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Big Oil Is Gaming the System to Raise Domestic U.S. Prices
Completion of the entire [Keystone] pipeline would raise prices at the pump in the Midwest and Rocky Mountains 10 to 20 cents a gallon, Verleger, the Colorado consultant, said in an e-mail message.The higher crude prices also would erase the discount enjoyed by cities including Chicago, Cheyenne and Denver, Verleger said.
CNN Money reports:
Gas prices might go up, not down: Right now, a lot of oil being produced in Canada and North Dakota has trouble reaching the refineries and terminals on the Gulf. Since that supply can’t be sold abroad, it reduces the competition for it to Midwest refineries that can pay lower prices to get it.
Giving the Canadian oil access to the Gulf means the glut in the Midwest goes away,making it more expensive for the region.
Tyson Slocum – Director of Public Citizens’ Energy Program – explains:
How does bringing in more oil supply result in higher gas prices, you ask? Let me walk you through the facts. A combination of record domestic oil production and anemic domestic demand has resulted in large stockpiles of crude oil in the U.S. In particular, supplies of crude in the critical area of Cushing, OK increased more than 150% from 2004 to early 2011 (compared to a 40% rise for the country as a whole). Segments of the oil industry want to import additional supplies of crude from Canada, bypass the surplus crude stockpiles in Oklahoma in an effort to refine this Canadian imported oil into gasoline in the Gulf Coast with the goal of increasing gasoline exports to Latin America and other foreign markets.
Cushing typically is a busy place – I noted in my recent Senate testimony how Wall Street speculators were snapping up oil storage capacity at Cushing. And all of that surplus capacity is pushing WTI prices down – and for many in the oil business, downward pressure on prices is a terrible thing. As MarketWatch reports, “[B]y running south across six U.S. states from Alberta to the Gulf of Mexico, [the Keystone pipeline] would skirt the pipeline hub at landlocked Cushing, Okla., a bottleneck that has forced Canadian producers to sell their oil at a steep discount to other crude grades facing fewer obstacles to the market.
There are several global crude oil benchmarks, and the price differential between Brent and WTI now is around $10/barrel, which is a fairly significant spread, historically speaking. Moving more Canadian crude to bypass the WTI-benchmarked Cushing stocks, the industry hopes, will align WTI’s current price discount to be higher, and more in line with Brent.
The Keystone pipeline isn’t just about expanding the unsustainable mining of … Canadian crude, but also to raise gasoline prices for American consumers whose gasoline is currently priced under WTI crude benchmark prices.
Slocum notes that oil is America’s number 1 import at time same that fuel is America’s number 1 export.
Specifically, more oil is being produced now under Obama than under Bush. But gas consumption is flat.
So producers are exporting refined products. By exporting, producers keep refined products off the U.S. market, creating artificial scarcity and keeping U.S. fuel prices high.
Slocum said that the main goal of the Keystone Pipeline is to import Canadian crude so the big American oil companies can export more refined fuel, driving up prices for U.S. consumers.
Tom Steyer points out:
Statements from pipeline developers reveal that the intent of the Keystone XL is not to help Americans, but to use America as an export line to markets in Asia and Europe. As Alberta’s energy minister Ken Hughes acknowledged, “[I]t is a strategic imperative, it is in Alberta’s interest, in Canada’s interest, that we get access to tidewater… to diversify away from the single continental market and be part of the global market.”
And see this NBC News report.
As Fortune explains, the U.S. is now an exporter of refined petroleum products, but Americans aren’t getting reduced prices because the oil companies are now pricing the fuel according to Europeanmetrics:
The U.S. is now selling more petroleum products than it is buying for the first time in more than six decades. Yet Americans are paying around $4 or more for a gallon of gas, even as demand slumps to historic lows. What gives?
Americans have been told for years that if only we drilled more oil, we would see a drop in gasoline prices.
But more drilling is happening now, and prices are still going up. That’s because Wall Street has changed the formula for pricing gasoline.
Until this time last year, gas prices hinged on the price of U.S. crude oil, set daily in a small town in Cushing, Oklahoma – the largest oil-storage hub in the country. Today, gasoline prices instead track the price of a type of oil found in the North Sea called Brent crude. And Brent crude, it so happens, trades at a premium to U.S. oil by around $20 a barrel.
So, even as we drill for more oil in the U.S., the price benchmark has dodged the markdown bullet by taking cues from the more expensive oil. As always, we must compete with the rest of the world for petroleum – including our own.
This is an unprecedented shift. Since the dawn of the modern-day oil markets in downtown Manhattan in the 1980s, U.S. gasoline prices have followed the domestic oil price ….
In the past year, U.S. oil prices have repeatedly traded in the double-digits below the Brent price. That is money Wall Street cannot afford to walk away from.
To put it more literally, if a Wall Street trader or a major oil company can get a higher price for oil from an overseas buyer, rather than an American one, the overseas buyer wins. Just because an oil company drills inside U.S. borders doesn’t mean it has to sell to a U.S. buyer. There is patriotism and then there is profit motive. This is why Americans should carefully consider the sacrifice of wildlife preservation areas before designating them for oil drilling. The harsh reality is that we may never see a drop of oil that comes from some of our most precious lands.
With the planned construction of more pipelines from Canada to the Gulf of Mexico, oil will be able to leave the U.S. in greater volumes.
This isn’t old news … or just a hypothetical worry.
As Bloomberg reported in December 2013:
West Texas Intermediate crude gained the most since September after TransCanada Corp. (TRP) said it will begin operating the southern leg of its Keystone XL pipeline to the Gulf Coast in January.
[West Texas Intermediate oil] prices jumped to a one-month high, narrowing WTI’s discount to Brent. TransCanada plans to start deliveries Jan. 3 to Port Arthur, Texas, via the segment of the Keystone expansion project from Cushing, Oklahoma, according to a government filing yesterday. Cushing is the delivery point for WTI futures. Crude [oil pries] also rose as U.S. total inventories probably slid for the first time since September last week.
“With the pipeline up and running, you are going to see drops in Cushing inventories,” said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. “It drives up WTI prices far more than Brent. You are going to see a narrowing of the Brent-WTI differential.”
Posted by Jeff Rubin on January 27th, 2014
Judging by pump prices, Canadian drivers might think oil companies were rolling in profits that only move higher. Lately, though, the big boys in the global oil industry are finding that earning a buck isn’t as easy as it used to be.
Royal Dutch Shell, for instance, just announced that fourth quarter earnings would fall woefully short of expectations. The Anglo-Dutch energy giant warned its quarterly profits will be down 70 percent from a year earlier. Full year earnings, meanwhile, are expected to be a little more than half of what they were the previous year.
The news hasn’t been much cheerier for Shell’s fellow Big Oil stalwarts. Exxon, the world’s largest publicly traded oil company, saw profits fall by more than 50 percent in the second quarter to their lowest level in more than three years. Chevron and Total, likewise, are warning the market to expect lower earnings when fourth quarter results are released.
What makes such poor performance especially disconcerting to investors is that it’s taking place within the context of historically high oil prices. The price of Brent crude has been trading in the triple digit range for three years running, while WTI hasn’t been far off. But even with the aid of high oil prices, the supermajors haven’t offered investors any returns to write home about. Since 2009, the share prices of the world’s top five publicly traded oil and gas companies have posted less than a fifth of the gains of the Dow Jones Industrial Average.
The reason for such stagnant market performance comes down to the cost of both discovering new oil reserves and getting it out of the ground. According to the International Energy Agency’s 2013 World Energy Outlook, global exploration spending has increased by 180 percent since 2000, while global oil supplies have risen by only 14 percent. That’s a pretty low batting average.
Shell’s quest for new reserves has seen it pump billions into money-devouring plays such as its Athabasca Oil Sands Project in northern Alberta and the Kashagan oilfield, a deeply troubled project in Kazakhstan. It’s even tried deep water drilling in the high Arctic. That attempt ended when the stormy waters of the Chukchi Sea crippled its Kulluk drilling platform, forcing the company to pull up stakes.
Investors can’t simply count on ever rising oil prices to justify Shell’s lavish spending on quixotic drilling adventures around the world. Prices are no longer soaring ahead like they were prior to the last recession, when heady global economic growth was pushing energy prices to record highs.
Costs, however, are another matter. As exploration spending spirals higher, investors are seeing more reasons to lighten up on oil stocks. Wherever oil producers go in the world these days, they’re running into costs that are reaching all-time highs. Shell’s costs to find and develop oil fields, for instance, have tripled since 2003. What’s worse, when the company does notch a significant discovery, such as Kashagan, production seems to be delayed, whether due to the tricky nature of the geology, politics, or both.
Shell ramped up capital spending last year by 50 percent to a staggering $44 billion. Oil analysts are basically unanimous now in saying the company needs to rein in spending if it hopes to provide better returns to shareholders.
Big Oil is discovering that blindly chasing production growth through developing ever more costly reserves isn’t contributing to the bottom line. Maybe that’s a message Canada’s oil sands producers need to be listening to as well.
Some have dreamt of it, others have only imagined it. Now Saxo Bank, the online multi-asset trading specialist and investment advisor has released its ‘Outrageous Predictions’ for 2014. They fully admit that the probability of any of them coming to fruition is rather low. But, that hasn’t stopped them making them. Be outrageously provocative and it can be predicted that as sure as eggs are eggs the crystal ball will go cloudy on you. But, it makes for light-hearted reading along the rocky road of fortune-telling. The saving grace is that if any one of them does actually hit the truth on the nose, Saxo Bank will be saying ‘I told you so’. If they don’t come true, Saxo’s drivel will be forgotten in the mass of pages on the internet.
Predictions for 2014
- Soviet-Style Economy in EU: This one comes from Steen Jakobson, Chief Economist and CIO at Saxo Bank. It tops the list. The Soviet-Union will be back in force in style at least in the EU, when deflation causes panic amongst the leaders of the EU. Wealth Taxes will be introduced across the Union in the attempt to reduce inequalities in society. Europe will at last move into the final stages of totalitarian government from Brussels.
- Fat-Five Tech Companies: Amazon, Netflix, Twitter, Pandora Media and Yelp are all trading at about 700% above market valuation. That’s while the rest of the information-technology sector is 15% under market value. The bubble will burst in 2014 for the fat five. Some of that flab just has to come off.
- US Deflation: It’s only the US government and the Federal Reserve that are saying that the US economy is doing better. January will see the FOMC dealing with deflationary pressure on the economy as consumer confidence gets a whacking and employment and investment take a beating after Congress ends up ‘disrupting the US economy’ again.
- Brent to Fall to £80/Barrel: Sanctions against Iran are going to ease. This coupled with the problems that will seem to abate in Libya will see the price of oil fall drastically. Non-Opec supply is predicted also to increase by 1.5 million barrels per day.
- CAC40 to Drop 40%: They don’t call it the 40 for nothing. The French economy will fall like pigeons being shot out of the sky. The investors in France will be scrambling for the way out as the French government ends up taking a lashing.
- Fed Tapers: March-time will cause widespread panic on the financial markets. Apparently the prediction is that Yellen will resign and that Bernanke will be called back. Oh, there is a Hollywood film too of what happens when Yellen gets kicked out of the comfy bed.
- Germany to Need Bailout: Germany will fall into recession and end up asking to be propped up by the European Central Bank. Let’s hope the Greeks agree to that one.
- Spain to Recover: Spain is set to become the strongest economy in the EU.
- Russia to Turn Tails: Russia will turn to the Western world and end up crying in mummy’s skirts as there are escalating costs of the Olympics and plunging oil prices. Russia will give up on Syria and will cave in to Europe on energy prices.
- China to Revolt: The Chinese will become emboldened and empowered in the face of their government as the one-child policy is loosened and the residency program comes to an end. Urban cities will see demonstrations and the government will change its policies bring the country into modernity.
Outrageous Predictions for 2014
Steen Jakobsen, Chief Economist at Saxo Bank states “This isn’t meant to be a pessimistic outlook. This is about critical events that could lead to change – hopefully for the better. After all, looking back through history, all changes, good or bad, are made after moments of crisis after a comprehensive failure of the old way of doing things. As things are now, global wealth and income distribution remain hugely lopsided which also has to mean that significant change is more likely than ever due to unsustainable imbalances. 2014 could and should be the year in which a mandate for change not only becomes necessary, but is also implemented”.
That’s all well and good except for the fact that looking back in history, changes rarely happen even at the crossroads of a crisis. Things carry on as they always did and it’s just business as usual. The banks haven’t changed the way they do business and governments haven’t changed the way they do theirs.
Apparently, the idea behind the predictions is to make people think of the worst-case scenarios that might possible happen in the world and to be in a position to adjust investments accordingly. Hype or outlandishly canny laughable material?
How many of the predictions do you go along with?
Mark Twain once said, “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.” And, there are many, many things that the public and policymakers know for sure about energy that just ain’t so.
That list is very long indeed and getting longer as the fossil fuel industry (which has little interest in intellectual honesty) continues its skillful manipulation of a gullible and sometimes careless media.
Below I’ve listed seven whoppers that it would be charitable to call misleading. Longtime readers will recognize that I’ve addressed them before in various pieces. But I thought that it would be useful to review the worst of the worst of 2013 as the year ends.
Here are seven things everyone knows about energy that just ain’t so:
1. Worldwide oil production has been growing by leaps and bounds in the last several years. Oil companies (with governments following suit) have cleverly redefined oil to include something called natural gas plant liquids (NGPLs) that you might surmise actually come from natural gas wells. These include propane, butane, ethane, and pentanes. The new definition also includes biofuels such as ethanol and biodiesel.
This mishmash is sometimes referred to as “total liquids,” but more often “total oil supply.” This redefinition, however, depends on something that just ain’t so, namely, that NGPLs and biofuels are 100 percent interchangeable with oil. There is some interchangeability, but the volume is relatively small. NGPLs make up just 10 percent of total liquids. I’ve seen investment research that asserts that probably less than one-fifth of that (equivalent to about 2 percent of total liquids) can be directly substituted for oil, primarily in petrochemical refineries. That portion could grow, but only with extensive and costly retooling of the refinery industry, a move that seems risky with U.S. natural gas production stalled (see below).
Now, the central problem with including NGPLs as part of the oil supply remains that they have only a very limited ability to be used as transportation fuel which is the main driver for oil consumption.
Moreover, the energy content of NGPLs is around 65 percent of oil per unit of volume. Ethanol has about 66 percent of oil’s energy, and biodiesel has slightly more than crude oil, but somewhat less than the diesel it is meant to replace. We must also consider all the energy including oil that goes into growing, harvesting, transporting and processing the crops that are feedstocks for biofuel refineries. Some studies show that more energy goes into making ethanol than ethanol produces when burned in an engine.
Despite these well-known facts, the industry and government continue to count NGPLs and biofuels in barrels right alongside oil as if they were all equivalent.
Ethanol and biodiesel do directly substitute for some motor fuels. But there are upper limits on what we can produce and use. We are near those limits with ethanol unless engines change to tolerate higher concentrations of ethanol. Moreover, neither ethanol nor biodiesel can be used for the wide variety of purposes that crude oil can.
It turns out that 2005 was an inflection point after which supply growth for both total liquids and oil proper slowed considerably. With all this in mind, let’s look at the actual numbers which come from the U.S. Energy Information Administration (EIA).
Growth from 1998 to 2005: 11.7 percent
Growth from 2005 to 2012: 5.7 percent
Oil Proper (Crude Oil Plus Lease Condensate):
Growth from 1998 to 2005: 9.9 percent
Growth from 2005 to 2012: 2.7 percent
You can see that the real oil supply (crude oil plus lease condensate) has been growing at just over one-quarter the pace it did in the previous seven years–even with record prices, record investment and the wide deployment of new extraction technologies. Slowing growth coupled with skyrocketing demand in places such as China and India has put a lot of upward pressure on oil prices. It’s one reason oil prices remain near record highs based on the average daily price of Brent Crude, the world benchmark.
In 2011 the average daily Brent Crude price was a record $111.26—which was followed by another record in 2012 of $111.63. The price in 2013 through December 26 has averaged $108.52.
2. U.S. natural gas production continues to grow by leaps and bounds.This claim is even more misleading than the first one. It’s true that natural gas production has grown in the United States in recent years due to the exploitation of gas trapped in deep shale deposits, deposits that new technology called hydraulic fracturing is now making accessible.
But, it turns out that the rate of production of these wells declines rapidly, and the numbers suggest that raising the overall U.S. rate of production is going to be very difficult and expensive. In fact, since January 2012, monthly U.S. marketed natural gas volumes have been nearly flat despite a more than doubling of natural gas prices from their April 2012 lows. The average monthly volume in 2012 was 2.11 trillion cubic feet (tcf). For 2013 the data are only available through September, but the average through that month was 2.12 tcf. It’s doubtful that the average will change that much when the final three months of the year are included.
The easy shale gas has been extracted. Now comes the hard stuff. We may already be on the shale gas treadmill.
3. There is enough natural gas under the United States to last the country for 100 years. This claim requires that you first do bad math on the numbers even the perpetrators of this falsehood provide. The number turns out to be 90 years using their figures and 2010 U.S. natural gas consumption (while assuming, improbably so, no growth in U.S. natural gas use for the next 90 years).
But even that number vastly overstates what we are likely to get out of the ground for it includes estimates of probable, possible and speculative technically recoverable resources. Now, just because something is judged to be technically recoverable does not mean it will be economically recoverable. And, if it is further labelled possible or speculative, it seems foolish to base our public policy on such resources as if they were proven to exist and were ready to extract.
Shale gas expert Art Berman suggests we focus on the probable resources category and assume generously that 50 percent of those resources will actually get turned into reserves. (Keep in mind that no resource is ever exploited to 100 percent and usually only to a fraction of that. Also, resources are what are thought to be in the ground based on sketchy evidence, while reserves are what the drill bit proves are actually there and, more importantly, amenable to extraction.) Based on these assumptions, the United States has about 550 tcf feet of probable and proven reserves which means that the country has a likely supply of about 23 years (again, assuming, improbably so, no increase in the rate of consumption during the entire period).
Since Berman made those calculations, some of the probable resources have moved into the reserves category. But, the outlook has not really changed because this was expected.
4. The United States is about to become the world’s largest oil producer. This claim depends on the same sleight-of-hand being used to inflate worldwide oil production numbers as noted above: the inclusion of NGPLs and biofuels in the production numbers. The United States has been furiously drilling natural gas wells in the last few years and has increased its supply of NGPLs greatly. The production of crude oil proper has also been growing for essentially the same reason natural gas production grew: the deployment of hydraulic fracturing techniques and horizontal drilling to extract previously inaccessible deposits of so-called tight oil.
The results have been impressive, lifting U.S. production of crude oil proper (crude oil plus lease condensate) from 5.2 million barrels per day (mbpd) in 2005 to 6.5 mbpd in 2012. The latest available monthly production results are for September 2013 and put U.S. crude oil production at 7.8 mbpd.
But, it seems unlikely given the very steep production declines that existing tight oil wells experience–about 40 percent per year–that production will be able to scale that of the world’s number one and number two oil producers.
Russia currently produces 9.9 mbpd of crude oil proper. Saudi Arabia produces 9.8 mbpd. Both numbers come from the EIA.
Could the United States produce more crude oil proper than these countries in the near future? Since we cannot know the future, anything is possible. But, consider that the United States has gotten most of the easy tight oil. Now, it must begin to rely on extraction of the hard-to-get oil. That oil will come out at a slower rate.
Meanwhile, the tight oil wells already drilled will continue to decline at colossal rates and their output will have to be replaced before any increase in production is possible. Trying to increase oil production under these circumstances can be likened to running up a down escalator since the declining production of existing wells cancels out much of the production from newly drilled wells.
If the United States were to attain the number one spot some day, it would be hard to maintain given the high production decline rates cited above.
5. The United States is on the verge of energy independence. This canard takes advantage of the lack of public awareness about U.S. energy resources. The country has long been self-sufficient in coal. This has never been an issue. It has also been nearly self-sufficient in natural gas, importing a little over 15 percent of its needs (almost all of it from Canada) from 1991 through 2011 according to the EIA. That percentage has trended down recently as U.S. production has increased. But the U.S. supply of imported natural gas was never in danger due to political disruptions or wars in faraway unfriendly countries.
So, it turns out that energy independence really means oil independence. On this count the country is still very far away from independence despite recent gains in domestic oil production. For the most recent week ending December 20, the United States’ net crude oil imports were 7.5 mbpd. The country would have to nearly double its rate of domestic crude oil production to meet its current consumption needs. That seems very unlikely given the production dynamics discussed above for tight oil which is where nearly all the growth in production is currently taking place.
6. The United States has 250 years of coal left. This claim keeps getting recycled even though a 2007 National Academy of Sciences study concluded that there was no basis for making such a claim. It suggested that the United States might have 100 years of coal left (assuming, improbably so, there would be absolutely no increase in the rate of consumption over that period). But, the report concluded that no comprehensive study of U.S. coal resources was currently available. The truth is nobody knows how much coal is left in the United States, nor how much of that might actually be accessible.
7. Peak oil is a myth. Peak oil is the idea that oil production inevitably reaches a maximum rate and thereafter begins an irreversible decline. It does NOT mean running out, but rather that production declines over time. It turns out that peak oil is actually an empirically demonstrated reality for every oil well, every mature oil field, and now for the majority of oil producing countries in the world. Those who tell us that peak oil is a myth can only be engaged in propaganda rather than a search for the truth. Ironically, many of them cite the upturn in U.S. production as “proof” that peak oil is a myth, forgetting that U.S. production peaked more than 40 years ago.
Oil is a finite resource and so, the real debate is over the timing of peak oil production for the world as a whole. Some say the peak is nearby. Others say it is two or three decades away. But no credible expert says that there will never be a peak.
The cases for and against a near-term peak would be difficult to relate in detail here. But, it’s worth noting that the optimists have been consistently wrong about prices and supplies in the last decade, and those predicting a near-term peak have been much closer to the mark.
That doesn’t mean that the peak must be nearby. But it suggests that the models and assumptions of the optimists are badly flawed.
There are so many other misconceptions about energy which remain that it would take a dozen seven-item lists just to begin to address them. But, I offer these seven as a starting point for a clearer and more honest discussion of our energy future in the coming year.
West Texas Intermediate traded near a two-month high above $100 a barrel after U.S. crude and distillate stockpiles fell more than forecast, while exports from Libya remained curbed by port closures.
Futures were little changed near the highest settlement since Oct. 18. Crude inventoriesdropped by 4.73 million barrels to the lowest level since September last week amid an increase in refinery operations, while distillate supplies, including diesel and heating fuel, fell by 1.85 million barrels to 114.1 million, the Energy Information Administration reported Dec. 27. A possible agreement with rebels to reopen the Libyan port of Hariga collapsed, the oil ministry said Dec. 28.
“The recovery of the U.S. economy is fueling expectations of higher oil demand in the U.S.,” saidOlivier Jakob, managing director at Petromatrix GmbH in Zug, Switzerland. “Distillate stocks will end 2013 at a multi-year low for the season and that should translate into very low stocks by spring.”
WTI for February dropped 7 cents to $100.25 a barrel in electronic trading on the New York Mercantile Exchange as of 11:43 a.m. London time. It closed at $100.32 on Dec. 27, settling above $100 a barrel for the first time since October. The volume of all contracts traded was about 56 percent below the 100-day average. Prices have climbed 9.2 percent in 2013, set for a fourth annual gain in five years.
Brent for February settlement was down 2 cents at $112.16 a barrel on the London-based ICE Futures Europe exchange. Prices have advanced 1 percent this year. The European benchmark crude was at a premium of $11.91 to WTI. The spread closed at $11.96 on Dec. 27, narrowing for a third day.
While there is currently no deal to reopen the port of Hariga, negotiations with rebels holding the terminal continue, Ibrahim Al Awami, head of measurement and inspection at Libya’s oil ministry, said by phone Dec. 28. The country is pumping 233,889 barrels of crude a day, compared with a daily capacity of about 1.6 million, the oil ministry said Dec. 21.
WTI has increased 8.2 percent in December amid reduced crude stockpiles in the U.S., the world’s biggest oil consumer. The country will account for about 21 percent of global demand this year, according to the International Energy Agency.
Crude inventories slid for a fourth week to 367.6 million barrels, according to the EIA, the Energy Department’s statistical arm. A median decline of 2.65 million barrels was forecast by analysts in a Bloomberg News survey. Refineries operated at an average 92.7 percent of capacity, the highest rate since July 12. Consumption of distillates climbed 2 percent to 4.17 million barrels a day.
“We saw some strength on West Texas based on the better-than-expected figures” from the EIA, Ric Spooner, a chief analyst at CMC Markets in Sydney, said by phone today. “There’s potential for the market to rally further if it gets more good news. The U.S. may see further improvement in economic statistics in the next few weeks.”
The EIA will next report weekly data on inventories and demand levels on Jan. 3, two days later than normal because of the New Year holiday.
Brent will drop for a second year in 2014 as U.S. oil production expands and supply threats ease in the Middle East and North Africa, a separate Bloomberg survey showed. Futures will decline to $105, down from $108.70 in 2013, according to the median estimate of the seven analysts who most accurately predicted this year’s level. Prices averaged $111.68 in 2012.
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Futures were up as much as 0.3 percent and are poised to end the year higher for the fifth time. Fighting in South Sudan, which exports about 220,000 barrels a day, has killed at least 500 people and led to the evacuation of employees from India’s Oil & Natural Gas Corp. There will be no floor or electronic trading tomorrow due to the Christmas holiday.
“There is thin holiday trading today and Brent prices are being sustained by political concerns surrounding South Sudan,” Andrey Kryuchenkov, an analyst VTB Capital in London, said by phone. “We’ll wait and see how the broader market reacts to the instability there as more news trickles out.”
Brent for February settlement rose as much as 34 cents to $111.90 on the London-based ICE Futures Europe exchange and was at $111.87 as of 12:02 p.m. in London. The contract closed at $111.77 on Dec. 20, the highest in more than two weeks. The volume of all futures traded was about 74 percent below the 100-day average. Prices have increased 0.7 percent this year.
West Texas Intermediate for February delivery was up 25 cents at $99.16 in electronic trading on the New York Mercantile Exchange. Brent was at a premium of $12.73 to WTI. The spread widened yesterday for a fourth day to close at $13.
UN Secretary General Ban Ki-moon asked the Security Council for 5,500 soldiers to add to the peacekeeping mission of 7,000 already in South Sudan. The U.S. is positioning troops in the Horn of Africa region to assist in any additional evacuations, Pentagon spokesman Colonel Steve Warren said yesterday.
“As the year comes to a close, the risk of an all out civil war that could stymie the country’s production of around 250,000 barrels a day is growing,” Vienna-based researcher JBC Energy GmbH said today in a note.
WTI’s 200-day moving average is $98.88 today, according to data compiled by Bloomberg. Futures also halted a rally near this indicator two weeks ago. Sell orders tend to be clustered around technical-resistance levels.
“Crude is seeing some resistance around the 200-day moving average, and that’s giving traders a reason not to move too far away from this level,” Ric Spooner, a chief analyst at CMC Markets in Sydney, said today. “After recent gains, we are at a level where traders might be comfortable to just wait and see if the news can catch up to the prices. People in the market would want to square these long positions.”
Gasoline stockpiles stockpiles in the U.S., the world’s largest oil consumer, probably rose by 1.1 million barrels in the week ended Dec. 20, according to the median estimate of seven analysts surveyed by Bloomberg before Energy Information Administration data on Dec. 27. Supplies have climbed the previous four weeks to 220.5 million, said the EIA, the Energy Department’s statistical arm.
Crude inventories are projected to have decreased by 3 million barrels, the survey shows.
The oil production cartel, which is meeting in Vienna today, is set to keep its production target unchanged.
ON THIS TOPIC
- Opec big hitters weather US oil discount
- Oil supply The cartel’s challenge
- China car growth fuels Opec bullishness on crude demand
- Opec keeps production targets unchanged
With Brent crude, the global benchmark, hitting a two-month high of more than $113 per barrel, oil ministers from the group which spans Venezuela to Saudi Arabia have said they want to keep targeting production of 30m b/d.
In spite of the apparent consensus, this week’s meeting has seen aggressive jockeying for internal position within the cartel.
Speaking to Iranian journalists in Farsi minutes before ministers went into a closed-door meeting, Bijan Zangeneh, Iran’s oil minister, said: “Under any circumstances we will reach 4m b/d even if the price of oil falls to $20 per barrel.”
“We will not give up our rights on this issue,” Mr Zangeneh added, suggesting Opec would be able to accommodate rising Iranian production to keep prices high.
Opec pumps around a third of the world’s crude oil supplies, and as the only source of spare production capacity plays a key role in setting prices.
Brent has averaged close to $110 per barrel this year, easily above the group’s unofficial target, as production disruptions in Nigeria and Libya have offset rapidly growing US shale oil output.
Buoyed by an interim agreement on its nuclear programme ten days ago, Iran said it would raise production from around 2.8m b/d today to 4m b/d next year.
Iran’s president Hassan Rouhani is looking to pursue a foreign policy of moderation to revive deadlocked nuclear talks with the west after tough financial sanctions have brought the Islamic Republic’s economy to a standstill
Iraq, meanwhile, has also said it plans to increase production by 1m b/d next year to 4mb/d.
That would put pressure on prices, and push the cartel to respond by reining in production from other members, although both countries face significant challenges in meeting their ambitious targets: Iran faces months of tricky negotiations before sanctions could be lifted, and Iraq’s oil industry is labouring under security and infrastructure problems.
Saudi Arabia, the world’s largest oil exporter and de facto leader of the cartel, would face most pressure to cut back on production to accommodate Iran and Iraq, as the kingdom has been producing at near record levels of more than 10mb/d as production from other Opec members has faltered.
But Saudi officials have suggested Iranian and Iraqi production growth is unlikely to materialise quickly, and ahead of the meeting Ali al-Naimi, the Saudi oil minister, brushed off Iran’s aggressive stance on price:
“You are preoccupied by Iran and that is not a good preoccupation,” he said. “You know what is going to happen if the price goes to $20? You know how many countries would be out of producing, including shale oil, including Canadian sands oil, including subsalt oil. All of that will be gone.
Brent was trading down 42 cents at $112.20 a barrel by mid-morning in London.
With the WTI-Brent spread at 8-month wides, RINs having collapsed, and US investors buoyed by gas prices at the pump near recent lows, the surge in crude oil prices today – by their most since October 2nd – may take some of the ‘tax-cut’ punch from the party (remember gas prices are still 11.4% above recent seasonal norms). The 2% jump in WTI (and 1.85% rise in Brent over the last 2 days) may have only pushed it back to one-week highs but breaks a trend of lower prices that many have hoped would persist. Desk chatter is that much of this move is a re-up of middle-east premia as Iran’s nuclear negotiator says no deal today.
Bear in mind that despite the euphoria over lower gas prices, they are still 11.4% above seasonal norms of the last 5 years…
While the White House spied on Frau Merkel and Obamacare developed into a slow-moving train wreck, while Syria was saved from all-out war by the Russian bell and the Republicrats fought bitterly about the debt ceiling… something monumental happened that went unnoticed by most of the globe.
The US quietly surpassed Saudi Arabia as the biggest oil producer in the world.
You read that correctly: “The jump in output from shale plays has led to the second biggest oil boom in history,” stated Reuters on October 15. “U.S. output, which includes natural gas liquids and biofuels, has swelled 3.2 million barrels per day (bpd) since 2009, the fastest expansion in production over a four-year period since a surge in Saudi Arabia’s output from 1970-1974.”
After the initial moment of awe, pragmatic readers will surely wonder: Then why isn’t gasoline dirt-cheap in the US?
There’s indeed a good explanation why most Americans don’t drive up to the gas pump whistling a happy tune (and it has nothing to do with evil speculators). Let’s start with the demand side of this equation.
Crude oil consists of very long chains of carbon atoms. The refineries take the crude and essentially “crack” those long chains of carbon atoms into shorter chains of carbon atoms to make various petroleum products. Some of the products that are made from petroleum may surprise you.
|Top 10 Things You Didn’t Know
Use Compounds Made from Crude Oil
The United States has the largest refining capacity in the world and is still by far the largest consumer of oil in the world (though China is beginning to catch up), and its refineries require 15 million barrels of oil a day. That means even though, due to the shale revolution, domestic production has dramatically increased to about 8 million barrels, the US still has to import between 7 and 8 million barrels of expensive foreign oil a day.
Let’s take a look at who the US buys the imported oil from. (Now that I finally figured out my way around the new Windows 8—which, by the way, really sucks—I can even add some color to my tables.)
Millions of barrels
exported to US per day
Canada is blue because it is not only friendly with the US, but also has the ability to increase oil production. The other countries are red because they either have decreasing oil production, or the country is not on good terms with the US government, or the production may be at risk for various reasons. The “red countries” all sell oil to the US at higher prices than does Canada.
As I said, the US imports about 7 million barrels of oil a day, and our top 5 exporters make up between 5.6 and 6.8 million barrels while the rest is split among other countries.
This means that even though the US has significantly increased its oil production in the past five years, a good chunk of oil has to be imported at much higher prices. And higher crude oil prices for refineries means higher prices at the gas pump.
But that’s not the only issue: The “new oil” produced from the shale oil fields in the Bakken and Eagle Ford formations isn’t cheap. Both the Bakken and Eagle Ford have been hugely successful, and an average well in either region can produce over 400 barrels of oil per day.
That may sound like a lot, but drilling thousands of meters into the ground (both vertically and horizontally), then casing and fracking the well, costs millions of dollars. And the trouble doesn’t end once the well has been drilled: oil and gas production can drop as much as 50% in the first year.
Think of it as running on a treadmill—but the incline gets steeper and steeper the longer you run. That’s the current reality of America’s oil production.
Now, these areas also have to deal with declining legacy oil production (“legacy” meaning older oil wells that produced before fracking became popular) due to depletion rates. Freeze-offs, and even hurricane season can affect the legacy oil wells’ production decline.
As the old wells begin to deplete, they need to be replaced by unconventional wells with horizontal drilling and hydraulic fracturing. Even though these new wells provide an initial burst of production, they decline very quickly. That means you need to drill even more wells just to keep up—and the vicious cycle continues.
The costs, as you can imagine, are forbiddingly high. Even in known oil-rich regions like the Bakken and Eagle Ford, the all-in cost of extracting a barrel of oil from the ground can cost as much as US$75 per barrel (for comparison, Saudi Arabia can produce oil for as low as US$1 per barrel). To put it in simple terms: cheap oil in North America is a thing of the past.
So, the US produces expensive oil and relies on imports of even more expensive oil. And since the refiners need to make money as well, this means higher prices at the pumps. Who loses? The US consumer, of course.
What would help lower gas prices? Building more pipelines to deliver cheaper Canadian oil to refineries in the US and decreasing the refineries’ dependence on expensive foreign oil. Until these new and much safer pipelines are built, rail has to pick up the slack. Almost 400,000 railcars full of oil are expected to be shipped in 2013, compared with just 9,500 railcars in 2008, a whopping 41-fold increase.
But rail is not the answer. In fact, transporting oil by rail is much more dangerous than transporting it by pipeline. Just last week, we wrote about two recent accidents, one of which claimed 47 lives.
Federal and state taxes at every step of the gasoline-making progress make the pain at the pump even worse. The US government already takes more than 60% of the divisible income from every barrel of oil produced… and another 50 cents per gallon at the pump.
Then there’s the matter of Obama’s supposed “Green Revolution” and how America would be saved through the use of alternative energies. Obama wrote massive checks to different renewable energy firms that went belly-up, the most famous of them all being solar panel manufacturer Solyndra, whose bankruptcy cost American taxpayers more than $500 million. Obama is also a heavy supporter of ethanol (his home state of Illinois, after all, is the third-largest ethanol-producing state) and has increased the targets for the use of ethanol in transportation.
Someone has to pay for all of these subsidies, so why not get the dirty, evil oil companies to pay for them? Keep in mind, though, that the oil companies have enough lobbyists and lawyers to keep the government at bay—so the higher prices will be passed on to the consumers.
To sum up why the price of gasoline is so high even though the US is producing so much more oil than before:
- The high cost of American oil production
- Even higher costs due to imported (non-Canadian) oil
- Obama not allowing cheaper Canadian oil to flow to the refineries via pipelines such as the Keystone XL
- The taxes on crude are used to fund Obama’s green dream—his green-energy “legacy”—and his love for ethanol and the taxes at the pump will not decrease
So what does this mean for you, the consumer?
You have two options: You can gripe about high gas prices… or you can choose to profit from the situation, no matter how dire. If you’re the former type, so long, and I hope you enjoyed my missive today. If you’re the latter, let’s talk money.
Who am I? Well, I kinda look like this guy…
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But really, I’ve had a pretty good run. Here is my audited return since January 1, 2012 (green column on the left).
I stand by my performance and offer anyone reading this article a guarantee: if you try the Casey Energy Reporttoday and do not think that it’s the absolute best energy newsletter in the business, you get all your money back, no questions asked.
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I have lost money on investments (anyone who says they haven’t is a liar), but I made sure I learned something from every harsh experience. And overall, I’ve made much more than I’ve lost. Our energy portfolio has been delivering +50% gains since January 1, 2012.
Right now, I’m the first to publish on what I think is going to send my track record to the moon. I’m on to an investment theme that I believe has the potential to make 10-fold returns for investors who play it right. That theme is the European Energy Renaissance.
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- Oil falls below $98 on plentiful supply (kansascity.com)
- Retail gasoline prices across Texas down 2 cents (wfaa.com)
- Gasoline could fall to $3 a gallon as crude prices continue to drop (jsonline.com)
- Israel fears being left alone to counter Iran nuclear programme – FT.com (dralfoldman.com)
- Separating Politics and War From Oil and the Economy (freedomoutpost.com)
- Why Oil Prices May Remain Strong, War or No War (dailyfinance.com)