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  • Energy Sector Trends Paint "A Very Alarming Picture"


    Energy Sector Trends Paint "A Very Alarming Picture"

    Oil could reach as high as $200 by the third or fourth quarters of this year

    by Joseph Dancy, LSGI Venture Fund, Adjunct Professor of Energy Law, SMU School of Law

    While energy demand may be tempered by a slowdown in global economic growth, longer term growing energy demands and supply constraints will continue to present incredible challenges. Much more capital will need to be allocated to the sector to address supply issues, which should create opportunities for investors. We noted the following developments in the energy sector last month:
    • The concept of 'peak oil' has been derided by the big oil companies for years, but last week the chief executive of the oil giant Royal Dutch Shell, Jeroen van der Veer, released a study forecasting the end of easy oil. Dr. Jim Buckee, retired president and chief executive of major independent Talisman Energy, claims he was not surprised that Royal Dutch Shell admitted oil supplies were getting tighter. Dr. Buckee says 'peak oil' is either here, or very close. "It is the underlying decline of the world's major fields that is the dominant driving factor here," he said.
    "If you think that at the moment the world is consuming 30-plus billion barrels a year of oil and is finding seven or eight billion barrels a year, and this state of affairs has been going on now for 20 or more years. . . It's obviously unsustainable and the world is increasingly drawing on the bigger, older fields. You couple that notion with the irreversibility of decline and you've got a very alarming picture."
    Dr. Buckee says the cost of a barrel of oil could reach as high as $200 by the third or fourth quarters of this year, and that prices would have to get that high before it would have any particular impact on demand. "I don't think that really we've seen any rationing of consumption by price," he said. Source: (ABC Premium News (Australia))
    • Oil at $100 a barrel gives exporters an incentive to pump more, but their difficulty in doing so indicates the world is struggling to sustain production. A growing number of leading industry figures, including the CEO’s of Total and ConocoPhillips, now question mainstream forecasts for supply. They suggest the era of "plateau oil" is nearer than many in the business have admitted.
    Some argue it may not be possible to boost flows beyond the current rate of 86 million barrels per day (bpd). Conventional supply from non-OPEC producers have missed forecasts in recent years and appear for now to have hit an "effective plateau", according to the International Energy Agency (IEA), adviser to industrialized countries. (Reuters)
    • Global demand for oil is likely to grow by about 1.4 million barrels a day in 2008 according to forecasts by Lehman Brothers. Current global demand is roughly 86 million barrels per day. Some experts predict lower economic growth will reduce demand. Lawrence J. Goldstein, an economist at the Energy Policy Research Foundation, expects global demand to grow by less than a million barrels a day in 2008 due to slowing economic growth. (New York Times)
    • Nigeria has warned energy companies it wants to renegotiate oil and gas exploration and production contracts covering offshore oilfields in the next three months, claiming record prices are yielding a windfall to Western oil firms operating in that region. It is the first time Nigeria has come up with a timeframe for renegotiating the complex agreements. The government signaled late last year it would review the contracts in an effort to secure a greater share of profits from offshore production.
    The Nigerian move reinforces a global trend of oil-exporting countries demanding better concession terms to reflect surging prices. Oil executives say the government's decision to follow the example of countries such as Russia, Algeria and Venezuela. Militant violence in Nigeria has shut in a fifth of output since 2006. (Financial Times)

    Royal Dutch Shell, the largest foreign company in the strife-torn Niger River Delta, said it would take a $716 million charge against earnings due to the deteriorating security situation. Industry sources say that in addition to the production shutdown about 435 miles of pipeline and thousands of barrels a day of crude oil and condensates have been stolen. Much of the pipeline has been used for pillars in house construction. Nigeria's government is also not paying its share of joint-venture investments in the Shell venture, claiming it cannot fund its portion. Nigeria has budgeted only $5 billion of the $9 billion it was supposed to invest in the Shell operated project in 2008.

    Nigeria is one of the major OPEC exporters of light, sweet crude oil, so any disruptions in supply will quickly impact world markets. (Washington Post, BusinessWeek)
    • With oil markets booming Gulf states will enjoy a staggering, unprecedented increase in wealth over the next decade that will give them vast financial power across the globe. By one estimate, the five oil-and-gas-exporting nations – Saudi Arabia, United Arab Emirates, Kuwait, Qatar and Oman, with a combined population of 23 million citizens – will add $6.2-trillion (U.S.) to their revenues over the next 14 years. That's roughly the equivalent of adding Canada's total annual output to their revenues every two years. Those estimates assume oil prices of $70 per barrel. The producer’s revenues would increase at higher average selling prices.
    • The International Energy Agency (IEA), a state-backed oil watchdog for industrialized countries, attributed recent record oil prices to pressures caused by strong demand and falling stock levels. In its monthly oil market report for January, the IEA forecast demand in 2008 of 87.8 million barrels per day (bpd), an increase of 2.3 percent, or 2 million bpd from 2007 levels. (AFP)
    • Average gasoline demand last month was 7 percent higher compared to the same week last year, even with prices 30% higher, according to a MasterCard report.
    China is set to become the world's largest consumer of energy by about 2010 according to a study by the International Energy Agency (IEA). The World Energy Outlook report predicts that China will overtake the US in its energy use.
    The Chinese economy has expanded by 11.4% over the past year, reaching its fastest growth rate in 13 years. The Chinese economy is very energy inefficient. It takes more than four times as much energy to generate a unit of GNP in China than in does in the U.S. according to a recent study published by Gordon Feller (chart at right).
    • China's crude oil imports rose 12.4 percent in 2007 to a new record. Crude oil imports for 2006 increased 16.9 percent from the previous year. (Xinhua)
    • China is facing widespread, temporary electric power shortages that could affect global energy markets if they aren't resolved soon. The distribution system is having trouble keeping up with the country's rising demand for electricity. Regulators said yesterday that 13 provinces and major regions, including the industrial-and-export hub of Guangdong in the south, will experience a total shortfall of about 70 gigawatts of electricity - one-tenth of China's total. Coal stockpiles have fallen to less than half typical levels, analysts said. (Wall Street Journal)
    China’s Prime Minister Wen Jiabao responded to growing public anxiety about inflation by announcing that China would freeze energy prices in the near term, even as international crude oil futures have continued to surge. Inflation has hit an 11-year high in China.
    • Crude oil production in Mexico's huge Cantarell oil field will continue to decline this year at around the same pace as in 2007, Pemex announced. Average daily production at Cantarell is forecast to drop by 200,000 barrels in 2008, increasing pressure on the state-owned oil monopoly to ramp up output at smaller oil fields.
    The decrease in production would be a drop of 16 percent from Cantarell's December 2007 output of 1.26 million barrels per day (bpd), its lowest level of the year. Yields at Cantarell declined 16 percent during 2007, slightly more than forecast. Pemex aims to keep its total crude output at around 3.1 million bpd by increasing production at other fields. Total Mexican output in 2007 declined by 5.3 percent. (Reuters)
    • The Energy Information Administration reported a record-high 274 Bcf natural gas draw from storage for the week ended January 25th. The five-year average draw is 185 Bcf. The draw from storage surpassed the previous record-high withdrawal of 260 Bcf (in January 1997) and comes on the back of powerful heating degree days that were 21% above normal.
    Low nuclear utilization is one reason for the strong incremental gas demand. Imports from Canada are also lagging. For the month the draw was 659 Bcf compared to a five year average draw of 580 Bcf. Working gas in storage now totals 4% above the five-year average and 13% below last year’s levels.

    Depending on the weather the next couple of months the volumetric draw from storage could be the largest we have ever seen. The chart at right from AmericanOilman.com tells the story. From a five year high (blue line) in week 49 of 2007 we have fallen quickly (yellow line) in 2008.

    If trends continue we will need to inject much more natural gas into storage this spring and summer than we did in 2007, which should help keep prices firm.
    • Before 2010, the price for a thousand cubic feet of natural gas will be $10 per thousand cubic feet, T. Boone Pickens predicted at a presentation last month. Crude oil prices will reach $100 a barrel again before the end of 2008. "We are importing 62 percent of our oil now, and the two largest producers are Saudi Arabia and Russia,” Pickens said. "And the two largest consumers of oil are ourselves and China. . . We have kind of got ourselves in a bit of a spot that is going to get even more uncomfortable.” (NewsOK.com)

    The latest production figures published on theOilDrum.com website indicate that liquids production has jumped upward the last few months after more than two years of flat production. ‘Liquids’ includes both crude oil and natural gas liquids. Data is from the Energy Information Administration (red line) and the International Energy Agency (blue line), both credible sources.
    If 2008 global demand forecasts of nearly 88 million barrels per day are correct, even the spike in production will not meet the growing demand. In that case demand would have to be met by draw-downs in inventories. Or supplies would need to be rationed by higher prices.
    • While OPEC decided against expanding output in a meeting last month, some oil traders say that OPEC members such as Saudi Arabia, United Arab Emirates and Angola have allegedly added around one million barrels a day to world supply since early last fall. If so, this spare capacity will assist in meeting growing demand and natural resource depletion rates inherent in many of the older fields. (Wall Street Journal)
    We think the supply and demand trends in the energy sector are long term issues, and that they present very attractive opportunities for investors.

    Joseph Dancy
    LSGI Venture Fund
    Adjunct Professor of Energy Law, SMU School of Law
    February 23, 2008

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    Last edited by FRED; 02-23-08, 06:13 PM.
    Ed.

  • #2
    Re: Energy Sector Trends Paint "A Very Alarming Picture"

    kudos to lukester for his interest and perseverance in making the above post not-so-much news but confirmation.

    Comment


    • #3
      Re: Energy Sector Trends Paint "A Very Alarming Picture"

      OIL PRICES WILL CRASH DOWN TO $40 A BARREL. IT'S JUST A MATTER OF TIME! WHY? ... BECAUSE, WE'LL HAVE A GLOBAL DEFLATIONARY VORTEX OF CATACLYSMIC PROPORTIONS. ELLIOTT WAVE HAS ACCURATELY FORECAST IT (FOR A FULL DECADE)!!! PRECHTER KNOWS HOW TO ASTUTELY READ THE SOCIONOMIC MOOD! [TM]. WHEN YOU CAN READ THE SOCIONOMIC MOOD, EVERYTHING IS REVEALED AS PLAIN AS DAY!

      YOU MUST INSTEAD BEWARE OF DA 'FLATION! (A unique patented EWI product - which changes meaning, in smooth and uninterrupted fashion, with each season - neat!)

      YOU TOO CAN RIDE ALL THE ACTIONABLE TRENDS - WITH US! ... JOIN ELLIOTT WAVE INTERNATIONAL - BE THE CHANGE!!!




      Last edited by Contemptuous; 02-24-08, 08:58 PM.

      Comment


      • #4
        Re: Energy Sector Trends Paint "A Very Alarming Picture"

        I hope that was posted in a fit of sarcasm! ;)

        Comment


        • #5
          Re: Energy Sector Trends Paint "A Very Alarming Picture"

          Originally posted by Lukester View Post
          Lukester (a.k.a. Robert R. Prechter Jr.),

          Your cover's blown! All further references to elliottwave.com will now be redirected to VancouverGoinUp.com, as per iTulip's one-strike spamming policy.

          Comment


          • #6
            Re: Energy Sector Trends Paint "A Very Alarming Picture"

            Ah, c'mon Rajiv. I was just getting warmed up for my "Elliott Wave Vaudeville" routine, and you have to puncture the mood?

            You know as well as I do that "Socionomics" is a very delicate construct. It does not react well to skepticism and it really wilts under critique! The only way people are going to "get Socionomics" and the imminent plunge of all inflationary signals is if we permit the general suspension of disbelief here.

            The problem is, iTulip readers like you are far too JAUNDICED and CYNICAL in your general outlook to grasp the subtelties Prechter is (droning) on about.

            Comment


            • #7
              Re: Energy Sector Trends Paint "A Very Alarming Picture"

              Originally posted by jimmygu3 View Post
              Lukester (a.k.a. Robert R. Prechter Jr.),

              Your cover's blown! All further references to elliottwave.com will now be redirected to VancouverGoinUp.com, as per iTulip's one-strike spamming policy.

              AAARRGGHH!! BWAAAAA!!

              Comment


              • #8
                Re: Energy Sector Trends Paint "A Very Alarming Picture"

                Originally posted by Lukester View Post
                AAARRGGHH!! BWAAAAA!!
                Seriously, what happens to other commodity prices if oil goes to $200?

                Back in Sept. 2005 the folks over at Resource Investor made the following gold price forecast if oil went to $100:

                "Looking ahead to a possible $100/bbl spike, the “new era” ratio of 8.72bbl/oz would imply a gold price of $872/oz. At the long-term average, $100/bbl implies a gold price of $1,744/oz."

                The historical relationship between the gold and oil price, as both are correlated to the money supply and dollar exchange rate value, have not held at least so far. If the ratio reverts to the mean, we can expect gold prices of $3,500 or higher if oil goes to $200.

                Joe Dancy has sent us another article that we will print this coming week titled "Experts: Global Food Shortages Could ‘Continue for Decades’ " that suggests that, as Jim Rogers has been telling us for years, the real money is to be made in agricultural commodities. He says, for example:
                From 1961 to 1970, the price of crude oil was static at about $1.80 per barrel. Based on the quality of wheat produced in Saskatchewan during that 10-year period, average price received by farmers was $1.58 a bushel.

                A barrel of oil and a bushel of wheat were about the same value back in the 1960’s. Today wheat might surpass $8 a bushel for this crop year, but a barrel of oil sells for around $90. A bushel of wheat has gone from being on par with a barrel of oil to being worth less than a tenth as much. (Star Phoenix (Canada))
                Ed.

                Comment


                • #9
                  Re: Energy Sector Trends Paint "A Very Alarming Picture"

                  Originally posted by FRED View Post
                  ... Seriously, what happens to other commodity prices if oil goes to $200?
                  Hey! That's MY HOBBYHORSE you just climbed onto!

                  Seriously Fred - this is the single issue I've been nagging on about for a year now. If this is the inevitable path of oil prices, a whole host of investment ideas pop up - appearing in a whole new light today all over again, in terms of valuation underpinnings. As you note, compared to the oil price itself, these other commodity inflation proxies start to look very attractively priced all over again today, despite their seven year run-up. Petroleum's projected future price trajectory shifts the valuation of everything requiring energy to produce in the next five years - sharply upwards.

                  I'm curious also to read iTulip analysis of how a constantly ramping oil price may have large implications for inflation bias upon global monetary aggregates. This is the area, global commodities in a screaming uptrend, where Elliott Wave's host of "gurus" begin to appear like real dolts. Genuine resource depletion in the early 21st Century, vs. exponential population and GDP growth explosions in half the world. Prechter must be smoking crack not to understand how it shifts the entire inflation > deflation debate.

                  Armed with a high degree of certainty about the future price of oil, Roger's RICI fund, or agricultural soft commodities, or Gold and Silver, or the future cost of mining all raw materials - these all start to appear as still cheap. If the cyclical paradigm of oil prices is plausibly really broken this time around (until we roll out a new energy source worldwide, which is a massive logistical undertaking - e.g. 50 trillion dollars to re-tool the world!), this shines a spotlight on all the lagging commodities which are linked historically to oil prices.

                  I've been waiting for iTulip to start parsing the implications of this for a long time! This BTW is why I would be skeptical of the slightest dimming of Russian power in upcoming years. I think countries like Russia and Canada / Australia will go from strength to strength. Canadians will definitely be "looking down their noses" at us poor Americans in another 20 years. Fancy that! Scorn and condescension, from our Canadian cousins (after all we've done for them over the years!)! :eek:



                  (future Canadian Natural Resource Czars, expressing scorn and
                  condescension, while looking southwards)
                  __________________________________________________
                  Last edited by Contemptuous; 02-24-08, 11:52 AM.

                  Comment


                  • #10
                    Re: Energy Sector Trends Paint "A Very Alarming Picture"

                    Originally posted by FRED View Post
                    Joe Dancy has sent us another article that we will print this coming week titled "Experts: Global Food Shortages Could ‘Continue for Decades’ " that suggests that, as Jim Rogers has been telling us for years, the real money is to be made in agricultural commodities.
                    Fred, i don't want to be seen to be stealing ITulip's thunder but the Dancy article was published here at FinancialSense recently.

                    http://www.financialsense.com/fsu/ed...2008/0222.html

                    Comment


                    • #11
                      Re: Energy Sector Trends Paint "A Very Alarming Picture"

                      Originally posted by jimmygu3 View Post
                      All further references to elliottwave.com will now be redirected to VancouverGoinUp.com....
                      i literally laughed out loud. thanks for that.

                      more seriously, i think we have to careful about deductions like "once upon a time a bushel of wheat cost the same as a barrel of oil, so therefore...." while oil seems to be getting harder to come by, agriculture has had a revolution in fertility, powered in part by hydrocarbon based fertilizers, i know, but more recently also by genetic modification. another key input into food is water! china has a very low availability of fresh water per capita compared to other countries, so grain exports to china are also implicit water exports to china. let's be careful about conclusions based on simple historical relationships; we must understand what forces underlie these historical relationships to see to what extent they still apply.

                      Comment


                      • #12
                        Re: Energy Sector Trends Paint "A Very Alarming Picture"

                        Originally posted by FRED View Post
                        Seriously, what happens to other commodity prices if oil goes to $200?

                        Back in Sept. 2005 the folks over at Resource Investor made the following gold price forecast if oil went to $100:

                        "Looking ahead to a possible $100/bbl spike, the “new era” ratio of 8.72bbl/oz would imply a gold price of $872/oz. At the long-term average, $100/bbl implies a gold price of $1,744/oz."

                        The historical relationship between the gold and oil price, as both are correlated to the money supply and dollar exchange rate value, have not held at least so far. If the ratio reverts to the mean, we can expect gold prices of $3,500 or higher if oil goes to $200.

                        Joe Dancy has sent us another article that we will print this coming week titled "Experts: Global Food Shortages Could ‘Continue for Decades’ " that suggests that, as Jim Rogers has been telling us for years, the real money is to be made in agricultural commodities. ...
                        Happened across this yesterday:

                        ...It is also important to stress that not all agricultural stock groups are the same. In fact, there exists a hierarchy of order in which investors should be aware of when placing funds into this sector.

                        The order goes like this; fertilizer producers first, seed and crop growers second and then machinery builders hold a tertiary position. As stated earlier, food producers do not count as having exposure to rising agricultural prices as they clearly show a negative correlation due to higher input costs....
                        Personally, I'd be more inclined to buy into Rogers agricultural commodities index via RJA, but it's interesting to see the hierarchy of recent returns for companies involved in different parts of the process (click the link for more on that). It surprises me a little that the fertilizer producers have been so profitable, considering that petroleum is such a major component of fertilizers and so their costs must be increasing. Apparently they have been more successful at passing those costs on to food producers than the food companies have been passing on again to consumers.

                        Comment


                        • #13
                          Re: Energy Sector Trends Paint "A Very Alarming Picture"

                          Originally posted by zoog View Post
                          Happened across this yesterday:

                          Personally, I'd be more inclined to buy into Rogers agricultural commodities index via RJA, but it's interesting to see the hierarchy of recent returns for companies involved in different parts of the process (click the link for more on that). It surprises me a little that the fertilizer producers have been so profitable, considering that petroleum is such a major component of fertilizers and so their costs must be increasing. Apparently they have been more successful at passing those costs on to food producers than the food companies have been passing on again to consumers.
                          Speaking of passing on costs, wine drinkers in the US can expect large price hikes in March and April for European imports. How much? If you like premium Champagne, for example, and are paying $45 today you can expect to pay the range of $60 shortly.

                          Comment


                          • #14
                            Re: Energy Sector Trends Paint "A Very Alarming Picture"

                            Originally posted by EJ View Post
                            Speaking of passing on costs, wine drinkers in the US can expect large price hikes in March and April for European imports. How much? If you like premium Champagne, for example, and are paying $45 today you can expect to pay the range of $60 shortly.
                            shit! tomorrow i sell an oz of gold to buy cases of taittinger and moet!

                            Comment


                            • #15
                              Re: Energy Sector Trends Paint "A Very Alarming Picture"

                              One thing I can't quite understand is why the Bush presidency would add to inflationary pressures on the price of agricultural commodities with their biofuel subsidies. Are these subsidies just a simple political sop to corn belt politicians and their constituents?

                              That seems too narrow a view to be the whole answer to me. I keep asking, what else would they have to gain with these policies? Especially if they know that dollar deflation policies would put a ton of pressure on them politically anyway because of their inherent inflationary effects on commodity prices. It's a double whammy that makes no sense.

                              Tinfoil hat theories anyone? I keep coming up with the fact that they must WANT commodity prices to soar but why? To take more money from the lower classes around the globe including the US where food costs make up a significant portion of income? To put political pressure on countries that are worried that their people might revolt due to the high prices? Can't you see some countries in private begging the US to reverse their biofuel subsidies for these reasons?

                              But hey, I really don't know squat when it comes down to it and am just barely trying to hang on with most of the conversations here, so someone sort this out for me please.

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