And petroleum inventories are sky-high as well, as the weekly EIA petroleum report shared. Crude oil climbed 5.6 million barrels (Mb) to ~17% above last year and the highest level since September 1990. Gasoline demand was down 4.2% last week, sending inventories above last year levels and above average. Distillate storage is more than 31% above last year, supported by demand that was 7.4% lower than the same week in 2008. And propane inventories rose to ~60% above last year on 17.5% lower demand.

And it turned out that the small drop in US crude production I wrote about last week was a fleeting phenomenon. Output recovered to 5.482 Mbd, the highest level in several months. Whether it will reach 5.5 Mbd is anybody’s guess as domestic oil drilling wanes.

Attempts at a bull run in fuel prices will take a while to arrive as recession-induced low demand maintains its grip on the energy market. Solar’s ability to compete with the resulting low energy price is diminished unless module producers are able to accelerate their cost reductions in the months ahead. I anticipate a return to higher energy prices this Fall and beyond that will expand the solar and wind markets to new records.

I’ll keep you posted on major developments in supply, demand, and price as it relates to our much-needed Sustainable Energy Transition.

In the US, prices weren’t this low since March 2006. They now have ~9.5% to fall before breaking the record low ~$4.33 in 2003-04.

This solarbuzz price watch is based on the purchase of one solar module from 1,300+ retailers worldwide. Factory gate prices can be 50-70% lower, which is why you have heard that modules are selling for less than $2.50 per watt by some indeces.

Prices should drop below the US record low by early 2010. If natural gas prices also lift above $7 per MMBtu (and oil above $70 per barrel) by that time, current federal and state incentives should drive a large growth in the solar market. In 2010, the US solar PV market could finally break the 1 GW level.

Bottom Line: Solar prices are dropping again and fossil energy prices are stagnating. If solar continues to fall at current rates and fossil energy prices recover toward 2007 levels (not quite 2008 highs), then the long-coveted grid parity for solar could become months away rather than years.

The number has dropped from 1,606 in September to 810 as of this week. And many analysts believe rigs will fall another 10+%. This doesn’t mean natural gas production could fall in half – because the number of producing wells is still high. But the rate that producers drill for new wells to compensate for the declining production in older wells has taken a big hit. Within a few months, US natural gas production will probably fall more than 5% and send prices higher than their current levels below $4. The global LNG market will be able to help make up for some lower US production, but may struggle if Canadian natural gas production falls sharply as well.

Again, I don’t see high probability of a big price spike for natural gas this Spring (in fact, they could fall a good bit further and help more utilities replace coal with lower-carbon natural gas). But if the summer is hot and the upcoming winter is cold, natural gas demand could uptick to the falling production level in the medium term.

I’ll keep you updated on this and other developments in the months ahead.

Have a great weekend!

Cooler than normal weather sent storage levels down at a faster pace than normal last week (20% faster), but average temperatures moving forward appear to make way for Spring inventory stability soon. Prices may fall in the near-term on the high storage levels, but then production will probably fall because companies have cut back on their new drilling.

The number of natural gas rigs in the US was reported by Baker Hughes today to have fallen to 884, a 45% decrease from its peak last September and the lowest since May 23, 2003. The recent fall in rigs leads the EIA to predict in their March Short Term Energy Outlook that US natural gas production will stagnate in 2009, after robust growth of ~6% in 2008. It may even fall significantly later in the year.

In Canada (our main source of natural gas imports), supplies appear set to slide. Their rig count dropped over 20% last week to 220, down almost 50% from its peak a few months ago. With decline rates generally higher than 20% per year, it won’t take long for lower rig counts to translate into lower production – which will then send prices back up to the marginal cost of production or higher.

So, a continued focus on efficiency and replacement by renewables will be crucial to prevent natural gas prices from spiking above $8 per MMBtu again soon. I’ll be sure to share the quick changes in the natural gas and larger energy sector as they continue to develop.

With winter drawing to a close within a few short weeks, supplies are poised to rise even higher compared to recent averages. This means the current price of ~$4 per MMBtu will probably drop. But a bullish factor on prices this week is the recent 10% increase in the price of oil. Oil and natural gas prices tend to co-move due to their ability to substitute each other as energy sources. A general rule of thumb is that oil’s price per barrel is roughly 10X natural gas’s price per MMBtu. Oil climbed above $140 per barrel last summer while natural gas almost hit $14 per MMBtu, and now the prices are $40+ to $4.

But with more recent numbers showing US manufacturing falling sharply, I believe natural gas may fall significantly below $4 even if oil climbs to $50 on fresh OPEC cuts (like the pullback that the UAE announced today).

It’s good for the climate for natural gas to substitute oil and coal. So I hope its price will remain low for at least several months before credit markets allow substitution by significant new wind and solar.

Onwards in the sustainable energy transition-

As I blogged a couple weeks back, First Solar has long held some of the lowest costs in the business. And based on their last press release, their costs fell more than 15% in the fourth quarter alone. Now they are within striking distance of competing with conventional power without substantial subsidies.

And unlike many of its competitors, First Solar maintained rapid revenue growth in the financial crisis-ridden fourth quarter over the third quarter and the fourth quarter of 2007.

Nice work, First Solar, and here’s to other solar companies continuing to lower their costs to make solar energy affordable enough to achieve its vast potential!

But whether the production stagnation is due to the market or the government doesn’t really matter to the global oil market. All that matters is that there will be less oil than anticipated. And for non-OPEC aggregate production, a stagnant Azerbaijan probably means a stagnant non-OPEC. The EIA predicted growth of .15 Mbd in 2009, about the amount Azerbaijan is shaving off their forecast. So, if this report is correct, the burden of offsetting production declines in Mexico, the UK, Norway and elsewhere is squarely on the shoulders of the US and Brazil.

So far, the US and Brazil are showing promise. After a slow start for the year, US oil production is now .2+ Mbd higher than last year. And Brazil is enjoying ~.1 Mbd growth. The question is whether the rapidly falling US rig count and diminished profitability on low prices will send production lower as the months progress. Another X factor is the US hurricane season this summer. If there are fewer direct hits on Gulf of Mexico oil infrastructure, US production seems poised for a big uptick, the first increase since 1991.

Of course, a slight decrease in non-OPEC production may not be a big deal in a year where global oil demand is predicted to fall more than 1 Mbd, but could create challenges further down the road. For now, the EIA weekly US petroleum report showed that crude oil supplies are at extremely comfortable levels. Crude inventories are 15% higher than last year and way above the 5-year average for this time of year. And all refined products (gasoline, distillates, and propane) are above average. The deep recession means that oil prices may even fall further this Spring as oil demand falls on lower Northern Hemisphere heating needs, unless OPEC makes another cut in production next month.

The recent potential reemergence of $2 gasoline that I wrote last week was delayed by worse than expected economic news, as I said may happen. Prices peaked at $1.966 a few days ago before falling back to $1.938 today. We’ll see how pump prices develop based on OPEC’s choices and the scale of our economy’s decline.

Bottom Line: Our precarious oil supply situation has not gone away. The fall in global demand is allowing prices to be low for some months. But stagnant production in places like Azerbaijan and declining production in most of the world means energy security combines with climate change to warrant a quick transition to accelerated efficiency and renewables deployment in the US and beyond.

I wrote last month on the potential production path if current declines continue at a mostly constant rate. This would lead to close to zero net exports by 2013. There of course is the possibility that decline rates accelerate, especially since oil’s price collapse and the credit crisis make enhanced oil recovery projects less profitable. But I now want to briefly go over the cases of the US, Indonesia, and the UK from data available in the BP Statistical Review of World Energy.

The US had peak oil production in 1970 at over 11 million barrels per day (Mbd), larger than Saudi Arabia’s output today. Ever since then, production has been in steady decline except for a few years of gains after prices skyrocketed in the 1970s and 1980s. Production is now ~40% below its peak of 39 years ago and is finally roughly stabilizing due to the high prices of the last few years.

Indonesian production peaked ~1991 at ~1.6 Mbd and has since fallen a similar ~40% before some stabilization at less than 1 Mbd. The UK peaked in 1999 at ~2.6 Mbd and has fallen ~45% before its slowly declining ouput ~1.6 Mbd.

If Mexico has a similar trajectory to these major producers, then production may begin to stabilize in the years ahead at ~2.3 Mbd (40% below the 2004 peak of 3.825 Mbd). This level of production would preserve some small exports beyond 2012 as long as Mexico accelerates its energy efficiency efforts.

I will monitor Mexico’s monthly production figures and report any major insight on future supply as the year progresses. Whatever the exact numbers turn out to be, efficiency will be a smart move for us as this top source of imports faces less and less oil as time goes by.

US pump prices of gasoline continued their record drop at 61 straight days falling to less than $2.10 per gallon. I now see the possibility of gasoline to fall below $2 per barrel for at least a number of weeks. But the bullish factor of colder weather (increasing heating fuel demand) may stabilize the price soon — the lower 48 states are a bit colder than normal for mid-November as the high here in NYC is predicted to be in the 30s for the next two days. We will see what Wednesday’s oil report and Thursday’s natural gas storage numbers reveal about fuel inventories as the heating season commences.

Bottom line: Widespread recession is lowering demand faster than OPEC cuts and non-OPEC declines for the time being. The resulting lower greenhouse gas emissions and lower energy prices could help stabilize our climate and our checkbooks — as long as we base our 2009+ economic recovery on energy efficiency rather than reverting back to our gas-guzzling, energy insecure ways of a few years ago.

The EIA predicts that next year will be different (as they did last year) since two large new fields are scheduled to ramp up production by the end of 2009 (Gulf of Mexico deepwater projects Thunderhorse and Tahiti). But continued depletion in old fields, the 2009 hurricane season, and the tight credit market may prevent such an increase — at least from getting significantly above 2007 levels.

One of the exciting predictions in the STEO is that coal demand will fall almost 1% in 2009 as substitutes such as wind and natural gas generate more of our country’s electricity. The recent renewal of federal renewable energy tax credits could result in wind and solar alone fully replacing 2% of coal electricity. It should be exciting to see how this plays out.

Thanks to the many Princeton alumni who have endorsed the PACE statement in its first day!

Onwards-