Crude Reality: Supply > Demand

Phil Davis submits: From Energyintel.com: "Oil demand growth picks up but base remains feeble!" "Contangos Peak!" What is driving these sudden downturns?

Sudden -- Ha! August Supply figures have been revised upward by over 200Kbd, showing that supply outpaced demand by 600,000 barrels a day for the entire month! September demand slipped further, and we had a build (still subject to an upward revision) of 860,000 Bpd for the month of September.

This will of course come as no surprise as we approach record U.S. inventories at the same time as 2 years of obscene oil prices have finally changed U.S. consumption habits for the better (or worse if you're trying to dump your speculative oil). Since 2003 global demand is up just .7% total with Japan, India, Europe and South Korea actually declining and only the U.S. and China increasing usage.

Global supply, on the other hand, has increased 4.8% in that same time!

What's worse for OPEC is that their position in the global marketplace is waning as other suppliers are rapidly increasing production:

There are currently 3,600 tankers in operation with an average capacity of 500,000 barrels of crude oil and a top speed of 15 knots. Assuming a fairly efficient system there are about 2,000 full tankers carrying 1B barrels of crude already at sea at any given time. If the entire gulf were to shut down production for one month and IF no other supplier could step in to fill the 30Mbd gap, it would still take 33 days for the disruption to actually be felt in the supply chain.

Tankers are already dropping rates by as much as 30% as U.S. oil supplies rise to 16% above last year's levels. We first picked up on this trend last month.

The U.S. gets just 3Mbd from the region and the loss of that oil would drain our petroleum reserves in 230 days -- again, assuming no other country were able to fill the gap and assuming no emergency measures were taken to curtail consumption.

The rampant consumption that should be of concern to OPEC is their own! Not of oil, but of goods and services which they have imported with a vengeance since 2003. Annual imports of G&S in OPEC nations has gone from just $200B in 2003 to $370B last year as oil spiked to $70 a barrel and raised revenues from $200B to $500B annually.

The question that's got them talking at the mosque: If oil prices go back below $50 a barrel, can they pull back spending fast enough to curtail a massive trade deficit, or are the OPEC nations doomed to face a Japan-like economic collapse?

What's an oil cartel to do? Why, cut production of course! Sounds like such a good idea that several countries are doing it already, but there is danger there as well. It seems that admitting they have spare capacity may be the fastest way to lower prices.

As you can see from the above chart, the last time OPEC had more than 3M barrels of spare capacity, oil was $30. And cutting back a million barrels is like a big neon sign saying there is plenty to spare -- so much so that it just isn't worth selling!

Speaking of spare capacity -- I said it way back in early August that we were facing a forced shutdown in the natural gas market and it's already hit England where gas prices fell to -.04 pence (about NEGATIVE 7 CENTS) as the grid backed up and wholesalers were begging storage facilities to take it off their hands!

In fact the whole world is now clued-in to the global glut of natural gas, and without the long hoped-for LNG (Liquified Natural-Gas) projects to suck up the supply (kind of like our SPR [Strategic Petroleum Reserve] has been for surplus oil) there is simply nowhere to put all the gas that is being produced.

Even coal is building to record levels as energy retailers at all levels have too much fuel at too high a price on hand. Drillers are feeling the pinch too.

NYMEX Energy traders are forecasted to go to work next week in 70 degree weather that will persist through the week, possibly a worst-case scenario for the upcoming inventory report!

Read all of Phil Davis's articles on Seeking Alpha.

Comments

[Polar Bear:]

You are being foolish. Have you looked at the oil production numbers ? 9 month averaga daily production is below the 2005 average. Despite substantially high prices most of 2006 so far, compared to last year. Drop in prices is partially engineered and partially due to a slowing US economy. Oil prices are going to soar. You pay a dollar for a can of water with sugar - called coke but pay just 11c a cup for something that can carry you and you family over a distance of couple of miles. How do you say that prices are obscene ? Whats your measuring yard stick ? how do you measure the value of something ?

Educate yourself - www.theviewfromthepeak...

2006 Oct 08 09:37 PM