Supply has outrun demand this year as a global recovery has yet to accelerate. Yet, oil prices more than doubled from February to August and are up about 50% from where they started the year.

Now, many traders are positioning themselves to profit from a pullback. The gap between prices of options betting on a decline in prices and those that would profit as a result of a rise in oil has widened to a record 10 percentage points, according to five years of data compiled by Banc of America Securities-Merrill Lynch.

Put options, which give traders the right to sell oil in December below current prices have an implied volatility of 54.3%, compared to 43.3% for options to call, Bloomberg News reported. Implied volatility is estimated volatility of a security’s price. Implied volatility generally increases when the market is bearish and decreases when the market is bullish.

Implied volatility is used in calculating an option’s premium and right now the premium for December and other put options shows “the market is worried,” Harry Tchilinguirian, a senior oil analyst at BNP Paribas SA (NYSE ADR: BNPQY) told Bloomberg.

“If puts are pricing higher than calls, we are looking at a situation where the market is more averse to the downside and is looking for more compensation” for the option, he said.

Perhaps the biggest reason the market is worried is that a generous supply of oil remains on the market, some of it piled up in offshore tankers. Meanwhile, the global economy is healing at a considerably slow pace with many analysts forecasting a so-called U-shaped recession for the United States – the world’s largest petroleum consumer.

U.S. stockpiles of crude are 14% higher than they were a year ago, according to the International Energy Agency (IEA). U.S. distillate fuel inventories – which include heating oil and jet fuel – stood at 167.8 million barrels as of Sept. 11 of this year, according to the Energy Information Administration (EIA). That’s the highest level since 1983.

As of Sept. 11, U.S. gasoline supplies are at 207.7 million barrels – 2.2% higher than they were in late May at the start of peak summer driving season, according to the EIA.

The story is much the same overseas where gasoil stockpiles – the European equivalent of heating oil -reached a record 23 million barrels on Sept. 10, according to PJK International BV, Bloomberg reported.

At the end of July, oil inventories in the 30 nations of the Organization for Economic Cooperation and Development (OECD) totaled about 2.8 billion barrels – 4.6% more than the same time last year, according to the IEA. More than 60 million barrels of oil are being held in tankers offshore.

The Centre for Global Energy Studies (CGES) in a monthly report that it expects high crude stockpiles will continue to constrain the market.

“The CGES expects little sustained upward pressure on oil prices over the remainder of this year and even next year prices are unlikely to rise much unless clear signals emerge that world is pulling out of recession in a sustainable fashion,” the CGES said. “High inventories, particularly of middle distillates, are putting a ceiling on oil prices at the moment … and this will only lift once those inventories start to be drawn down.”

The report also noted the Organization of Petroleum Exporting Countries (OPEC), which controls 40% of the world’s oil supply, sees promoting economic growth as being more important than the short-term pursuit of higher prices.

“OPEC signaled its broad satisfaction with the current level of oil prices when it met in Vienna earlier this month,” CGES said. “It recognized that sustainable upward price pressure will only come with economic recovery and rising oil demand.

Saudi Arabia’s oil minister, Ali al-Naimi weeks ago told reporters that the cartel is more concerned with reinvigorating the global economy than raising oil prices.

“Economic growth is the name of the game, that’s what’s going to drive the price,” said al-Naimi. “As long as economic growth is there, the price is going to go up.”

OPEC has last year lowered its production quotas by 4.2 million barrels per day (bpd) – about 5% of global demand – hoping to put a floor under prices that plunged more than 80% from their record high above $147 a barrel last summer. The reduction was effective in halting the fall in prices, but even with the cuts supplies continue to grow.

Additionally, some OPEC nations have not strictly adhered to the mandate. The cartel’s production exceeded its quotas by 1.2 million barrels a day in August, according to Bloomberg estimates.

The glut of oil on the market has some analysts wondering whether or not spooked speculators will hasten their retreat from the market.

“If ever there was going to be a retreat below $60 a barrel, it is now,” Stephen Schork, president of consultant Schork Group Inc. in Villanova, Pa., told Bloomberg in a telephone interview.

Light, sweet crude for December delivery yesterday tumbled $2.33 a barrel, or 3.24% to settle at $69.71.

Source: Traders Anticipate a Drop in Oil Prices as Supply Outruns Demand

No one reads it. The mainstream media ignore it.

It’s the product of the best prognosticators in the Department of Energy. Okay, that may be what puts most people off. But if you’re patient enough to dig into it, it will cough up some fascinating nuggets of information.

The present edition is no exception. The report refrains from spelling out the conclusion that seems most obvious from its data. However, confirming a trend begun just last year, the 2009 edition clearly reveals that the government has been forced to admit that Peak Oil is coming. Moreover, it’s expected to arrive much faster than was believed as recently as two years ago.

This represents a remarkable turnaround in the agency’s opinion. Up until 2008, they were predicting unbroken growth in world oil supplies for the next two decades. But in ’08 and ’09, the rosy picture turned decidedly unrosier.

Before we look at the numbers, a couple of notes on terminology. The EIA makes its projections based on what its analysts call the “reference case,” i.e., average economic growth. It also provides estimates for better- and worse-case scenarios, but the reference case represents the best guesses they have.

Oil (as we generally think of it), upon which most of the world economy depends, is termed “conventional liquids,” i.e., the stuff that comes gushing up from under Saudi sands. “Unconventional liquids” – extra-heavy oil, bitumen, coal-to-liquids, gas-to-liquids, and biofuels – are also covered in the report, as we’ll see, but conventional is far and away the most important one at this moment in history.

With that in mind, by 2007 the IEO was in its final year of irrational exuberance, confidently predicting that world production of conventional liquids would be 107.5 million barrels/day (up from 81.9 in 2005). That dovetailed nicely with a forecast for world demand of 118 million b/d, with 10.5 million barrels of unconventional liquids taking up the slack.

By ’08, they had put the info into table form, and look what happened:

Same table, ’09:

Projected production, as you can see, is suddenly shriveling up. From 107.5 million b/d of oil projected for 2030 in 2007, to 102.9 million b/d in 2008, to this year’s meager expectation for 93.1 million. That’s a drop of 13.4% in only two years, and posits production growth of only 11.6 million b/d (14.2%) from 2006 levels.

If that isn’t an admission that the era of Peak Oil is upon us, what is?

The report assumes that some of this stunning shortfall will be made up by development of unconventional liquids to the tune of 13.5 million b/d, including a jump of 5.9 million b/d in biofuels. At the same time, while conventional liquid production from non-OPEC nations is projected to grow only 7%, OPEC is expected to substantially increase its contribution, ramping up output by almost 25%. (All figures are for the period of 2006-2030.)

Does this seem optimistic? Well, it presupposes some heavy lifting on the part of OPEC, a dicey proposition in the best of times.

And it means creation of the infrastructure necessary to exploit extra-heavy oils, tar sands, shale, ultradeep deposits and other unconventionals, all of which require sophisticated technological know-how and face significant environmental challenges.

Biofuel production could more easily be elevated. But to reach the lofty level of nearly 6 million b/d would necessitate a huge diversion of cropland from food to energy, certain to be attended by a rise in food prices, not to mention potentially serious food shortages. The need for food being rather more primal than the need for gasoline, politicians are going to be reluctant to risk loosing angry mobs into the streets.

Even if all of these developments proceed flawlessly, though, we’ll still have to face a widening gap between production and consumption. Or will we?

As it turns out, we’re in luck! Or so the EIA would have us believe. Because, accompanying that falling supply is – you guessed it – declining demand. In 2007, the IEO anticipated world demand for all liquids of 118 million b/d in 2030. This year, that estimate shrank to 107 million b/d, right in line with production.

The important point to take away from the IEO’s analysis is that the world is facing a decline in liquid fuel production and the government, after years of straight-faced denial, is now admitting it.

Does this mean we’re going to run out of oil? No. But supply constrictions mean that the good old days of limitless, cheap oil are gone. And, though viable alternatives eventually will be developed, there’s no way of putting a timetable on that. In the interim, we’re going to have to pay up if we want to keep the family jalopy on the road.

How much? The IEO report’s reference case calls for $130/barrel oil in 2030, but that’s based on relatively modest demand increases from India, China, and other developing nations, and we find it very optimistic. It easily could be twice that.

Regards,
Doug Hornig

Source: Washington Capitulates: Peak Oil Is Real

When we think about the concept of ’Peak Oil’ today, we need to keep in mind what we’re talking about. The curves show oil output peaking in so many parts of the world. This phenomenon is quite real, as long as you understand that it’s the light, sweet, easy-flowing oil that is getting harder and harder to find, certainly in significant quantity.

But there are a lot of other hydrocarbon molecules out there. Most of those molecules are not light, sweet crude oil. Indeed, most of the hydrocarbon molecules that the world will use in the future will be ’heavy,’ with lots of carbon atoms and not so many hydrogen atoms.

Here’s a graph from oil services giant Schlumberger that estimates the world’s heavy oil and bitumen resources. Canada’s 400 billion cubic meters of bitumen translates into something like 1.4 trillion barrels of oil equivalent. How much is that? Well, it’s about SEVEN times the total oil reserves of Saudi Arabia.

Sure, there are still issues about land disturbance, settling ponds, water usage, gas usage and myriad of other things that come up when you’re spending billions of dollars on a major mining effort. But Syncrude has built its business model around dealing with the ’other’ issues, and not just moving oil sands and recovering oil products. Don’t underestimate the ability of the Alberta government to regulate its energy producers. This is a long way from Appalachia.

Meanwhile, we’re talking about literally billions of barrels of bitumen (or oil equivalent) that the process makes available to the North American marketplace. And if the United States wants to get onto its environmental high horse about the source of the hydrocarbons from the oil sands — and tax or ban their importation — there are other buyers in the world. Like the Chinese, who have racked up many frequent flyer miles on their treks to Fort McMurray.

Source: The Saudi Arabia Next Door

“People are buying in thinking that demand will pick up for oil and products soon,” said Zachary Oxman, managing director at futures trading firm TrendMax Futures.

Meanwhile, energy traders are awaiting the Energy Information Administration’s report on petroleum inventories scheduled for release later today.

Analysts surveyed by Platts expect a decline of 2 million barrels in crude stockpiles and an increase of 800,000 barrels for gasoline. They also project an increase of 1.4 million barrels in distillate supplies.

Total petroleum inventories, including crude oil, gasoline and diesel, are expected to rise for a sixth straight week, adding to what already is a 19-year high.

“The fundamental picture looks bleak and far too much uncertainty remains on the demand outlook, so a move lower is possible,” said Nimit Khamar, of Sucden Financial Research.

“However, given the [oil] market is mainly driven by financial markets and economic sentiment for now, and not [by] oil fundamentals, further gains cannot be ruled out, although a rally based on this comes with an increased risk of a sharp correction,” Khamar added.

Source: Crude Climbs Fifth Day Straight

As evidence of how screwed up things are out there, crude apparently got a boost from the Labor Department’s report mentioned above. So more than half a million new people filing for unemployment in a week is good news?

“The jobs data and the dollar are helping oil today,” said Phil Flynn, vice president at futures trading and research firm PFG BEST Research. “But weak demand concerns are rising.”

Meanwhile, crude inventories at Cushing, Okla. – the delivery point for crude futures traded on the New York Mercantile Exchange – jumped to 30.2 million barrels last week, up 5.6% and adding pressure to futures prices.

Also on the energy front, U.S. natural gas inventories rose 75 billion cubic feet in the week ended July 3rd to reach 2,796 billion cubic feet, the Energy Information Administration reported yesterday. Analysts at IHS Global Insight had expected an increase of 71 billion cubic feet.

At the current level, inventories were 601 billion cubic feet higher than last year at this time and 452 billion cubic feet above the five-year average.

Source: Crude Oil Gains

There were no great surprises in the report. However, there was an uptick in crude inventories at Cushing, Okla. — the delivery point for crude futures traded on the New York Mercantile Exchange. They jumped to 30.2 million barrels last week, up 5.6%, which added a bit of pressure to futures prices.

Summing up, “The market is adjusting itself,” said Michael Fitzpatrick, of MF Global. “In the past few weeks, there was a lot of wishful thinking that the economy will recover. Now people realize there is no evidence of any sustainable economic growth.”

Source: Crude’s Slide Intensifies

“I think the dips you are seeing now are preceding the next big down move in stocks and commodities as well,” Oxman added. “I’d be net short, with a trading bias to the short side.”

Another bear is Edward Meir, of MF Global, who wrote that, “Despite the string of declines hitting the crude-oil markets of late, we do not think the current selling bout is over just yet … The markets remain vulnerable to a poor fundamental backdrop, typified by high stocks and lackluster demand.”

And in noise out of D.C., the Commodities Futures Trading Commission says it will hold hearings in July and August on whether to limit investor positions in commodities, particularly crude oil, heating oil, natural gas and other energy products. The CFTC is targeting investments from exchange-traded funds and index investors.

Source: Crude Falls More

“The latest oil price increase to over $70 a barrel is not justified by current fundamentals, [although] it cannot be ignored that the oil market has improved,” wrote analysts at Commerzbank. “The underlying demand remains week.”

In a potentially positive development the Movement for the Emancipation of the Niger Delta, or MEND, say they are studying an amnesty offer announced by Nigerian President Umaru Yar’Adua, but will turn in their heavy weapons by the August 4th deadline stipulated in the document.

The group, however, objects to the term “amnesty,” saying that, “We are not criminals. Amnesty is offered to criminals and people that have been convicted. We are fighting for our rights, carrying guns fighting to protect our fathers’ land. What we are suffering from is marginalization, slavery, oppression. We accept the peace, and are ready to lay down our arms, so the amnesty itself is just a mix of language.”

In the natgas arena, the fuel continued its forward and back movement, posting a loss on the week, with July futures shedding 2% to finish at $3.949 per million British thermal units.

Source: Crude Slips

Crude flirted with the $70 mark yesterday, briefly topping it for the first time in six months, at $70.32, in a rush of optimism immediately after the jobs data came out.

Despite the slippage, crude ended the week up 3.2%.

“Crude turned around to the downside because of the strength we are seeing in the U.S. dollar,” said Tariq Zahir, of Tyche Capital Advisors. “More importantly, the fundamentals of crude oil are still bearish … Demand is down, and inventories are up.”

Credit Suisse analysts concurred, saying that, “Demand destruction is still a topic in the market … At the same time, OPEC production has started to grow again. We think price risks are skewed to the downside.”

In the natgas arena, the fuel was higher on the week, with July futures gaining 10%, to $3.868 per million British thermal units.

Source: Crude Tops $70

In addition, traders took a cue from Goldman Sachs (NYSE:GS), which increased its 2009 oil price forecast to $85 a barrel, up from $65/barrel previously. Goldman analysts wrote that the recent rally in crude prices is likely to be “the first stage” in a rally for oil prices that they anticipate will coincide with an economic recovery.

Looking shorter term, analysts at Commerzbank said that a further price correction is likely soon, perhaps even to a range of $50 to $55 a barrel. “We think that the recent optimism about an imminent rise in oil demand was overdone and that oil inventories remain at a very high level,” they said.

Meanwhile, many continue to search for the break point, where fundamentals will kick in. “The market probably has a little bit more left in it to mount a push to $72 resistance before more substantial setback sets in,” wrote Edward Meir, of MF Global.

Source: Crude Barrels Higher