The Greece debt crisis lowered the value of the euro, thus increasing the dollar's value and lowering the price of oil. (image: marketoracle.co.uk and Nicholas Whitaker via heatingoil.com)

Greece’s budget crisis reemerged as a major factor in the oil markets on Friday, and crude and heating oil prices slumped as Greece’s troubles undermined confidence in the euro. The weak euro lifted the value of the dollar, which made dollar-priced commodities (like crude oil and heating oil futures) more expensive for traders holding other currencies, dampening demand. Greece will likely remain in the spotlight at least until Thursday, when EU leaders will meet to discuss what Europe can do to assist Greece. India was also on the minds of oil traders on Friday; India raised interest rates, which could slow down economic growth and growing oil demand in that nation.

Today’s average retail heating oil price in the Northeast is 4 cents lower than Friday’s average price.

Crude oil prices over the course of today, March 19. (image: ft.com)

Crude and heating oil prices fell sharply today, with crude oil dropping the most it has in six weeks. The cause behind today’s falling prices was the strong US dollar, which makes commodities prices in dollars more expensive for traders who hold other currencies. This lowers demand for those commodities, such as crude and heating oil futures, which pressures prices to go down.

Today’s closing prices on NYMEX

Crude oil (April 2010 contract): Down 2.0 percent, $80.57 per barrel.
Heating oil (April 2010 contract): Down 2.1 percent.

Gas flare (r.) and example of a gas-to-liquid reactor (l.) that can fit on a FSPO vessel. It looks like a chemical processing plant dropped onto a raft. (image: epmag.com and r3sciences.com)

Brazilian oil company Petrobras is aggressively financing technology that will convert flare gas, a byproduct of oilfield production so named because it is commonly disposed of by continuous burning during drilling operations, into a synthetic and commercially viable form of crude oil.

It may seem surprising that natural gas, a valuable natural resource, is emitted in great quantities as a consequence of oil extraction only to be thrown away like garbage. When underground oil is subjected to high pressure, gas dissolved in the liquid escapes through a separate pipeline valve that reaches the surface. Yet, the practice of combusting this “associated gas” as quickly as possible (i.e. gas flaring) has become standard for decades in oilfields too remote from potential markets or transport infrastructure to take advantage of the fuel’s value. Official estimates place the global amount of gas squandered in this way annually at ¼ of the natural gas consumption in the US. Though technology does exist for converting this gas into liquid crude oil, initiatives pursued by Petrobras-financed companies Compact GTL (UK-based) and Velocys (Ohio-based) aim to create equipment compact enough to fit on Floating Production Storage and Offloading vessels used in offshore drilling.

Layers (top) separating the Tupi oilfield from the water's surface. For reference, keep in mind that the world's tallest building (bottom), the Burj in Dubai, is just under 1000 meters. (image:oildrum.com and amitbhawani.com)

The ability to conduct a gas-to-liquid process onboard drilling modules is very attractive to Petrobras, which this year plans to begin production on Tupi, the world’s largest oilfield that just happens to sit underneath 2 kilometers of water and 4-5 kilometers of rock and salt. The project is almost prohibitively expensive, and converting superfluous gas to oil would be a critical offset for the expected losses that come from poking holes in the wrong parts of the seabed, a necessary part of locating a drill location.

Thinking big, it’s logical that oil from surplus gas could supplement profits for unconventional oil projects such as shale oil and oil shale, of which the world will only be seeing more in the future.

The development of viable gas-to-oil technology would not only provide revenue that would offset the costly trial-and-error stage of deepwater oil drilling, it would solve offshore drillers’ problem of what to do with excess gas. Since 2002, gas flaring has come under worldwide scrutiny because of its significant contribution to global warming. The World Bank’s Global Gas Flaring Reduction partnership (GGFR) estimated in 2009 that 1.5% of the world’s total carbon emissions comes exclusively from gas flaring. Any technology that reduces carbon emissions by that magnitude is a benefit for the entire planet.

German chemists Franz Fischer and Hans Tropsch in the 1920s first pioneered the science of creating liquid oil from coal, which was later extended to gas stocks. The process required reacting natural gas with hot steam to form a synthesis gas of carbon monoxide and hydrogen. When passed over a cobalt catalyst, the gaseous hydrocarbons mix with ions and grow into longer chains, forming a wax within seconds that is easily converted into diesel. Previously, large reactors were required to process the large amount of heat produced by the reaction, but companies Compact GTL and Velocys are able to build a compact system because of their use of microchannels, which allow heat to be distributed more efficiently, reducing the temperatures and reaction time involved and shrinking the size of the unit.

Synthetic oil contains less sulfur and pollutants than naturally occurring crude oil. When produced from biomass, synthetic fuel is called biofuel, but most biofuel production processes involve a chemically different and less direct method than the synfuels conversion. In the late 1970s, the development of synfuels was slated to receive $88 billion in support over 20 years from the US government, but was later cut by the Reagan administration due to low oil prices and skepticism about the technology’s effectiveness.

Along with other factors, the euro's plunge following Greece's escalating debt situation has indirectly lowered oil prices. (image: www.europeanbusiness.gr and Nicholas Whitaker via heatingoil.com)

A strong dollar pushed down the crude and heating oil prices on Thursday. The euro fell against the dollar on news that Greece, whose deficit crisis has battered the euro over the past month, may have to turn to the International Monetary Fund for a bailout. As the dollar gets stronger, commodities that are priced in dollars (like crude oil and heating oil) become more expensive for traders who hold other currencies, which lowers demand and prices. Weekly inventory reports and OPEC’s meeting on Wednesday generated conflicting interpretations, leaving the value of the dollar to lead oil prices.

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

Crude oil prices over the course of today, March 18. (image: ft.com)

The value of the dollar drove oil markets today and led to lower crude and heating oil prices. A strong dollar tends to lower the prices of commodities priced in dollars, since they become more expensive for traders who hold foreign currencies, which drives down demand. OPEC’s lack of concern with member compliance could keep oil markets flooded with supply, as OPEC nations produce more oil than allowed by their quotas.

Today’s closing prices on NYMEX

Crude oil (April 2010 contract): Down 0.9 percent, $82.20 per barrel.
Heating oil (April 2010 contract): Down 1.0 percent.

(image: s.wsj.net and Nicholas Whitaker via heatingoil.com)

Oil prices continued to be buoyed by the Federal Reserve’s announcement on Tuesday that interest rates would be kept at low levels, which contributed to a weaker dollar yesterday. Because crude and heating oil futures are priced in dollars, a weak dollar makes them cheaper for investors who hold other currencies and drives up demand. Higher oil prices got further support from the EIA’s inventory report, which showed a decline in supplies of distillates, which include heating oil and diesel, and in supplies of gasoline. Despite rising crude inventories, traders took this as a sign of growing demand. OPEC also announced that it would maintain its current production quotas, even as it anticipates growing global oil demand.

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

Crude oil prices over the course of today, March 17. (image: ft.com)

The price of heating oil increased today as inventories of distillates, which include heating oil and diesel, fell by more than expected. That inventory decline, combined with a drop in US oil imports, led some to forecast an eventual supply crunch that would lift oil prices. OPEC announced today that it would maintain its current production quotas even though it foresees growing oil demand, which supported higher prices across all oil markets.

Today’s closing prices on NYMEX

Crude oil (April 2010 contract): Up 1.5 percent, $82.94 per barrel.
Heating oil (April 2010 contract): Up 1.2 percent.

A global oversupply of oil enabled by OPEC's quota violations could lead prices to fall. (image: tehrantimes.com, blog.redfin.com, and AP via cbsnews.com)

Monday, an article in the Financial Times questioned the strength of OPEC in light of its members’ extensive quota breaking, and stated some analysts believe that a current global oil glut could drag down prices by the end of the year.

OPEC quota compliance has become an especially important issue as quota “cheating” is happening with increasing frequency, and OPEC announced on Wednesday that it would maintain current quotas, despite some members exceeding them.

Back in December 2008, the cartel responsible for 1/3 of the world’s oil agreed to make the biggest production cut in its history; a slash in output of 2.2 million barrels per day. The cut was motivated by the financial crisis’ blow to global oil prices, which plummeted by nearly 70% in the months following July of that year. Since then, OPEC’s official quota has not budged, remaining at 24.845 million barrels a day despite the widely-recognized fact that the true output of its members has run hundreds of thousands of barrels per day above this level.

In 2008, analysts estimated OPEC overproduction ranged from 600,000-800,000 barrels daily. This past January, Reuters Africa reported that an OPEC document registered overproduction at 1.87 mbpd. The FT article stated that OPEC quota compliance—a percentage measure of how real output matches agreed-upon levels—has slipped to a low of around 50 percent (its highest in the past two years was 80 percent, in spring 2009).

Iraq’s lode of international oil contracts could soon boost OPEC production by several million barrels, the article pointed out. With the second-largest oil reserves in the world, Iraq’s new participation in OPEC (after years of sanctions and disruption brought by war) could, in a scenario where quotas remain unchanged, either force the body to curtail the above-quota production in other countries, or explode the fissure in compliance to a point where OPEC loses the unity it needs to keep order and retain control over prices.

When OPEC nations break their quotas, they profit from the higher prices permitted by the supply restraint of fellow members.

However, some countries pump excess crude in order to stave off consequences of their own economies’ severe fragility. This is the case with the worst quota breakers: poverty-stricken Angola, which has observed no cuts in its production, and Nigeria, which was overproducing by 300,000 barrels daily in December. It’s also an expected motivation for war-torn Iraq, which is currently the only OPEC member exempt from quotas but whose pending contracts will soon change this as its production soars.

Additionally, when many members break their quotas and overproduce, previously compliant nations are pushed to overproduce in order to make up for the loss in profit that resulted from the supply glut’s depreciation of their oil. Compliance brings higher prices through supply restraints, so quota violations bring lower prices through increased supply. In a somewhat ironic feedback loop, members increase output to compensate for lower prices; the further increase in world supply contributes to lower prices.

Exceeding quotas, in conjunction with low oil demand worldwide, could be the reason for the oversupply the FT article mentions:

Some analysts and traders note that despite recent upward revisions in demand – especially from China – markets remain oversupplied and Opec faces some risk that prices will fall this year.

A global oil glut has been present for years, ever since the recession dampened demand from developed economies, and worldwide oil demand has only increased nominally in the last year or so. The current supply-demand imbalance would indicate that prices should fall, yet the price of crude has climbed by 79% over the past 52 weeks.

Therefore, any price declines would have to be brought on by a confluence of several factors. According to the FT, some analysts see nearing-termination of government stimulus packages (both the US and China), and the new limits on energy trading in the US (which could lessen price-hyping speculation activities) as two such important factors.

Crude oil prices over the course of today, March 16. (image: ft.com)

Weakness in the dollar led the price of crude oil to its biggest gain in four weeks, defying predictions that oil markets would be cautious ahead of announcements by the Federal Reserve and OPEC. The price of heating oil followed crude’s lead, rising substantially despite the spring-like temperatures that most of the Northeast, the world’s largest heating oil market, is experiencing today. The Fed’s announcement that interest rates would be kept low occurred shortly before the market closed, but had been anticipated throughout the day and lifted oil prices.

Today’s closing prices on NYMEX

Crude oil (April 2010 contract): Up 2.4 percent, $81.71 per barrel.
Heating oil (April 2010 contract): Up 2.8 percent.

A grim future looks to be in store for refineries like this one, owned by Valero. (image: roamsecure.net)

As the global recession made deep cuts in oil demand, the refining sector was hit especially hard. For major oil companies, refining has sucked away profits made in exploration and production. Refiners without such a diversified business have simply struggled, squeezed between low consumer demand for refined oil products and the rising price of the crude oil refiners have to buy.

What can refiners do to get back on their feet? The Financial Times’ Energy Source blog examines the argument from a pair of analysts at the investment bank Barclays Capital who say they have the answer: close more refineries.

According to the Barclays Capital analysts, only closing refineries—not selling them or waiting for oil demand to recover—can eliminate the refining industry’s overcapacity that is dragging down profit margins. Not that refineries haven’t been shut down; Sunoco closed a refinery in New Jersey, Valero did the same in Delaware, and the French oil company Total set off a strike that led to fuel shortages in France when it closed the doors to its refinery in Flanders. Yet Barclays’ analysts think refiners would need to make more drastic cuts to revive profit margins, and to make those cuts they will have to overcome the political opposition to refinery shutdowns that comes from consumer groups, workers, and communities. In their logic, the French oil company Total erred when it promised to close only one refinery, after workers at all of its other refineries went on strike to protect their jobs.

Political opposition in the US comes from consumer groups that have accused refiners of keeping prices artificially high by reducing operating capacity, as an editorial in Monday’s Los Angeles Times noted. Yet refiners are in a difficult position. Higher crude oil prices don’t necessarily mean that refiners profit. At all times their operating costs are dependent upon the price of crude; they make money on the difference between crude prices and the price of refined petroleum products. In 2008 they were criticized for not increasing capacity as oil prices hit record highs in response to spiking demand; now that demand has fallen, they are under fire for closing capacity. Like any business, refiners made cuts when faced with reduced demand for its products.

Even if refiners cut capacity further, closed more refineries, and alienated consumers in the process, their troubles could still continue. As the Barclays analysts note, capacity cuts in North American or European refineries will have little affect on prices of refined oil products (and therefore on refiners’ profits) if capacity is added in China.

It’s hard to see many bright spots in the refining industry’s future. Depending on your point of view, oil demand in the developed nations that make up the OECD will either stay flat or has peaked and is set to decline, but neither prospect is encouraging for refiners. Crude oil production is likely to move to unconventional sources, raising the price of crude for refiners.

For consumers of refined products like heating oil and gasoline, it might be beneficial to have Chinese refiners step in and add oil products to the market, which helps keep prices down. But it seems unrealistic to expect refiners to continue to produce when it only cuts into their profits; no business that did so would survive for very long. Refiners may begin to see the same things the analysts at Barclays see, and slash capacity to swell profits, at the expense of consumers buying heating oil and gasoline.