A massive jump in U.S. crude oil inventories of 7.5 million barrels on Wednesday failed to dent the price of oil even though the dollar spiked up to a new ten-month high. There is some seriously bullish support under this market!
The IEA said yesterday that oil price risks are skewed to the downside but nobody appears to be paying attention. IEA Director Richard Jones said "The price outlook hinges on oil demand growth and our prognosis is there won't be many changes this year in fundamentals." He went on to say that over the next 3-4 years new production from Brazil and West Africa will weigh on prices. Evidently he is not drinking the same kool-aid that his boss Fatih Birol has been drinking.
He was referring to Ghana's 700 million BOE Jubilee field. The first of three floating production, storage and offloading vessels is due to start producing before the end of 2010 at 120,000 bpd. The Brazilian Tupi field is expected to end 2010 around 100,000 bpd. Both fields should ramp up significantly over the coming years but everyone keeps forgetting about the four-million plus barrels of daily production we lose each year to depletion. Those are the IEA's official numbers.
Meanwhile Jan Stuart, economist at Macquarie Research, raised his prices for oil in 2010 to an average of $86.50 per barrel. He sees Q4 averages at $92.75 for WTI and $91 for Brent. He believes we will see a "neat and simple fundamentals driven rally beginning next quarter." He believes that global demand growth will hit 2.4% due to emerging economies, not including Brazil, Russia, India and China, to grow by 3.5% in 2010.
BRIC demand is expected to rise by 920,000 bpd but collective demand in the 20+ other emerging economies is expected to rise by 675,000. That is more than the 626,000 bpd of growth expected from China. Stuart said OPEC appeared to be planning a "weak fundamental scenario" as an excuse for not raising production this summer. The ploy is to let prices rise and point to "speculators" when it gets over the current comfort zone. Stuart also said he is no longer confident Saudi Arabia will try to restrain the price.
In the UK, Sir David King, the government's former chief scientist, warned that global oil reserves were overstated by one-third and said there will be shortages and price spikes within the coming years. The overstatement claim is not new and has been repeated by dozens of researchers over the last 20 years. However, this is a new voice in the wilderness proclaiming that, which we already know.
King claims the recognized global reserves of 1,350 billion barrels should be downgraded to 850-900 billion and claims demand will be greater than supply by 2014. The historical perspective on the inflated OPEC reserves comes from the overnight increase in estimates by many OPEC countries in the 1980s when OPEC decided to issue production quotas based on reserves. Almost overnight many OPEC countries issued new reserve claims without any additional exploration to backup those claims. Ever since those claims were made serious geologists and oilmen with experience in those OPEC countries have ignored them as phony. However, the IEA acknowledges them in their projections.
The problem with the IEA is that they are paid by the 26 member countries to keep them satisfied that there are no surprises ahead. Each country pays them a small fortune to "manage" future production estimates. Politicians can hide under the cover of the IEA reports, which up until 2008 had said there will be plenty of oil until after 2030 and production will continue rising to more than 105 mbpd because of the massive reserves held by OPEC nations.
As long as the IEA kept up the charade there was no reason for politicians to make unpopular changes in their country's oil consumption habits. There was no reason to respond to the peak oil claims. In late 2008 and early 2009 the leader of the IEA changed the tune they were playing to emphasize the potential for "shortages" by 2015 if insufficient investment was made in finding and producing additional oil. That investment threshold was sometimes mentioned from $2 to $20 trillion depending on the time horizon being discussed. It was Mr. Birol's way of warning that there was trouble ahead but blaming it on lack of investment rather than gross errors in the IEA's prior projections.
Sir David King, Sir Richard Branson, Ian Marchant and others who have joined Britain's Peak Oil Industry Taskforce are trying to raise awareness of the potential shortages ahead. The group claim they are "very concerned" that Western governments are not taking the concept of peak oil seriously while China is throwing tens of billions of dollars into its efforts to grab as many energy resources as possible.
It is one thing for a few retired geologists and a few concerned newsletter editors to be waiving the warning flag but when billionaires start joining the club maybe it is time for somebody to listen.
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