Crude supplies rose 2 million barrels per day (Mbd) on lower demand from refineries and higher domestic production that offset lower imports. Crude inventories are now ~13% above last year and significantly above the historical average.

Distillates and propane fuels are also at historically high levels, 25+% above last year. Gasoline supplies are also up, though they are below last year’s very high levels. Low demand for these fuels means that greenhouse gas emissions from petroleum are poised to fall again in 2008, though not as quickly as last year unless the recession deepens further and/or climate consciousness can help drive behavior change toward increased use of bicycles, transit, and vehicle efficiency.

These high inventories help keep oil prices at levels much below 2006-2008, ameliorating our tough economic times. But the falling oil rig count means that later in 2009-10, non-OPEC oil production will naturally fall. In what some see as a goodwill gesture for the global economy, OPEC decided last weekend to focus on full compliance of the previously agreed cuts in output rather than cutting its goalposts further.

So while oil prices may pass $50 per barrel in the months ahead, they do not appear set to rise above the 2007 average of ~$72 until economic recovery takes hold in 2010 or beyond.

We’ll see how oil markets develop, and I’ll report on the natural gas inventory numbers as they come out later in the week. Here’s to us choosing (and incentivizing through policy) the climate responsible road of lower carbon energy and efficiency going forward!

OPEC has cut its production that amount but higher crude oil production in the US is helping keep our prices below $50 for now. In fact, US crude supplies are at historically high levels on the back of the recessionary low demand of late. The EIA weekly petroleum report shows oil inventories remain more than 12% higher than last year’s level. If OPEC decides to cut production further this weekend, we could see oil prices climb a bit. But the economic news has to stop deteriorating for a big upward price move to occur.

Oil demand could really tank beyond 1.6% if economic indicators continue to under-perform. Australia and Brazil had 4th quarter contractions, and China’s exports fell more than 25% in February! With many economic analysts such as Nouriel Roubini predicting economic recovery waiting until 2010, its hard to find a floor this year for oil demand contraction.

The silver lining is that energy costs and greenhouse gas emissions are again lower in the US this year. And for us to ensure that trend continues into 2010, we’ll need to maintain a strong focus on efficiency and pass a cap and trade climate bill.

With outstanding leadership and deployment of renewables, we may even be able to make 2008 the year of peak greenhouse gas emissions globally. I’ll keep you updated on that as the numbers roll in…

For natural gas inventories, the cold snap had an effect. Natural gas in storage fell more than 6% last week to a level below last year. But supplies remain healthy at 1.2% above the historical average. The cool weather of the next two weeks could bring supplies slightly below average levels, but low industrial demand keeps prices very low below $5 (which I thought was more of a floor than it has been the past several days).

The question is whether the falling oil and natural gas rig count will translate into significantly lower US production that brings the market back into balance at a price level higher than today. I’ll be reporting on that story as it unfolds in the weeks ahead. But for now, renewable energy companies will need to focus on lowering costs to stay competitive with the less expensive fossil energy reality of 2009.

Onwards in the Sustainable Energy Transition-

There will probably be an above average fall in storage levels that should lift prices above $5 but will have a hard time increasing them toward $6+ unless the Arctic air remains beyond the  upcoming week. The other big factor that could allow natural gas prices to increase above $6 again is a reduction in drilling that lowers production to match the lower demand. The EIA currently predicts a ~.7% increase in production so producers will probably have to delay a few expansion plans to prevent prices from remaining below $5.50.

Oil prices can also be affected by demand for heating oil, especially in its demand center of the Northeast. There will probably be a couple of significant draws from distillate and propane stocks over the next two weeks that bring them back to average levels. I suspect oil prices will remain mostly flat until reports of complete OPEC compliance and further potential cuts materialize.

Bottom line: The cold snap will probably prevent prices from falling much further from today’s low levels. But a rise above $6 for natural gas or $45 for oil would probably require a long cold snap and/or further OPEC action amidst current recessionary low demand. An exciting result is that natural gas is low enough to compete with and replace coal in some markets, lowering our greenhouse gases even further than current trends.

I’ll be in touch sporadically during the inauguration festivities these next few days. I’ll be shuttling people around DC in our Greenway rickshaws/pedicabs and will report on the scene shortly

But the supply picture could deteriorate in the months ahead. Not only could non-OPEC production fall another 350,000 or so like in 2008, especially as US production is almost 2% below year-ago levels even though the EIA predicts 6+% increase in 2009 (current lower production is probably a result of the oil rig count falling due to more expensive old wells losing their profitability on the low prices). On top of those natural declines, OPEC may decide to pull their production back further and foster 2007 prices again (~$70-$75 per barrel) by the end of the year. This could happen even if global demand falls because Saudi Arabia has shown in the past that they are good at limbo when they decide to be (they lowered their production from over 10 million barrels per day (b/d) to less than 5 million b/d in the 1980s). Saudi Arabia recently announced a further decrease in production for February to 7.7 million b/d, a level 2 million b/d below last summer’s production crest. This decrease is designed to put a floor on oil prices and potentially help them increase above $40. There may be more supply reductions in the months ahead to help prices move toward $70.

An economically rational Saudi Arabia would lower production if they felt that would raise prices. For example, selling 6 million b/d for $70 earns the country almost 50% more revenue than selling 8 million b/d for $36. Of course, they would love to have the solidarity of fellow OPEC producers in such a reduction of supply. But as the largest world producer and exporter, Saudi Arabia has the greatest ability to swing its production to achieve a higher or lower price.

And OPEC’s reluctance to increase production in early 2008 to lower oil prices shows that if they attain market control from a falling non-OPEC supply, they may allow oil prices to move beyond $100 again in 2010 if demand recovers by then.

Bottom line: Oil prices are close to their historical average, but have upside risks due to the natural decline of non-OPEC fields and the decision of OPEC producers to maximize their revenue. Even while the recession keeps demand low worldwide, it would be prudent for all of us importers to plan for $2.50+ per gallon gasoline in the medium term and even higher prices in the long-term so that price shocks do not derail our economic progress. The best route to achieve this is through a sustainable energy transition based on efficiency and continued growth in renewable energy deployment.

A Little Historical Background

Non-OPEC production has been on a rough plateau since 2004. It fell slightly in 2005 then increased a bit in 2006 and 2007. For 2008, the US Energy Information Agency (EIA) predicted that non-OPEC production would increase ~1 million barrels per day. Non-OPEC producers certainly had a price signal from high oil prices to increase their production in 2008. But instead, overall non-OPEC output was down ~300,000 barrels per day (b/d). In December, the EIA predicted an increase of ~400,000 b/d — with much of that occurring in the US, Brazil, and Azerbaijan. Such an increase would require OPEC producers to keep their production at current levels or to drop even further to maintain current prices amid the recession.

But the non-OPEC production increase the EIA expects could evaporate just like in 2008 or even worse. Norway expects its oil production to fall ~9.7% — which means a drop of ~200,000 b/d. Mexico expects production ~3 million b/d, or a drop of ~170,000 b/d. The UK will probably fall at least another 100,000 b/d. And now Russian production is more suspect. If their output falls 2%, that means a drop of ~200,000 b/d. That 700,000 b/d of non-OPEC declines may be difficult for other producers to offset. And the low price signal supports little new production to offset mature field declines.

US production is projected to increase by ~400,000 b/d on less hurricanes and some new fields ramping up. But the first week of US production was below its 2008 level — so we will have to see big change for EIA projections to become reality. The supply constraints do not equate to a scary first half of 2009 because demand has fallen so dramatically. But if economic recovery tries to pick up in the second half of this year or in 2010, we shouldn’t count on large increases in non-OPEC oil to fuel it.

Bottom line: The potentially declining non-OPEC supply picture is another reason we should all help Obama transform the US energy system through a Green Stimulus Package. Economic growth can be securely built on the efficient use of renewables for future demand growth and through substituting some of the carbon-emitting fossil fuels upon which we now depend.

Onwards in the Sustainable Energy Transition!

Looking back at 2008, oil has been perhaps the wildest ride. Most analysts had no clue oil could rise to its July record ~$147 per barrel and then were equally caught off guard by the recent lows below $40. It is projected that 2008 will be the first year with a global demand decrease since the early 1980s. So, what shifts can we try to anticipate in the year ahead?

Bloomberg reported today that the median projection from a roundup of oil analysts is a rebound in oil’s price to ~$60 per barrel (50% higher than today). I find this guesstimate to be reasonable, but think the range of possibility spans from as low as $30 and as high as $80. If the recession continues to deepen beyond the first quarter then OPEC would be forced to continue to lower its production but may not be able to do so enough to get prices out of the $30s. But if OPEC is disciplined in the cuts it committed to by January 1st (December numbers show they cut even further than their December commitment and may have the resolve to follow-through next month), then price may begin to rise toward the cost of marginal non-OPEC production of $70-$80.  For the latter scenario, the economy will probably need to show signs of life in the second half of ‘09.

Outside of OPEC, the supply side may be a bullish or bearish pressure on prices. The lower oil prices may curtail many marginal oil projects and enhanced oil recovery efforts — accelerating the natural decline in old fields. This could send production down sharply in Mexico, Russia, the UK, and Norway. The tight credit market may exacerbate this delay in new production, and send non-OPEC oil production down even more than this year’s ~300,000 barrel per day drop . But on the potentially bearish side, Brazil could send their production higher and the US is projected by the EIA to increase production more than 5% in 2009 due to a less active hurricane season and a number of large Gulf of Mexico projects ramping up.

The demand side is even more difficult to predict given the alarming economic situation. Will demand fall a huge 3+% worldwide on a continuation of the current cratering in industrial production? Such a scenario would almost certainly keep prices below $60 per barrel. Or will India, China and a few other developing countries manage to grow during this tough time and make up for some of the falling demand across the OECD. Another key question mark is whether Obama & Co. can continue to make progress toward efficient travel. If people buy more efficient vehicles and carpool/bicycle/take transit more in 2009, we can continue to reap the benefits of lower gasoline prices. But if we revert to our 2007 habits because of the temporary drop, prices could climb back above $2 per gallon.

Bottom line: This will be another interesting year for the oil market. The race will be between falling global demand and the combined forces of OPEC cuts and natural decline in non-OPEC production. The tighter credit market may also slow new projects and pressure prices to rise from their current low below $40 per barrel. While we probably won’t see summer 2008 oil prices above $100 per barrel in 2009, I guesstimate the potential range for monthly prices to be ~$30-$80. Continued advances in efficiency would allow us all to enjoy low prices and decrease our climate-disrupting carbon emissions.

The second report, an early release of the EIA Annual Energy Outlook, showed long-term demand weakness. In a big shift from last year’s report, it projected US demand for oil will remain flat through 2030 — unlike the almost constant demand growth we have experienced ever since oil’s North American discovery in ~1860. While it does project some increase in liquid fuel demand over the next 22 years, the EIA believes that incremental demand will be met by increasing biofuels supply [Stay tuned for more dramatic details about the Annual Energy Outlook in the days ahead].

Additionally, OPEC’s announced cut, while a record amount at 2.2 Mbd, is not completely trusted by the market. Some members often produce beyond their quota, so the oil price may not significantly react to the cut until the lower supplies are visible via lower shipments around the globe. These numbers should be available by mid-January.

So, the price may rise above $50 per barrel if OPEC executes the cut they announced AND there is no further collapse in oil demand beyond current EIA predictions. Another wild card is the production levels for non-OPEC producers Russia, Kazakhstan, and Azerbaijan — who have stated some willingness to cut production in sync with OPEC. These three oil producers have a similar dependence on oil revenue and hope to prevent a further spiral downward in prices.

Bottom line: Even a record cut by OPEC has little ability to increase prices in today’s deep recession. News from the US, the world’s biggest consumer of oil, is full of low demand in the short-term and stagnant demand in the long-term. As I’ve posted here before, this reduction in oil consumption is good for the climate and can help us reduce greenhouse gas emissions in the decades ahead as long as we keep our focus on smart efficiency and low-carbon energy deployment.

As I guesstimated

OPEC will meet on Wednesday, the 17th, and announce a cut in production. Some OPEC members are claiming this cut may be surprisingly large so that oil prices climb back toward $70 per barrel. Such a cut could be 2-2.5 million barrels per day and may include a promise from non-OPEC Russia to cut as well. Colder than average weather would also be a bullish pull on prices since it would increase demand for heating fuels. Time will tell.

The best thing we can do as importing consumers is to focus on efficiency and domestically-available substitutes such as wind, solar, and natural gas. Such a sustainable energy transition would prevent oil prices from climbing back toward records even if the OPEC cuts are dramatic and the weather unusually cold. Such efforts will be good for our struggling economy and win us friends worldwide in the ongoing effort to curb greenhouse gas emissions (Europe and others leading in Poznan need our partnership to effectively mitigate global warming).

Onwards in the sustainable energy transition-

The desperation of OPEC to cut further even as winter heating begins leads me to think many analysts at Morgan Stanley and elsewhere may just be right that global oil demand will fall in 2009 for the first time in more than 20 years. The climate change implications would be a much slower growth in global greenhouse gas emissions for the year, giving hope that we can begin to lower global emissions within the next decade.

The EIA weekly oil report coming out tomorrow will shed some light on whether US inventories remain strong as the winter commences (I saw my first few snow flurries here in New York City today). I will report fully on its insight and other major energy and climate news of the day tomorrow afternoon.

Onwards to a sustainable energy transition-