The price of oil fell as tropical storm Alex headed away from Gulf areas where production and refining is concentrated. (image: Nicholas Whitaker for HeatingOil.com)

Oil prices dropped on Monday as new forecasts showed that tropical storm Alex would miss the major centers of oil production and refining in the Gulf of Mexico. The storm continues to strengthen and is expected to become a hurricane and make landfall in Mexico, but since it no longer threatens the oil supply both crude and heating oil prices shed some of the gains made on Friday when the storm appeared more threatening. Oil supplies remain ample, and in the absence of economic news that points to growing demand the excess supply of crude oil and refined products weighs on oil prices.

Today’s average retail heating oil price in the Northeast is 2 cents lower than Monday’s average price.

Tropical storm Alex looked like less of a threat to oil production on Monday, and oil prices fell. (image: ft.com)

Prices for crude oil and heating oil gave up some of the gains they made on Friday as a weather system threatened to develop into a tropical storm and disrupt oil production in the Gulf of Mexico. Over the weekend the system strengthened and became tropical storm Alex, but forecasting models have the storm missing areas of key production in the Gulf. Some facilities have been shut down as a precaution, but supplies of crude oil and petroleum products are substantial enough that the storm would have to wreak real damage to lead squeeze oil supply.

Today’s closing prices on the NYMEX

Crude oil (August 2010 contract): Down 0.9 percent, $78.19 per barrel.
Heating oil (July 2010 contract): Down 0.9 percent.

(image: heatusa.com and zimbio.com)

Declining inventories of distillates, which include heating oil and diesel, and gasoline were no match for the 7-million-barrel buildup of crude oil supplies in Thursday’s oil markets, and crude and heating oil prices dropped. The mixed inventory reports point to low refinery activity; the crude oil is there, but it’s not being refined into heating oil and gasoline, so inventories of finished fuel products declined. Demand for oil in the US remains weak, despite expectations for demand recovery as the economy improves.

Today’s average retail heating oil price in the Northeast is 3 cents lower than Wednesday’s average price.

(image: s.wsj.net and zimbio.com)

After an early rally on Monday—crude had gained over 3 percent—the price of crude and heating oil fell back towards where they started. A weak dollar was the cause of the rally, and as it regained some of its strength the rally collapsed, weighed down by the immense inventories of crude and heating oil that have placed a ceiling on oil prices. This week’s inventory reports are expected to show another build in crude inventories, but distillate inventories could decline, which is lending some support to heating oil prices on Tuesday morning.

Today’s average retail heating oil price in the Northeast is 1 cent higher than Monday’s average price.

Professor Kjell Aleklett. (image: wikipedia.org and aspo-australia.org.au)

A physicist at Sweden’s Uppsala University is taking issue with last week’s assessment of future oil supplies by the International Energy Agency (IEA), reports the Guardian.

Physics professor Kjell Aleklett at Uppsala University, one of Europe’s leading academic institutions, published a scathing review of the IEA’s annual World Energy Outlook, saying that the organization has drastically downplayed the scale of future oil shortages. He contends that the IEA’s oil supply figures have become “politicitized” and urges European governments to review global oil supplies themselves.

In its World Energy Outlook annual report, the IEA last week predicted lower oil prices due to carbon-reduction efforts. The timing of the IEA report was designed to spur leaders to come to an agreement in Copenhagen next month. Aleklett, the co-author of a new report, “The Peak of the Oil Age,” says oil production will be closer to 75m barrels a day by 2030 than the “unrealistic” 105m the IEA predicted in its report. Aleklett, who also runs a Global Energy group at Uppsala, described the IEA’s report as a “political document,” designed for consuming countries with a vested interest in low prices.

This accusation by Aleklett is the second time in a week that the IEA has come under fire for an unrealistically rosy forecast: last Thursday, a whistleblower at the agency expressed similar doubts about the way energy statistics were being collected, and added that the U.S. has been encouraging the overly-optimistic reporting to avoid a global oil panic and resulting oil grab. Other IEA insiders also suspect U.S. influence and fears of a stock market panic helped to prompt the Paris-based organization’s figures.

When the whistleblower story appeared, Aleklett said that he had similar worries about the IEA. He says that when the Organization of Economic Cooperation and Development, the 28-country council that counts on IEA as their energy advisor, gave him the task of writing a 2007 report, ‘Peak Oil and the Evolving Strategies of Oil Importing and Exporting Countries,’ it was one of a number of reports that were discussed at a round-table meeting held at the IEA. At that time, says Aleklett, he had several private conversations with IEA officials, who reported the revelations that were now being reported in the Guardian, under the promise that he not name them as sources. He said he heard the same allegations earlier from a Norwegian IEA officer, who maintained that the U.S. was pressuring the agency.

According to the Canadian Globe and Mail, Aleklett and the IEA are in agreement on the estimated oil volume in the fields yet to be discovered and developed. They sharply disagree on the productivity of these new fields, with the IEA contending that these fields will more than fill the supply gap, as the old fields are no longer usable. Alekett points to history, which has shown that the new fields, which are generally smaller, are less productive than old ones and points to the dramatic production rates from the North Sea fields, which reached their peak output in 2000, as an example. He cites the slow-to-nonexistent development of these new fields, and says that the not-yet-developed reserves in the IEA report cover 1,874 fields of various sizes that would all have to come into production in the next 20 years.

“That is something like eight fields per month coming on stream,” Alekett’s report reads. “Even if the oil exists, it is questionable whether the necessary investment needed to produce such a rapid pace of development can be achieved in timely fashion.”

A tar sands mine. (image: ran.org)

The paper also focuses particular concern upon future production rates from “unconventional” sources, such as tar sands, saying that there is a lack of information in the 2008 Outlook figures which has been repeated in the 2009 Outlook report, and adding that “we must therefore regard the IEA production figure as somewhat dubious until it is explained more fully.”

For its part, IEA has called the accusation that politics are influencing its predictions “groundless,” and that the Outlook report was reviewed by 200 independent experts. A spokeswoman from the agency said, “We would be happy to see any initiative to improve the data quality on reserves and decline rates. We believe our World Energy Outlook 2008 opened an important door to have more field data and transparency and would very much welcome similar efforts to help improve transparency in the oil sector.”

The IEA was established in 1974 after the oil crisis in an attempt to safeguard energy supplies to the West. The World Energy Outlook is produced annually under the control of the IEA’s chief economist, Fatih Birol, who has defended the projections from other outside attacks. Birol has been facing tough questions about the figures from inside the agency, say IEA sources.

Alekett’s own predictions of the global oil supply are stunning: Production in 2030 will be about 76 million barrels a day, or about one-third less than the IEA’s figure, and some 10 million less than current production. If, as seems likely, Alekett’s report and the IEA whistleblower’s allegations are correct, the coming scenario is not pretty. If oil supplies decline, prices would dramatically rise, which of course, would be passed on to consumers in the form of higher prices for fuel, diesel and heating oil, food, and pretty much everything else.

(image: treehugger.com)

As HeatingOil.com reported in late October, Saudi Arabia made a huge move recently by dropping the West Texas Intermediate (WTI) as its benchmark for pricing oil.

The move came as a blow to NYMEX, where the WTI is the most-traded contract. However, in a Reuters opinion piece Wednesday, the Massachusetts-based Energy Security Analysis Inc (ESAI) argued that the Saudis’ decision is a sound one, paving the way for lower oil prices and a more stable market.

Saudi Arabia has picked up Argus’ Americas Sour Crude Index (ASCI), and ESAI doesn’t think they will be the last. It is possible that Iraq, Kuwait, and the UAE could all make similar decisions in the months ahead. These additional shifts would mean that a significant amount of physical crude oil would be priced using ASCI, and would put more distance between crude pricing and the WTI.

While it’s possible that no crude price could ever be completely free of the WTI benchmark’s influence, these recent moves will lend more power to alternatives like Argus’ ASCI. What this essentially means is the less influence WTI has on crude pricing, the more prices will be directly linked to good ol’ supply and demand, instead of futures and speculation. This in turn will form a more stable market with a realistic pricing structure in place.

Also at play is the fact that WTI would remain the “American benchmark more shaped by the dollar,” leaving it open to the instability that the American dollar often brings.

By not using WTI as their pricing index, it gives Saudi Arabia, and any other OPEC nations who may join, a shield from fluctuations in the market. In addition, because they will not be directly influencing WTI, they will be able to have more autonomy in pricing their oil by basing it on real supply and real demand.

It still remains to be seen how this will actually shake out in the oil markets (the Saudi Shift will go into effect in 2010), but it does look like Saudi Arabia made a good move for them, and for us. A more stable market makes it easier to predict what’s coming, and in the end, it will likely mean lower crude prices and lower heating oil prices.