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Westwood: Oil shock to thrust gas, alternate energy forward


By OGJ editors


HOUSTON, May 17 -- Predicting another oil shock, analysts John Westwood Ltd., Canterbury, England, said depleting oil reserves, coupled with growing energy demand, will result in sustained oil price increases, greater capital investment in natural gas production, drastic conservation regulations, and fevered development of renewable energy substitutes funded by "windfall" profits.


The current $40 oil prices likely will begin sustained rises soon, requiring the massive development of natural gas and renewable energy resources, said the firm's John Westwood.


China's rising oil demand, in particular, likely will continue, he said. China has 5 times the US population and is industrializing rapidly, Westwood said. Vehicle growth in China also is expanding apace, increasing global oil demand (see CERA: Impact of China's energy situation, OGJ Online, May 17, 2004).


"Any growth in global economic activity increases oil demand such that, at 1% demand growth a production peak [will occur] in 2016; at 2% it occurs in 2012; and at 3% it occurs in 2008. The world's known and estimated yet-to-find reserves and resources cannot satisfy even the present level of production of some 76 million b/d beyond 2020," Westwood warned.


Oil wanes; prices rise

Supply specialist Michael R. Smith added that, of 99 producing countries 52 are already past their production peak and 16 are at peak. Once a country passes peak production, he said, there is little chance it can reverse its decline. "When this happens to total global oil supply, then growth in demand will be impossible," Smith said.


"Large capital investments within OPEC countries are already required to rapidly increase production after 2008 by at least an additional 1-2 million b/d every year to offset declines elsewhere," he warned. If such output is not achieved as fast as required, the world will then see sustained growth in oil prices, Smith said.


Once oil supplies approach peak and scarcity prevails, prices will double within 3-4 years, just as they did during the oil shocks of the 1970s until oil demand falls significantly, Smith said.


"Drastic conservation will make prices fluctuate as they did in the oil shocks, always settling at a higher level," Smith said. A new stable energy mix might ultimately be achieved with substitute fuels, but it is uncertain how long that would take. "Meanwhile producers will face steadily increasing government, environmental, and conservation regulations," Smith said.


"Windfall profits arising from energy price surges, which traditionally have funded new oil and gas investment, will have to be, at least partly, employed in bringing other forms of energy to profitability."


Gas, renewables boom

"Global production of natural gas, currently some 2,600 billion cu m, is expected to grow to 4,755 billion cu m/year by 2025," an average increase of 2.75%/year at a cost of $25-40 billion/year, he said. Smith forecast that more than $39 billion will be spent during the next 5 years on LNG facilities.


"The future driver for renewable energy will not be global warming, but security of supply," said Westwood, who forecasts major investment increases in all renewable energy sources, particularly windpower and biomass, to offset soaring conventional energy prices.




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My thoughts are that 1st few weeks in June will be greatly significant in terms of medium term strategy. The reasons are;

1. better understanding (hopefully of the saudi and major Brent crude producer's) view of their future earnings estimate

2. some direction with regards to Iraq and the 'coalition' of the willing

3. gold pivots

USA electioneering directions


Of course I could be wrong, but these are my thoughts with regard to timing to make some meaningful analysis and posturing for the medium term http://www.sharescene.com/html/emoticons/weirdsmiley.gif

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So why wouldn't oil prices rocket?

By Alan Kohler

May 19, 2004


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A few oily thoughts.


The last "super giant" oilfield (more than 10 billion barrels) was discovered 40 years ago; the last American refinery was built 25 years ago; each successive American "driving season" guzzles more gas than the last.


The average oil discovery these days is small - 50 million barrels - and the average net present value of each reservoir is below the cost of exploration. Drilling for oil has not paid off for a long time.


Meanwhile, in America, rapacious consolidation and a clamp on new capacity has led to a shortage of gasoline, separate to the demand/supply picture for oil.


And then there's this driving season, a uniquely American event. It starts on the Memorial Day long weekend, or the last Monday in May, and ends on Labor Day, the first Monday in September. These two long weekends are the bookends of summer: in between, millions of yank-tanks and SUV gas guzzlers jam the highways, filled with Griswolds heading off to Wallyworld.


As this year's Memorial Day approaches, a shortage of refining capacity is pushing the price of petrol above a horrifying (to Americans) $US2 a gallon - equivalent to 77.7c Australian a litre. For some reason this has also pushed the Australian unleaded petrol price above $1 a litre ($US2.57 per US gallon).


Why a refining-capacity-driven rise in the end price should result in a sharp rise in the raw material input price (crude oil) is hard to fathom but, then, the oil market is not the most rational of markets.


The oil price, like the price of most commodities, is set according to both long-term and short-term factors, with an emphasis on how the traders feel that day (or sometimes that minute).


The short-term factors du jour are the impending US driving season combined with a shortage of refining capacity, instability in the Middle East and rapidly growing demand from China.


The latest escalation in the oil price - that is, when oil decoupled decisively from other commodities which it had been tracking for about 12 months - began on April 5 with the uprising in Iraq led by Moqtada al-Sadr.


But underlying these factors is a persistent prediction that global oil production will peak around 2008-10 and then begin an unstoppable decline.


The patron saint of the oil production doomsayers is M. King Hubbert. In 1956 he correctly predicted that US production would peak in 1970; he later predicted that global production would peak in 1995 but he got that wrong.


Nevertheless the debate goes on. One of those keeping the Hubbert flame alive is Colin J. Campbell. This passage from a July 2002 paper by him sums up the (still) current thinking: "Oil discovery in the United States peaked in 1930 with the discovery of the East Texas field. Peak production inexorably followed 40 years later but no one particularly noticed as cheap imports made up the difference.


"Since then, the same pattern of peak and decline has been repeated from one country to another, save for the Middle East, and the time lag from peak discovery to peak production is falling, thanks to modern technology.


"Given that peak world discovery was passed in 1964, the corresponding peak of global production is now getting close. Exactly when it will come depends on many short-term factors, not least of which would be military intervention in the Middle East. The base-case scenario points to 2010 but it could come sooner if economic recovery should drive up the demand for oil. The question is not whether but when oil production will peak."


Note that these forecasts are about oil production peaking, not "oil reserves running out". Note also that military intervention in the Middle East has now occurred and that another factor has since emerged to drive up demand for oil: the explosive growth of China.


It turns out, in fact, that Chinese demand and military intervention in the Middle East are the two most important short-term factors behind this year's oil shock. But whether they bring forward the long-term oil peak is impossible to say.


That's because there is no reliable information about Saudi Arabian reserves and production, and no one has any real idea whether there is more oil to be found on the Arabian Peninsula, if they actually look.


One of the most important assumptions underlying the oil market is that the Saudis can act as almost swing producers in the event of a supply disruption. That is far from clear.


But as Americans prepare their SUVs for the driving season, OPEC is running at full capacity and the non-OPEC producers are in decline.


There may well be a short-term correction back to below $US40 a barrel if OPEC quotas are raised and Saudi Arabia maintains its over-production but it is far from clear that the successors of M. King Hubbert are wrong about the big picture.


No one's making oil any more.



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World oil prices take off

20/05/2004 09:42:16 AM


World oil prices have taken off, nearing record highs amid bloodshed in the Middle East and US President George W Bush's refusal to release emergency oil reserves.


After dipping for a day, speculators returned to snap up oil and crush emerging sentiment that the market may have peaked.


New York's benchmark light sweet crude for June delivery soared 96 cents to 41.50 dollars a barrel, five cents shy of the record close set Monday for the 21-year-old futures contract.


The light sweet crude July contract broke new ground, leaping 1.20 dollars to close at 41.62 dollars a barrel.


Brent North Sea crude oil for delivery July gushed 95 cents higher to 37.90 dollars.


Petrol roared 6.34 cents higher to a record close of 1.4503 dollars for a gallon of regular unleaded to be delivered in June.


"This is a real, live, honest-to-God bull market," said AG Edwards director futures research Bill O'Grady.


"Every time this market breaks down you get what I suspect is hedge fund and commodity fund money that just comes into it and buys it," he said.


"If this market is going to go down it is going to happen because of a change in psychology."


Investors were spooked by the surge in oil prices.


After gaining more than 100 points in early trade, the Dow Jones Industrial Average finished with a loss of 30.80 points or 0.31 per cent at 9,937.71, unable to hold above the key psychological level of 10,000.


Traders said oil was supported by Bush, who repeated his policy of refusing to release oil from an emergency reserve to lower record petrol prices, saying it would weaken the country in its "war on terror".


He expressed concern over the high price of petrol and its impact on American consumers but pressed lawmakers to ease the pain by swiftly passing an energy bill now before Congress.


Soaring petrol prices threaten to become a major political liability in the run up to the November 2 presidential elections.


"We will not play politics with the strategic petroleum reserve," Bush told reporters after a cabinet meeting in the White House."






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Clamour for more oil intensifies



The current surge is not just to do with consumption


Calls are intensifying for oil cartel Opec to boost the amount it produces to help ease sky-high energy prices. The 11-nation group's members will meet at a conference on 22 May, and many observers hope for a decision then. But while Opec members warned that an increase may not bring down prices, the European Union said there was now an "urgent need" for more supply. US light crude ended the day up 96 cents to $41.50, just 5 cents below Monday's historic 23-year high. In London, the benchmark Brent Crude price ended up 93 cents to $37.88.


Economic fears


The call for Opec to increase production was led by EU commissioner Loyola de Palacio. She said the global economy would bear "a very heavy cost" unless prices moderated. A willingness to raise production - a suggestion made by Saudi Arabia and backed by the United Arab Emirates - was, she warned, "a question of credibility for Opec". "If it does not come about, we will clearly see that Opec is not interested in oil price stability," she Ms de Palacio. The problem today is not a crude oil problem... it is a gasoline market problem Purnomo Yusgiantoro, Opec president Gilles Gantelet, Ms de Palacio's spokesman, told the BBC's World Business Report that the call was not selfishly motivated. "It is not the rich consumers that are suffering, but developing countries," he said. UK Chancellor of the Exchequer Gordon Brown said he would urge Opec to raise output "to meet world output at the prices that they themselves have said are sustainable".


Time for a new basket?


However, Ali Rodriguez, head of Venezuela's state oil company, said the oil market was already well supplied and a production increase by Opec (of which Venezuela is a member) will have little effect. Instead he blamed the current high prices on oil speculation and the situation in Iraq. US president George W Bush also called on Opec to raise production but turned down a request from US airlines for America to stop its oil stockpiling. Meanwhile, the Philippines suggested it and its Asian neighbours should have their own US-style strategic oil reserve to help alleviate what its energy secretary Vincent Perez called "near-crisis levels" of oil supply. In theory, Opec has a target price of $22-28 a barrel for its "basket" - a sample of Opec members' oil prices. But the basket price has been well above the band all this year, and Opec president Purnomo Yusgiantoro of Indonesia hinted that the band could be rethought. "$22-28 a barrel was the price that we set in 2000 and now that price is eroded because of the inflation, because of the depreciation of the US dollar," he said.




In any case, he said, Opec members were already pumping 85-95% of capacity. "The problem today is not a crude oil problem," he said. "It is a gasoline market problem." Demand is being boosted by a number of factors, including the uncertainty in Iraq, vast demand from the fast-growing Chinese economy and low stocks in countries across the developed world who are choosing to stockpile because of tensions in the Middle East. Opec's most recent figures show that its 10 members who are meant to cap production are already quota-busting to the tune of 2.1 million barrels a day above the 23.5 million target. With that kind of over-production, experts say, only Saudi Arabia and the UAE have much headroom to pump more. For other members, a quota rise would only legitimise their existing output.






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