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.

The TWIP and changes in regulations

There has been some talk recently of the current Administration raising taxes on oil and natural gas companies. Specifically the suggestion is that Section 199 of the American Jobs Creation Act and Section 1.901-2 of the Treasury Regulations would be repealed. The API recently hosted a conference call on the topic, which I unfortunately missed. A report on the plan has recently been prepared by Dr. Joseph Mason at Louisiana State University , who succinctly describes the results as:

Section 199 was enacted by President Bush in 2004 to provide taxpayers benefits for production activities in the United States. The provision grants a “deduction equal to a percentage of the lesser of ‘qualified production activities income or taxable income.” Under the provision, labor- intensive corporations are particularly favored by being able to deduct a percentage of domestic production activity each year. The repeal would apply solely to oil and gas firms.

Dual capacity credit, (Section 1.901-2) on the other hand, allows companies to deduct taxes on incomes from abroad, offsetting relatively high U.S. taxes on foreign incomes.3 Hence, the dual capacity regulation is a way for American firms to compete efficiently against foreign competitors.

In repealing the dual capacity credit, however, the current administration would effectively double-tax firms conducting business in many foreign countries.

With the Australian intent to raise taxes on energy producing companies being one of the causes that led to the collapse of the last Government, this has not deterred the Prime Minister who is now re-committing the Government to a carbon tax. In short, given that governments around the world need to find some new pockets from which to extract the funding to keep their budgets closer to balanced, the energy industry seems to have been chosen as the sacrificial lamb.

In which regard it is interesting to note that the TWIP this week has been looking at the earnings of major oil and natural gas producers. It notes that average earnings were up over the same period last year, albeit still well below the 5-year average. Crude prices are up again, and the major companies have been increasing capital expenditures, with the increased availability of funds again. The oil and gas expenditures for the majors, for example, is not only up over last year, but is 19% over the average for the 2005-2009 timeframe.

Generally in the energy business, industry has to invest an increasingly large amount of money to find and then develop new fields of production. New resources are harder to find, and more expensive to develop, even when things go according to plan. Unfortunately the business is also one where impacts take some time to have an effect. Oil shipped in from the Arabian Gulf takes time to get to the United States, as a trivial example, but more germane, it takes years to find new fields, and then more years to develop them. The problem is that this usually slow response to change means that the impact of changes in the rules don’t always immediately appear to have the consequences that ultimately show up.

I have mentioned before (and will again) the dangers that the UK faces in long term energy supply as power stations are condemned to closure without a surety that there will be power in place and available to meet the evolving gap that this will lead. The world, at present, seems to believe that all will be well thanks to Russia, Turkmenistan and their neighbors who have a plethora of energy to offer. What is usually neglected in that review is the pipeline construction heading from those countries to China. The problem, of course, is that everyone assumes that the energy will be available, not recognizing the growing number of customers who are all bidding for volumes that will not meet global demand over the intermediate time interval. And the frequency with which gas pipelines seem to rupture as it crosses some of those borders is quite remarkable. The latest, between Kazakhstan and Russia occurred early Wednesday.

We are all, I fear, sadly complacent.

Turning just briefly to some of the graphs in the TWIP, and their possible meanings; Refinery inputs have leveled out, a little above last years numbers:

(Source TWIP)

Domestic crude is hovering around where it was at this time last year while imports have fallen from 10 mbd down to about 9.2 mbd since the middle of the summer, but this is a recognition of the change in driving as go go into the Fall. The drop in demand, that was holding off a little when I last commented on the numbers a couple of weeks ago, is now well under way.

(Source TWIP )

Since this is the first year that the EIA is showing ethanol numbers it is worth noting that while ethanol production continues to climb:

(Source TWIP )

the volume in stocks has been declining, though since this is the first year that the record is displayed, it is not yet clear how the seasonal trends will impact the shape of the curve.

(Source TWIP )

Given that, at the end of the month, the EPA is expected to rule on the use of E15 (i.e. 15% ethanol in the mix) ) it is perhaps not wise to make too many comments on the current shape of these graphs, since they are likely to change under that influence.

The anticipated benefit (apart from lowering the amount of crude that has to be imported) is based on an anticipated reduction in pollutants and better burning of the fuel in the engine. It remains to be seen what the unanticipated consequences are.

Since this is the political season our mayor dropped by our service club the other day to comment about the horrors of trying to run a budget as more and more mandates come down from the Federal Government, often written years ago, but only now showing up (so that he was careful to say that both parties share in the blame). His main theme (other than that we are not as bad as we might be, but that street repairs can only fix shorter stretches) was that many of the consequences only show up much later than the legislation, and regulation, and by that time it gets very difficult to correct initial mistakes.

Secure and timely energy supplies are a critical part of the success of industrialized nations. We need to remember that.

As demand rises, can oil supply keep up?

Liquid hydrocarbons provide the fuel for the vast majority of the vehicles that carry us to and fro over the course of a day. The latest edition on the TWIP comments, in looking at the future of vehicles through the eyes of the Annual Energy Outlook, released this month, that:

the market share of alternative vehicles will increase to 49 percent of new vehicle sales by 2035 due to the combination of more stringent corporate average fuel economy standards, the renewable fuel standard and higher fuel prices (See Figure 1). However, with continuing improvements in the fuel economy over time, conventional gasoline-powered vehicles are projected to retain the majority of sales.

Figure 1 looks like this:

EIA projects for vehicle fleet changes in future years (EIA)

But the projection carries with it some inherent assumptions about the continued availability of those fuels, both here and in the other countries around the world. And in some of those growth is expected to be such that, by 2035, countries such as China will have more vehicles on the road that the USA. Last year the Chinese car industry overtook that of the United States, and just recently Saudi Arabia began selling more oil to China than it does to the United States. Sales to the US averaged about 2,000 bd below 1 mbd last year, while those to China just crossed that significant marker. Similarly Russia, the country that now leads the world in crude production, increased its sales to China so that it now supplies around 7.8% of total Chinese crude imports. (Through last October this amounted to around 100 million barrels of oil for the year).

There is a new pipeline that is being constructed to help those exports, with the goal of increasing sales from their current 6% of Russian exports to between 20 and 25%.

After many years of discussions, the construction of the pipeline started in April 2006. The ESPO was supposed to connect Tayshet (in the Irkutsk oblast) with the Kozmino port on the Pacific Ocean. The new oil pipeline is intended to stimulate the development of a new oil production centre in Eastern Siberia, which is particularly important in view of the expected decline in production from the Western Siberian fields and in the Urals-Volga region. The ESPO's total length will be 4857 km and it will have an annual capacity of 80 million tons. The first section between Tayshet and Skovorodino (Amur oblast) has a capacity of 30 million tons.

Initially, oil will be transported from Skovorodino to Kozmino by rail. The second phase of the project (to 2014–2015) will see the construction of the pipeline section to the terminal in Kozmino (50 million tons) and the expansion of the first section’s capacity to 80 million tons. Moreover, a branch connecting the ESPO with China's Daqing has been under construction since April 2009; it is expected to start transporting 15 million tons a year in 2011 (with an option of extending the capacity to 30 million tons).

Russia’s Energy Strategy through 2030 does not see a shift from fossil fuels to alternative energy until after 2022.

Now these projections of growth, and the fuel supplies required to meet them are predicated on there being enough, relatively economically viable, supplies of crude to meet that demand. There are the occasional troubling signs that this might not be the case.

JoulesBurn has one of his usual, incisive and informative posts on The Oil Drum today discussing his latest analysis of information from the satellite view of the recent Saudi addition at Haradh. This, the third addition to the program of extraction from the Southern tip of the large Ghawar field, is being produced, and bragged about by the Saudi, at a level of 300,000 bd. But as Joules has spotted, and pointed out, there are a lot more production wells that have been drilled into that field in recent years than Saudi Aramco have been admitting to, and their placement suggests that they are being needed to maintain production from wells that might not have been able to sustain the original targets.

Now that could be a problem, and Ace has commented that this could signify that Aramco might not be able to sustain more than 8.35 mbd this year, and expects a decline next year.

Into this picture now increasingly steps the slowly growing global economy. And as it seasonally happens US demand for gasoline is beginning the steady increase that normally occurs between now and mid-summer, with the concomitant increases in price.

US Demand curve from TWIP (March 3, 2010 )

Turning to the vehicle miles travelled data for last November the numbers were positive across the entire country, with an average increase of 1.4% over the previous November. (This is in contrast with the October figures where the overall had shown a drop of 0.7%, the first drop in 5 months). The rolling 12-month total, because of that, reached a plateau, though I expect that it will return to upward progress next month, perhaps beginning to exceed the driving done in 2004.

Rolling 12-month total of vehicle miles driven in the USA through November 2009. (FHWA )

Gasoline, crude, supplies and miles travelled

This winter has been a little harder, in the sense of snow on the road, than some I have experienced in the past. Which may explain, to a degree, the drop in gasoline demand that the EIA is reporting has happened over the past month.

Gasoline Demand (EIA )

If you look at this time last year the current curve seems to be tracking what happened back then, and the steady upward trend in demand that has occurred in the last two years as we move forward from this date will, I suspect, likely be repeated.

What is that going to do to gasoline prices, and with them the price of crude? Well prices have dropped back a little, bear in mind that it was this time last year that they bottomed out, and then there was a run-up until about August, which was the end of the summer driving season.


Average gasoline prices (EIA)

We have had the same sort of pattern with crude prices (and the change since last February is why I consider recent drops as relative inconsequential). Domestic crude, after a steady rise since last August, has taken a little drop, and with imports also falling, the inputs into domestic refineries are around 900 kbd off last year’s numbers.

Refinery inputs of crude (EIA)

There is still enough oil available through the market to cover an expected increase in demand over the short term, but I have a growing concern for supply on the summer of 2011.

Looking at traffic volumes, after a little hiccup in October, the numbers for November were more of a gain. The average traffic increased by 1.4%. While for the entire year through November traffic had risen by 0.3%. And this time all regions were showing an increase in traffic, although there was still a decline in urban traffic off the interstate.

Monthly changes in miles driven for 2009 relative to 2008 (FHWA )

The hiccup does show up in the running 12-month total, which has flattened, at around the levels that we were at in 2004, when the curve was merrily climbing upwards.

Cumulative miles driven through November 2009 (FHWA )

Given that car sales rose 6% last month (with the exception of Toyota) with some manufacturers showing double digit rises in sales over last year there is more promise for the economy in these numbers.

Saudi Arabia is maintaining higher levels of supply both to Asia and to Europe. And while Russia is still playing nice, as the Ukrainian election is on Sunday, and it still has a candidate or two in the race, it too has promised to keep supplies up to Western Europe. With the higher crude prices bringing a bit of stability back, perhaps we can get through this winter without any histrionics in that part of the world.

Oil up, gas down, and Hurricane season is here

I had meant to include the weekly plot of gasoline demand in the last post, that began by talking about the hybrid, but somehow the post drifted into a different direction and I ended up not including it. The graph, from this week’s TWIP, showed that gasoline demand is really remaining fairly constant at a rate slightly above last year(and in about the same relatively flat condition), though you might want to recognize the significant difference in price. This time last year was about the time that price peaked.
Gas demand over the past year (EIA TWIP)
Gas prices over the last two years (EIA TWIP)

The question on where it goes from here does depend on the way the global economy goes, though as you gather, in the case of gasoline, with the spread between supply and demand now controlled by OPEC, I expect that there will be a slow but steady increase.

Natural gas, on the other hand is another story. The Natural Gas Weekly (NGW) report is out today, and shows the slow but apparently inexorable decline in prices is continuing.

Natural gas prices against oil prices (EIA Natural Gas Weekly)


This steady decline in gas prices, which may well continue if there is the influx of LNG at year end, has the potential to significantly hurt the developing production of natural gas from the gas shales. As I previously noted, Chesapeake may well be able to produce from these formations at less than$4 a tcf, but once the price gets down to $3 or so, then I suspect that those bets are off.

The NGW is not very comforting in that regard, noting that

At $3.41 per MMBtu on Wednesday, July 29, prices at Henry Hub were $9.17 per MMBtu, or 63 percent, below last year’s level at this time. Current spot prices at market locations in the lower 48 States average about 62 percent below year-ago levels.

As a result there has been a further increase in storage injection, significantly above the 5-year average figures. The NGW blames this on the unseasonably cool temperatures:

Relatively mild temperatures in each of the Census Divisions in the lower 48 States during the week ended July 23, 2009, likely contributed to the above-normal level of injections into storage. Based on the National Weather Service’s degree-day data, temperatures in the Lower 48 States during the week were, on average, more than 2 degrees cooler than normal and 4 degrees cooler than last year’s levels.

Whether this has anything to do with the lack of sunspots, and the consequent slight drop in received sunlight is a topic for another day. (If the colder weather continues into the winter, then the drop in demand for air conditioning may be compensated by the increased need for heat). Though the stubborn refusal of the global temperature to follow the steadily increasing curve that has been predicted by the AGW models is becoming remarkable.

That difference with prediction is also evident from the subject of the TWIP front page this week, which dealt with the amount of oil from the Gulf of Mexico (GOM) that gets shut in each season due to hurricanes.

Impact of Hurricanes on GOM production (EIA TWIP)

The slow decline in overall production is partly because of the loss of smaller and older producers following recent major hurricanes – production too small to justify the redrilling of wells, and also it is because the fields near the coast are well defined and exploited, and are in overall decline. But the risks from hurricanes are clear, when the platform locations are examined.

6357 oil platform locations in the GOM

The question that the TWIP asks relates to the likelihood of there being strong and frequent hurricanes through the platform-intense regions this season. So far, with the cooler relative sea temperatures there has not been the activity of more damaging years, but the TWIP quotes NOAA as predicting a slightly higher than normal season, with a consequent transient outage of 4.5 million barrels over the season. However the recent identification of this as being an “El Nino” year may change that prediction, though we won’t know until next week, August 6th to be precise.

Whether storms are increasing in severity has been a subject of debate, following such a prediction in “An Inconvenient Truth” , but the data apparently does not show that there has been an increase in storm energy but rather the reverse.

Historic trends in Cyclone Energy (Ryan Maue )

And, as far as oil and gas production from the Gulf is concerned it is only going to take one strong hurricane with the wrong path and, as historic experience has shown, production can be really impacted. (It took years to get the Thunder Horse platform back into commission after it was damaged by Hurricane Dennis in 2005, and the 250,000 bd of oil and 200 mcf of gas production temporarily lost).

The season is yet young, and we’ll just have to wait to see what transpires.

EIA updates - the quiet before the ruckus

There was not a great deal of news in the “This Week in Petroleum” release this week. The cover note described the potential of the Bakken Formation

The Bakken Formation contains a major onshore unconventional oil resource in Montana, North Dakota, and Saskatchewan, Canada. It has three distinct layers, called members. Two of these (the Upper and Lower Members) are shales, while the Middle Member is an interbedded zone of various rocks. The Bakken shales produce a light oil that is generally desirable because it offers a high yield of gasoline and other key petroleum products. Proved oil reserves in Montana and North Dakota grew from 831 million barrels in 2006 to 892 million barrels in 2007. (Proved reserves are the estimated quantities that can be produced with reasonable certainty from known reservoirs under existing economic and operating conditions.) . . . . . USGS estimated that the Bakken Formation may contain from 3.1 to 4.3 billion barrels of technically recoverable crude oil with the most likely average (mean) being 3.65 billion barrels. By comparison, total U.S. crude oil inputs to refineries were 5.5 billion barrels in 2007.

The problem is that the oil is difficult to extract and in today’s news Tristar Oil and Point Energy Trust are buying Talisman Energy’s Bakken land, and will jointly operate the assets which currently produce 8,500 bd of oil, from reserves of around 45 mb. Talisman is focusing on the gas production side of operations, which includes their drilling in the Marcellus Shale.

Returning to the TWIP the curve of interest continues to be the build in gasoline demand:
Gasoline demand from TWIP March 4, 2009

The 9.2 mbd supplied for the fourth week in February 2009 exceeded that for every previous fourth February week on record, and while this may be corrected later it does signify that we are not seeing in these figures the dramatic drop in consumption that would stall the annual increase from now through May. OPEC are said to have cut supplies by 770,000 bd from January to February, and so the difference between available supply and demand is likely to tighten over the short term. In turn I would expect that we are seeing a floor in price becoming established, from which it will begin to rise before too long.

Turning to the Natural Gas Weekly Update the update talks of the impact of the cold spell last week in boosting demand, but stocks remain above normal (13.8% above actually). The spot price of natural gas at the Henry Hub was $4.23 per million Btu (roughly the same as 1 kcf) almost the same as before the increase in demand (up $0.03). Even if you look at the price graph with “optimistic eyes” it remains a little difficult to convince yourself that it is bottoming out.
Source EIA

Further to my note earlier in the week on rig counts and what they portend, the update also notes the fall in the number of rigs drilling for NG. As the plot shows the number is dropping off fast. From the peak they are now off 40%. With just a few more they will match the sort of drop that I used in the calculation, from which one might judge that the country might be 20% shorter in gas supplies by as early as next winter., save only that stored or shut in by companies such as Chesapeake.

Some new vehicle travel numbers

As I sit waiting for “This Week in Petroleum” to update I wandered over to the Federal Highway Administration to see if the latest Traffic Volume data was available. And it is, with the numbers for December 2008 just having been posted. The reason for the interest can be seen in the plot of miles driven, that they provide, and this is the new one:

Source FHWA

It actually looks a little more fearsome than it is.
UPDATE: The TWIP information has been added.

The data plotted above is a 12-month rolling average, and when you look at the individual month data, and use the urban highways plot as representative (the argument also holds for the rural and total) you can see that driving started to drop last December relative to 2006. Through all of last year it has been down relative to 2007, but with the December figures we are starting to stabilize, and come closer to the previous years figures.

Source FHWA

In fact if you look at the regional plot, the Northeast is slightly up on last year, and most of the other regions are not down much (relative to the previous drops of around 5%).

Source FHWA

So this may mean that for most of us the situation may be stabilizing (sorry West Coast, not you yet). Now this data is still a couple of months old, and it shows that the drop is still going on, but demand for fuel may be leveling off.

Added: A little late today, the TWIP now is up, let me add the two plots from this week that I have been looking for. The first is the demand curve. Now we know from the second figure that driving started its dive last December, so the comparison is with what was already turning into a drop, but if you look at this week’s gasoline demand:
Source EIA TWIP

Then you can see that current demand, which equated to the same number as this time last year last week, has just risen above it this week based on four-week averaging. However if you look at the tabulated numbers the week saw a drop of 100,000 bd on average, which is down 200,000 bd on a year ago.

Source EIA TWIP

Which takes up back to see what is going into the refineries, and this is still paralleling the drop of last year. It is currently about 300,000 bd below last year’s figure.
Source EIA TWIP

Gas prices have now been rising for 3 weeks, while home heating oil prices have been falling for five weeks. But even as refinery input bottomed out at this time last year, so it appears to be doing the same again this year, although we may have to wait a week or two to see a clearer trend.




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