Crude Thoughts

Interest Only Mortgage, Train wreck coming

2007-02-15T15:09:00.000-08:00

Excerpts from latest peak oil review

2006-12-18T22:25:00.000-08:00

During their meeting in Nigeria last week, OPEC oil ministers compromised on a second production cut of 500,000 b/d that will not become effective until February 1st. Preceding the meeting, there were many warnings that a second production cut was not needed. The November 1st production cut was indeed taking hold; oil prices were back above $60 per barrel; and the IEA reported that stockpiles held by OECD countries had dropped by 40 million barrels in October. The EIA is projecting that the US stockpiles alone will drop by 82 million barrels during the fourth quarter.

Unless the cuts are totally ignored, a case can be made that significantly higher oil prices are coming in 2007. A recent analysis by the EIA projects that world demand will grow by 1.5 million b/d during the year and that non-OPEC supply will grow by only 1.3 million b/d. If these numbers prove out, the EIA concludes that OPEC needs to be increasing not decreasing its production.

There is still no definitive word on why the Saudi's pushed through a second production cut in the face of considerable evidence it was not needed. The Saudis maintain that high inventory levels are a threat to market stability and suggest that a coming general slowdown in world economic growth make a production cut necessary. Some observers, of course, remain suspicious about the Saudi's ability to continue producing above 9 million b/d.

Goldman Sachs takes on Amaranth traders

2006-12-10T18:57:00.000-08:00

System rewards the corrupt, reckless and losers

Goldman Sachs, the American securities firm, has hired 17 traders from Amaranth Advisors, the hedge fund that imploded this year after losing $6.5 billion (£3.3 billion).

The loss was down to a team of energy traders in Canada, whose bets on the direction of natural gas prices went awry. Amaranth turned its trades in natural gas, oil and power over to JPMorgan and its hedge fund rival Citadel. Both reaped tidy profits from their investments within a matter of weeks.

http://business.timesonline.co.uk/article/0,,13129-2498075,00.html

America's Bubble Economy

2006-12-04T23:43:00.000-08:00

It is always Christmas Time

2006-11-24T18:03:00.000-08:00

Watch the animation, click here

For Data Junkies

2006-11-24T13:56:00.000-08:00

Chart created using EIA data. Quarterly averages of daily production of Oil+Liquids. Cick on the image to see a larger & clearer image.

Are we at peak oil ? Production didn't drop because of rock bottom prices. Q2 of 2006 saw prices hit an all time high. A natural free market response would have been to bring more supplies. Did not happen.

A Tale of Four Predictions—Hubbert, Deffeyes, Yergin & Jackson

2006-11-20T10:43:00.000-08:00

Following is from ASPO-USA peak oil review :

In 1956, M. King Hubbert, a well-known geoscientist, predicted that US Lower-48 oil production would peak and start an irreversible decline between 1966 and 1971. Lower 48 production peaked in 1970, 14 years after Hubbert’s prediction.
In a book published in 2001, Kenneth Deffeyes, an associate of M. King Hubbert, predicted that world oil production would peak between 2004 and 2008. He later stated that the most likely peak was late 2005. Two measures of world oil production, Crude + Condensate and Crude + Condensate + Natural Gas Liquids (NGLs), are both down or flat relative to December, 2005, according to the US Energy Information Administration (EIA). Total Liquids, which is all of the above plus such things as refinery gains, bitumen/water blends and ethanol, are up slightly from December, 2005.
In a column published in Forbes Magazine in November, 2004, Daniel Yergin, an historian and chairman and co-founder of Cambridge Energy Research Associates (CERA), in response to a question regarding future world oil production and oil prices, predicted that world oil production would surge, driving oil prices down to $38 per barrel by November, 2005. In fact, oil prices have traded in a range about 50% to 100% higher than Yergin’s predicted long term index price, as flat to falling oil production has forced oil prices higher in order to equalize supply and demand.
Last week, Peter Jackson, an associate of Daniel Yergin, offered a critique of the Peak Oil theories outlined by Hubbert and Deffeyes and, like Yergin before him, predicted rising world oil production, with the world not showing any real decline until the 2040 to 2050 time frame.
In the past, Hubbert was right and Yergin was wrong. Now, their respective associates are making similar predictions, using similar methods.

It is pretty clear the track record of CERA and Daniel Yergin when it comes to energy production.

Deffeyes uses a method that is now commonly referred to as Hubbert Linearization (HL), which involves plotting annual production (P) divided by cumulative production to date (Q) versus Q to estimate the Ultimate Recoverable Reserves (URR) for a region, which Deffeyes calls Qt. Regions, in the absence of political and/or technical problems, tend to peak and start declining shortly after reaching the point at which they have produced 50% of Qt, i.e., half of their recoverable reserves.
The following regions have shown lower production after crossing the 50% of Qt point: Texas; Lower 48; Total US (after a secondary lower peak following the beginning of North Slope production in Alaska); Russia; North Sea; Saudi Arabia; Mexico and most recently the world (except for Total Liquids).
I should be clear that the HL method applies to conventional oil production, which I define as oil production that will move to a wellbore without the application of heat energy. The two largest concentrations of unconventional deposits are the large bitumen deposits in Canada and Venezuela. There is also considerable research being done on oil shales, which are really kerogen deposits, a precursor to bitumen. Deffeyes’ opinion is that unconventional sources of oil will most likely serve to slow, but not reverse the decline in aggregate world oil production. Recent reports from Canada and Venezuela support Deffeyes’ view. In any case, the bottom line is that all of the unconventional sources of oil are hugely expensive, energy intensive and are very slow to ramp up production rates.
Jackson is asserting that better technology and the exploitation of unconventional sources of oil (plus gas-related liquids, which aren’t considered here) will permit the world to have several decades of rising, or at worst, flat production.
First, consider the Lower 48, where the industry has tried virtually every new technological innovation known to the industry, and production has fallen fairly steadily, now down more than 50% since peaking in 1970.
What about more recently developed regions? Haven't they done better than the Lower 48? Let’s consider the North Sea, which peaked in 1999 (crude + condensate) and started a very rapid decline. It is compelling that two vastly different producing regions-- the Lower 48 and the North Sea, with the North Sea being developed with vastly better technology than the Lower 48—peaked at the same 50% point, relative to their Qt estimates (for both crude and condensate.)
The basic premise of the HL method is that the first half of the production for a region is a good predictor of the second half of production. “Khebab,” a contributor on The Oil Drum blog, has demonstrated this mathematically. He took the production data only through the 50% of Qt mark for the Lower 48 and Russia (1970 and 1984 respectively) and predicted the post-50% of Qt cumulative production for the two regions, again using only production data through 1970 and 1984 to generate the model. The post-50% of Qt cumulative production through 2004 for the Lower 48 was 99% what the HL model predicted, and the post-50% of Qt cumulative production through 2004 for Russia was 95% of what the HL model predicted.
Today, we have the same amount of production data for the world that resulted in the highly accurate post-50% cumulative production predictions for the Lower 48 and Russia.
Peter Jackson is asking us to believe that we are going to see what we have never seen before—conventional oil production rising for decades after crossing the 50% of Qt mark. This prediction is especially remarkable given the near certainty that all four of the current super-giant oil fields producing one million barrels/day or more are in decline or crashing, while there is only one new super giant field being developed, the problematic Kashagan Field that won’t reach peak production, at the earliest, until 2020.
In conclusion, according to the EIA the world through August 2006 has produced roughly 100 million fewer barrels of crude + condensate than if we had simply maintained the December 2005 production level. This is consistent with the Hubbert/Deffeyes model. It is not consistent with the Yergin/Jackson model. The early data suggest that Deffeyes is correct and that Jackson is wrong, but we can't yet say with certainty who is correct.
Regardless of whether the Hubbert/Deffyes or the Yergin/Jackson model is correct, we need to start as soon as possible to fundamentally change the way we use energy in the United States. My personal opinion is that we need to tax energy consumption to fund Social Security/Medicare, offset by cutting or eliminating the Payroll Tax.

click on the image to enlarge.

Author: Jeffrey J. Brown is an independent petroleum geologist in the Dallas, Texas area. His e-mail is westexas@aol.com.

San Francisco Bay Area Rent vs Buy ?

2006-11-19T09:08:00.000-08:00

Median single family home in Bay Area costs well over 700,000 dollars. San Francisco has the ignominy of being arguably the most expensive metro to live in USA. What makes more financial sense - rent or buy ? Let us look at some examples:

I know a friend of mine who rents a home for $2100 a month and a similar house in the same neighbourhood is listed for sale at $950,000. Let us analyze the costs

Rent

Total monthly cost = $2100/-

Buy

Buy price = $900,000/-
Down Payment =$180000 ( 20% )
30 year fixed rate = 6.25%
Monthly Mortgage payment Principal =$683
Monthly Mortgage payment Interest =$37503,750
Property Taxes=937.50
Sub Total ( Monthly Expenses ) = $5370.5
Tax Savings ( Assuming a 28% rate ) =1312.5
Net Total ( Sub Total - Tax Savings ) =4058
Maintenance=$150
Total Expenses of owning =$4058+$150-$683=$3525

Now Imagine, if the housing prices fall instead of staying steady.

Missing interest on $180,000 at 5% a year ? How about compound interest on the differnce between monthly cost of Buying versus Renting ?

$180,000 initial deposit + $1425 contributions everymonth at 5% interest for 1 year will leave you with 26726 extra dollars in your savings ( $9626 in interest )

It doesn't take into account the inflationary effects of Fed's monetary policies.

An after thought: I am in the inflationary camp when it comes to the future of the U.S economy. When backed against the wall, democratic governments and central bankers have always opted in favor of inflation rather than deflation. So if you can still afford to make payments and can still leave a cushion of 6 months expenses as savings in the bank, I still think buying a home would win in the long term compared to renting - even at these elevated prices.

In Debt We Trust

2006-11-18T10:20:00.000-08:00

In America's earliest days, there were barn-raising parties in which neighbors helped each other build up their farms. Today, in some churches, there are debt liquidation revivals in which parishioners chip in to free each other from growing credit card debts that are driving American families to bankruptcy and desperation.

IN DEBT WE TRUST is the latest film from Danny Schechter, "The News Dissector," director of the internationally distributed and award-winning WMD (Weapons of Mass Deception), an expose of the media's role in the Iraq War. The Emmy-winning former ABC News and CNN producer's new hard-hitting documentary investigates why so many Americans are being strangled by debt. It is a journalistic confrontation with what former Reagan advisor Kevin Phillips calls "Financialization"--the "powerful emergence of a debt-and-credit industrial complex."

http://www.indebtwetrust.org/aboutthefilm.html

Housing Bubble vs. Great Depression

2006-11-17T00:07:00.000-08:00

Inflation is more likely

2006-11-16T12:22:00.000-08:00

Consequences of a deflating housing bubble are immense for the US economy, just recovering from the aftermath of a techbubble implosion. Imbalances in the economy here and internationally are huge, debt burden on households, federal and local goverments are enormous. An implosion in housing is something Federal Reserve would try to avoid at any cost. I sense that we are at the cusp of a major inflationary bust for the U.S economy. Fed has a natural inflation bias - not when it comes to fighting it, but when it comes to causing it.

Source: Minyanville

Everything is well orchestrated right now, the boom in stocks, the hammering of commodities, publishing of doctored data with a deflationary bias, disappearing of M3, Fed & Treasuries operating clandestinely in the repo market ( repos were part of the M3 that disappeared as of March 2006 ). I believe deflationists might be completely wrong, but that doesn't mean I am bullish on US economy.

Consumers are burried in debt and they can't even file bankruptcy under the new laws. Imagine if china stops financing our deficit, it will cause U.S goverment to go bankrupt. The trillions of U.S debt they are holding will become worthless. Just like Chinese have backed themselves into a corner, lenders to american lumpen householders have backed themselves into one. They have to keep lending to the zombies to prevent the house cards from collapsing.

These lenders are hardly interested in collecting the principal back. They just want to collect interest from here to eternity. Not that scam will go on for ever.

You can take it to the bank that Fed is not going to repeat year 1999-2000. Will they succeed ? Money is still plenty. Inflation, Inflation and more inflation. Have you given it a thought.

Do recessions do any good ?

2006-11-16T00:21:00.000-08:00

An economic boom based on relentless credit expansion create mal-investments. A recession is a natural mechanism of the free market to wipe out these mal-investments/over-investments. But it is very unpopular amongst politicians to have to deal with a recession, especially when it is their turn to sit on the throne. So John Maynard Keynes came with a political solution to what is an essentially economic problem - goose up money supply and increase goverment spending to compensate for the lack of spending from business/consumers. What this lopsided thinking amongst the so called economists have caused is to never let the recession run its natural course. So the work that a recession was supposed to do gets postponed for a later date. The imbalance continues to build up and it all has to blow up one day in the form of a depression or hyperinflationary end game for the currency. Given the inclination of current crop of politicians and central bankers towards inflating, I expect that latter to happen rather than the former.

A hang over is to be expected after a long night of partying and drinking binge. Hang overs are never pleasant to deal with but best thing to do is to deal with it and get it over with. The cure suggested by Keynesian economics is sort of like an alcoholic going on a non-stop drinking binge to avoid having to deal with a hang-over. Consequences of such irresponsible actions are invariably devastating. Cure is obviously worse than the disease.

If you have read the book "Collapse" by Jared Diamond, he talks about how well intentioned efforts to prevent natural forest fires in Montana have caused fuel build up, eventually causing a much larger conflagration that ultimately guts millions of acres of forest. Free market and nature have many parallels.

Current interventionist tilt among economists have consistenly stopped market from doing what it really wants to do. Market will one day come back with vengeance, and it will not be a pretty site.

"The force of a correction is equal and opposite to the deception and delusion that preceded it." - Bill Bonner of the Daily Reckoning

Are we past peak ? II

2006-09-04T21:03:00.000-07:00

EIA has updated the data with average daily production numbers for the month of June, 2006. Average daily production for the first six months of 2006 is slightly below the 2005 average. This is despite the drop in production during Sep-Oct 2005.

Looking at the 20 year history of oil production, oil production has either declined or stayed flat during 3 periods, represented by R1, R2 & R3.

The period marked as R1 was the first Gulf war and the recession in US and the beginning of deflation in Japan.
R2 is when the Asian currency crisis and the subsequent meltdown in the high growth economies of Asia.
R3 is the implosion of the dot com bubble in the US.

Now oil production is flat to down (X1) amidst record high prices and we are told by economists that the US economy as well as the economies of the world are soaring. Are we at peak oil ? It's worth asking isn't it ?

Note: Click on the chart to see larger image.

Are we past peak ?

2006-08-10T19:15:00.000-07:00

Average Daily oil production

Year/ production( in million bpd )
--------------------------

2002/ 77
2003/ 79.6
2004/ 83
2005/ 84.34 ( including the dip during Sep-Oct 05, due to hurricanes )
2005/ 84.5 ( 10 months excluding Sep-Oct for hurricanes )
2006/ 84.5 ( First 5 months only )

Highest ever monthly average was 85.05 in December 2005.

If oil is plentyful and price is record high, why isn't the production increasing ?

All the data mentioned so far is from: EIA website ( http://www.eia.doe.gov )

Also some interesting decline rates according to BP statistical survey. These declines are from 2004 to 2005

USA = 5.5%
Canada = 1.3% ( despite oil sands )
Mexico = 1%
Norway = 7.5%
UK = 11%
Iraq = 9.5%

Most of the significant growth in production came from Former Soviet Union Africa and Middle East. It will be interesting to see this years numbers for Saudi Arabia ( declining production from April 2006 )Kuwait ( with the peaking of Burgan ) and Mexico ( peaking of Cantarell ).

What's up with oil inventories?

2006-06-22T22:23:00.000-07:00

If you have been watching the oil inventory lately, you have probably seen headlines screaming record oil inventories. This has puzzled me for more than one reason. First of all how can oil prices sustain at such levels if the perceived oil glut is true ? Especially for more than 6 months. It is very clear that sophisticated buyers of this commodity ( Refiners ) are willing to take delivery of oil at such sustained high prices. I was wondering why a company like Valero/Tesoro would buy oil amidst the so called "glut", at these high prices ? These were all questions that crossed my mind. Some facts, my speculation and conclusions follow.

These are some of the facts from the recent release from EIA

1) Domestic production of oil is down 7.1% for the first 166 days of this year compared to the same time period last year on a bpd ( barrels per day ) basis.

2) Exports are down 55% ( Granted, it is fraction of a relatively small number)

3) Refinery gains are down 3.7% YTD compared to last year.

4) Net product supply has ( including refined products, NGL etc ) increased only 0.2%

5) Net imports have increased 3.6%

6) Total nventory including SPR and finished products is 1732.8 million bpd, enough to last us for 83-84 days at the current level of consumption.

7) Total inventory excluding SPR is up 0.8% compared to last year. Nothing to write home about.

8) Tottal inventory including SPR and finished products is up 0.1% compared to last year.

Besides, as far as I know, there is no one dipping a stick into storage tanks to figure out the inventory level. These are at best not accurate but a computer based projection. All these talk about Oil glut is nothing but a well planned propaganda which the market has rejected completely. I have serious doubts about Fed Reserves resolve in fighting inflation or high commodity prices. There is only one way to introduce a drop in the price of oil - a serious recession. The current federal reserve doesn't have the backbone of the Paul Volcker Fed. Besides, this time any recession driven drop in the price of oil will only be a short term solution.

The odds of a recession by the end of the year is pretty high, to my mind. Fed will be doing massive reflation of money supply before the end of the year. As far as oil goes, I am raging bull. But then, I don't claim to have any crystall ball.

References:
( Weekly Petroleum products stocks )
( Weekly Petroleum Status Report )

Commodity bubble ?

2006-06-03T16:11:00.000-07:00

One thing that I hear about over and over from the talking heads on TV and the mainstream media is that commodities are in a bubble about to burst, sort of like the dot com bubble. Could this be true ?

Commodities are supply and demand driven and most commodity demand is driven by its commercial/social application, except for may be Gold. Gold obvisously has some investment demand. Gold is easy to store unlike Crude oil, Natural Gas or Copper. Price of these commodites are driven by Supply and Demand situation.

The price quoted for most of these commodities are scheduled for delivery in 2-3 months time. Most of the speculators in the commodity market has no intention of taking delivery on the futures contracts they trade and they exit well before it is time to take delivery. So if there is a glut of crude oil like some of these so called experts suggest, a bubble will not sustain beyond a 2-3 months period. If there is a glut of contracts in the market that the speculators are trading up, when it is closer to delivery, there will be a massive exodus from these commodities and price will collapse. We have seen this happen with Natural Gas futures last winter. But most other commodities including crude oil, base metals and precious metals have been in a sustained bull market for years and somebody is actually taking delivery on all those contracts. How much "overpriced" copper and crude oil can you store in your basement ?

This is not to say there is no uncertainity or fear premium in the price of crude oil. I believe there is. But the notion of Crude oil prices retreating to $25 a barrel is ridiculous at best. Could prices retreat from the current levels ? yes it could. Will it retreat ? I wish I knew for certain. The only two scenarios that could lead to a substantial drop in commity prices are a 1) a drop in demand or 2) an increase in supply.

As far as the dropping demand goes, it would take a severe recession on a worldwide basis to see a substantial drop in the price of commodities. This is very bullish for commodities long term because the supply situation will remain unresolved.

An increasing supply is nowhere to be seen on the immediate horizon. As for Oil, we might have already entered the terminal decline in the production of the precious resource or we very soon will.

I do not want to pretend that I am an expert commodity trader. I am not, far from it. Just a computer engineer trying to apply some common sense logic. But if you see any discrepancy in logic, please post your comments.

Oil services - An overview

2006-03-16T23:36:00.000-08:00

Oil industry can categorized into two major sectors - upstream and downstream. Upstream is the process of extracting the oil and refining it. Downstream is the commercial side of the business such as refining and delivery of usable petroleum products and retail.

Down Stream services: Conventional oil production in North America peaked, starting with the peaking of oil production in the lower 48 states of USA, followed by Canada and then Mexico recently. Most of the new oil coming online are heavy crude from the oil sands of Canada and the deep waters in the gulf of Mexico. The existing refining facilities are not geared to handle heavy sour crude. Valero has been a big exception. Their success in recent years has been based on its ability to refine cheaper sour crude. Most refineries still need light sweet crude for refining.

This sector is dominated by a handful of giants. In fact, much of the energy industry is ruled by major 'integrated' oil companies. Integrated meaning – these companies do both upstream and downstream side of the business.

Upstream Services : Unlike many people think, oil fields do not resemble an underground lake of dark viscous liquid. Instead, if you were to draw an analogy, oil fields look more like wet sponges. Oil is trapped inside small pores of underground rocks. Porosity of the rock is what determines the amount of oil that can be recovered. As the oil fields age ( most US oil fields are in their twilight), the difficult to reach oil needs to be reached through more well bores both vertical and horizontal. Secondary and tertiary recovery processes needs to be employed. This is where the expertise of oil service companies come handy.

There are two major types of upstream Services - Drilling services and oil field services. Drilling service companies offer their expertise with land rigs, offshore rigs, drill Ships etc. While, the oil field service companies offer services in areas of Seismic testing, Directional Services ( drilling angles ), transport services ( moving rigs ).

In his latest book "The Coming Economic Collapse", Stephen Leeb goes on to say "1970 to 1980, oil service company shares rose more than twenty-fold, almost exactly matching the gains in oil itself. Similarly, during the initial stage of the current bull market - from the end of 1998 to August 2000, when oil prices climbed threefold before reaching an interim peak - the gains in oil service companies nearly equaled those of oil. We conclude that, in bull markets, oil service companies typically rise as much as oil".

As the price of oil increases, with declining production from aging fields, it becomes critical to squeeze out every possible drop of oil from these fields. This is where the expertise of these service companies become invaluable. Engineering services depend on highly skilled man power. Years of engineering expertise that these firms and their talent pool provide, will not be replaced in the marketplace overnight. Majors and independent producers will be paying top dollar for the services offered by these service firms.

As civilization goes on its quest for more oil, service companies that provides expertise in areas of deep water drilling, oil sand upgrading and heavy crude refining might see some of the biggest growth, in the coming years.

© 2006 Oil Shock for TheViewFromThePeak.com

Disclaimer : Oil Shock is neither a petroleum engineer nor an oil industry insider. If any of the information provided in the above write up is wrong, any one is welcome to post their comments.

Its running out!

2006-03-13T13:19:00.000-08:00

To quote Matt Damon's character from the movie Syriana, "Its running out and 90% of whats left is in the middle-east. It is a fight to the death". That 90% figure is an exaggeration. It is more like 60-65%, based on who you believe. Doesn't that give you a lot of comfort ?

The Oil supply situation in the world is dire and the Arabs and Persians know this better than we do. Whether Iran impasse gets solved peacefully or not ( evidence overwhelmingly points to a confrontation ), oil is headed higher, much higher. Crude oil inventory may have risen in the US, but it did not rise on a glut of new supply - instead it rose on falling demand, thanks to mild winter weather in most of North America.

I just came across this article titled "Running Out of Oil? History, Technology and Abundance" by Max Schulz - a fellow at Manhattan Institute. Thinking must be too painful for these so called experts. He brushes aside "peak oil" on the basis of how the whistleblowers have been wrong in the past!! Article goes on to say "The good news about this bad news is that, historically, the doomsayers have always been wrong". Coming from an energy expert who served in the upper echelons of our Nations administration, that statement bewilders me. Pinning the future of a nation and the world on a mere hope that some really smart geologists are wrong ?

Mr. Schulz then strikes at "peak oil" as a nonissue on the basis of technological advancement. Oh, we lumpen worry warts, we could never think of that, could we ? Either inadvertantly or by design, he failed to explain why three and a half decades of technological advancement could not reverse the 1971 peak in US oil production.

Abundance - Strike three and peak oil is out. "Questions about energy supply shouldn't be thought of in terms of how much is available, but in terms of how good mankind is at finding and extracting it" says the article. It doesn't surprise me at all, that, these abundance theorists time and again fail to explain, why the peak year for oil discovery was 1965 and not 2005( figure-1). Didn't the high oil prices that lasted for a decade, starting from the early 1970s, provide the incentive for mankind to find these abundant sources ? I will let you answer that question for yourself. Technology sure didn't stop Pemex from announcing that the giant cantarell field has entered an irreversible decline.

Figure-1: Oil discovery from 1930s.source: ASPO

Then there are others who think that the Russian Oil Miracle has put the peak oil theory to rest for good. But the russian energy minister thinks otherwise.

Peak Oil is for real, sooner we accept that fact, better it is for humanity.

Until later,

Oil Shock

Gas is cheap!!!

2006-03-12T16:40:00.000-08:00

At the time my writing this, natural gas futures are trading for $6.65 per cubic feet. Less than 3 months ago, the price had spiked upwards to more than $15, anticipating a cold winter. But fortunately for most Americans, their heating bills did not go up 400% as predicted during the turbulent days of Hurricanes. Instead, the prices declined due to an unusually mild winter. We may not be so lucky next winter.

Natural gas futures might continue to trade, in and around their current price for some more time, but not very long. Unlike a lot of people think, natural gas demand is not confined to the winter. Many electric power plants in the nation are powered by natural gas. People turn on their A/C during the summer causing spikes in electricity demand. Here in Californian we have gotten used to rolling black outs in the summer. There is no reason to believe that this coming summer is not going to stress the electric grid system.

Figure 1 – Source : hubbertpeak.com

Gulf of Mexico has experienced some active hurricane seasons over the last couple of years and if experts are to be believed, this could be another year of high hurricane activity. A repeat Hurricane Katrina or Rita could knock out much of the natural gas output from the Gulf of Mexico. Though most of the Natural gas consumed in the US is produced locally, we have become increasingly dependent on imports. US natural gas production peaked in 1972 at 21.4 TCFG. In 1998, US natural gas production was at 18.4 TCFG. US has been importing increasing quantities of natural gas to meet growing domestic demand. Canada has been the biggest source of our natural gas import . There are indications that natural gas production in Canada might have peaked already. Hence the natural gas situation in North America looks rather grim. The public aversion to building LNG facilities, has not been helping the situation.

Source: Dave Russum, Geo-Help, Inc. Calgary

Our neighbor to the north has been experiencing a boom, based on rising interest in vast amounts of hydrocarbons locked in Alberta's oil sands. Many of the ongoing projects are scheduled to start production over the next 1-3 years. Unlike conventional oil wells, crude mined from oil sands are heavy and highly viscous. Heavy oil needs to be converted to light synthetic crude before it can be transported through pipelines to refineries all around the world. The process of converting heavy oil to lighter crude is known as upgrading. This upgrading process uses large amounts of natural gas. Demand for natural gas from these oil sands projects are expected surge in the coming years.

On the other hand, there has been an increased interest in Ethanol, since the “Addicted to Oil” state of the Union speech by President Bush. This could lead to an increased demand for natural gas based petrochemicals used in agriculture. Whether Ethanol is the answer to our energy woes is a discussion for another time.

At current prices, natural gas is a great value.

© 2006 Oil Shock for TheViewFromThePeak.com

Oil is headed higher, Big Oil - may be not

2006-03-10T16:22:00.000-08:00

If you can accept that all the easy to find oil has been discovered and oil production is on the cusp of a precipitous decline, it is easy to understand why crude oil price is headed higher. The bull market in crude over the last few years has been driven by surging demand from a growing world economy - especially the newly industrializing giants like China & India. Sheer size of their population puts tremendous pressure on resources, especially energy. This trend will continue at least into the near future. Many major oil fields the world over, are in decline. New production coming online will not come close to replacing the declining production from existing fields, let alone fulfill growing demand. So we find ourselves in this dire situation with staggering demand growth and flat to declining supplies.

Big oil companies are struggling to replace their reserves. These giants have been enjoying the current bull market in oil. Hardly any of their surging profits are directed back into finding new fields. The execs who run these Goliaths know better than we do, that new exploration may not be a worthwhile investment. The way these giants have been replacing their reserve is through acquiring other oil companies - with substantial reserves. Case in point is Chevron. But, for the controversial acquisition of UNOCAL, Chevron would have hardly replaced what they produced last year. These behemoths will have to pay higher and higher price to acquire new reserves. Profitability of producing from reserves acquired when oil was trading for $15 will soon disappear.

Valuation of these companies are based on reserves as much as it is based on profitability. So dwindling reserves and higher oil prices may mean that the growth in stock price may not be as much as other midsized companies. So investors looking for growth need to look elsewhere. It is my opinion that, mid-sized oil producers will turn out to be a better investment bet in the coming years. These nimble midsized oil production companies would be good acquisition targets, currently trading at a big discount compared to their reserves.

Another area that investors could consider is Canadian Oil sand companies. They can profitably operate their business with Oil trading upwards of $35. Oil sand companies have the potential to increase production unlike US oil giants.

Until later,
Oil Shock

© 2006 Oil Shock for TheViewFromThePeak.com