Oil to $60.....by January?

[GRG55]

Re: Oil down to low of $88.67

Who knows what will happen in these crazy economic times we're experiencing. (Talk of "panic" and Dow Futures down 400 for tomorrow.) It helps that Pres. Bush and Energy Secretary Bodman are "talking the talk". Now, if they would just "walk the walk" and sell a few barrels from the SPR, I'd be in business. I'll give a little stretch to January and take 60 by Feb. 14, when my March puts expire.

Good luck with the trade! Shorting oil on the bounce after the first top and pullback, the second time it hit $100 and failed, seemed like a decent trade at the time for those with the talent and temperament (I don't qualify on either count).

What will be interesting is how it reacts over the next couple of years to the inevitable shovelling of mass quantities of US$ off the back of the truck (or out of BB's helicopter) in this election year.

[Gordo]

500,000 bpd decrease in global refinery output

Japan refinery output down 3.3% or 163,000 bpd since Jan 1. Japan is the 3rd largest oil consumer in the world, at 4.9 mbpd. China is 2nd largest at 6.9 mbpd and US leads at 20.2 mbpd. Global oil demand is about 86.5 mbpd.
If global demand decreases the same as Japan, 3.3%, (not unreasonable to presume) that would be a total decrease of 2.85 mbpd. If Saudi Arabia increases its production by its reserves of 2 mbpd on Feb 1 (not unreasonable since GWB requested a substantial increase) that would be the equivalent of a total of 4.85 mbpd in extra capacity through decrease in demand and increase in production or about 5.4% of the 88.5 mbpd global production, after the Saudi increase. This 5.4% increase in capacity is functionally the same as a 5.4% decrease in global demand. A 5% decrease in global demand can result in a 50% reduction in prices as occurred in 1999.

TOKYO, Jan 25 (Reuters) - Japan's top refiner Nippon Oil
Corp will extend production curbs into February, it said on
Friday, while Idemitsu Kosan Co will also scale back runs due
to weak winter demand, adding to a global slow-down in refinery
output.

The curbs will reduce their planned February productionlevels by about 63,000 barrels per day (bpd) versus initialestimates, about 1.3 percent of total capacity in the world'sthird-largest consumer, where warm weather has reduced seasonaldemand and weak global margins have made exports unappealing.
That follows cuts of more than 100,000 bpd in Januaryproduction for five refiners, although total global run cutsmay be five times that amid signs that mild weather, highprices and possibly a worsening economic outlook are takingtheir toll.
"Domestic demand is weakening, especially kerosene," said aNippon Oil official. "There's no point in having surplusinventories."
http://www.reuters.com/article/rbssE...10998220080125

[Gordo]

Fuel Crisis in China

NY Times, January 24, 2008
HONG KONG — The Chinese government issued an “urgent notice” on Wednesday to the country’s power generators, coal companies and railways to address an electricity shortage that has led to rationing in more than a third of China’s provinces in recent weeks.
The rationing, mostly achieved by telling factories that their power will be shut off for a day or two each week, coincides with the annual frenzy of factory production to meet orders before shutting down for the Chinese New Year holidays, which fall in early February this year.
Factories have kept going during past electricity rationing, usually during the summer air-conditioning season, by running diesel generators. But that is proving expensive this winter because of high fuel prices.................
................The low tariffs have made it uneconomical for oil-fired plants to operate, and many have stopped doing so.
“It makes absolutely no sense for anyone to run a diesel- or oil-fired plant. They’re all shut down,” said a power company executive in China who asked not to be identified because of the sensitivity of commenting on regulatory policies..............................

Pinched by Price Controls, Power Plants in China Scale Back

[metalman]

Re: Fuel Crisis in China

NY Times, January 24, 2008
HONG KONG — The Chinese government issued an “urgent notice” on Wednesday to the country’s power generators, coal companies and railways to address an electricity shortage that has led to rationing in more than a third of China’s provinces in recent weeks.
The rationing, mostly achieved by telling factories that their power will be shut off for a day or two each week, coincides with the annual frenzy of factory production to meet orders before shutting down for the Chinese New Year holidays, which fall in early February this year.
Factories have kept going during past electricity rationing, usually during the summer air-conditioning season, by running diesel generators. But that is proving expensive this winter because of high fuel prices.................
................The low tariffs have made it uneconomical for oil-fired plants to operate, and many have stopped doing so.
“It makes absolutely no sense for anyone to run a diesel- or oil-fired plant. They’re all shut down,” said a power company executive in China who asked not to be identified because of the sensitivity of commenting on regulatory policies..............................

Pinched by Price Controls, Power Plants in China Scale Back

china has yet to learn that price controls don't work.

[GRG55]

Re: 500,000 bpd decrease in global refinery output

Japan refinery output down 3.3% or 163,000 bpd since Jan 1. Japan is the 3rd largest oil consumer in the world, at 4.9 mbpd. China is 2nd largest at 6.9 mbpd and US leads at 20.2 mbpd. Global oil demand is about 86.5 mbpd.
If global demand decreases the same as Japan, 3.3%, (not unreasonable to presume) that would be a total decrease of 2.85 mbpd. If Saudi Arabia increases its production by its reserves of 2 mbpd on Feb 1 (not unreasonable since GWB requested a substantial increase) that would be the equivalent of a total of 4.85 mbpd in extra capacity through decrease in demand and increase in production or about 5.4% of the 88.5 mbpd global production, after the Saudi increase. This 5.4% increase in capacity is functionally the same as a 5.4% decrease in global demand. A 5% decrease in global demand can result in a 50% reduction in prices as occurred in 1999.

TOKYO, Jan 25 (Reuters) - Japan's top refiner Nippon Oil
Corp will extend production curbs into February, it said on
Friday, while Idemitsu Kosan Co will also scale back runs due
to weak winter demand, adding to a global slow-down in refinery
output.


The curbs will reduce their planned February productionlevels by about 63,000 barrels per day (bpd) versus initialestimates, about 1.3 percent of total capacity in the world'sthird-largest consumer, where warm weather has reduced seasonaldemand and weak global margins have made exports unappealing.


That follows cuts of more than 100,000 bpd in Januaryproduction for five refiners, although total global run cutsmay be five times that amid signs that mild weather, highprices and possibly a worsening economic outlook are takingtheir toll.


"Domestic demand is weakening, especially kerosene," said aNippon Oil official. "There's no point in having surplusinventories."


http://www.reuters.com/article/rbssE...10998220080125

There isn't a hope in hell that Saudi Arabia can, or will, increase it's production by 2 million barrels per day on Feb 1 - or any other time for that matter.

After I read the link in your next post down, about Chinese electricity production, it just seems to confirm that barring the debt deflation global recession that EJ anticipates, the demand for raw materials to build out more infrastructure (such as more Chinese power plants) would appear to be dangerous to discount...

[Gordo]

Re: 500,000 bpd decrease in global refinery output

There isn't a hope in hell that Saudi Arabia can, or will, increase it's production by 2 million barrels per day on Feb 1 - or any other time for that matter.

Don't sugar coat it like that, GRG55. Tell it like it is.

[GRG55]

Re: 500,000 bpd decrease in global refinery output

Don't sugar coat it like that, GRG55. Tell it like it is.

I knew you could take it Gordo

[Gordo]

Re: 500,000 bpd decrease in global refinery output

I knew you could take it Gordo

Seriously, GRG55, China is facing a fuel crisis (factories shut down for a day or two a week), South Africa has shut down its gold mines for lack of fuel, Australia has run out of premium gas, Japan is reducing refinery runs for lack of fuel, and practically the whole world is suffering from the fuel crisis to some extent.

Pres. Bush and Sec. Bodman have asked for increased production as did the Davos meeting.

Saudi Arabia has 2 mbpd in unused capacity. Opec is not stupid. They know that if there is not a substantial increase in production on Feb. 1, some smart politician (Obama?) is going to start talking about breaking up OPEC, a taboo subject up till now.

[Rajiv]

Re: 500,000 bpd decrease in global refinery output

Saudi Arabia has 2 mbpd in unused capacity.

Can you document that? I am certain as is GRG55 that the Saudi's are running at capacity -- there is going to be no increase in production in the short term -- and I believe that declining oil fields are outpacing any new discoveries.

[Gordo]

Re: 500,000 bpd decrease in global refinery output

Can you document that? I am certain as is GRG55 that the Saudi's are running at capacity -- there is going to be no increase in production in the short term -- and I believe that declining oil fields are outpacing any new discoveries.

Saudi Arabia has held back about 2 million barrels a day of oil that could be supplied to the market if needed, Naimi said.

Naimi Says Saudi Arabia Has Extra 2 Million Barrels of Supply Bloomberg - Jan 15, 2008

[Rajiv]

Re: 500,000 bpd decrease in global refinery output

From FT interview

FT: On supply and demand, what is the Saudi Arabian view on where the market is? Why the prices are so high?

AN: I cannot answer why the prices are so high. Prices are determined by a market that is influenced by many factors. We are assuring reliability of supply, we are investing a lot of capital in expanding our producing capacity. We are today not producing all our capacity because it is not needed. The demand is not there, the customers are not there. I believe that no-one will argue with us that inventories levels are today still within the 5-year average and in a comfortable place. We are watching that very carefully. You saw what we did in the last conference, we moved the ceiling up and we have no problems to move up or down to guarantee the integrity and stability of the market

Why did he make that statement (in bold red) in November? That is because all of that theoretical 2m bpd is extermely sour crude -- and demand for sour crude is at its limits because there is no excess refinery capacit to process that crude.


From Updated World Oil Forecasts, including Saudi Arabia

This paragraph on capacity in IEA's 12 June 2007 Oil Market Report, page 15, explains Saudi Arabia’s current surplus capacity situation within an OPEC context.

Notional spare capacity stands at 4.0 mb/d, while our measure of effective spare capacity (excluding Indonesia, Iraq, Nigeria and Venezuela) stands at 2.85 mb/d. Although these volumes are physically producible, even this lower figure likely overstates what OPEC could actually shift onto the market given current prices and shortages in refinery upgrading capacity. Heavy, sour Saudi Arabian and Kuwaiti crude accounts for 88% of the effective spare capacity figure. In the absence of substantial discounts, these volumes might struggle to find buyers while sizeable amounts of refinery upgrading capacity remain offline for scheduled and unscheduled maintenance. Readily marketable spare crude capacity may therefore be much lower, and a more accurate reflection of current market tightness.

In other words, this IEA paragraph says that the world has only 0.35 mb/d spare capacity of readily marketable light sweet crude because the spare capacities of 2.20 mb/d from Saudi Arabia and 0.30 mb/d from Kuwait are hard to sell heavy sour crudes.

[Gordo]

Re: 500,000 bpd decrease in global refinery output

From FT interview



Why did he make that statement (in bold red) in November? That is because all of that theoretical 2m bpd is extermely sour crude -- and demand for sour crude is at its limits because there is no excess refinery capacit to process that crude.


From Updated World Oil Forecasts, including Saudi Arabia

Excellent response, Rajiv, but a quote from your response states:

Heavy, sour Saudi Arabian and Kuwaiti crude accounts for 88% of the effective spare capacity figure. In the absence of substantial discounts, these volumes might struggle to find buyers while sizeable amounts of refinery upgrading capacity remain offline for scheduled and unscheduled maintenance.

The world is facing a fuel crisis. Cut the price and get the 2 mbpd on the market. IMHO

[Rajiv]

Re: 500,000 bpd decrease in global refinery output

For the last five years Saudi Arabia has been begging the world to build new refineries to process heavy sour crude -- there have been few takers.

From econbrowser in 2005

The third critical ingredient is refining capacity. British Petroleum reported that global refinery capacity increased by 1.8 million barrels a day between 2001 and 2004, while global crude production was up 5.3 mbd. Moreover, not enough of this capacity is able to process the increasingly heavy and sour crude supplies. Chernoff again:

The marginal refining capacity in the world cannot process heavy, sour crudes at all, let alone process these crudes into light, sweet products. Converting existing refining capacity to process heavy, sour crudes to produce light, sweet products is expensive and time-consuming. In the U.S., the conversion (for the refiners who are converting) is a multi-year, multi-billion-dollar project. Some refiners have elected to produce light, sweet products only from light, sweet crudes. Others have elected to retire refining capacity. In parts of the world that supply markets with only higher sulfur products or that have dropped out of the market to supply low-sulfur products, little or no conversion will take place and the demand will continue for the diminishing fraction of light, sweet crudes.

Although the change in the price spread is pretty dramatic, the explanation is quite simple: (1) supply is down, (2) demand is up, and (3) the capital investments necessary to cope with facts (1) and (2) were not made. Government regulation in response to environmental concerns appears to have played an important role in both (2) and (3).

The situation has not changed much since 2005

[Gordo]

Re: 500,000 bpd decrease in global refinery output

For the last five years Saudi Arabia has been begging the world to build new refineries to process heavy sour crude -- there have been few takers.

From econbrowser in 2005

The situation has not changed much since 2005

Rajiv,

The Saudis and their Gulf allies have $2.5 TRILLION in profits from oil in the last few years.

They should have built the refineries themselves.

Prediction-In the face of the world wide fuel crisis, if OPEC doesn't increase production by a substantial amount on Feb. 1, I predict some smart politicians will start calling for the break up of OPEC.

The extra 2 mbpd is there. If not now, when: if not them, who. We'll find out real soon.

[GRG55]

Re: 500,000 bpd decrease in global refinery output

Rajiv,

The Saudis and their Gulf allies have $2.5 TRILLION in profits from oil in the last few years.

They should have built the refineries themselves.

Prediction-In the face of the world wide fuel crisis, if OPEC doesn't increase production by a substantial amount on Feb. 1, I predict some smart politicians will start calling for the break up of OPEC.

The extra 2 mbpd is there. If not now, when: if not them, who. We'll find out real soon.

Gordo: No personal offense intended, but for someone who is apparently shorting crude oil, this statement shows a remarkable lack of understanding of what is going on physically and politically in OPEC. If there is a future worldwide steel shortage (from the predicted infrastructure bubble) are you going to suggest that the big iron-ore source countries, Brazil and Australia, should have used their profits to build more steel mills for the rest of us? The fact is that the major Gulf OPEC producers have been expanding their refinery investments at home and abroad, including the USA, pretty aggressively.

Maybe this link will shed a little light on the unbelievable amounts of money the Gulf OPEC producers have been spending, and the current situation there. This linked article covers only a small part of what we all know is a very complex situation. OPEC is openly concerned about:

• USA petroleum products consumption flat to falling for 3 years;
• USA imports of crude oil have declined;
• USA economy slowing and apparently headed for (already in) recession;
• Global economy slowing and US recession may spread;
• Project costs are skyrocketing, and the US created credit crisis is now making mega-project financing much more expensive, leading to more project delays;
• Last year's US energy legislation mandating an increase in biofuels to more than 15 billion gallons/yr by 2012 and 36 billion gallons/yr by 2022, which will accelerate the above trends, and also influence legislation in other developed country jurisdictions, particularly Europe.

If I get an opportunity in the next day or two, I will try to post more comprehensive picture on one of the peak oil threads.

http://www.business24-7.ae/cs/articl...eadlineID=1467

As for "smart politicians" (is that an oxymoron?) calling for the break up of OPEC (presumably to "force" a supply increase) they might as well be calling for the break up the Kingdom of Saudi Arabia, as no other OPEC (or non-OPEC) country can, by itself, have any material impact on new global crude oil supply.

Bottom line IMO: When Aramco's Khursaniya expansion finally comes on production later this year, it will be very telling if the export increment of light, sweet crude the world sees is the expected 500 k bbls/day, or if some measurable part of the new production is needed to offset depletion elsewhere in the Kingdom.