Digital Globe satellite image of an oil storage facility. The company takes satellite images of oil production and storage facilities for use by oil companies and oil market analysts. (image: digitalglobe.com)

CNBC reported Tuesday on Digital Globe, a private satellite company that sells birds-eye-view photos to oil companies, oil analysts, and investors.

The company, which operates three satellites at altitudes of between 300 and 600 miles, can take images of basically anything that is visible from the air. US intelligence agencies are top Digital Globe clients, but civilian industries are finding more ways to use the images. Common private-sector applications of the satellite images are urban planning, land use, agricultural analysis, location-based services on cell phones and other handheld devices, and of course evaluating oil production and shipping.

The company’s images can help oil analysts determine how much oil is actually being produced at a certain extraction sites like offshore platforms. While using satellite pictures to count the number of trucks or tankers going to or from an oil well may seem like a haphazard way of gauging oil supplies, it makes a lot of sense when one considers the notorious inaccuracy of official oil supply data released by the American Petroleum Institute (API), the US government’s Energy Information Administration (EIA) and the International Energy Agency (IEA). Just this week, the API report showed a 5.86-million-barrel increase in US crude oil stockpiles during the previous week, while the EIA report showed an 800,000-barrel decrease over the same period.

It’s hard to say how the use of more sophisticated analytical tools like Digital Globe’s images will affect the oil market. But if it brings a bit more certainty to the task of accurately measuring supply and demand, it could help create a more stable market that is truly grounded in fundamental forces.

To watch a video of CNBC’s report from Digital Globe “Mission Control,” visit the CNBC website.

Speculators’ dollar involvement in the US commodity futures market has ballooned in the last decade. The majority of experts believe this trend is a direct cause of higher and more volatile oil prices. (image: dinocrat.com via Bloomberg and the CFTC)

It’s official: the view that increased speculative activity in oil markets has brought higher prices and more volatility is the majority opinion.

Reuters reported on Tuesday that a survey of professionals in all segments of the oil industry showed that nearly 75 percent of respondents believed that speculation has raised oil prices above the level determined by supply and demand alone. According to the report, the extra boost to oil prices provided by speculators costs consumers of oil products $300 billion per year.

Among those surveyed, estimates of how much speculation has inflated oil prices ranged from $10 to $30 per barrel. Using the low-end estimate of $10 per barrel, Reuters found that oil producers reap $300 billion in extra profits per year—profits that come directly out of consumers’ pockets. Although speculation in commodities markets has been growing since major deregulation in 2000, close examination of its effects on prices only began after the price of crude spiked at $147 per barrel in July 2008. Speculation has been linked to the price spike, and 73 percent of respondents in the Reuters survey said that the spike was not caused by factors related to supply and demand.

Scrutiny of speculation’s influence on oil prices has intensified in the last six months, as low demand and overflowing supplies pointed to lower oil prices but the prices of crude and other oil products steadily increased.

Reuters surveyed “40 major figures in the oil industry,” including “bank analysts, traders, hedge funds, brokers, refiners, exchanges, consumers, consultants and academics.” The results of the confidential survey pointed to a clear consensus in the industry:

73 percent thought increased speculation had boosted prices above the level dictated by supply and demand, with only 17 percent saying it has had no impact.

Analyst Eugen Weinberg of Commerzbank offered his take on the subject, which provides a good summary of the majority view:

investment inflows into the market over the last years did contribute to the price increases, and heightened speculation brought more volatility.

In public discourse, financial interests continue to deny speculation’s influence on oil prices and cast speculators as important market players that allow for hedgers and other business interests to make sound investments. Analyst Phil Flynn of PFGBest told Reuters that speculators are currently serving to ready the market for a soon-to-come upswing in demand:

With the huge growth of China in recent years, we have had some of the greatest demand growth ever for commodities. The value of speculators coming into the market is that they allow the needed investment in future supplies.

The survey results were released as many business interests and market players eagerly anticipate announcement of new energy trading regulations by the Commodity Futures Trading Commission (CFTC), which wrapped up a three-month public comment period on the regulations on Monday. The CFTC has proposed “position limits” on certain energy commodities (including crude oil and heating oil), which would cap the amount of contracts one party could hold at a time.

Most survey respondents echoed initial reactions to the CFTC’s announcement of position limits: they are too generous and will therefore be ineffective at reining in price volatility.

But while 64 percent of those surveyed favored increased regulation, only 41 percent said the current CFTC proposals would be successful. Almost a quarter said the limits did not go far enough or saw ways for traders to circumvent the rules, while 35 percent said they risked doing more harm than good.

Through a confidential survey of experts, Reuters has made clear the consensus view on speculation and its relation to oil prices:

1. 1. Speculation has significantly inflated oil prices in recent months and brought more volatility to the energy markets
   2. Increased regulation is needed to curb speculators’ influence
   3. Regulations proposed by the CFTC are too weak to address the issue

The first and second points above fit in with the larger trend toward tighter financial regulation marked by reform bills currently under consideration in Congress, and it seems momentum is building toward reforms that could actually bring lower and more stable prices of crude, heating oil, and gasoline in the near future. Perhaps this momentum will allow for new steps to be taken that will address or supersede the CFTC position limits that many view as inadequate and bring the real change consumers so desperately need.

The Deepwater Horizon oil platform shortly before it sank last week. (image: green.autoblog.com)

On Tuesday, the oil drilling rig Deepwater Horizon exploded in the Gulf of Mexico, killing 11 workers and injuring several others. After the explosion, the rig was engulfed by a crude oil-fueled blaze until it sank a day later. The sinking of the drilling platform caused the pipeline that had connected it to the the sea floor to rupture, opening up an oil leak that is currently estimated to be gushing 42,000 gallons (1,000 barrels) of crude per day into the waters of the Gulf.

On top of the heavy human cost of the incident is the threat of widespread environmental damage, which is growing by the minute as a massive oil slick spreads toward land. By Monday afternoon, the size of the oil slick was estimated at 1,800 square miles, the New York Times reported. Although no environmental effects have yet been observed, sea flora and fauna could soon be harmed by the presence of the oil in the water. Environmental damage could worsen as the oil slick moves into coastal ecosystems, which the US Coast Guard estimated would not happen for at least 36 hours, according to the Wall Street Journal. BP, the oil company that commissioned the sunken platform, is charged with stopping the leak and cleaning up the spilled oil, both of which could take months.

The growing oil slick on the surface above the leak. (wsj.com)

Observers of oil markets are accustomed to seeing events that have only tenuous connection to the oil industry, some occurring in far-flung places, have a significant impact on oil prices. However, this disaster, despite the potential environmental damage and massive cleanup costs that will be shouldered by BP, has so far had no effect on oil prices. Crude and heating oil prices fell on Monday, but analysts attributed the drop to economic factors unrelated to the oil spill.

Because of the tiny amount of oil produced by one drilling rig in relation to world supply, the sudden loss of one rig’s oil is not enough to affect the price of crude oil on global markets.

The explosion and oil spill could have an indirect effect on US energy policy, however, as opponents of offshore drilling will have fresh evidence of the risks incurred by each new offshore rig. According to the Washington Post, White House spokesman Robert Gibbs told reporters on Friday that the incident did not lead the president to rethink his recent decision to open up large swaths of coastal waters to oil drilling. However, with images of the burning platform and huge oil slick fresh in their minds, citizens and members of Congress may think twice before supporting any expansion of offshore drilling in the near future.

The IMF sees no downturn in the price of oil or commodities more generally. (image: abclive.in)

The International Monetary Fund (IMF) released its latest World Economic Outlook on Wednesday, reported Bloomberg, and forecast that commodity prices would stay “high by historical standards.” While the prediction applies to all commodities, Bloomberg reported that crude oil and copper were pivotal in leading commodity markets higher.

The IMF’s analysis of commodity markets agreed with the conventional wisdom in oil markets that economic growth to come later in the year would boost demand and strain the ability of oil producers to keep up:

The tension between rapid demand and sluggish capacity growth is therefore likely to re-emerge once the global recovery matures into a sustained expansion, thereby keeping prices at elevated levels by historical standards.

Many predict higher oil prices, but some oil industry insiders—most recently the CEO of Exxon Mobil, Rex Tillerson—are concerned that higher oil prices will lead to demand destruction as consumers alter their behavior in response to the rising cost of heating oil, gasoline, or other finished petroleum products.

Sens. Lieberman, Kerry, and Graham will take center stage next week when they unveil their energy and climate bill. (image: aprn.org)

Three key senators plan to release their proposal for comprehensive energy and climate legislation next week. Senators Kerry (D-MA), Graham (R-SC), and Lieberman (I-CT) hope to win bipartisan support with a sector-based approach that treats utilities, transportation, and industry separately, in addition to expanding offshore drilling and nuclear energy.

Though the bill rejects the economy-wide cap and trade system that the House passed last summer, the proposal still puts a cap on emissions from the utility sector—just don’t expect the trio of Senators to use the phrase “cap and trade.” While utilities face the added costs of an emissions cap, transportation would be subject to what might be called a “carbon fee on transportation fuels” (according to the Houston Chronicle) or a “gasoline tax” (according to the Los Angeles Times). The transportation fee—which would affect the oil industry—will be a “linked fee” that is tied to the price of greenhouse gas emissions for utilities. In that way, the senators hope to evenly distribute the impact between the oil industry and the natural gas industry, which powers many utilities. Industry will initially be exempt but will eventually be integrated into the emissions cap placed on utilities.

Several oil majors have already made clear their preference for a carbon tax rather than cap and trade, so the oil industry may decide to support this bill, or at least not actively campaign against it.

Passing the bill will remain extremely difficult, as the New York Times details. In their effort to win over skeptics, the bill’s trio of drafters has included language that would restrict the power of the EPA and could overturn state laws, Politico reports. While this may be necessary to win Republican votes, it could cost the votes of some Democrats who oppose restricting the EPA’s authority under the Clean Air Act.

The “tripartisan” lead taken by Kerry, Graham, and Lieberman could help lawmakers bridge the aisle and avoid some of the rancor associated with health care reform, but that’s far from guaranteed. The Senate also plans to take up financial reform, which could speed up the debate over energy and climate legislation or force it to the back burner, delaying any final action indefinitely.

Any energy and climate bill that becomes law will have some impact on the price consumers pay for heating oil. If costs for the oil industry increase, heating oil users will likely see higher prices. The oil industry’s tolerance, if not quite support, for the proposal developed by Kerry, Graham, and Lieberman could indicate that this is a climate bill that will have only a mild impact on heating costs.

Oil prices have moved above OPEC's preferred range, but the cartel has no plans to raise output. (image: topnews.in)

Not long ago the oil minister of Saudi Arabia, Ali al-Naimi, proclaimed that the price of crude oil was “perfect” between $70 and $80 a barrel. But as prices have crept above $80 a barrel, hitting an 18-month high of $87.09 on April 6, OPEC has made no sign that it plans to increase output to combat rising prices. Now OPEC representatives have indicated they would be content with prices at $90, $95, or even $100 a barrel.

The price range of $70–$80 seemed perfect because it offered profit for producers without pushing the price for gasoline, heating oil, or diesel so high that it curbed consumer demand and stunted economic growth. Many authoritative analysts of the oil industry—most recently the International Energy Agency (IEA)—have warned that oil prices above $80 could start cutting into the consumer spending that’s expected to lift the global economy out of recession. “Ultimately, things might turn messy for producers if $80-$100 is merely seen as the new $60-$80,” said the IEA. If OPEC recognized that in December, why don’t they recognize it now?

According to the head of Libya’s National Oil Corporation, Shokri Ghanem, the push above $80 a barrel may only be a fluke, reported Reuters. When asked about the current oil price, Ghanem said, “What we are seeing in the market is a kind of fluctuation that we cannot build a policy on.” Reuters cited other unnamed OPEC representatives as saying that $90 or $95 per barrel might be the price trigger for OPEC to consider formally increasing oil production.

The oil minister of Kuwait, Sheikh Ahmed al-Abdullah al-Sabah, named a different price at which OPEC would take action: $100 a barrel. He added that current oil prices were not interfering with economy recovery, and that Kuwait was pleased with the current price level, Bloomberg reported.

In recent months OPEC has at times sounded like a consumer advocate, railing against speculation for artificially inflating oil prices and vowing to fight price volatility. The group has even looked the other way as members violate production quotas and add supply to an already oversupplied oil market. However, OPEC’s inaction as oil prices move further away from perfect seems to confirm suspicions that OPEC can’t resist the pull of higher profit margins, even if they run counter to the cartel’s long-term interests.

Reuters points out that OPEC has a history of naming price targets and then doing nothing as prices soar. In 2004, OPEC stated a target of $22 to $28 a barrel, but declined to raise output as prices moved higher. In 2009, crude oil at $50 per barrel satisfied OPEC, which didn’t want to stifle any economic recovery, but now OPEC members say oil may have to reach double that price before quotas are raised. And even if the price of crude oil does hit $100 per barrel, OPEC may decide that it’s comfortable with that price, too—or prices that climb even higher.