From ASPO USA  Jan. 25, 2010

Tom Whipple, Editor

Steve Andrews, Publisher

PRICES AND PRODUCTION: Oil prices have now fallen by $10 a barrel from a recent high above $84 reached the week before last to close on Friday at $74.54. The usual factors of falling OECD demand, prospects for warmer weather in some regions, a stronger dollar, weaker equity markets, lower seasonal demand and fears that Beijing may be putting brakes on its rapid growth are thought to be behind the slump. The US weekly stocks report showed much lower refinery runs and falling demand for petroleum products in the US.

The IEA is now saying the OPEC will not need to raise production in 2010 as sluggish growth outside of Asia, improvements in non-OPEC production plus an 800,000 barrel/day increase in natural gas liquids should cover any growth in demand.

There is still much uncertainty as to the future course of the oil markets. Chinese demand remains strong as does demand from India and Korea. Goldman-Sachs is still talking of $100 oil, but says this will not come until 2011. Threats to global oil production due to dwindling electricity supplies in Venezuela and the threats posed by the Iranian nuclear standoff continue.

President Barack Obama’s proposal last Thursday to limit commercial banks’ size and their ability to participate in some types of risky markets was generally not well received by oil market players. Commercial banks are some of the largest participants in oil markets and might be required to change their trading roles.

Natural gas prices rose for a second day in New York, to $5.82. The move is likely weather-driven, as sharply colder weather forecast for the Midwest next week should boost heating demand. Yet a sharp drop in natural gas in storage could be factoring in as well.

From a record 3.837 trillion cubic feet of natural gas in storage at the November start of the heating season—15 percent above the five-year average—inventories fell to 2.607 trillion cubic feet by mid- January; that’s slightly below the five-year average. Further, the rapid drop happened despite the recession-induced 10 percent drop in demand from factories, chemical plants and steel mills. Now it appears that demand from the industrial sector may be on the rise. If so, analysts anticipate that next week’s cold snap could drive gas in storage well below the five-year average by month’s end.

VENEZUELA: Last week the news about Venezuela’s on-going electricity crisis took a turn for the worse. For weeks the power output from the drought-suffering Guri Lake hydro dam—the supplier of nearly three-fourths of the nation’s electricity—has been operating at just over 50 percent of capacity. Now output from Planta Centro, the nation’s largest fossil-fueled power plant, has declined from its rated 2,000 megawatt capacity down to just 267 megawatts and hasn’t hit 500 megawatts during the last three months. Insiders say it has not been properly maintained for years. To compensate in the short term, President Hugo Chavez has cut back on steel and aluminum operations that use up to 20 percent of the country’s power. Rolling blackouts currently impact much of the nation. If Chavez diverts power from the 940,000 b/d Paraguana refinery to more pressing uses, some analysts think that the ensuing price spike could drive oil above $100 a barrel.

A natural gas project with estimated reserves of nearly 15 trillion cubic feet of natural gas had been put out for bids that were supposed to close on Friday, January 15th. Last week the government should have announced winners of the bidding process. Despite last-minute efforts to improve conditions for potential bidders, apparently no bids were submitted.

Venezuela’s oil ministry announced that it had failed to agree on the details of a deals with Norway’s Statoil and France’s Total to develop some extra-heavy crude in the Orinoco belt. While discussions have been ongoing since 2007, the ministry’s hope for a 300,000 barrel/day production project isn’t going to happen. The government hopes for much better results from its Carabobo oil-drilling auction later this week.

None of these long-term projects will change Venezuela’s immediate oil production prospects which are steadily sinking. According to OPEC data, Venezuela’s oil exports fell during December by over 50,000 barrels per day, declining for a fifth straight month. Production during the Chavez era remains roughly 25 percent lower than the years preceding his era.

Over the weekend, Chavez’s critics staged a large protest march. In addition to the electricity rationing problem, opposition politicians hammered away at the country’s high crime rate and the recent 50 percent currency devaluation. Hard times in Venezuela may not be ending soon.

CHINA CONTINUES TO GROW: The economic numbers reported by the Chinese government remain impressive. On Beijing announced that its economy grew by 8.7 percent during 2009, surpassing the 8 percent target set early last year. Fourth quarter growth climbed 10.7 percent from a year earlier, a reflection of recovering global trade plus stimulus investments in infrastructure. Other reports indicated that Chinese bankers still were issuing loans at a rate several times the level needed to reach economic targets. China is clearly on track to surpass Japan and become the world’s second-largest economy soon. The U.N. expects that China’s economy will grow four times faster than the US economy this year. Finally, inflation came in at 1.9 percent for December 2009 vs. 2008, up from a year-over-year 0.6 increase in December that was preceded by nine months of deflation.

In response to this suite of news, and fearing an overheating economy, Chinese regulators reined in their banks. They told banking officials to temporarily shut down lending amid growing worries about inflation and asset bubbles. Such a clamping down on growth would have broad implications, including supply and price forecasts that assume increased Chinese demand for petroleum products.

But China’s energy consumption keeps moving ahead. The nation’s electricity production capacity increased 7 percent during 2009, barely keeping ahead of a 6 percent growth in consumption. The production of refined oil products increased nearly 8 percent to reach a new high of 7.5 million barrels/day.

Throughout the past decade, China has invested a substantial portion of its net earnings in US debt instruments. But 2008 appears to have ended that trend. Chinese holdings of Treasury securities declined between July and November, the first extended decline since they became a major purchaser back in the early 2000s. In 2006, China bought nearly half the US debt; last year they bought less than 5 percent. If this trend continues, mid-term impacts on inflation and the price of oil may be quite notable if not extremely painful.