My Grandmother used to always say “Not for all the tea in China.” As China is where English people get their tea.
Now oil is trading up again based on “Chinese demand!”
Yes China is a big, rapidly expanding country with a Billion people and their consumption of oil is going to go up 10% next year.
A Billion people! 10%! “Oh my gosh,” you say, “we must buy oil stocks before it’s too late!”
Nonsense!
America is, as we know, an energy hog. Our 300M people suck up 22M barrels of crude a day, only 9M barrels of which we produce ourselves.
How much oil do China’s 1B people burn up in an average day? Just 7M barrels total!
In fact China imported just 785M barrels of oil so far this year. You see all the shocking reports that their import demand will grow 10% next year – that’s 90M barrels, just 2% of the US’s 4.75B barrels imported annually.
Those demand figures include China’s move to fill up their own SPR, which will have 100M barrels when it is completed in 2008. They can perhaps impact global demand by 1-2M barrels a week if they fill it as fast as they can. Since August, they have actually placed just 3M barrels in the reserve because, unlike our leaders, China does not wish to impact prices.
Yet the oil bulls will have you believe there is a dragon on the other end of the earth drinking up the world’s oil. This is simply not true! It is just another part of the Fear Factor that is being used to keep buying energy stocks and crude oil despite mountains of evidence that there is a global production glut of oil.
Even Boon Pickens says his new high target for crude is $70, of the $50-70 range, and he’s one of the world’s greatest oil pumpers. Since his target was $100 when oil was $70, if he’s lowered his target by $30 when oil is $58 – look out below!
With costs rising and demand falling, a drop in the actual price of crude is the trifecta of doom for integrated oil profits.
Today we had a crude surplus of 2.6M barrels for the week, very interesting with BP’s Alaska pipeline running just 40,000Bpd out of its usual 450,000Bpd capacity due to a power outage.
In addition to the capacity build (assuming BP ever turns this thing back on) the IEA has lowered global demand forecasts by another 95,000 barrels a day, the third cut this year. How much is too much and when does supply and demand ever kick in?
If you ever wonder why oil trades down every night and up only in the US markets, aside from the manipulation that takes place in the US, it’s because traders in other parts of the world take the time to read the papers.
In New Zealand’s papers, you would have read about how traders in Singapore have so much surplus gas (100,000 tons) that they now have to ship it all the way down to South Africa at a cost of $1.3M per 30,000-ton tanker:
“The Asian gas oil market has been suffering from a supply glut due to soft regional demand. But the market has been supported by Hin Leong’s buying spree. The trader has purchased about 14 million barrels of gas oil since June.” In Singapore, they know their manipulators by name!
You may have read that oil was $55.12 a barrel in Russia on Wednesday, before the US led rally salvaged crude from slipping into the $54s.
There is, in fact so much crude that tankers are now being used to store oil by speculators as falling demand has dropped rates to $77,000 a day, pretty cheap for 500,000 barrels! Still if prices don’t go up soon a lot of speculators are sitting on a lot of unwanted tankers full of oil…
There’s an interesting spin on Iran, they may use oil to bribe the Russians and the Chinese with 26Bn barrels of oil in exchange for voting against sanctions in the UN. Opening the Azadegan field to foreign drillers would add over 1Mbd to global production.
In addition to all the oil that is currently being overproduced, there are Billions of barrels of fuel soon to be coming on line. Concerns in the US are that there will soon be an ethanol glut as our current 5Bn gallon annual supply will double by 2010 – with just the already scheduled projects!
A barrel of oil makes 19 gallons of gas so 5Bn gallons of ethanol replace 263M barrels of imported crude – that’s 4M barrels a week of distillate build!
Regular crude production is up too. According to BHI, worldwide rig count is up 10% over last year with much of that increase coming from US drillers who are reopening old wells that may not have been profitable at $19 a barrel but have become bonanzas at $60 a barrel.
If those rigs come on-line with just half the world’s average production capacity (total 89Mbd), they could add 4.5Mbd by early 2007!
Now do you see why the markets are rallying around the globe?
Once those spigots are turned on, they don’t shut down again until oil goes below $30 (and that’s just looking at the build in rigs through September). In 1981, the last time oil went “through the roof” there were 3,969 active rigs in the US. As oil prices plunged during the Clinton administration, many of these rigs were shut down to a low of just 622 in 1999 as they couldn’t compete with $20 oil.
During the Bush administration, as oil prices have climbed from $30 to $60 (yes, I’m being generous) US drillers, many of whom happen to be contributors and “close personal friends” have had a bonanza as they reopened 1,002 well sites in the past 6 years.
On a global scale, we are still 2,600 sites from our 1981 high (ah, the Reagan years!) and even the conservative EIA estimates that 1,500 of these sites can be profitably drilled at $40 a barrel.
Canada opened 96 new rigs just last week! We kicked in with 76 new sites. If they produce just 1,000Bpd each (very low), last week’s new wells would add 172,000 barrels of daily production.
There would be a lot more production on-line now but for the very bad experience we did have in the 80’s as those extra 4,000 active rigs quickly became unprofitable and wiped out the city of Houston One of the companies that was wiped out at the time was George Bush’s aptly named Arbusto Energy, but don’t worry – Bush sold his shares a week before the company went bankrupt and the SEC said everything was just fine!
With alternate energy, Canadian oil sands, deepwater drilling and shale oil all coming on-line in the next few years, supply is expected to outstrip demand by 4-8M barrels a day by 2010, that will take a heck of a production cut from OPEC to maintain prices!
So who is still buying energy stocks at or near historic highs, up 100% on the average over the past 24 months? As of last week, no one, but for the past 2 days the oil sector has been bid up – even as crude trades down to 52 week lows.
Should you buy it? As my Grandma would say: “Not for all the tea in China!”
But don’t worry oil bulls – all is not lost! We had a glut of oil last year and you were saved by two of the worst storms of the century – perhaps you’ll luck out and we’ll have another catastrophe that kills thousands of people (but not so many as to decrease demand)!
