Peak Oil Passnotes: Crude Oil Sets Its Sights High
By Edward Tapamor
13 Apr 2007 at 11:41 AM GMT-04:00
resourceinvestor.com
PARIS (ResourceInvestor.com) -- Regular readers of this column will remember how shorting by traders in the third and fourth quarters of 2006 dragged oil down as low as $49.90 intraday. The floor price set at the end of 2005, around $55, seemed unbreakable, yet a year later it failed. We were surprised.
At the time crude seemed a long way off breaking back towards its $78.40 highs, even if it did end up where we thought it would, around $61 on Christmas Day. But today the signs are there again that crude really could surge once more. Could crude really get back over $75 this year? Could it set new records?
Only one thing has really changed, the way Brent crude and the West Texas Intermediate (WTI) have swapped places in terms of price, but this could be very important. For many years the WTI price was around three to four dollars more than that of Brent. Now that situation has been reversed in what could be one of the first signs of a peak in oil production exacerbating prices.
If we are to believe men like Royal Dutch Shell [NYSE:RDS-B] chief executive Jereon van der Veer there will not be a single peak in production but a series of peaks. The peak of Brent crude may be a pointer of what could occur in the future.
Brent crude is the blend of crude oil form a number of fields in the British North Sea. It is collected together, mainly at the oil terminal of Sullom Voe where it has a sulphur content of around 0.37%. It is nice and light and it makes gasoline like there is no tomorrow. There is just one thing. It is running out.
One difficulty is that Brent is still highly desirable by those simple refineries that just love light sweet crude. When a refinery has not been upgraded to process heavier or more ‘sour’ crude oils it still relies on the light varieties. Like the Brent blend and the even lighter WTI blend in the United States.
However Brent production has peaked. This is not a subject of any dispute. The U.K. is flitting between being a net exporter and net importer of crude oil as its total production has declined, from a high of around 3 million barrels per day in 1999, to around 1.3 million barrels per day today.
The result is that the smaller amounts of Brent are fetching a higher and higher price. Technology has not been able to replace Brent crude, this despite the mass upgrading of refineries that has been taking place in Europe.
In the current market this has been exacerbating continued high gasoline demand, including growing demand in the U.K. for the first time in three years, plus impending major stock draws if you believe the International Energy Agency’s latest pronouncement. And you may not.
We also face what appears to be the calm before the storm as far as Iran goes and simultaneously we are re-entering the hurricane season in the U.S. Remember last year the markets priced in more hurricanes like they had seen in 2005, but they never came. Now the markets are not pricing in any hurricanes because there were no serious ones in the Gulf of Mexico last year. That could be an error.
Then one should add a sprinkle of worrying reports from Pemex about the state of Cantarell’s faster-than-expected decline rates. There is the continuing disaster in Iraq. There is also the looming possibility of some seriously hot summers in the richer OECD countries which will activate all those new energy-hungry air conditioning units. The result is the stage is being set for a new push for crude. |
