| |
Petroleum Review Editorial November 2005
A stunning achievement, but have we reached the yield points?
Over the last month, the oil industry has risen to the challenge of the massive disruption to its Gulf of Mexico oil and gas production, and to its Gulf Coast refining operations. At the time of writing, 67% of oil production (around 1mn b/d) was still shut in, while a similar proportion of gas production was still offline. Eight refineries are still not operational, and there is a dawning realisation that the disruption will last well into 2006. So far, however, all is holding together, with the supply system proving to be more resilient and more flexible than many imagined. However, we are now moving into the winter quarters and it is far from clear how the extra oil and gas demand will be met.
Having briefly glimpsed $70/b in late August, the current $60/b oil price appears almost reasonable. In fact, it merely takes us back to the levels of early August and is a staggering 50% above the levels of last December. However, since early August there have been three important developments. Firstly, the choke point in the supply system has moved from being the supply of crude to being the ability to refine it. In particular, the ability to refine high sulphur crude. Secondly, the IEA/US decision to release stocks of both crude and products in the wake of the Katrina and Rita hurricanes, and their aftermath. And thirdly, mounting evidence that demand is starting to wilt in the face of high prices. The alternative, but complementary, explanation is that demand is slowing in line with a normal cyclical economic slowdown. Whatever the exact causation, the result is that, for the first time in over a year, there is rather less pressure on the crude supply system.
So, is $60–$70/b some sort of demand yield point? Traders appear to have been wrongfooted by the swift move from a crude supply constraint to a refinery capacity restraint and then a flood of stock release crude and product. The IEA has now revised this year’s oil demand growth down to 1.26mn b/d. (As late as June 2005 it was predicting 2005 growth at 1.8mn b/d. It is now predicting 1.7mn b/d for 2006.)
There are, however, a number of reasons to be cautious and to wonder if the current, more benign, situation can last. Barring an almost catastrophic collapse in economic activity, demand for oil products will increase as we move into the winter quarters. The IEA’s latest assesssment is that 3Q2005 demand of 82.4mn b/d will rise to 85.5mn b/d in 4Q2005 and ease only fractionally to 85.4mn b/d in 1Q2006. With considerable optimism, the IEA claims that the 3.1mn b/d uplift in demand between the third and fourth quarters can be met. This, in turn, requires the speedy return to operation of the US Gulf refineries, the reliable operation of all the world’s major refineries at high levels of throughput and hydroskimming margins to remain positive in order to encourage throughput in the world’s less sophisticated refinery units. The IEA also suggests that all refinery maintenance would have to be postponed if requirements are to be met.
At best, this scenario appears highly optimistic. A more realistic expectation is that there will have to be further stock releases this winter. This raises two concerns. Will European governments continue to be relaxed about releasing product stocks from Europe, which has large stocks of oil products, for almost certain use in the US? In contrast to Europe, the US holds all its strategic stocks as crude, apart from a fairly minor 2mn barrels of heating oil stocks in the north-eastern states. The second question is: ‘Just how much stock will countries agree to release this year, given that it may not be that easy to replace them?’ Particularly if the IEA is right that demand growth will recover to 1.7mn b/d in 2006.
In this issue of Petroleum Review, our major feature is on the Asia-Pacific region, which has three key characteristics. It has been the world’s fastest developing region in terms of economic growth, oil demand growth and gas demand growth. Regional oil production is broadly flat and may soon move into decline, but meeting regional oil demand involves rising crude imports, overwhelmingly from the Middle East. Regional gas production and consumption are currently broadly balanced, but a rapid demand growth will make the region a net gas importer fairly quickly. As a major importing region it is increasingly in competition with Europe and the US for available supplies.
The other key characteristic of the region has been high levels of government subsidies on many oil products. In the face of rapidly rising oil prices most, although not all, Asia-Pacific governments have reduced or eliminated these subsidies as their budgets could not support them. This, in turn, is seen as the primary cause of the recent slowdown in regional demand. The question now is whether this is a temporary setback as populations adjust to higher prices before growth recommences? Or is it a yield point in which activity is restrained by the higher prices in a more sustained way?
The more facetious commentators have already suggested that the best energy policy at the moment is to pray for a mild winter. With senior figures in the US Republican administration calling on Americans to switch off lights, share cars, and take the train rather than the plane, we may be at the point where even the oil industry’s legendary reliability in delivering the product will be put to the test.
Chris Skrebowski
The opinions expressed here are entirely those of Chris Skrebowski, Editor of Petroleum Review, and do not necessarily reflect the view of the EI.
 print-friendly format
|
| |
|
|
