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From the Editor - Opec to boost crude supplies, but prices hit new record high.Chris Skrebowski. At its much-heralded meeting on 10-11 September, Opec unexpectedly agreed to increase production by 500,000 b/d from 1 November. Apparently unimpressed by Opec's decision, spot prices for WTI* immediately rose to a new record of $79.6/b, having briefly moved above $80/b — the highest dollar value ever recorded, but still below 1979's inflation adjusted $90/b short-lived peak. The key influences driving the price surge were the announcement of an unexpectedly large drawdown of US stocks after a steady series of stock drawdowns over recent weeks and concerns that a tropical storm (Humberto) in the Gulf could worsen and damage production facilities. In the event the storm petered out, but the price surge continued amid reports of funds moving back into oil. The storm did cause refinery closures and this boosted spot gasoline prices and, indirectly, crude prices. US gasoline stocks are currently very low, so any threats to supply lead to spikes in gasoline prices. In the face of all this the Opec supply increase was, at least for the moment, discounted — largely because the United Arab Emirates is due to close its offshore fields in November for maintenance and workovers. This potentially could reduce supply by 600,000 b/d, meaning that there would be no additional Opec supplies on the market before December. Middle East crude takes around two months to be transported, refined and moved through the system before it becomes product on US and European markets. This means the new supply will not impact until late February, when the Northern Hemisphere winter is starting to wane. The knowledge that additional supplies are on the way would normally be enough to make end-users relaxed about running down stocks. At the moment it appears the market fears that stocks will have run down well before the additional Opec supplies start to appear; hence the move to higher prices. It is unlikely that such a pessimistic market view will hold sway for long, but prices are likely to remain volatile as the market is buffeted by good and bad news about new supply, market demand and the level of stocks. While price volatility is to be expected, the basic situation of supply tightness continues, which means that barring a major economic setback prices will remain high — a situation that seems set to run well into 2008. Lengthening shadows Global biofuels production is set to reach 1mn b/d in 2007. In a basically tight market it provides a welcome addition to refinery sourced liquid fuels. Biofuels are widely seen as a major success story and have produced a rising tide of reports and predictions suggesting a golden future for consumers and shareholders alike. In the face of such 'certainty' it is probably wise to be a little sceptical. There are a number of good reasons to think the future of biofuels may not be as golden as it is being painted. Since April, the price of wheat has doubled and now trades at record levels. The media is full of stories of rising bread and pasta prices, normally adding the footnote that rising biofuels demand is helping drive the prices up. Russia has threatened to ban wheat exports while Australia and, to a lesser extent, Canada, have steadily revised down the size of this year's crop. Corn prices, despite record plantings, have also hit records and Mexicans have rioted over sharply rising tortilla prices. The record corn plantings have been at the expense of soya beans, which are now also rising in price. High corn prices may have improved incomes for corn farmers, but they have inflated costs for cattle farmers, dairy farmers, pig farmers and the hosts of manufacturers who use corn products such as corn syrup in their outputs. Booming incomes in Asia are increasing demand for meat and milk, which, in turn, has boosted grain prices. Palm oil is also rising rapidly in price as, apart from being a potential biodiesel feedstock, palm oil is used in a wide array of products ranging from soap to mayonnaise. The challenge is that food and cosmetic manufacturers are able to outbid biodiesel producers for available supplies. Indonesia has even talked of an export ban on palm oil. Even in Europe, where economic growth is rather less vigorous, similar challenges are emerging. German biodiesel refiners are finding they are outbid for rape seed supplies by the food companies and, as a result, the biodiesel refineries are operating at half capacity. The challenge is easily stated, but may be quite intractable. Biofuels have been made economic by a combination of subsidies and mandated use as additions to traditional gasoline and diesel. There has been strong political backing for something that could potentially mitigate the rises in fuel prices caused by high crude prices. Now booming demand and poor crop yields (caused by bad weather rather than climate change) appear to have turned biofuels into an engine for food price inflation. In our July issue, John Mumford, formerly of BP, warned of the reputational risk to companies if biofuels were over hyped. Now the question may be the reputation of politicians who thought biofuels were an easy route to enhancing motor fuels supplies while mitigating climate change impacts, only to be confronted with food price inflation and unhappy voters. Go LNG To finish on a positive note, recent contracts for LNG supplies by both China and India make it clear that we are close to the final investment decision (FID) for the Gorgon project. The Australian government has given the go ahead and sales contracts are being agreed. Following the green light for the Pluto LNG project, it would seem the long hiatus on FIDs for LNG projects has finally broken. *WTI — West Texas Intermediate, a benchmark crude. The opinions expressed here are entirely those of the Editor and do not necessarily reflect the view of the EI.
Date: 30.10.2007 Leave your comment
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