Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
Silver Notches Best Month Since 1979 - 12th Aug 20
Silver Shorts Get Squeezed Hard… What’s Next? - 12th Aug 20
A Tale of Two Precious Metal Bulls - 12th Aug 20
Stock Market Melt-Up Continues While Precious Metals Warn of Risks - 12th Aug 20
How Does the Gold Fit the Corona World? - 12th Aug 20
3 (free) ways to ride next big wave in EURUSD, USDJPY, gold, silver and more - 12th Aug 20
A Simple Way to Preserve Your Wealth Amid Uncertainty - 11th Aug 20
Precious Metals Complex Impulse Move : Where Is next Resistance? - 11th Aug 20
Gold Miners Junior Stcks Buying Spree - 11th Aug 20
Has the Fed Let the Inflation Genie Out of the Bottle? - 10th Aug 20
The Strange Food Trend That’s Making Investors Rich - 10th Aug 20
Supply & Demand For Money – The End of Inflation? - 10th Aug 20
Revisiting Our Silver and Gold Predictions – Get Ready For Higher Prices - 10th Aug 20
Storm Clouds Are Gathering for a Major Stock and Commodity Markets Downturn - 10th Aug 20
A 90-Year-Old Stock Market Investment Insight That's Relevant in 2020 - 10th Aug 20
Debt and Dollar Collapse Leading to Potential Stock Market Melt-Up, - 10th Aug 20
Coronavirus: UK Parents Demand ALL Schools OPEN September, 7 Million Children Abandoned by Teachers - 9th Aug 20
Computer GPU Fans Not Spinning Quick FIX - Sticky Fans Solution - 9th Aug 20
Find the Best Speech Converter for You - 9th Aug 20
Silver Bull Market Update - 7th Aug 20
This Inflation-Adjusted Silver Chart Tells An Interesting Story - 7th Aug 20
The Great American Housing Boom Has Begun - 7th Aug 20
NATURAL GAS BEGINS UPSIDE BREAKOUT MOVE - 7th Aug 20
Know About Lotteries With The Best Odds Of Winning - 7th Aug 20
Could Gold Price Reach $7,000 by 2030? - 6th Aug 20
Bananas for All! Keep Dancing… FOMC - 6th Aug 20
How to Do Bets During This Time - 6th Aug 20
How to develop your stock trading strategy - 6th Aug 20
Stock Investors What to do if Trump Bans TikTok - 5th Aug 20
Gold Trifecta of Key Signals for Gold Mining Stocks - 5th Aug 20
ARE YOU LOVING YOUR SERVITUDE? - 5th Aug 20
Stock Market Uptrend Continues? - 4th Aug 20
The Dimensions of Covid-19: The Hong Kong Flu Redux - 4th Aug 20
High Yield Junk Bonds Are Hot Again -- Despite Warning Signs - 4th Aug 20
Gold Stocks Autumn Rally - 4th Aug 20
“Government Sachs” Is Worried About the Federal Reserve Note - 4th Aug 20
Gold Miners Still Pushing That Cart of Rocks Up Hill - 4th Aug 20
UK Government to Cancel Christmas - Crazy Covid Eid 2020! - 4th Aug 20
Covid-19 Exposes NHS Institutional Racism Against Black and Asian Staff and Patients - 4th Aug 20
How Sony Is Fueling the Computer Vision Boom - 3rd Aug 20
Computer Gaming System Rig Top Tips For 6 Years Future Proofing Build Spec - 3rd Aug 20
Cornwwall Bude Caravan Park Holidays 2020 - Look Inside Holiday Resort Caravan - 3rd Aug 20
UK Caravan Park Holidays 2020 Review - Hoseasons Cayton Bay North East England - 3rd Aug 20
Best Travel Bags for 2020 Summer Holidays , Back Sling packs, water proof, money belt and tactical - 3rd Aug 20
Precious Metals Warn Of Increased Volatility Ahead - 2nd Aug 20
The Key USDX Sign for Gold and Silver - 2nd Aug 20
Corona Crisis Will Have Lasting Impact on Gold Market - 2nd Aug 20
Gold & Silver: Two Pictures - 1st Aug 20
The Bullish Case for Stocks Isn't Over Yet - 1st Aug 20
Is Gold Price Action Warning Of Imminent Monetary Collapse - Part 2? - 1st Aug 20
Will America Accept the World's Worst Pandemic Response Government - 1st Aug 20
Stock Market Technical Patterns, Future Expectations and More – Part II - 1st Aug 20
Trump White House Accelerating Toward a US Dollar Crisis - 31st Jul 20
Why US Commercial Real Estate is Set to Get Slammed - 31st Jul 20
Gold Price Blows Through Upside Resistance - The Chase Is On - 31st Jul 20
Is Crude Oil Price Setting Up for a Waterfall Decline? - 31st Jul 20
Stock Market Technical Patterns, Future Expectations and More - 30th Jul 20
Why Big Money Is Already Pouring Into Edge Computing Tech Stocks - 30th Jul 20
Economic and Geopolitical Worries Fuel Gold’s Rally - 30th Jul 20
How to Finance an Investment Property - 30th Jul 20
I Hate Banks - Including Goldman Sachs - 29th Jul 20
NASDAQ Stock Market Double Top & Price Channels Suggest Pending Price Correction - 29th Jul 20
Silver Price Surge Leaves Naysayers in the Dust - 29th Jul 20
UK Supermarket Covid-19 Shop - Few Masks, Lack of Social Distancing (Tesco) - 29th Jul 20
Budgie Clipped Wings, How Long Before it Can Fly Again? - 29th Jul 20
How To Take Advantage Of Tesla's 400% Stock Surge - 29th Jul 20
Gold Makes Record High and Targets $6,000 in New Bull Cycle - 28th Jul 20
Gold Strong Signal For A Secular Bull Market - 28th Jul 20
Anatomy of a Gold and Silver Precious Metals Bull Market - 28th Jul 20
Shopify Is Seizing an $80 Billion Pot of Gold - 28th Jul 20
Stock Market Minor Correction Underway - 28th Jul 20
Why College Is Never Coming Back - 27th Jul 20
Stocks Disconnect from Economy, Gold Responds - 27th Jul 20
Silver Begins Big Upside Rally Attempt - 27th Jul 20
The Gold and Silver Markets Have Changed… What About You? - 27th Jul 20
Google, Apple And Amazon Are Leading A $30 Trillion Assault On Wall Street - 27th Jul 20
This Stock Market Indicator Reaches "Lowest Level in Nearly 20 Years" - 26th Jul 20
New Wave of Economic Stimulus Lifts Gold Price - 26th Jul 20
Stock Market Slow Grind Higher Above the Early June Stock Highs - 26th Jul 20
How High Will Silver Go? - 25th Jul 20
If You Own Gold, Look Out Below - 25th Jul 20
Crude Oil and Energy Sets Up Near Major Resistance – Breakdown Pending - 25th Jul 20
FREE Access to Premium Market Forecasts by Elliott Wave International - 25th Jul 20
The Promise of Silver as August Approaches: Accumulation and Conversation - 25th Jul 20
The Silver Bull Gateway is at Hand - 24th Jul 20
The Prospects of S&P 500 Above the Early June Highs - 24th Jul 20
How Silver Could Surpass Its All-Time High - 24th Jul 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

Instability & Depletion Add Uncertainty to Energy Sector

Commodities / Energy Resources Apr 03, 2009 - 07:57 PM GMT

By: Joseph_Dancy

Commodities

Best Financial Markets Analysis Article1Energy use correlates closely with economic growth. Last month the World Bank forecast the global economy will likely shrink for the first time since World War II. International trade will decline by the most in 80 years according to the report, a stark trend in an economy that has been ‘globalized' over the last several decades.

Both the IMF and World Bank forecast developing nations will bear the brunt of the economic contraction as they face huge shortfalls to pay for imports and to service debts. “This crisis is the first truly universal one in the history of humanity,” a former IMF Managing Director.


Analysts note popular anger around the world is growing as a result of rising unemployment, pay cuts and freezes, bail-outs for banks, falling house prices, and the plummeting value of savings and pension funds. As people lose confidence in the ability of governments to restore stability, protests and social instability are increasingly likely.

Crude Oil Market / Political Instability - The Economist Intelligence Unit (EIU) issued a report last month that predicts the global economy will begin recovering in 2010 under their base case scenario. They assign a 60% chance for that scenario. Growth would be slow, but positive.

Along with their economic forecast the EIU calculates a ‘political instability index'. The 2009 base case identifies 95 countries with a ‘high risk of regime threatening social unrest'. Under the more dire economic forecasts, which they assign a 40% probability, the chance of instability increases.   

In 2007 only 35 countries made the EIU's ‘high risk' list for political instability. Actual events proved that 66% of those countries experienced serious social unrest or instability—a very high back tested level of correct forecasts.
2
What the EIU report does not address, directly or indirectly, is the number of major crude oil exporting countries that are on the list of 95 countries with a high or very high risk of political instability.

Political instability may not result in regime change, but will add uncertainties to the export markets. Energy exports tend to be a focus of disruption in areas experiencing social instability.

Crude oil exporters on the list of those at high risk of political instability account for nearly 26 million barrels per day of production—a very high percentage of global petroleum output. Keep in mind globally we use roughly 85 million barrels of liquids per day, which is near the global capacity to produce. Seven countries were represented on the list. In addition the Ukraine, a country through which 20% of the natural gas consumed in the European Union, is included as a country with a ‘very high' chance of instability.

In sum, if the EIU's 2009 analysis is correct, and if it is as accurate as the back tested 2007 analysis, the probability of instability in an oil exporting country in the next 12-18 months is very high. Which will add another wildcard into the energy equation, increasing volatility – and investment challenges and opportunities.

Crude Oil Market / Depletion - In a stunning projection issued last month the International Energy Agency (IEA) sees a ‘massive fall' in Mexico's Cantarell Oil Field production in 2009. The field was the second largest producing field in the world a few years ago. It produced roughly 1 million barrels per day on average last year—a decline from 1.4 million barrels per day in 2007. In 2009 the IEA expects production to average around 600,000 barrels per day—a decline of 40% from last years production level.

Pemex, the field operator, is experiencing severe problems with natural gas and produced water production from Cantarell wells which results in well shut-ins and abandonment. Additional water separation units are expected to be installed on production platforms. Total Mexico production declined to a 13 year low last year and is expected to fall further in 2009 and 2010.

3With current crude oil prices around $45 substantial volumes of production will be shut-in or not developed according to analysts. Stanford Bernstein forecasts U.S. crude oil production will decline by 400,000 barrels per day next year if current crude oil prices remain in place. This figure is a bit high in our opinion, but the downward trend in production and tendency to shut-in wells is the correct analysis.

A separate analysis posted by a contributor to the Oil Drum a few weeks ago predicts world liquids production – crude oil, processing gains, and natural gas liquids – peaked a year ago in March, 2008. (See chart at right, TheOilDrum.com, http://www.theoildrum.com/node/5177 )

Depletion, which runs anywhere from 4% a year upward (note Cantarell's nearly 40% decline rate referenced above), reductions in capital expenditures, depressed energy prices, limitations imposed by the global credit crunch, nationalized oil fields, all will adversely impact future production levels.
45

Matthew Simmons made an excellent new presentation last month on the outlook for the energy sector. He concludes crude oil supply will soon drop sharply as credit and pricing issues slow development to a crawl—and he also contends global demand for energy has not fallen as much as many assume (see chart of U.S. demand at right – the U.S. is the largest global consumer of crude oil).

Longer term Simmon's analysis confirms the bullish trends are still in place, global demand will continue to be robust while supply becomes more expensive to develop.

Crude oil futures remain in ‘contango' – a situation where the value in the future is much higher then at the present. Some analysts claim this is bullish for the commodity, an indication that the supply and demand for oil  remains bullish. Companies can use this curve to hedge production from current reserves in the ground (chart courtesy Financial Times). 

6Natural Gas Market – Week after week we have seen significant declines in North American drilling activity—which you would expect with product prices at current levels. Last month the U.S. natural gas rig count fell to 810, the 18th weekly decrease and the lowest rig count since April, 2003 – six years ago. Since the peak last summer (at 1,606 rigs) the rig count is down 796 rigs, almost 50%, and continues to fall.

As noted in last month's LSGI Report with elevated depletion rates the current level of drilling activity will not replace production—and supplies and deliverability will suffer relatively quickly due to depletion. By the fourth quarter the Energy Department estimates U.S. natural gas supplies will decline by more than 5% - and will continue to fall as drilling is not replacing reserves. 

The CEO of Devon Energy, Larry Nichols, notes "the drop in supply will be so steep, it could easily catch up to where demand has dropped to before the recession ends." We agree with his assessment.

7The last time drillers slowed drilling activity to this extent was seven years ago in the 2001 slowdown. Natural gas futures subsequently advanced 86 percent as supplies were adversely impacted. It took four years after the 2001 drilling slowdown for U.S. natural gas production to begin increasing again – it is difficult to reverse the trend once drillers step off the exploration treadmill. 

The charts at right illustrate the relationship between active rigs (top chart from Bloomberg) U.S. natural gas production volumes (middle chart from Financial Times) and futures prices (bottom chart from the New York Times). We tried to roughly correlate the time periods to illustrate the relationship between the rig count, production, and pricing.

Demand for natural gas has declined with the U.S. economy. Demand from the industrial sector is around 5% lower than year earlier levels according to the Energy Department. This sector accounts for roughly one-third of the market. Demand is not expected to increase in this sector until late 2009 or early 2010.

8Electrical generation is also down roughly 2.5% from year earlier levels according to data from the Edison Electric Institute. Summer demand for electrical generation is expected to be lower than year earlier levels, and natural gas storage should be easily filled to near capacity by summer end assuming no massive hurricane disruptions in the Gulf of Mexico. 

As we enter the fall and winter months we expect trends in supply and demand will make it clear the oversupply relationship has changed. We expect prices to begin to firm from the current depressed levels at that point, if not in late summer. 

By Joseph Dancy,
Adjunct Professor: Oil & Gas Law, SMU School of Law
Advisor, LSGI Market Letter

http://www.lsgifund.com

Email: jdancy@REMOVEsmu.edu

Copyright © 2009 Joseph Dancy - All Rights Reserved

Joseph R. Dancy, is manager of the LSGI Technology Venture Fund LP, a private mutual fund for SEC accredited investors formed to focus on the most inefficient part of the equity market. The goal of the LSGI Fund is to utilize applied financial theory to substantially outperform all the major market indexes over time.

He is a Trustee on the Michigan Tech Foundation, and is on the Finance Committee which oversees the management of that institutions endowment funds. He is also employed as an Adjunct Professor of Law by Southern Methodist University School of Law in Dallas, Texas, teaching Oil & Gas Law, Oil & Gas Environmental Law, and Environmental Law, and coaches ice hockey in the Junior Dallas Stars organization.

He has a B.S. in Metallurgical Engineering from Michigan Technological University, a MBA from the University of Michigan, and a J.D. from Oklahoma City University School of Law. Oklahoma City University named him and his wife as Distinguished Alumni.

Joseph Dancy Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules