MonthlyReport

Global Supply World Records ... as of Sept 11 2009

Top 7 National Producers ... as of Dec 31 2008

TrendLines Barrel Meter ... as of March 6 2010

Irrational Exuberance Revisited ... Sept 11 2008

TrendLines Compilation of Crude Oil Price Forecasts ... as of Jan 10 2010

TrendLines Gas Pump ... as of Oct 27 2008

Sept 11th ~ A new Annual Supply record of 85.4-mbd was set in 2008. The year-to-date pace of 2009 Extraction (to Aug 31) is 83.7-mbd.

The Quarterly Supply record of 85.8-mbd was set in 2008Q1. July 2008 continues its distinction for the all time global Monthly Supply record: 86.6-mbd, 2.4-mbd above today's monthly pace of 84.2-mbd.

The Quarterly record for Demand of 86.9-mbd was set in 2007Q4 (with difference of 1.7-mbd drawn from inventories). High Demand Month is February 2008's 87.7-mbd.

TrendLines Research's All Liquids Underlying Decline Rates Observed in 2009: 3.2% Worldwide & 2.5% in Saudi Arabia

Note: IEA 2008 recent annual stats are overstated by 0.8-mbd due to its failure to deduct energy inputs for processing BTL & Bitumen. Thus, only EIA A/Q/M stats are recognized as Records.

Feb 3rd ~ The recent OPEC quota restrictions are unfortunate as Saudi Arabia missed its 10.68-mbd Annual Record (set in 2005) by a mere 50-kbd.

Russia has an insurmountable lock on second place (10.0-mbd) for national suppliers. The USA has recovered well from Hurricane repercussions (7.4-mbd). Following are China (3.9), Iran (3.8), Canada (3.3) & Mexico (3.1-mbd).

TrendLines Research's All Liquids Underlying Decline Rates Observed in 2008: Worldwide 3.3%, Saudi Arabia 4.5% & USA 3.4%

Marsh Lake, the Yukon ~ Mar 6 2010 ~ The USA Contract Crude Price averaged $72 in February, down $3 from January, and near double the $37/barrel four year low of December 2008. Including spikes, Crude Oil should settle into a general trading range of $60 to $72/barrel thru the balance of Q1/Q2. The present spiking activity is completely detached from fundamentals. As seen in the chart, Prices during the last three seasons have been hugging the Unconstrained Spike Potential line (dashed red line). In light of upcoming high Inventory levels, a $12/barrel downward correction to $60 appears imminent.

With February's fundamentals-based Crude Price (yellow line) at a mere $42/barrel, the contract price was a bloated 1.8 x's fundamentals .... an unduly inflated price considering the average factor was 1.5 over the last five years. The high for this metric in the recent past was 2.2 in y2K, and only 1.4 during the July 2008 spike, on its way to 1.0 x's fundamentals upon the collapse later that year. The level of bullishness reflected by this metric has not been seen since mid-2004.

One factor for the relatively higher Price is renewed speculation/hedging activity. A new record of 291k long futures contracts was set in late October, compared to the recent volume high (259k) in March 2008. At 476k in October, total non-commercial contracts, long & short volume combined, has passed the former 440k record Feb/2008 mark. The net volume (longs minus shorts) set a new record of 135k in January. This compares to 2008's high mark of 100k.

The following TrendLines Price Targets are based on our projections of future Avg Extraction Cost, Currency Debasement, Hedging Activity, National Inventories, Surplus Capacity & The Media Noise-du-Jour effects on Windfall Profits.

March/2011: TrendLines Research 1-yr Target for USA Contract Crude Price of $78 is increased today to $86/Barrel; assumes 86-mbd Supply, 7-mbd Surplus Capacity & $26/barrel Avg Extraction Cost. The USDollar returns to its secular debasement vs the Euro. Its fortunes are conversely correlated to America's Deficit & National Debt and the USD:EUR exchange rate should revisit the .65 mark.

On the medium term, Crude Prices escalate to new record highs ... then plunge. Geopolitical events could spike Price over the $100 threshold as early as 2011Q3, and the monthly Avg will almost certainly cross over by 2011Q4. Two major forcings are behind this general upward price movement: (a) a return to secular uptrend of USDollar debasement; and (b) ever-rising Extraction Costs. TrendLiners will recall that this has been our position since late 2008.

The first significant American impact of higher prices will be a serious re-collapse of New Car & Light Truck Sales. This occurred in 2007Q4 upon attainment of certain Oil Price/GDP ratios, and were signalled when Crude hit $85/barrel ($3/gallon gasoline). This same threshold will have been breached when Contract Price passes thru the $92/barrel ($3.25/gal) level likely in 2011Q3. The weak state of the Recovery raises question as to whether the USA economy can absorb such a shock to the auto sector. Even more doubtful is ability of the rest of the world to take this in stride. Several G-20 nations may find themselves back in Recession, about the time Price goes thru the $103/barrel level.

The present record for the monthly Avg ($131/barrel) was set in July 2008. Unsustainable spikes could breach that figure in 2012Q4, with the Monthly Avg catching up in 2013Q1. Hopefully, sticker shock will coax the American Congress & President to address their fiscal mismanagement at that point. Due to political realities surrounding the timing (Nov 2012 Elections), the Republican Party is poised for good fortunes with respect to potentially slashing the Democratic Majority ... and possibly dethroning Obama himself.

The Barrel Meter model assumes the USD:EUR exchange rate will deteriorate til reaching 0.45 in April 2013 (EUR:USD = 2.22). Political platforms by both Parties will be required to address the Deficits & National Debt during the Election Campaign. Whatever the outcome of the Race to the Whitehouse, the USDollar debasement should be halted by hard decisions in Washington, to the glee of the investment community, and despite the USDollar's diminishing status as the global reserve currencey.

The post-$60 price run of Crude's contract price will finally be impeded in 2013Q2. At that juncture, Price will be blocked by the same Demand Destruction Barrier (DDB) that firmly arrested the 2008 price run. The negative effects of rising energy costs on the disposable income of consumers and the profits and viability of businesses and institutions eventually takes a toll against the economy. The Demand Destruction Barrier represents an Crude Price/GDP ratio whereby recessionary feedbacks come to fruition that can enhance economic contractions. To that end, this $150 peaking of Price could quite likely precipitate an economic contraction should the neither the Fed not mitigate with appropriate Monetary Policy, nor Congress with appropriate Fiscal measures. As happened in the Summer of 2008, Demand will back off as alternative energies and substitutes are pursued. With the marginal All Liquids being less required, Avg Extraction Prices should collapse as much as 50% as international Inventories burgeon ... but alas the secular uptrend will not be thwarted.

March/2015: TrendLines 5-Year Target of $129 decreased today to $72/barrel; assumes 90-mbd Supply, 4-mbd Surplus Capacity & $33/barrel Avg Extraction Cost. After 2013, the USD:EUR exchange rate rebounds to a 0.75 (EUR:USD = 1.33) trading range.

Based on an 8.5 year business cycle in play, the USA is likely to see an economic cycle high in 2013Q1 and another contraction in 2017Q3. The extent of this being a hard or soft landing is dependent on Fed action. A resultant $10 dampening on crude price is temporary. Be assured the secular price rise shall continue, mainly forced by rising Extraction costs.

March/2020: TrendLines 10-Year Target of $173 decreased today to $101/barrel; assumes 96-mbd Supply, 1-mbd Surplus Capacity & $47/barrel Avg Extraction Cost.

In comparison, the similar WTI Futures Contracts for these same 1-yr & 5-yr targets are $79 (down $1 from 30 days ago) & $87 (down $3) respectively today. Look for the futures prices to slide $1 on the short term & rise another $41/barrel for 2015, as they catch up with current realities. Our comparative figure for the final futures date of Dec 2018 is $176/barrel, far higher than the $95 (down $5 from 30 days ago) for today's contract.

Over the long term, the benefits of USDollar improvement and stabilization of Extraction costs are far outweighed by the evaporation of Surplus Capacity. From its peak of 8-mbd in 2012, spare production capacity completely dwindles away by 2025, aside from economic events. An encounter with $243/barrel is projected in 2029. Technical obsolescence inspired Demand Destruction should bring about some degree of price stabilization deep into the future.

June/2035: TrendLines 25-Year Target of $218 increased today to $226/barrel; assumes 97-mbd Supply, 1-mbd Surplus Capacity & $100/barrel Avg Extraction Cost.

Components of the USA Contract Crude Price

The Barrel Meter offers a visual depiction of the TrendLines Research analysis of the components that comprise the USA Contract Crude Price. By studying the forcings that affected Price from 1999 to 2007, our model was able to dissect in real time the factors in play during the historic 2008 spike. Importing future Surplus Capacity stats from our Peak Scenario 2200 production profile to the Barrel Meter model allows us to combine forecasts of each of those components and reasonably project Crude Price 25 years into the future.

USA Contract Crude Price Spike - using the TrendLines Barrel Meter, it is possible to dissect the $94 spike (from Jan-2005) to $131/barrel PEAK (July 2008) & collapse back to $37 (Dec-2008):

$94 Spike Forcings:
$131 PEAK Forcings:

$23 Windfall Profits via Media Noise $30

$ 1 Hedging/Speculation Activity $ 2

$ 6 Tighter Inventories $10

$26 Tighter Surplus Capacity $35

$28 Currency Debasement $30

$10 Weighted Extraction Costs $24

The TrendLines Price Targets are based on our projections of future Avg Extraction Cost, Currency Debasement, Hedging Activity, National Inventories, Surplus Capacity & The Media Noise-du-Jour effects on Windfall Profits.

Highlights

March/2011 - 1-yr Target for USA Contract Crude Price: $86/Barrel

March/2015 - 5-Year Target: $72/barrel

March/2020 - 10-Year Target: $101/barrel

2035 Target (25-Yr): $314/barrel

USA New Car Sales collapse: 2011Q3 @ $92/barrel crude ($3.25/gal gasoline)

Return of G-20 Recessions: 2012Q1 @ $103/barrel

Potential Spike to $100/barrel: 2011Q3

Sustained Prices over $100: 2011Q4

Next Potential Spike past record $131/barrel: 2012Q4

Sustained Prices over record $131: 2013Q1

It has been our position since 2004 that Crude Prices in excess of $70/barrel were not sustainable in the Global Economy. As alternative substitutes become more available, this recessionary barrier should rise by about $5/barrel ($ .24/gallon gasoline) per year. It is also clear that the auto industry and the vibrant USA economy shut down when crude hit $85/barrel & gasoline breached $3/gallon. The Oil Price/GDP ratio that inspired this event is poised to repeat in 2011Q4: $93 Crude & $3.28 gasoline. These thresholds should be respected.

Lower energy prices assisted in bringing an end to the USA Severe Recession in April 2009 (to be announced by NBER May 3 2010). But, present spiking activity in Crude Price and gasoline jeopardizes the pace of both the global & USA economic Recoveries. The main downward forcing on Crude Price after attaining new records was the onset of Demand Destruction. The concept of Demand Destruction had eluded most analysts and pundits leading up to the events in 2008. Excessively high product pricing robbed businesses, institutions and consumers of their profitability, viability & disposable income. Conservation, alternative energy and substitution strategies flourished. And they will again should price outreach its place. The most positive outcome of this last episode was the extinguishing of an overly generous Lack of Surplus Capacity premium along with the dispelling of Peak Oil rumours.

TrendLines Research has assisted many stakeholders recognize that All Liquids will enjoy an ever increasing pace for approx two decades, to be followed by a very manageable Post Peak decline. With a return to healthy Surplus Capacity, Marginal costs are irrelevant at this time and thus assures a reasonable pricing regime. Knowledge of these two factors allows policy makers to conduct their research and due diligence and make long term decisions in a less hurried environment.

Jan 10 2010 ~ Yesterday we expanded our Barrel Meter presentation to introduce a 25 Year Target for Crude Price. This was accomplished by importing data on Extraction Costs & Surplus Capacity from our Peak Scenario 2200 into the model. The result is a projected $218/barrel in 2035.

Last month our première Price Forecast compilation chart introduced Adam Sieminski's price study, it mirrors our sentiment that current crude prices are poised for at least a 15% downward correction to better reflect underlying fundamentals. The chief energy economist of Deutsche Bank (Washington) projects contract prices to reach $182/barrel by 2035.

Seeing the global Recession subsiding more quickly, IEA bumped up its 2015 forecast seven bucks to $73 this week. Their long term targets mostly skim a tad below Deutsche Bank, rising to $158 by 2030. EIA released its 2010 AEO in mid-December. Converse to IEA, its path straddles above the Deutsche Bank course, rising to $203 in 2035.

For a reference point, we've inserted our Demand Destruction Barrier (DDB). It demarks the apparent Oil/GDP ratio where rising prices eventually attain critical mass leading to sea changes in conservation and substitution. This invisible ceiling halted the epic 2008 spike at $131/barrel, and should thwart the current price run at $157 in 2014Q4, followed again by a very major correction, according to the Hutter Barrel Meter.

Disagreement that such a constraint mechanism exists separates conventional price forecasting from those within the McPeakster fraternity. For illustration purposes, we include their three showcase predictions to demonstrate the divergence. Monthly updates by a "joker" over at theOilDrum (aka Ace) have been trimmed recently, but still warn the cult following of a $179/barrel spike within 40 months! From here, we deteriorate to contributions by two members of the Lunatic Fringe: Jeff Rubin (ex-CIBC World Markets) foresees "sustained pricing" of $205 in 2012 & Matt Simmons (investment banker) sports infamous speculation of $300 by 2014 & $546/barrel ($600 WTI) in "much less than 20 years".

Note: all targets have been converted to nominal USDollars, and are adjusted to reflect EIA's USA contract crude price (approx 9% less than WTI). Its July 2008 peak of $131 was followed by a December bottom of $37/barrel.

IRRATIONAL EXUBERANCE REVISITED

Sept 11 2008 ~ The Summer of 2008 was indeed a strange one with neophyte pundits like Jeff Rubin of CIBC World Markets screaming & hand waving about imminent $200/barrel crude & $1.75/litre gasoline. This fear mongering was irresponsible and reflected poor comprehension of the Demand Destruction and an inept Economic model. Since crude rose above $70/barrel, energy costs have dampened the GDP growth rate and have an equivalency to rising Fed Rates.

As Contract Crude peaked at $134, TrendLines Research set its Target Price at $109/barrel on July 11 2008. On Aug 6, with Crude down to $119, we reduced our Target further to $102/barrel.

Jeff Rubin failed to realize that a Crude Bubble was under way. The correction in play is now an expansionary forcing to the Economy. Rubin's Recession is as improbable as his $200 Crude, $1.75/litre gasoline & last year's Peak Oil forecast.

It was analysts for Investment Bankers, like Rubin, that assured impressionable consumers that Nortel was worth $100/share, houses should sell for a million bucks & one should pay way more than a thousand dollars for a gold. Crude was just another play. Follow the money folks! It's all about commissions & bonuses...

TrendLines Gas Pump

Oct 27 2008 ~ Like Crude, USA Gasoline went way up; and is plunging just as fast.

This month's Retail Price of $3.57/gal is comprised of $2.84 Wholesale refinery product & a $ .73 Margin. In turn, Margin is $ .48 Taxes & $ .25 Profit.

One would think the retailers are getting very rich, eh. Well, analysis reveals Margin is only up from $ .54 in January Y2k. Taxes & Profit are up from 44.5 & 12.5 cents at that time. In other words, Profit has been rising at 9% per annum.

The Crack Spread (diff betw Wholesale & Contract Crude) for Refiners can be seen ranging from $1.08 & $ .17 ($45.24 & $7.10/barrel) and is currently $ .66/gallon ($27.58/barrel). When this figure drops below $ .48/gallon ($20/barrel), Refiners prefer to produce diesel and gasoline imports commence to rise.

Archive March 2007 Commentary: To give recent price moves and OPEC's actions some perspective, let's recap recent events as tracked by this Report since last October:

The graphs above illustrate steady Supply growth thru 2004 & 2005 and including Q3 of 2006 of 2.1-mbd. Unfortunately, the global GDP growth rate of over 4% was not anticipated; and as we can see in the graph to left, Surplus Capacity evaporated (from over 5-mbd spare to less than 1-mbd). This presented a challenge to the overall supply chain and the constant threat to J-I-T deliveries caused contract prices to creep up to $69/barrel (as seen in the EIA graph below).

Real Prices not only re-attained historic norms but burst thru the upper band and almost reached new highs. This inevitably brought on Demand Destruction in the Summer of 2006.

While Supply had continued its onward and upward path, indeed setting a monthly record in July, much crude was going to commercial inventories around the globe as buyers resisted the new price regime. Regular TrendLiners will remember my comments last Autumn that the sector was seeing surplus production of 1.7-mbd thru 2006Q2 and 1.5 (see surpluses in graph to left) in Q3. At the same time, i mentioned that much of the "apparent demand" was actually speculator-driven.

Eventually the record production of July was dampened as OECD Inventory levels reached practical capacity. There just was no more storage room, Demand Destruction was taking its toll (see record inventories in graph below) and in a mere five months, Contract Prices fell back to $45/barrel (a 35% decline). With orders dwindling, Saudi Arabia and others throttled back even before the OPEC quota cuts were announced. The writing was on the wall. Extraction fell to the extend that during Q4, Demand actually surpassed Supply by 0.2-mbd, but the difference was easily drawn from the record high Inventories.

Prices finally firmed in late January when the OPEC quota restriction matched resurging Demand brought on the discounted Winter prices. Q4 actually set a record for Demand as mentioned above. The 2007Q1 Call of 86-mbd indicates even higher Demand may be upon us prior to the normal seasonal softness of Q2 which is said to have a 84-mbd Call (see Quarterly Call chart below). Between tighter Inventory draws and a new aircraft carrier approaching the shores of Iran, prices have again perked up and are today up $7 dollars ($52/barrel) from last month. But this should be short-lived; and if the lighter Demand of Q2 presents itself as forecast, sub $50 oil will be upon us thru most of the Spring and Summer.

The big question is whether this is the calm before the storm. Q4 Call is 87-mbd. New production infrastructure is somewhat stalled in several producing nations. My analysis is that this Summer & Autumn, suppliers will prudently refill the recently tapped Inventories for a similar drawdown as we saw this past Winter season. I would not be surprised if again Demand outpaces Supply in Q4. This scenario would come at the cost of softer prices thru the Summer as those surpluses go to new record stock builds.

As we see in the green EIA Spare Production graph above, that Agency sees 2-mbd surplus in 2007/2008; a reflection of new extraction, refining and shipping facilities in the works. Russia continues to be the numero uno producing nation. Russia, Canada, Angola & Iraq will provide the new growth in 2007. Most of the 2008-2010 capacity build is occurring in Saudi Arabia. The swing producer is currently supplying 8.6-mbd of crude; and has announced a desire to fold the present 0.6-mbd restriction of its OPEC quota into a larger 2.5-mbd of surplus capacity that it wishes to preserve for geopolitical uncertainties or natural calamity. Thus, Saudi Aramco's expansion of extraction to 12.6-mbd from 11.2 by August 2009 is entirely via projects presently under construction. Phase 2 of this combination of closing depleted fields and developing Reserves will culminate in 13.5-mbd of Maximum Sustainable Capacity (MSC) by the end of 2011 with 11-mbd of ongoing production.

This program represents a 2.3-mbd addition to January's flow rate ... a tad over 0.5-mbd/year. It is certainly an aggressive plan, in that it accelerates a February 2004 Presentation which had planned to attain a lesser 12.5-mbd MSC by 2016. These figures do not include an additional 2-mbd available via NGL & refinery processing gains. Saudi Arabia's post Katrina effort saw the swing producer surge to 9.5-mbd for two seasons.

This bodes well for future Prices on the medium term. Only OPEC stands in the way. Saudi Arabia seems to be openly seeking a band centered on $50/barrel. The Kingdom's badly kept secret of its $43 estimation for 2007 Revenues within its national budget gives us clues to their flexibility.

In the end, i will be watching global GDP figures for my sense of the equilibrium in the marketplace. Central bankers, national Treasurers and global oil suppliers all want balance. Manipulating oil prices to the extent that they bring upon the globe a 3.5% real growth rate would be a precious and workable tool that on the surface is as useful as the tinkering with interest rates via Monetary Policy. I'm certain that Alan Greenspan, even in retirement, would concur!

This week's GAO Peak Oil Report brings to an end the submissions to the National Petroleum Council's Supply Task Force. This Global Oil & Gas Study was initiated by USA Energy Secretary Bodman. I was humbled to be invited to contribute and engage in a teleconference with Colin Campbell, Jean Laherrère, Robert Hirsh, Doug Low, Steve Andrews. Albert Bartlett & Ron Swenson. The second phase included Roscoe Bartlett, Roger Bentley, Mark Gaffigan, Richard Heinberg, Matt Simmons & Randy Udall. Mark represented the GAO and will be making public its review of Peak Oil in March. Please take a few minutes to peruse TrendLines Presentation. The release this month of the UN's IPCC AR4 underscores the necessity for integrated national energy policies.

The highlight of course of the last month was meeting Stephen Harper, Canada's new Conservative Prime Minister, in the Yukon to open the Canada Winter Games. It's been as cold as -42C this Winter. Where's all that Global Warming the IPCC promised, eh?!!

Status of USA Oil/Gas/Gasoline Stocks ... as of Nov 23 2007

{USA Summary: nat'l gas stocks are 3% higher than last yr; total oil products stocks are 3% lower; and gasoline stocks are 4% lower}

(Nov 29, 2007) Crude oil & natural gas stocks continue to flourish at or above their five-yr channels as seen in the graphs shown near the bottom of this page. At this time, TrendLines 2007 year-end target for USA contract price is raised to $57/barrel (compared to last month's $56) as OPEC continues to virtually revise upward its acceptable basket price. Current global Supply & Inventories are not sufficient to meet estimated 2007Q4 Demand of 87.1-mbd nor 2008Q1's 88.2 Call; indicating continued moderate price spikes ahead. OPEC is openly telegraphing that it is comfortable with a Price Band of $50 to $80 as contract prices broke thru the $80 Price barrier for the first time this month; and resides at $89 today. Our target for year-end USA Contract Price for 2008 is raised to $44/barrel based on increasing global Demand.

America's Strategic Petroleum Reserve has been taking on additions (5mb) for three months and is approx 1% higher than one year ago. Aside from the supply woes, there will be very little pressure on prices and related spiking due to weather trends with the likelihood of above avg temp's in the USA thru the Winter. Largest anomalies will again be in the American Midwest & Southwest. Nat'l gas avg prices of $7 should continue, with occasional spikes to $9. TrendLines target for the Spring 2008 trough in working gas is raised slightly to 1500-Bcf today. Gasoline stocks remain south of the five-yr channel.

It is our blending of reserve stocks data with forward looking seasonal weather forecasts that has kept the TrendLines Energy Projections in the forefront since 2002. Whereas the comments above (and below) are made monthly, we are now updating the graphs below weekly. Therefore some inconsistencies with the comments may appear from time-to-time in a rapidly changing environment...

Crude Oil & All Liquids:

6.7% lower from same 2006 date ~ Oil (crude) ... a month ago was down 5.9% from last yr.

2.9% lower than same 2006 date ~ All Product Oils (incl Strategic Reserve) ... a month ago down 3.7% from last year

Note: the Strategic Reserve is 0.9% (6mb) higher than one year ago at this time.

Natural Gas:

9.3% higher than its same date five yr avg ~ Natural Gas ... a month ago up 7.2% from same date 5yr avg

3.1% higher than same 2006 date ~ Natural Gas ... a month ago down 0.3% from last year's date

TrendLines forecast for Spring 2008 trough: 1500-Bcf

>fig's & stats from US DOE

see more Energy related info at our Misc Graph Blog on the Energy Venue Page

Freddy Hutter
Marsh Lake, Yukon
867.660.5533
fh@trendlines.ca
www.TrendLines.ca/energy.htm

Send email to Freddy Hutter with questions or comments about this web site Copyright © 1989-2010 TrendLines Research ~ Last modified: February 01, 2010

Send email to Freddy Hutter with questions or comments about this web site
Copyright © 1989-2010 TrendLines Research ~ Last modified: February 01, 2010