have to play games with taxing one form of energy to encourage another, they need the cheapest possible source of power. And at the moment we know what that is!

And just to emphasise that, here is the most recent projection for future demand from the EIA.


I will forgo a comment on the assumption at the top of the plot.

This week's TWIP and record world demand for oil

Te EIA released their “This Week in Petroleum” today, with an article on American demand over the past year plotted by month. I had not seen the data presented that way before, and since you may not have, either, here it is:

Change in overall demand in the USA (EIA )

It is spread over two years so that you can see that demand bottomed out in May 2009, and has been rising ever since. As they point out, a growth of almost 1 mbd over last year is a very significant increase in demand, which just about offsets the similar sized drop in demand back a couple of years ago as the crisis began to develop.

If one notes that the plot ends in September, and then goes to the refinery input plot for this past week, that too is kicking up significantly, though at only about half the earlier gain y-o-y.

UPDATE: Because of these evidences of continued rising demand, the IEA has just raised its forecast of demand for next year by another 260,000 bd to 88.8 mbd.

Though in the period between these two points the input reverted to close to being the same as last year.


Gasoline demand does not show as high an increase, with most of the increase in production going into distillates.




That steady increase is a little odd, except that is being used to keep stocks up, given that demand has suddenly dropped off:

(The above figures are from today’s TWIP

At the same time ethanol production has steaily continued to climb to the point where it has now set a new record at 0.939 mbd.


Elsewhere in the world Wood Mackenzie is noting that we appeared to have returned to consumption levels from before the recession. In fact a new record has been reached:

Worldwide oil demand for this year’s third quarter will set a record at 88.3 million b/d, said Wood Mackenzie Ltd., Edinburgh, in its latest analysis. 

According to the report, provisional data shows that global oil demand for the recent quarter will almost certainly exceed the previous highest quarter—the fourth quarter of 2007—when demand averaged 88 million b/d.



Just 3 years from the onset of the great recession, global oil demand has recovered to the pre-recession peak seen in 2007, the report said.

The IEA is predicting that this new level will be close to the average demand for the whole of 2011 but it may be that those predictions are already behind the times.

Assuming that this is the case, then the talk of seeing crude over $100/bbl in the near future is likely to become more true than less. Not that this will cause much concern among the OPEC ministers soon to meet in Ecuador, and certainly it is not going to be a concern if, as Lybia’s minister predicts, oil reaches the $100 figure. Should that occur it might be that quotas get loosened a little, but that is unlikely to occur before the next meeting next June. Which might suggest that the projection of $100 oil may be exceeded quite a bit sooner than most people think. There is, after all, only so much oil still stored around the world in tankers.

A VMT oddity and the latest TWIP

I have been writing about the use of the monthly reports from the Federal Highway Administration (FHA) on vehicle miles travels, at intermittent intervals over the past couple of years. It provides an informal way of trying to see how fuel demand is going in the United States, and perhaps some indications of the recovery of the economy. The figures are now out for September 2010 and I was looking at the plot I usually use of the rolling 12-month average of miles driven:

Rolling 12-month VMT (Source FHA )

I hadn’t been paying much attention to the lower scale, it shows years and it wasn’t until I tried to see when it was that the driving was last at this level that I realized that the scale does not include years that end in 4 or 9. Which is my oddity for the day.

Other than that the recovery of driving seems to be holding up both in urban and rural areas, and generally across the country. Texas seems to be doing a little better than most, but other than that the picture appears to be, as the plot shows, one of steady growth at a rate similar to that before the great oil price boost.

Moving over to This Week in Petroleum the picture similarly shows nothing particularly out of the ordinary. The EIA is going to take a slightly different look at storage capacity data, and that is their front page story of the week, but as one looks at the plots, other than the slow creep up in oil prices, there is little untoward in them. Domestic production has continued to increase, lowering the need for imports, at a time of year when refinery inputs in general are down.

Source EIA

At the same time ethanol production is continuing its steady climb in production:

Source EIA

At a time when the gilt seems to be wearing off the ethanol gingerbread, the public discussion seems to be having little effect on that reality.

But other than that, nothing much of significance that I can see, (which doesn’t mean that I’m not missing something – perhaps that gasoline demand has dropped to the same level as last year?)

September TWIP and July VMT

One of the metrics of the economy that serves as a marker to me on how we are doing relates to the use of vehicles, and as a consequence the amount of gas that is being used. Prices of gas haven’t changed much over the past months, nor has the price of crude. Thus without price fluctuations confounding the causes of change, it is possible to get some measure of how we’re doing from how much gas is being used. Recognizing that the summer driving season is now over, but that information is now available on how the patterns of driving went.

This Week in Petroleum, where I get the data on this, has, this week, focused on the impact that Canada is having on imports, given that it is the largest supplier to the USA at the moment. Part of the story they told this week was that the impact of pipeline problems between the two countries had not ultimately had much impact, and service is now resumed.

From TWIP Sept 29, 2010

The Canadian supply has remained relatively steady over the years, and not been much impacted by the declines in demand recently, though as a seasonal event, the demand for crude is currently falling.


If one looks at the TWIP monthly figures rather than the annual demand, the fall in demand that started some months ago, is continuing, and given that domestic production remains relatively level, it will be interesting to see when this turns around.


The amount of gasoline produced from this crude input would, logically, also fall, as it has been though it has just recently had a little uptick, relative to the trend of a year ago.


That is as a result of an increase in demand that can also be seen in the TWIP figures.


One week’s data should not, of course, be construed as having much import on its own, but it is worth watching.

Ethanol production, after a relatively steady, though small increase, concurrently had a slight dip, though this is, I suspect, likely to be insignificant in the longer term.


Looking at vehicle miles driven, the last report for which relates to July numbers, the curve (bearing in mind that it is a 12-month rolling accumulation) has picked up and is now past the early “bump in the road” which we saw earlier in the year.


The slope is not yet that exciting, with the overall levels still equivalent to those back in 2005, but it is upward and a recognition that things are doing better. And it appears to be an across the board increase around the country, and in both rural and urban driving.

The question however, will likely arise before too long as to what impact the increasing demand is going to have on prices. For while the demand in the US and Europe has seen anemic growth, that in Asia is much more robust, and has been consuming the “slack” that had been left in global demand. We shall see how this impacts the capabilities of world suppliers to continue to meet this, in the months ahead.