Output falling to meet lower demand

The petroleum report showed crude oil inventories fall closer to the average range, with its fifth straight week of significant decline. This slide has been largely driven by lower imports. A drop in US crude output is also helping to restore some balance – production is now ~5% lower (~.3 million barrels per day (Mbd)) than its highs during the Spring.

However, petroleum product inventories remain high. Gasoline increased to high levels as demand remains down 1.3% from last year. Distillates (mainly diesel) and propane also increased last week, with distillate demand down a huge 28.9% from 2008. Continued weak demand has sent crude prices down more than 15% from their early July highs and has gasoline falling back below $2.60 per gallon nationwide after almost touching $2.70 a couple weeks ago. As I wrote last week, it will take a marked drop in output or recovery in demand for prices to hike back up significantly in this prolonged recession.

A similar story for natural gas

The weekly natural gas storage report conveyed a similar story. Low prices have lowered output and induced a greater consumption of natural gas for electricity generation (substituting coal). These shifts are slowly returning inventories to balance, as inventories are now 19% rather than 23% above the historical average. It will take months of suppressed prices (and thus lower output) before the surplus subsides.

Prices to mirror recovery

Economic stability is necessary to bring real balance to fuel inventories and lift natural gas and oil prices. These lower costs can help consumers get their finances back into balance before the age of efficiency and renewables really kicks in a few months from now.

Onwards-

Oil Output Slides Slower than Demand

Oil demand is down more than 5% in 2009 thus far and shows few signs of change. The Energy Information Administration (EIA) Petroleum Weekly Report shows demand of most oil-based fuels nosediving. Gasoline, distillates (mostly diesel), and propane demand fell 3.2%, 24%, and a whopping 39%, respectively. As a tempering force to supply gains, US crude output slid 1.8% to 5.163 Mbd last week, just .8% higher than in 2008. Much further reduction in production could bring US stockpiles back into the average range and threaten to lift prices above $70 per barrel again. But more economic stability is necessary to raise prices much further.

Natural Gas Storage Finally Slows its Growth

It took sub-$4 per MMBtu and a heat wave across the South to finally keep natural gas inventories from its above average growth. Output may fall below 2008 levels in July and send prices back above $4. But again, some economic recovery is important for prices to climb significantly above $4.50 per MMBtu. Storage remains more than 20% above average, and is poised to hit new record levels by October. Natural gas will remain a strong substitute for coal this summer even though coal prices are half their 2008 average.

Low Energy Demand Means Slow Renewables Growth

It’s hard to justify strong demand for new renewable energy when overall energy demand remains significantly below 2008 levels. But if solar and wind producers can continue to lower costs and economic recovery picks up in the second half of 2009, we may be on the cusp of another wave of strong expansion.

Bottom line: The recession maintains its grip on fuel prices midway through 2009. Whether demand recovery, output decreases, or changes in the exchange value of the dollar will change that reality in the months ahead is difficult to know. I’ll keep you posted on these trends and their influence on greenhouse gas emissions in the weeks ahead.

Onwards in the Sustainable Energy Transition-

Petroleum Inventories Remain Very High

The Energy Information Administration (EIA) reported yesterday in its weekly petroleum report that US crude oil storage fell another ~1% last week. Even so, crude supplies remain more than 10% above average and US output has been rather robust above 5.2 million barrels per day (Mbd). The lower oil rig count in 2009 has yet to lower crude oil production below last year’s levels. Gasoline is the only fuel with below-average inventory levels. And the lower pump price (compared to last year) allowed last week’s gasoline demand to rise 1.1% above the same week in 2008. But demand for distillates (mainly diesel) and propane continued to languish at recessionary low levels — 16.9% and 10.2% lower than last year, respectively. Either further demand recovery or lower output and imports are necessary to drive significant price increases from current levels.

Natural Gas Inventories Sky-High

And the storage level for natural gas has kept prices close to their recent lows below $4.50 per MMBtu. Even though natural gas is substituting coal for electricity generation across much of the Southeast, lower industrial demand and persistent high domestic production have storage levels moving toward record highs. Inventories are almost 23% above average and continue to surprise analysts with its weekly growth.

Higher Oil Prices Spur Hope for Alternatives

Bicycling, pedicabs, solar and wind power, and other alternatives to fossil fuel energy are benefitting from the return of higher oil prices. Oil is now more than double its winter low below $35 per barrel. If non-OPEC output begins to wane in the weeks ahead and the recession does begin to fade, these alternatives may surge forward quickly. I’ll keep you updated on progress in the weeks ahead.

Onwards in the Sustainable Energy Transition-

Oil Above $67 Per Barrel

The early signs of economic stability and a weakening dollar have doubled the lowest price of oil reached last December (~$32.50). Last week’s EIA petroleum report showed US crude inventories falling 1.5%, but still significantly above average. Gasoline supply fell below average levels, but distillates and propane remained above average. With most petroleum inventories above average and recessionary low demand continuing for the next few months at least, it is hard to imagine the price continuing to rise much further in the short term unless production begins to fall on the low rig counts and prices.

Low Gasoline Storage Sends Wholesale Prices Up

Wholesale gasoline prices increased further over the past week, and are poised to send pump prices above $2.55 and potentially as high as $2.60 per gallon in the near future.

Rig Count Up for Oil, Down for Natural Gas

Another reason oil prices should slow down its increasing trend is the oil rig count is increasing on oil’s recent price recovery. The oil rig count climbed 3.9%, which may keep second half 2009 oil production from dipping below 5 million barrels per day. For natural gas, the rig count continues to fall – last week at a 1.1% rate. By this fall, natural gas production will probably slide below the 2008 rate and help prices climb 50+% toward the marginal cost of production of $7+ per MMBtu. Then again, natural gas prices could remain below $6 into 2010 if companies like GM and Chrysler continue to struggle mightily to sell their products.

The current oil price climb is dangerous for our economy unless we accelerate our deployment of efficiency and renewables. Stay tuned in the weeks ahead for more details on the increasing price of fossil fuels and the role it plays in our Sustainable Energy Transition.

Onwards-

Today, the oil price convincingly passed $60 per barrel as the dollar fell to $1.377 per euro (10% weaker than its peak several weeks ago). Oil had previously touched $60 before retreating during the last few days. But this time, a weekly report from the US Energy Information Administration (EIA) showed a larger drop than expected in US inventories of crude oil, at 2.1 million barrels or .6%. This drop followed a bigger 1.2% drop the week before. Therefore, even though oil storage levels remain above average, the emerging trend of decline has caused speculators to bid the price up.

Gasoline May Spike to $2.50

Gasoline storage levels fell 2.1% to below the average range, its second big drop in as many weeks. With prices now at $2.33 per gallon and wholesale prices that translate into $2.50+, we are likely to see a continued spike in gasoline’s price in the week ahead. In fact, without extremely bad economic news derailing the rally – average gasoline prices seem destined to rise above $2.40 and toward $2.50 soon.

Lower Imports & Lower Demand

Crude oil imports averaged less than 9 million barrels per day (Mbd), down more than 5% from last year. But this still isn’t a problem for the short-term because inventories are so high and recessionary demand remains more than 5% below 2008 levels. Last week’s demand for gasoline, distillates, and propane fell 1.4%, 13% and 4.7%, respectively. The timing and speed of economic recovery along with the pace of oil field decline rates will determine prices going forward.

Fuel Efficiency Crucial

Obama’s announcement yesterday to raise fuel efficiency standards in the US market to 35.5 mpg by 2016 was a great step forward. The Union of Concerned Scientists estimates this policy will save Americans at least $30 billion dollars per year (reduced gasoline expense, etc.) in 2020 based on a gasoline price of just $2.25 per gallon. The efficiency standard will also lower our oil import needs by 1.4 million barrels that same year (enough to replace dwindling shipments from Mexico).

Bottom Line: A focus on efficiency will be crucial to keep our economy from suffering an even worse oil shock than 2008 in the years to come. This same efficiency is a big part of the climate mitigation effort we need to deploy in the US and worldwide. Solid policy like strengthened fuel efficiency standards accelerate the Sustainable Energy Transition, helping our environment and our wallets simultaneously.

Onwards-

For instance, overall petroleum use was only 18.2 million barrels per day (Mbd), down 7.9% from last year and the lowest since May of 1999. Last week, demand for gasoline was down 4.2% from 2008, distillates down 17.7%, and propane down a rapid 31.4%. This low demand has sent inventory levels of everything but gasoline close to records. Crude oil production remained ~.2 Mbd (3.7%) below its mid-April peak. But the beginning of output from the Gulf of Mexico’s Tahiti platform started to flow this week, which may help 2009 average US crude production stay above 5 Mbd.

A Weaker Dollar and Stabilizing Economy

While the fundamentals of supply and demand remain largely bearish for now, speculators are sending oil prices up as high as $58 per barrel on the weaker dollar and signs the economy is regaining its footing. The dollar has weakened over 5% in recent weeks and the rate of job losses is decelerating. Some analysts are talking $70 oil in the weeks ahead, but that seems unlikely unless lower rig counts really pull oil production down quickly. But $70+ by year’s end seems reasonable, as the global economy will hopefully get its groove back. This would translate into gasoline prices ~$2.50 per gallon, so I encourage everyone to refocus on efficiency to lower costs (and be climate-friendly).

Natural Gas Rising Too

Natural gas prices have gone up 25% to $4 from their late April low ~$3.15 per MBtu. And the CEO of major natural gas producer Chesapeake, Aubrey McClendon, said prices are likely to rebound dramatically by late 2009. He expects the new normal for prices will emerge to be more than double today’s price, at between $8 and $9 per MBtu to ensure the marginal cost of new supply is reached.

Again, there is no short-term worry as supply is 23% above the five-year average and demand remains low. But production should decrease on today’s lower rig count by late summer.

Wind & Solar Relative Prices Improve

If natural gas and oil do indeed rise another 100+% and 20+%, respectively, then the relative price of wind and solar will improve dramatically. I will keep you updated at SETenergy.org as this develops.

Onwards in the Sustainable Energy Transition-

Three weeks ago, I wrote about a small drop in production as the potential beginning of decline. But then the following week saw the year’s highest production at 5.481 million barrels per day (Mbd). So I waited to report the small fall in production that I read about last week (a 1.1% slide to 5.421) until after a second straight drop followed it. And that consecutive drop was reported this week as output slid further to 5.269 Mbd.

A Significant Drop in Production

While US crude production currently remains .25 Mbd above last year, the .21 Mbd (almost 4%) drop in production over two weeks could signal tighter supplies on the way. If such a rapid decrease continues for three more short weeks,  output would fall below 5 Mbd again and require imports to rise.

High Fuel Inventories Prevent Short-Term Worry

Recessionary low demand has caused all fuel inventories to remain above average. While gasoline demand was only down .4% last week, demand for distillates (mainly diesel) and propane fell 16.8% and 8.5%, respectively. As a result, crude oil inventories are almost 15% higher than last year and the highest since 1990. So it will take many weeks of US production below 5 Mbd for supplies to feel tight again.

Rig Count Falling, But More Slowly

The number of rigs actively drilling for new oil and natural gas wells slid again this week to 945 (oil fell 6 to 196, natural gas fell 1 to 741, and miscellaneous fell 3 to 8). This weekly slide of 10 rigs (1%) is much slower than the ~40 rig drops of recent weeks.  But the further slide means that oil output will probably continue to decline for several months. And natural gas, with its faster decline rates, will probably begin to show significant production decreases soon. With natural gas storage that is 34% above last year and 22.5% above the five-year average, this fuel carries no short-term worry either. But by late summer, output declines may catch up with the rate of recession-induced demand reduction and get the price back above $4 per MBtu.

Bottom Line: The falling rig count is finally translating into lower oil output and will soon show itself in natural gas production numbers. While supplies are ample for the short-term, more market tightness is on the way in the medium term. A continued focus on deploying efficiency and renewables can prevent a 2008-style price spike as output falls in late 2009 and 2010.

Onwards in the Sustainable Energy Transition-

Context: Very High Supplies

Crude supplies rose 1.6 million barrels (Mb) to 361.1 Mb, the highest storage level since July 1993. And supplies of gasoline, distillates, and propane are all significantly above average largely thanks to demand that is 2.8%, 9%, and 8.8% below last year, respectively. On top of these recessionary low demand levels, US oil output is currently more than 5% higher than last year due to a multi-month/years lag in production increases induced by the high prices of 2006-08.

Delayed Effect of Lower Rig Count

Lower oil prices has triggered an ~45% drop in active US oil rigs drilling new wells. So, oil field decline should begin to eat away at overall output levels soon. This process takes months because it often takes a few months for new oil wells to ramp up their production. The question is, are we there yet?

US oil production dropped a tiny .2% last week, from 5.48 million barrels per day (Mbd) to 5.469 Mbd. If this drop continued every week for the next year, US oil production would fall ~10% back below 5 Mbd. So, we must track any emerging trend.

We’re Fine For Now

Even a persistent drop of .2% per week should not trigger a huge price spike in the weeks or few months ahead. Supplies of oil and its fuel products are way above average. But if a falling production trend does persist into the Fall and the economy stops deteriorating, oil prices could begin to climb significantly in the second half of 2009.

I will keep you informed on whatever trend emerges and how it affects our efforts to lower greenhouse gas emissions in the US and beyond.

Onwards in the Sustainable Energy Transition-

Crude supplies increased to almost 14% above this time last year. Distillates (diesel and heating oil) gained slightly on 6.1% lower demand to remain way above average. Propane also benefited from low demand (down 20.9%) to sit above the average range. The only fuel below last year’s level is gasoline, which fell ~1.5% last week on demand similar to last year matched with below-normal import levels. Gasoline tanks are now ~7.4% below last year’s high level and within the historical average.

The fact that our supplies are ample even with 10% lower crude oil imports is encouraging for those of us promoting energy independence. And since it is on lower demand, there are great climate implications as well.

Here’s to us continuing this trend in the years ahead by rapidly deploying efficiency and renewables! If we don’t, we could get caught up in a zero sum game of competition amongst oil importers for declining global oil exports beyond 2010.

Onwards in the Sustainable Energy Transition-

The executive summary of their 800-field assessment projects a reference business-as-usual scenario as well as two climate mitigation scenarios through 2030 in its annual World Energy Outlook. Their Outlook includes major shifts from last year stemming largely from a deeper understanding of accelerating declines in the bulk of global oil fields. Their research found that smaller oil fields decline faster (especially offshore) than the giants and super-giants of old. So, as we become more dependent on offshore and smaller oil fields for the bulk of our new oil, the overall decline rate accelerates. They estimate natural decline rates are currently 9% per year and expect rates to rise to 10.5% by 2030. Advanced technology and investment allows producers to slow the current rate to 6.7%, though they project it will increase to 8.6% by 2030. Based on these estimates, producers will have to add ~5.5 million barrels per day (Mbd) in new fields in 2009 and a growing amount each year afterward just to maintain current production levels ~86 Mbd.

If you match up this 6.7% decline rate to the Oil Megaprojects Database maintained by Petroleum Review editor Chris Skrebowski, we get peak global oil production by 2012. Beyond that year, the world has less and less oil to transport its people and goods. This wouldn’t mean the world runs out of oil in 2013 by any means — 80+ Mbd of oil will still allow millions of trucks to roll and airlines to fly. But prices would increase to levels to slow demand growth, probably above $100 per barrel again. The IEA calls current prices ~$60 per barrel temporary, believing that a return to average economic growth will bring higher prices. As I’ve mentioned in previous blogs, they think any further fall in price is dangerous for oil market balance since it could delay high-cost oil projects that are needed to come online to make up for field declines in the years ahead.

Contrary to the Oil Megaprojects conclusion, the IEA still believes oil production can grow through 2030, thanks to unconventional oil sands, heavy oil, and oil shale making up for declines in conventional oil. But their hopes are precariously pinned on maintaining current high investment levels ~$350 billion per year and increased cooperation between international oil companies (IOCs) and national oil companies, especially in the Middle East. At a time when many oil producing nations are getting more nationalistic and making terms less favorable for IOCs, the IEA projects greater cooperation. For instance, the IEA depends on Saudi Arabia increasing its production by ~50% to over 15 Mbd — even though their current policy is to grow capacity to only 12.5 Mbd, leaving some oil in the ground “for future generations.”

For the climate, the 9% lower oil consumption estimate in this year’s WEO for 2030 (106 Mbd rather than 116) translates into a reduction in carbon dioxide emissions. But since coal is a key substitute, the overall reduction is only 1% and does not prevent dangerous emissions levels. The IEA then makes a serious call for climate change mitigation, outlining scenarios of emissions reduction to achieve 550 parts per million (ppm) carbon dioxide in the atmosphere and 450 ppm. The climate scenarios not only help the environment but they also lower the price of oil significantly and create trillions of dollars in fuel savings over the years. But to get implemented, either scenario will take serious political will and progress in post-Kyoto negotiations culminating in Copenhagen next year.

The report highlights the exact reason I launched SET — our world faces twin challenges of oil energy security and climate change. The best policy choices are ones that mitigate both challenges simultaneously: a Sustainable Energy Transition based on rapid deployment of efficiency and renewables.

With the full report coming out on Wednesday, I will share more information on this groundbreaking report in the days ahead.