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 Malacca Strait is the narrow channel that separates Malaysia from Indonesia, and carries a third of the world’s seaborne oil. (image: sabrizain.org)

Singapore’s navy issued an advisory saying it had “received indication” that a terrorist group is planning an attack on oil tankers passing through the Malacca Strait, Bloomberg reported today. The warning did not name any terrorist groups, but the threat could be coming from a regional group with ties to al-Qaeda.

The Malacca Strait runs between Malaysia and the Indonesian island of Sumatra, and is the shortest sea route between the Persian Gulf and North Asia, says the EIA. According to EIA data, roughly 15 million barrels a day passed through the Malacca Strait in 2006, which accounts for nearly one-third of the global amount of oil shipped by sea. The IEA calls the Malacca Strait one of six “chokepoints” in sea routes around the world, similar to the Strait of Hormuz that leads out of the Persian Gulf, making it a critical point for global security, reports Reuters.

The navy’s advisory reported that “the terrorists’ intent is probably to achieve widespread publicity and showcase that it remains a viable group,” an indication that al-Qaeda may be involved in some way. Terrorism expert Rohan Gunaratna told Bloomberg of the possible al-Qaeda connection: “There are terrorist groups in the region that have the intent to carry out terrorist attacks and some of these groups have relationships with al-Qaeda.”

Al-Qaeda has previously targeted ships in terror attacks. The suicide bombing of the USS Cole in 2000 killed 17 American sailors, and a 2002 suicide bombing of the French supertanker Limburg spilled 90,000 barrels of oil into the Gulf of Aden. Oil tankers are considered “soft targets,” according to an analysis by Reuters, because the slow-moving ships can be attacked by smaller, more maneuverable vessels such as speedboats or fishing boats. Little wonder that Gunaratna, head of the International Center for Political Violence and Terrorism Research in Singapore, bellieves “the warning should be taken very seriously.”

So far oil markets have been unmoved by the threat, but that would surely change if an attack were attempted or successful. Markets have shown a consistent response to terrorist attacks, which includes sell-offs in many markets as investors’ appetite for risk collapses, and a turn to US Treasuries and some commodities (such as gold) as safe havens.

While any terrorist attempt could trigger this psychological response, an attack that disrupted a major shipping lane such as the Malacca Strait would have a more severe and longer-lasting impact on the global economy. If the Malacca Strait were rendered impassable—through an oil spill, for example—the supply chains for oil and many other goods would be upset, leading to higher prices that would ripple through the world economy.

Already this heating season, heating oil consumers have seen retail heating oil prices rise because of labor strikes in France, attacks on oil pipelines in Nigeria, and an attack on an oil tanker by Somali pirates, demonstrating how the price of oil is intertwined with world events. An attack in the Malacca Strait would likely raise home heating costs again, and perhaps have a financial impact that extends beyond oil markets. A terrorist attack would, of course, have other costs as well, because while the Somali pirates intended to capture the tanker and hold it ransom, terrorists affiliated with al-Qaeda may have no such intention, and instead aim for a dramatic act that achieves nothing but destruction.

(image: welt.de and zimbio.com)

Wednesday’s inventory report from the EIA had next to no influence on the oil markets yesterday, as crude and heating oil prices climbed despite a surprising 4.1-million-barrel increase in crude oil inventories. Analysts had predicted a build of 1.4 million barrels; their prediction for a decrease of 900,000 barrels in distillate inventories, which include heating oil and diesel, held true. Weakness in the dollar pushed oil prices higher on Wednesday, since a weak dollar makes commodities cheaper for those holding other currencies and makes commodities appealing as a hedge against inflation. Gains in the stock market also supported higher oil prices because they signal improvement in the US economy, which would eventually increase demand for oil.

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

Crude oil prices over the course of today, March 3. (image: ft.com)

Crude oil inventories rose by 4.1 million barrels, according to the EIA, far surpassing predictions for a build of 1.4 million barrels, but had no impact on oil prices today. Some analysts pointed to gains on the stock market and the weak dollar to explain rising oil prices. When the stock market moves up, that points to an economic recovery that will boost oil demand, and a weak dollar makes commodities cheaper for investors who hold other currencies. Others pointed to the increase in refinery utilization rates as evidence that any build in crude inventories would be short-lived.

Today’s closing prices on NYMEX

Crude oil (April 2010 contract): Up 1.5 percent, $80.89 per barrel.
Heating oil (April 2010 contract): Up 1.9 percent.

A 2004 report from the Institute of Energy Economics Japan, host of last weekend’s summit on oil prices. (image:eneken.ieej.or.jp)

Government regulators of oil markets from around the world called for harmonized regulation of over-the-counter markets and greater transparency of supply and demand data in an effort to curb oil price volatility, BusinessWeek reported on Sunday.

Regulators convened in Tokyo last weekend for the International Energy Agency’s “oil price formation workshop” along with representatives from the financial sector and oil industry. Attendees included regulators from the US Commodity Futures Trading Commission (CFTC), whose members have repeatedly stated their intention to tighten regulation of energy markets.

At the conclusion of the meeting, statements from the IEA and others outlined two courses of action that would combat volatility in oil prices: coordinated regulation of over-the-counter (OTC) oil trades across all international markets and more complete and transparent data on supply of/demand for oil.

From BusinessWeek:

“Regulatory authorities in many countries are cautious about systemic risks that could be led by a lack of transparency in OTC transactions,” IEA Executive Director Nobuo Tanaka said in an interview in Tokyo today. “It is very important to expand the network of transparency.”

OTC transactions refer to the trading of commodities-based derivatives outside of regulated exchanges like the New York Mercantile Exchange that are not subject to oversight by the CFTC or any regulatory body. OTC trades allow for huge speculative bets to be placed on oil that could distort the market and bring about major price swings. With greater transparency and some oversight, regulators hope to reduce the influence of OTC trades on prices and reduce volatility. In January, CFTC chairman Gary Gensler advocated bringing OTC transactions under the purveyance of clearing houses—third-party companies that oversee derivative trades—that would provide needed oversight. Such a move would require close cooperation among international regulators to ensure that derivatives trading rules were consistent across international borders. A lack of such consistency would allow traders to circumvent regulators by simply taking their transactions to a different country. CFTC commissioner Scott O’Malia emphasized this point: “We need to make sure rules and standards are right. We are managing a risk appropriately and consistently because clearinghouses are very important and we can’t have any failures.”

A joint statement issued by the IEA and the Institute of Energy Economics Japan, which hosted the summit, also called for more accurate and transparent data on oil demand and oil supplies. Estimates of oil consumption and world stockpiles of petroleum products vary widely, making it difficult to get a clear picture of the oil market at any given time and evaluate whether or not prices reflect that picture accurately. For example, data on crude oil and product stockpiles in the US are released twice a week, first by the industry group API and then by the Department of Energy’s EIA. Even though these reports are released within less than 24 hours of each other and cover the exact same data, they consistently report wildly different numbers that often vary by several million barrels. Transparent and verifiably accurate data on how much oil is in storage would hopefully stabilize prices by reducing extreme speculative bets by big traders that may push prices up or down.

The positive outcome of the Tokyo meeting is what appears to be a consensus among regulators and market players as to what needs to be done to reduce oil price volatility that plagues heating oil users, drivers, and other petroleum product consumers worldwide. However, whether or not that leads to concrete action is a different question altogether. Here in the US, the CFTC has been talking tough about energy commodities regulation for almost a year. But with the exception of introducing generous position limits that critics say will have no effect on oil prices, the commission has done nothing to advance their stated cause.

If the CFTC’s inaction proves to be a model for regulators who attended the summit, consumers have nothing to look forward to but the same unpredictable and intractable gasoline, diesel, and heating oil prices that they have come to despise.

Federal Reserve Chair Ben Bernanke at a House Committee hearing yesterday. (image: Saul Loeb via Getty Images)

Testimony by Federal Reserve chairman Ben Bernanke overcame concerns about oil demand and pushed oil prices higher on Wednesday. Bernanke said the Fed would not raise interest rates anytime soon, which should keep the dollar low. A weak dollar makes commodities cheaper for traders who hold other currencies, increasing demand and prices. Other news yesterday put some downward pressure on crude and heating oil prices. The strike at Total’s refineries in France ended, removing concerns about fuel shortages. The EIA’s inventory report showed a build in crude supplies and a smaller-than-expected decline in distillate inventories, which include heating oil and diesel. Weak demand for heating oil could be exerting more influence as the heating season winds down; heating oil futures, which usually move in tandem with crude oil futures, rose by a much smaller percentage on than crude did on Wednesday.

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

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.

Crude oil prices over the course of today, February 24. (image: ft.com)

The EIA inventory numbers showed a build in crude supplies and a smaller-than-expected drop in distillates, which include heating oil and diesel, but weak demand was overcome by the effect of Federal Reserve chairman Ben Bernanke’s testimony before Congress. Bernanke said the Fed’s benchmark interest rate would stay low “for an extended period,” which pushed the value of the dollar lower. The weak dollar supported higher oil prices, since it makes dollar-priced commodities cheaper. Crude’s gains were larger than those in the heating oil market, where substantial inventories may be weighing on prices as the heating season nears its close.

Today’s closing prices on NYMEX

Crude oil (April 2010 contract): Up 1.2 percent, $79.81 per barrel.
Heating oil (March 2010 contract): Up 0.3 percent.

As usual, the EIA’s weekly inventory report released on Wednesday morning will likely be the most influential factor in determining crude and heating oil prices this week. A moderate decline (about a million barrels or so) in distillate stockpiles, which include heating oil, is generally expected during the heating season. A much larger decline would undoubtedly push heating oil prices up, while a smaller stockpile decline or any increase would lead to lower heating oil prices.

Assuming Wednesday’s inventory report doesn’t bring any surprises, look for small price increases (around a penny or two per gallon) or flat prices each day this week.

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(image: newsimg.bbc.co.uk and Nicholas Whitaker via heatingoil.com)

Inventory numbers and a weak dollar combined to drive up the price of crude and heating oil on Thursday. The EIA’s inventory data was somewhat mixed, with crude oil stockpiles rising by 3.1 million barrels, but oil markets took more notice of the drop in distillate supplies. Distillates, which include heating oil and diesel, fell by 2.9 million barrels, roughly twice as much as what was expected. A weak dollar—weighed down by news that new jobless claims had risen last week—helped traders see the upside to oil prices, since a weak dollar makes dollar-priced commodities, such as heating oil and crude oil, cheaper for investors.

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