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Sunday, January 14, 2007

Well, Crap

I don't think OPEC is moving oil. I think the petty dictator coalition is moving oil. Russia failed last week; this week the rats have been deployed. Needless to say, this will affect some energy stocks:
President Hugo Chavez said on Saturday the country's entire energy sector had to be nationalized, reinforcing his socialist revolution.

He said Venezuela was "almost ready" to take over the foreign-run oil projects of the Orinoco Belt run by heavyweights such as Chevron, Conoco Phillips and Exxon Mobil, that produce about 600,000 barrels per day.
I think oil futures could go to $56-57 this week, and I think if they move big Chavez may try to take action rather than just squealing about it.

As for gas prices, I think the drop in demand in the US is probably deeper-seated than most people realize. For one thing, people are switching to smaller cars, and that trend will hold for a long while. The move is partly economic, and partly patriotic. Chief No-Nag, for instance, got angry last year and parked the big truck. He bought two old Hondas and built one good one from them. The total cost was less than $2,000, and he had a lot of fun doing it. Now I realize that Chief No-Nag's solutions tend to involve metal or wood construction of one sort of another, and that most people won't do this. But most households will tend to trade off one big vehicle for one small one, and multiplying that by millions gives you a hefty drop in consumption over a year. We have not seen a significant drop in retail gas prices in most areas though, and now we probably won't this week. China dropped.

Gas prices rose 3% in December. If you strip out gas/auto prices, retail sales gains were much more restrained. The National Retail Federation is projecting "subdued" growth to continue through the first half of 2007. If gas prices were to drop, though, this projection would have been adjusted higher.

TWIP is a good read. It sure looks to me like someone took an opportunity to shake up the oil barrel. The draw on inventory of crude presents a good opportunity to move the market this week, but gas and distallate (diesel & heating oil) supplies are high, especially in comparison to last year. However, when that red line starts heading into average territory, the market can move:

Now to EIA's short-term forecast for 2007. In 2006, oil demand in the US dropped. For 2007, it is projected to rise. China is projected to account for one-third of the world growth in demand:

I have some questions about the accuracy of the growth projection for the US. The switch to more efficient vehicles should be a cumulative effect, and construction is projected to be flat-to-slower. That's a hefty swing for manufacturing alone in one year! Note the sharp rise in 2004, which I believe is primarily due to new construction - construction which is now on the downward path, and was on that path in 2006. Construction is an extremely energy-intensive industry.

Now to growth in world oil supply projection. The most important thing to keep in mind is that OPEC is projected to have only a 29% share and non-OPEC increase in supply is projected to be around 1.1 million barrels a day (Venezuela is OPEC):

I do not see a shortage in these numbers. OPEC is restricting supply for a reason. As you can see, Russia is under pressure. It desperately needs high prices.

Any thoughts on the outlook for natural gas? Gas is the preferred fuel for electric power plants as well as home heating. Most of the ethanol plants that have been built over the last couple of years use gas for process heat. And it's much harder to import gas than oil, since it must be liquified for transport by sea.

Although the supply/demand situation on gas looks pretty favorable at the moment, when shortages do develop they are likely to be very sharp, due to the import problems.
My guess is part of the reason the Gasoline prices have not come down is because this time of year the refineries are set up to produce more Home heating oil (colder temps) and less gasoline(people staying home more). With the warmer weather, the reverse is happening. I called to complain about the price of my last delivery of HHO, and the dealer was complaining about having to bid for storage. Oh, poor boy.
David, overall gas looks tighter than oil to me now. The big finds won't be coming online withing the next couple of years.

I have hunted for quantative information on the new ethanol plants, but I'm not coming up with anything. Note that the short term forecast is projecting an additional 100,000 barrels of ethanol which is added into the oil supplies. There have been warnings that perhaps we may have too much ethanol capacity coming online for the corn supply. I am watching corn/cattle/swine futures because of that.

I think the average person has a poor understanding of the extreme dependence of the oil market on economic activity, and you can read papers all day long and get no hint that high prices will produce more output, so....
CF - yes, that's the traditional mix. So did your supplier offer you a price break if you took a large delivery? That's what I would do....
These guys up here have a good trick. To get the service contract, you have to sign up for "Automatic Delivery". We were joking at work a week ago about the oil guys out filling up everyone's tank after Crude dropped $4/barrel. Funny enough, they were in my driveway when I got home that afternoon. When the bill came, it was .20/gallon more than the previous delivery, when spot had fallen .20. I called the boss and asked for an adjustment. He babdled on for a while, and when he finished, I repeated that I wanted an adjustment. He then hung up on me.
Nice customer relations.
There's no competition? Because it sounds like this is a relationship that needs to end.
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