Germanico Pinto, Ecuador’s minister of natural non-renewable resources and current president of OPEC, has called for reduced oil speculation in pursuit of less volatile prices. (image: laht.com)

Bloomberg reported on Wednesday that another high-profile international figure has pledged to fight excessive oil speculation, which many believe contributes to volatile prices. OPEC President Germanico Pinto of Ecuador laid out what he sees as the negative impact of volatile prices on OPEC and the oil industry: “volatility produces difficulties in the markets and in defining a long-term strategy for public investment in the oil industry.”

When making long-term plans for oil exploration projects, oil companies rely on a projected crude price to predict future revenues and budget projects accordingly. Unpredictable prices can place such projects in a state of limbo, adding to uncertainty about future supply levels. Furthermore, as Pinto noted, the inability to predict the profitability of oil companies makes them less attractive to public investors.

Pinto’s statement represents a cause in which the interests of oil companies and consumers are aligned. Just as huge oil companies need steady prices to plan their budgets, so too do American consumers of heating oil and gasoline. But while the OPEC president’s dedication to reducing oil speculation and price volatility may draw additional attention to that goal, he wields little if any power to push toward it. His public statement gives additional industry support to the CFTC’s push to curb speculation on US commodities markets, but his position as the head of an international business organization affords him no official influence over national or international policy.

So the battle for tighter controls over commodities speculation in pursuit of steadier oil prices has a new and vocal ally. Whether heating oil users and gasoline buyers in the US will see any benefit in the near future is still unclear, but they can take some comfort in knowing that, at the very least, when OPEC talks, the world listens.

Crude oil prices over the course of today, March 9. (image: ft.com)

Crude and heating oil prices fell today, though each gained back some ground from earlier losses. A strong dollar drove down demand for oil futures, because those commodities became more expensive for traders holding other currencies. Traders expect this week’s inventory reports to show an increase in supplies of crude, and the price of crude and refined products sank as a result. The API’s inventory data will be released later this afternoon, while the EIA’s figures will be issued Wednesday morning at 10:30 am. Inventory numbers are likely to dominate oil markets tomorrow.

Today’s closing prices on NYMEX

Crude oil (April 2010 contract): Down 0.5 percent, $81.48 per barrel.
Heating oil (April 2010 contract): Down 0.8 percent.

The future of oil prices in 2010 is anything but clear. (image: stupidsvannah.vox.com)

In January, we took a look at the two schools of thought on crude oil prices in 2010: the first stated that the price of crude will stay flat, hovering around $80 per barrel, and the second predicted that crude’s rise to the $80 mark was a fluke and that prices would decline significantly as the year wore on.

Two months later, it seems that not much has changed. Bloomberg reported on Friday that a survey of 40 oil market analysts turned up 15 who believed the price will increase this year, 15 who said it would decrease, and 10 who said it would stay the same. As of this writing, the price of crude oil had last closed at $81.85 a barrel on the New York Mercantile Exchange.

Uncertainty about the direction of oil prices can be traced primarily to the unpredictable state of the American economy. While it seems that the worst of the recession has passed, mixed news on the nation’s overall economic health continues to confound economists and other analysts. Without a clear picture of when or how fast the US economy will get back up to speed, analysts and traders are unable to predict when crude oil demand will surge and set prices on a steady climb.

Bloomberg quoted one analyst who summarized the current oil-trading climate:

“You never know what direction the market is going to move on any given day, because of the very mixed signals on the economy,” said Peter Beutel, president of trading adviser Cameron Hanover Inc. in New Canaan, Connecticut. “There is plenty of supply on hand. We are seeing better demand, but I wouldn’t call the growth brisk.”

The supply that Beutel alludes to are the 341.6 million barrels of crude in US storage last week, “the highest level since August and 5.7 percent above the five-year average for the week, according to an Energy Department report on March 3,” Bloomberg cited. That extra supply of crude will help dull the price impact of any sudden upswing in demand, but also represent sluggishness in US demand that has dogged oil prices since the recession began.

Excess supply and weak demand would usually lead one to expect lower prices, but the last year has seen a steady rise in crude prices despite these factors, making the near future of oil prices that much harder to predict.

When even the experts can’t agree on oil prices, it’s anyone’s guess where the prices of heating oil, gasoline, and other consumer petroleum products will go this year. If you’re planning out this year’s fuel budget now, you’ll unfortunately have to plan for unpredictability.

(image: welt.de and life.com)

The price of crude oil closed at an eight-week high on Monday, and heating oil futures on NYMEX perked up as well, but gains in the market were too small to have much impact on retail prices. Expectations of economic improvement—still driven by Friday’s relatively positive jobs report—supported higher oil prices, but price increases were tempered by a stronger dollar. As the value of the dollar rises, commodities price in dollars become more expensive for traders holding other currencies, which lowers demand and puts pressure on prices to fall. The fundamentals of supply and demand still point to lower oil prices, and so far this Tuesday traders have been taking notice; this afternoon’s API report and tomorrow’s EIA report could move prices for crude and heating oil.

Today’s average retail heating oil price in the Northeast is unchanged from Monday’s average price.

When oil traders got two similarly named African countries mixed up last month, heating oil and gasoline consumers paid the price. (images: pickatrail.com)

Here at HeatingOil.com, we often report on the maddeningly confusing logic (or lack thereof) behind the movements of oil prices.

Perhaps the most important lesson to be learned from such reports is that in the oil markets, perception is everything. Just last week, a marginally positive US employment report caused a spike in crude oil prices that drove up gasoline and heating oil prices. If the business media is to be believed, oil traders perceived the jobs data as a sign that the US economy is on its way to recovery, which means US demand for oil will pick up sometime soon, which means prices will pick up also, which makes traders want to buy up oil futures contracts to cash in on the coming price increases. As more traders bought up contracts, the demand for contracts increased, sending crude oil prices upward on the New York Mercantile Exchange on Friday. As a direct result of the buying trend on Friday, heating oil and gasoline consumers are paying a few cents more per gallon today.

So here we have a clear-cut example of how oil traders’ perceptions can have direct bearing on the retail prices of heating oil and other refined petroleum products. It seems a little arbitrary, but after all these traders are the experts, right? If they think the jobs report is reason to expect an uptick in oil demand, they’re probably right. Even if the jobs report was not good news, it was not as bad as it could have been. As TheStreet.com reported on Friday, “Though the report was modest in reflecting a flat month for hiring, the subtle loss is buoying positive sentiment among investors.” On Friday, traders simply did their job: their perception, as experts, led them to buy more oil contracts and drive up the price.

But what happens when traders’ perceptions are just plain wrong?

For an example, we need only to look back to last month. In a turn of events grossly underreported by the business media but deftly brought to light on Saturday by the Record Searchlight of Redding, California, traders made a boneheaded error that ended up costing consumers extra pennies per gallon.

On February 18, the West African nation of Niger experienced a military coup that deposed the nation’s president, Mamadou Tandja. On February 19, the retail price of heating oil increased by an average of 4 cents per gallon as a result of the previous day’s rise in crude prices. Although we didn’t know it at the time, it appears that the coup in Niger had a lot to do with those rising prices. The day after the coup, Reuters reported that oil traders mistaking Niger for its oil-rich neighbor Nigeria had sparked a buying frenzy that helped send the price of crude to its February high of $79.29 a barrel.

Political turmoil in oil-rich nations and regions can have a major effect on oil prices, and with good reason: if a major oil exporter is gripped by a crisis that interferes with its oil industry, world oil supplies drop and prices go up. Nigeria is the eighth-largest exporter of crude in the world, supplying about 3 million barrels per day, so a coup or other major upheaval in that nation would certainly drive up prices. Niger, on the other hand, does not produce oil—the CIA World Factbook lists the nation’s 2007 oil experts as 0 barrels per day (157th in the world), so political events in Niger should have no bearing on oil prices whatsoever. Even the business news source MarketWatch (operated by the illustrious Wall Street Journal), seems to have hastily reported the coup had taken place in Nigeria, as this correction indicates. With that report, MarketWatch managed to take a false rumor off the trading floor and into world commodities and financial markets.

And so it seems that oil traders’ misperception of Niger as Nigeria gave oil prices a significant boost. To be fair, Nigeria has more than its share of political problems, as rebel groups sporadically attack oil infrastructure in protest of what they see as unfair distribution of oil wealth on the part of the national government. A coup in Nigeria would make sense, which made the false belief that one had taken place there that much more believable. And of course the names of the two nations are quite similar, not to mention the fact the bulk of Nigeria’s oil comes from the Niger Delta region of the country. So perhaps the misunderstanding stemmed from an honest mistake. But honest or not, the point is that one piece of misinformation led to a trend that had billions of dollars worth of ramifications throughout the world economy, not least of which was American consumers paying more for their heating oil and gasoline.

Faced with their stupid and costly error, errant oil traders would likely claim that it was actually other factors that drive up oil prices on February 18, as Reuters explained:

oil prices continued rising afterwards to within cents of $80 a barrel on Thursday, spurred by other factors such as tension over Iran’s nuclear programme and a weaker dollar.

While that may be true, would prices have increased that much on that day without the Niger/Nigeria factor? It is literally impossible to say with any certainty, but reasonable analysis would say no. Perhaps if traders had double-checked their information before reacting, heating oil would have risen by just two cents instead of four on the following day. Those two extra cents, multiplied by millions of gallons delivered around the country, amount to heating oil users paying millions if not tens or hundreds of millions of dollars for oil traders’ careless error.

Theoretically, oil markets only respond to two forces: supply and demand. However, as last month’s events show, the reality is that the whimsical perceptions of oil traders can have just as much influence on oil prices as supply and demand. Keep that in mind next time you notice the price of gas go up a few cents.

Oil traders: for crying out loud, check your facts! Put up a map of Africa in your cubicle, if necessary. Your mistakes can be expensive for the rest of us, so please do us the favor of making sure your perceptions are based on truth before you start the next buying frenzy.

(image: cyberinvestmentguide.com and Nicholas Whitaker via heatingoil.com)

Tuesday saw little new information to change the picture of supply and demand in the oil markets, but gains in stock markets and other commodities markets encouraged traders to push up the price of crude and heating oil. Some analysts pointed to the expectation that economic conditions will improve through the rest of the year to explain yesterday’s rising prices; those who anticipate that prices will rise in the medium term have an incentive to buy commodities now and would be less concerned about day-to-day changes in the oil markets. The EIA report, due out at 10:30 am, will give some new insight into supply and demand in the oil markets.

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

Today, heating oil prices jumped. In the last minute they rose four more cents. (image: s.wsj.net)

Gains on the stock market have generated economic optimism and boosted crude oil and heating oil futures on NYMEX. As the economy grows, oil demand will rise, and the price of crude has steadily increased today and brought the price of heating oil along with it. With inventory reports due out this afternoon and tomorrow, some traders could be pushing oil prices higher in expectation of drawdowns in supplies of crude or refined products.

As of 1:00 pm, the average retail heating oil price in the Northeast is 4 cents higher than this morning’s average price.

John Kilduff, co-CEO of Round Earth Capital (r.), speaks to European CNBC correspondent Guy Johnson (l.) about a coming oil rally. (image: cnbc.com)

In line with Goldman Sach’s forecast early this week, CNBC’s European Closing Bell program on Tuesday featured co-CEO of Randolff Capital John Kildoff predicting that oil prices would soon rise significantly. Calling the past week’s global crude oil price fluctuations below $80 a barrel a “temporary setback” and the French Total refinery strike “a little hyped,” he stated:

I think the move back above 80 will be before us in the next several days. And we’re going to continue higher. I’ve been on the record as saying I think we’re going to see a $100 a barrel for crude oil here, at some point during the first half of the year.

Oil prices took a dive Tuesday on reports of low consumer confidence, falling to $78.84 a barrel. CNBC correspondent Guy Johnson noted the interest in Goldman Sach’s release of an optimistic forecast the day before, which predicted oil prices would reach $85-95 by the end of the year.

Kilduff agreed that prices like that would be damaging but stated they would be temporary and “probably coincide with the peak summer gasoline demand here in the United States.” In an unusual turn, he blamed oil refiners for the coming price uptick.

The issue’s going to be right now is that we’re seeing severely constrained supplies around the world in terms of refining capacity especially. That’s why this Total situation had such an impact on the markets. Because we have a US refining industry that’s running on only 80 percent of capacity, that’s been that way for about eight months now. So they’re trying to drain global supplies to a point where they can get profits up and these refined products’ prices higher. As a result we’re very vulnerable to any outages.

Due to unsustainable profit margins caused by high prices for crude and low prices for distillates, oil refineries have shut down all over the country. Those low prices are the result of weak demand for gasoline and heating oil this past year, which combined with a historic overhang in distillate supplies to erode the market value of refined products.

Kildoff suggests that refiners are hurting consumers with these measures because demand is going to rise quickly if certain economic data from China are accurate. Those data include millions of car purchases in the past month and record imports of crude. Kildoff also mentioned that OPEC and other producers are artificially restricting supply to boost prices. In response to a puzzled Johnson who pointed out that the global oil glut is still present, Kildoff insisted that a supply shortage is imminent. He stated there have been some “notable takedowns” of that floating storage by Shell and other companies, and also said that the continued profitability of keeping those supplies off-market is itself evidence of future high prices. Forward prices for crude already take into account the time it takes for any production ramp-up to meet the market.

“The whole supply chain gets very tight very quickly. It’s doing us a terrible disservice. There’s no other industry out there in terms of basic materials that’s doing so much to constrain our supply as oil producers and oil refiners. So it’s a bit of a unique story in this regard.”

Freefalling oil barrels illustrate a net export collapse. And yet there are still barrels. (image: gettyimages.com)

President Obama pledges to attain national energy independence, only to be publicly rebuked days later by the Saudi oil minister for his lack of practicality. Two prestigious energy tracking agencies (CERA and the UK Energy Research Center) study the issue and release hefty reports in the same month with opposite conclusions. These are some of the examples given by host Jim Puplava in a January 30 segment of Financial Sense Newshour to introduce the increasingly fierce peak oil debate.

But to independent petroleum geologist and guest expert Jeffrey Brown, a crisis of world peak oil production is less critical than a crisis of peak oil exports.

Most of the peak oil debate centers on supply, analyzing the productivity of oil fields both known and yet-to-be discovered. There is no consensus on the amount of oil left in the world. Experts diverge considerably in their estimates due to the lack of truly reliable data and the powerful political motivations involved. Brown takes a different angle by using a different model, one developed with colleague Dr. Samuel Foucher and originally inspired by Matthew Simmons. Dubbed the Export Land Model, it analyzes a nation’s net oil exports—the difference between a nation’s production and consumption of its total liquid oil products.

According to Brown, it’s the future net exports, not production, we should be paying closest attention to when searching for signs of peak oil, because that’s the factor that crashes first, and hardest. Brown’s analytical model is unique in that it emphasizes the tendency of oil exporting nations to experience economic growth even as their oil supplies diminish.

* * *

The model’s reasoning goes like this: A nation only exports the surplus of its vital resources. Following a peak in oil production, a nation is flush with capital after exporting more oil than ever in its history—oil that is often sold at previously unreached high prices as well–and its economy responds with growth. But with an expanding economy comes growing demand for oil, causing the nation’s domestic oil needs to cut into a supply that recently began a steady decline. These two sources of pressure on the nation’s oil surplus cause it to deplete at an ever-faster rate. Unless the nation does the unprecedented and keeps its rate of domestic consumption always at or below its exponentially declining rate of production, the surplus vanishes and exports stop.

The “iron triangle” of the Export Land Model. Increasing consumption causes a nation’s net export decline rate to exceed its production decline rate. (image: wikipedia.org)

It’s because the decline in oil exports accelerates that the bottleneck in oil made available to importing nations occurs as a “crash,” not the steady decline, or “long gradual tail” so often pictured by authorities like the IEA. As Brown said on the OilDrum discussion board: “I’ve compared a typical production decline profile to a commercial airliner doing a normal gradual descent for landing. An export crash, like the UK and perhaps Mexico, looks more like a terrifying near vertical dive into the ground.”

UK oil production and exports. The production curve is the classic “peak oil” curve. As can be seen, the drop-off in net exports is dramatically steeper than the drop-off in production. (image: energybulletin.net)

But even an airplane crashing into the ground still stops at the ground. Not so with an export crash, which is only one step on a still-lower descent. Brown discussed with Puplava how a net exporter can become a net importer within a matter of years, and gave the UK as an example, which peaked in net oil exports (as well as production) in 1999, and hit zero export status in 2005.

As these exporters slip into importer status, not only are they not delivering oil into the market, they’re creating additional demand for the remaining volume of exported oil. And these exporters are simply falling into the path that the US and China followed. We went from being a major oil exporter in the Second World War to net importer status only three years later in 1948. (from the interview with Puplava)

According to Brown, the UK is a “classic example” of his model, because it saw a rapid export crash with “virtually no increase in consumption.” The example of the US is also highly illustrative, as its fast consumption rate made it a net importer long before its production peaked—a margin of 22 years.

That’s why Brown’s comparison above is particularly daunting. If other countries are following the US’ pattern, the world could experience a supply shortage far in advance of a global production peak, or what most people talk about when discussing “peak oil.”

* * *

To an oil-exporting nation, a decline in its oil surplus means it needs to start selling some other product. But to a global community dependent on oil, a depletion of net exports may as well be a supply crash. That’s the insight that makes net export analysis so powerful, but it is still surprisingly ignored in most peak oil discussions.

According to Brown’s ELM analysis from 2008, net oil exports from the world’s top five producers have already peaked. A graph supporting this fact showed the price of oil against the average annual net oil exports from Saudi Arabia, Russia, Norway, Iran, and the United Arab Emirates. As prices rose, these countries’ cumulative net oil exports also rose—presumably out of the desire to cash in on increasing demand indicated by higher prices. But in 2005, crude oil exports from these countries dropped sharply. The decline continued even as prices skyrocketed on their way to the all-time peak of $147 per barrel in July of 2008. Brown explained the significance of this pattern in an email to HeatingOil.com:

I brought up the post-2005 production and net export volumes versus price because it does provide evidence that the post-2005 decline in crude production and the decline in net oil exports were, [in my opinion], largely involuntary, much like the Texas & North Sea declines. My point was that if producers and exporters were happy to meet rising demand from 2002 to 2005, why were they suddenly unwilling to meet higher demand from 2005 to 2008?

If we are to believe the Export Land Model, the answer is that they did not have the oil to export. The model, using EIA data for these nations’ oil consumption, production and exports showed that these nations had already reached peak oil production and export capacity, and would approach zero net liquid fuel exports by 2030. Because these countries are responsible for about half of all the world’s oil exports, the 2008 paper that presented these results predicted a literal “draining-away” of the world economy’s lifeblood. It is worth noting that according to the IEA, which does not engage in ELM analysis, 2020 is the projected date of the global peak in oil production.

In an article published on GetRealList on February 8, energy analyst Chris Nolen, after studying two of the top three exporters to the US, declared “The Oil Export Crisis Has Arrived.” Finding that Mexico and Venezuela together exhibited an 8% decline in exports since 2005, he suggested that a crisis has been present for some time, but has not fully manifested because of the recession’s dampening effect on the US economy and demand for oil.

* * *

The Export Land Model is just a theory, like any other. But what makes it compelling is that even if it’s a little right, it says that whatever happens will happen quickly.

Brown happens to think both a production peak and export peak has been reached. He has said that the spike in oil prices from 2005 to 2008 was the result of a furious bidding war for dwindling exports—a theory at odds with the belief that the price run-up of the past few years was a result of excessive speculation, not market fundamentals. That is how oil can be selling for $80 a barrel even though supplies are at record highs and demand at record lows (as had been the case in recent months). But if Brown is correct (and it’s possible that both were contributing factors), then current prices are not a confounding anomaly, but a reflection of true demand for a critical resource in advance of pending export scarcity.

Oil demand is improving. How much depends on one's beliefs about economic recovery. (image: newsx.com)

On Monday, Goldman Sachs and the London nonprofit Centre for Global Energy Studies released conflicting forecasts for 2010 oil prices.

According to Reuters, Goldman Sachs predicted crude oil prices would increase to the $85-95 range by the end of the year, citing positive growth in the US manufacturing sector and Japan. As reported by MarketNews.com, the Centre for Global Energy Studies (CGES) agreed that oil demand was improving but found insufficient evidence to tie this development to real growth and predicted prices would not rise above $80 or $90 a barrel.

Since October, oil has been selling in the $70-80 range. The CGES attributed a small increase in oil demand to ballooning Chinese consumption and a recent cold weather spell that has created more demand for heating oil in the Northern Hemisphere. However, the agency predicted these demand sources would diminish in strength for the rest of the year due to warmer weather predictions and a slowdown in China that would likely follow from the near-termination of the Chinese government’s massive stimulus package. The CGES report pointed out that Chinese crude oil imports have already fallen from 500,000 barrels per day in the first half of 2009 to 80,000 bpd in the last few months. Because real growth will require a recovery in exports, the report reasoned, a substantial demand contribution from China is dependent on a broader economic recovery from its trading partners.

Goldman Sachs pointed to data from the US industrial production sector that showed positive year-on-year growth in the first term of 2010 for the first time since the beginning of the recession. However, the trader neglected to comment on the rising unemployment and wage stagnation in developed countries. As previously reported on HeatingOil.com, the investment bank has cited a rapidly expanding Asian market and dwindling production in the world’s largest oilfields as reason to expect soaring 2010 oil prices.

In contrast, CGES found that a large oil surplus would force prices down in 2010, predicting a market addition of almost 1 million bpd of liquid oil products and liquid natural gas by the year’s end from OPEC and non-OPEC producers. The agency also noted that increased efforts to employ alternative energy or conserve, inspired by the price spike of 2008, will continue depressing demand for oil.