January 2011 Archives

In homage to prolific mystery novelist Erle Stanley Gardner, we can call this one The Case of the Ephemeral Endorsement, given its quick vanishing act.

In fact, a good case could be made to call it the Non-Existent Endorsement, since spokespeople for the supposed endorsee claimed no such backing was ever given.

Chinese President Hu Jintao took his political roadshow to the United States from January 18-21 with a state visit, during which he preached to US President Barack Obama and the country on building a cooperative Sino-US partnership based on mutual respect and mutual benefit.

Hu was pressed hard on Beijing's human rights and currency policy, but the Chinese president appears to have weathered all the scrutiny left after successfully ratcheting up business ties.

G'Day USA--the slogan at a recent energy conference that was part of the Australia Week event--sounds catchy, but the real greeting there Friday was more like G'Day Asia-Pacific.

Australia and the US will of course continue to swap energy investment and technology. But energy demand, expected to skyrocket in the developing Asian economies on Australia's doorstep, is the real eye-opener.

If the NYMEX light sweet crude oil contract is dying, and is irrelevant because its Cushing delivery point is drowning in oil that can't move to the US Gulf refining centers, it has a strange way of showing it. Open interest at this point is slightly more than it was at the beginning of 2010.

But that doesn't cover up the bewilderment that the oil industry is expressing at the Brent/WTI spread, which on Wednesday climbed above $11 before falling back slightly. Still, Brent was a little more than $2 over WTI in early December, and now it's double digits. This is a relationship that for years, when Brent exceeded WTI, it was newsworthy. Now the only thing newsworthy about it is the double-digit size of Brent's premium to the Cushing-based barrel.

This week's report from the Energy Information Administration on oil inventories caught the market a bit by surprise, showing a big jump when a much smaller gain was anticipated. You can see our analysis here.

Didn't seem to matter to the price today; WTI was up about $1.25/b while Brent rose about $2.70.

Angola has just chosen its partners for its next major challenge: exploring its pre-salt fields.

With the exception of Cobalt International Energy, state-owned oil company Sonangol's partner in the Gulf of Mexico, the other companies are all majors and include Total, Eni, ExxonMobil, Chevron, Statoil and ConocoPhillips.

Despite all the uncertainty and hand-wringing about the Macondo drilling moratorium, at least 14 deepwater Gulf of Mexico projects appear on track for launch in 2011, with the potential to add more than 168,000 b/d of new oil production.

That scorecard comes from this year's annual Platts review of projects moving through the pipeline toward first production.

Platts' monthly survey of Chinese oil demand can be found here, and it is more of the same: still hanging in at a per annum rate of increase in excess of 18%.

In its recent monthly report, the International Energy Agency said China would see its demand rise 5% to 9.79 million b/d in 2011 from 9.34 million b/d in 2010. There's a big difference between 5% and 18%. There's also a big difference between 5% and 7%, and the latter figure if what Chinese demand rose just from November to December. So for that 5% target to be hit, the rate of growth is going to have to slow by a tremendous amount.

Not surprisingly, environmental lobby group Greenpeace was quick to condemn this week's award to BP of four new petroleum exploration permits off Australia's southern coast, even going so far as to label the move "some kind of sick joke."

UK oil major BP is being singled out for its role presiding over last year's Macondo oil spill disaster in the Gulf of Mexico, particularly given the recent findings of the US Oil Spill Commission that the incident was the result of systemic industry problems and a "failure of management" by the companies involved. But Australian environmental groups are also particularly wary of offshore drilling after watching a well at the Montara field spill oil into the Timor Sea off Western Australia for 10 weeks in 2009.

The International Energy Agency on January 18 made a big upward revision to its estimate of world oil demand in 2011, even as its oil market projections came under attack from OPEC.

The Keystone XL pipeline was announced in the middle of 2008, and it's highly unlikely anybody saw this coming.

"This" is the controversy that the line has created. The Macondo spill certainly fanned the flames, but even before that, environmentalists targeted the line as a "fightable" representation of something they very much object to: the production of petroleum from Canada's oil sands.

An entertaining article has recently circulated on the Internet titled, "Things Babies Born in 2011 Will Never Know." It lists products, customs, ideas and other items that just about everyone over the age of 10 knows or remembers but are fast disappearing, and are presumed to be entirely out of use by the time 2011 newborns reach the Age of Reason.

Among them: videotape, wired phones, encyclopedias and film cameras. Your grandkids may look at you in disbelief when you tell them that you actually had to visit a library or talk to an old-timer to find out, for example, who "Red" Adair was. (For all you newbies, Red Adair was a legendary oil well firefighter.)

Republican Mark Grisanti, a newcomer who defeated Democrat Antoine Thompson for a New York State Senate seat in November, will take over a key committee chairmanship from his former opponent.

The Buffalo News reported this week that Grisanti, a freshman from Erie County, was appointed by Dean Skelos, the new Senate majority leader, to chair the Senate Environmental Conservation Committee. The election flipped control of the Senate to the GOP.

On January 13, a member of the US Commodity Futures Trading Commission issued a statement that may be the first clarification of a clarification of a statement following up on remarks that had been given roughly a month earlier.

Sadly, all of these statements were an attempt to clear up confusion. So how did we get here?

Bankrupt US onshore explorer TXCO Resources has joined the ranks of Nikola Tesla, John Pemberton, Elias Howe and other forward-looking innovators with brilliant ideas which, for  whatever reasons, never adequately rewarded them--but which others later developed and handsomely turned into enormous profits. 

Those 19th century inventors were unable to realize the full potential of their products due to proprietary agreements, intellectual property theft or failure to foresee the true value of their inventions. But TXCO's bane was lack of capital, and bad timing.

For the first time in several weeks, US product inventories declined. That's the key number in this week's Energy Information Agency weekly statistical report.

There is a tendency for the average person to think that petroleum demand is highest during the summer months, for driving season, or during the first months of the year, when the northern hemisphere needs to heat itself. Not true; it's the fourth quarter of the year. So as Platts' Linda Rafield noted, the drop in demand for the past week, though slight, is keeping with traditional demand ups and downs.

You can see Linda's commentary here.  

OPEC's final meeting of 2010, its 50th anniversary year, resulted in yet another rollover of a crude production target that has been in place for two years and which bears no resemblance to actual output.

In a way, the official target is meaningless and those analysts and journalists who follow the oil producer group closely know this. But the point of continuing with a 24.845 million b/d target for 11 of OPEC's 12 members when actual output is some 2 million b/d higher must puzzle those in the wider world.

Oil rig drilling in the US is climbing into the stratosphere while hitting another new high, while horizontal drilling for both oil and natural gas has become not only the preferred drilling direction but broke usage records last week, according to the venerable Baker Hughes rig count.

The weekly count, which has kept track of the split between rigs drilling for oil versus natural gas since July 1987, posted an oil rig peak -- at least for most of the time that Baker has kept records -- of 764 for the week ended December 11 of that year. 

In the 23 years since, that number was only exceeded three times -- first, during the week ended December 22, 2010 when it jumped to 771 oil rigs (because of the Christmas holiday, the data was released earlier than normal), and then again the following week ending December 30, 2010 when it hit 765 rigs. (See this December 30 blog entry.)

Platts' monthly survey of OPEC output, which can be found here, showed a significant increase in December compared to November. Saudi Arabia increased its output; so did Iran and Iraq. Even Venezuela showed a slight upturn.

Given the tight supply/demand balance at present, with OPEC output up until recently at levels less than the OPEC call -- the amount of OPEC production needed to keep inventories flat -- this higher output will prove to be welcome news for consumers.

The newly elected Republican majority in the US House of Representatives is poised to sharply curtail the Environmental Protection Agency's ability to issue new environmental regulations and enforce existing rules.

The anti-regulatory fervor is reminiscent of Republican efforts in the mid-1990s, spearheaded by former Representative Tom DeLay, Republican-Texas, who, to his everlasting shame, called EPA the "Gestapo of government."  In private life, DeLay owned an exterminating business and reportedly ran for office because of his anger over EPA regulation of DDT.

Opportunities in the oil & gas upstream sector are said to be terrific right now. In Pennsylvania alone, tens of thousands of jobs have been created puncturing holes in the Marcellus Shale and extracting natural gas. In Williston, North Dakota, center of the Bakken formation, housing is tremendously tight because the surge of workers is outpacing the ability to put roofs over their head.

Must be a great job, huh?

Not according to this survey.

The Macondo blowout in the Gulf of Mexico unleashed existing ire against BP in the region stemming from its 2005 Texas City refinery disaster, as well as some doses of sanctimony from others in the oil industry that it would not of happened but for a BP problem.

But, the National Oil Spill Commission, at least on January 5 in an initial chapter of a pending report, seems to lack such seething criticism of BP alone. Rather, Obama's spill commission finds the root causes are "systemic" and could happen again within the industry.

The spread between Brent and WTI always has been a key industry benchmark. Traditionally, WTI was more than Brent, but this is no longer the case. In fact, WTI has now declined to about $5/b less than Brent, a tremendously wide gap.

It's not hard to figure out why. Given the continued increase of Canadian oil sands output, as well as North Dakota crude production, and the increase in available storage at Cushing, Oklahoma, the delivery point of the New York Mercantile Exchange crude contract, WTI's values have sunk. It's discussed by Platts' senior analyst Linda Rafield in this week's review of the weekly American Petroleum Institute and Energy Information Agency statistics.

It was said in 2008, when oil prices reached their all-time high, that the only countries that showed an increase in oil consumption that year were those that capped prices or subsidized them to some degree. With prices rising again, though still a long way from the 2008 peak, those subisidies are once again becoming an issue in many countries.