Seeking Alpha
Profile| Send Message|
( followers)  
Last summer we pointed out various suspicious instances where incidents happened that would coincidently would boost the price of oil at critical junctures: a refinery shutdown here, a pipeline attack there, saber rattling overseas... always something.

The price of oil was on a confirmed downtrend and the Fed was ready to pause as the inflation pressure from energy seemed to be ready to subside in the long-term. The hurricane forecast was revised down to only 3 likely storms this season, and the pattern has shifted away from the Gulf while most of our platforms are now back on line from last year.

The bond market seemed very sure of themselves, with rates dropping down below 5% across the board - remember when an inversion spelled doom? I don't agree with the logic but it seems to me that Treasury traders are making a big bet that oil (the main inflation driver) is peaking.

While I am a big oil bear for a variety of reasons, I think there are too many overriding global and US economic issues to believe that you can lend money 5 years out at 5%.

I'm starting to think that the refiners are purposely dogging it on restarting plants to keep the prices up as you can't tell me it takes a year to get back to full strength. Also, if refinery utilization is below last year's levels, how can oil consumption be higher? I don't have any unrefined crude in my house, do you? Inventories are at a 7 year high and, despite all the warnings, the supply just keeps coming (check the tanker traffic).

I have already mentioned that we face a forced shutdown of natural gas production in October as there simply is no room to store more gas in the US. While no one is projecting that oil will hit that kind of top, inventories are at a 5 year high during this peak usage season.

So today's "spill" (it was reported to be 5 barrels of oil) in Alaska and the shutdown by BP (and XOM, COP & CVX) of 500,000 barrels a day of production just seems a little suspicious in its timing. BP are the guys who are currently being investigated for blatantly manipulating the propane market in 2004. It is also interesting that, just one month ago, Alaska's Liberal Press organization (Alaska's "other" paper that was critical of Big Oil) was purchased by conglomerate Wick Communications.

Let's not even talk about the fact that Lord John Browne, the head of BP, just happened to make a very rare visit to this Alaskan site on Friday!

You will hear that 8% of US production is off-line but that only represents .5% of global production and the shutdown is likely to be very short-term. As with many things, the initial reaction is likely to be an overreaction as the real story in oil continues to be the supply/demand picture.

BP also had a 6,400 barrel spill on March 13th (also a Monday) which also arrested an 8% drop in oil from $64 to $59 the previous week. The price shot up to $65.55 for a week before pulling back to $61.25 on the following Monday.

Now I know when you hear "pipeline" you think of some massive structure that must be very difficult to support and maintain as it must be one of the great engineering feats of the 21st Century, so it's easy to imagine how hard it must be to fix. Well here's a picture:


Scary isn't it?

While forecasts for consumption continue to be ratcheted up and T Boone Pickens is screaming "peak oil" on every channel that will have him on, the numbers are starting to tell a different story. Year over year growth in demand is falling rapidly in all categories and we haven't even begun to see the effects of cutbacks in home heating/cooling, SUV driving and industrial use that will hit the trend watchers in the fall. Here is a useful site to stay ahead of the BS the oil bulls are trying to sell you so they can dump out of their positions on top.

Have we reached peak production? Not if you count Canadian oil sands which can be turned into oil very profitably at $50 per barrel. Then there's coal and natural gas, two other things we have plenty of and don't forget nuclear. At $20 a barrel this country voluntarily took itself off coal and nuclear energy but at $50 a barrel we may begin to rethink that stance. Then there's always the dreaded (and buried) renewable energy market (.pdf).

Global demand for oil was 79.3M barrels a day in 2003 and was 83.3Mbd last quarter, down from 84.9Mbd in Q1 and I can tell you that number is not going up next quarter at $70+ per barrel! Supply, on the other hand was 79.8Mbd (.5Mbd surplus) in 2003 and is now 85.1Mbd (1.9Mbd surplus). So please, when you hear all these "analysts" spouting off opinions or read the bloggers telling you how precarious our position is - send them this (.pdf).

Remember, the supply numbers are real and are increasing rapidly, the demand numbers are extrapolated to increase at levels any economist will tell you is unsustainable at these prices. If there were no alternatives to oil, it would be possible for demand to continue to grow but demand for oil was based on $30/barrel pricing which led to large scale use projects to be approved in 2004 that no longer seem like a very good idea.

The SUV explosion in this country is a craze that was driven by low oil prices as was energy wasteful home and commercial building projects (giant lobbies, excessive windows, cheaper (leaky) materials). All this stuff takes time to change but it's happening already and once demand destruction begins, it will be very hard to give consumers confidence that it's OK to buy a gas guzzler again.

So the long-term supply picture ignores the fact that there are 3 Trillion barrels of oil shale up in Canada (forecasts typically rely on getting just 4M barrels a day from Canada by 2030, despite what Suncor may tell its investors) and assume that coal and nuclear consumption will remain flat.

Demand forecasts assume that the US drivers will continue to average just 21 mpg even though European drivers have been at 35 mpg since 2003. There is also the assumption that the world economy will continue expanding at this breakneck pace no matter what they charge for a barrel of oil.

This is why the long rates are heading down. In the long run, all lies are revealed and the oil lie of the past 24 months is one of the biggest ever told. I'm just not so sure how fast it will come undone as the "shortage" has moved from rumor to common knowledge in record time thanks to the incredible spin that has been placed on it by an unprecedented cooperation of Big Oil, OPEC, and our own government, which happens to be run by two oil men...

Source: Today's BP Spill: Timed To Keep Oil Prices Up?