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 TrendLines  Research  ...   Long Term Perspectives by Freddy Hutter

 Peak Oil Depletion ~ Production Records, the Barrel Meter & the Gas Pump

• Peak Oil Since 1956 • Saudi Arabia Outlook • URR • BarrelMeter, GasPump & World Production Records • Scenarios • Freddy Hutter's Peak Scenario 2200 •

 

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[New!]Quarterly Production for the Top 7 Nations

[New!]World Production Records ~ 2010 setting new Annual Record ~ new Quarterly Record set in Q1 ~ Monthly Record poised for January

[New!]the Gas Pump ~ USA Gasoline Price Components & Crack Spread ~ New Car Sales poised to Collapse in Q1 upon $3.42/gallon ($92/barrel)

[New!]TrendLines Barrel Meter Compared to Recognized Long-Term Crude Oil Price Forecasts ~ EIA raises 2035 target to $224/barrel

[New!] TrendLines Barrel Meter ~ $92/barrel Oil ($3.42/gal pump) in 2011Q1 Could Decimate USA New Car Sales (again) ~ 1-yr, 5-yr, 10-Yr & 25-Yr Price Targets

Irrational Exuberance Revisited

    Scroll down for this month's[New!]TrendLines charts

 

July 28th ~ In a grudge match that's lasted 25 years, Russia has regained the lead as World's top All Liquids producer.  It is improbable Russia's 1987 annual/quarterly/monthly records of 11.5-mbd will ever be surpassed.

Russia is steady @ 10.4-mbd, while Saudi Arabia sits at an OPEC quota restricted 9.6-mbd.  In 3rd place, the USA is stable @ 8.3-mbd,

Following are China (4.0), Iran (3.7), Canada (3.2) & Mexico (3.0-mbd).

TrendLines Research's All Liquids Underlying Decline Rates Observed in 2010:  Worldwide 2.9%, Saudi Arabia 2.7% & USA 2.5%

 

July 27th ~ The pace of flow rates to July 13th indicates a new global Annual Supply record of 85.6-mbd is being set in 2010.

A new global Quarterly Supply record of 86.0-mbd was set in 2010Q1 July 2008 continues its distinction for the all time global Monthly Supply record:  86.7-mbd, 0.7-mbd above today's monthly pace of 86.0-mbd.  Projection of year-to-date flows infers the next new monthly record will be set in January 2011.

The Quarterly record for Demand of 86.9-mbd was set in 2007Q4 (with difference of 1.7-mbd drawn from inventories).  The High Demand Month was February 2008's 88.0-mbd, but consumption fell to 82.2-mbd by January 2009 amidst the depth of the world Recession.

TrendLines Research's global All Liquids Underlying Decline Rates Observed:  2010 - 2.9%;  1970-2009 Avg - 2.7%

 

Note:  Because IEA data is overstated by an avg 0.8-mbd due to failure to deduct energy inputs for processing non-conventionals, IEA's A/Q/M stats disqualified for Record purposes.

 

the TrendLines Barrel Meter ~ $92/barrel Oil ($3.42/gal pump) in 2011Q1 Could Decimate USA New Car Sales (again)

July 12th ~ The USA Contract Crude Price averaged $70 in June, down $2 over thirty days, but still near double the $37/barrel four year low of December 2008. The decline was mainly attributable to a toning down of media hysterics & reduced speculation/hedging activity. The cost of imported oil ranged from $65/barrel for Mexico Maya Heavy to $79 for Indonesia Minas Light.

Including spikes, crude oil should settle into a general trading range of $74 to $92/barrel thru the balance of Q3/Q4. The present spiking activity is completely detached from fundamentals. As seen in the chart, Prices during the last three seasons was closer to 1.9 x's fundamentals rather than the 1.4 "fair value" norm (dashed yellow line). The obscene record profits for IOCs we predicted for Q1 have been confirmed, and shortly to be announced quarterly earnings should reveal this disturbing trend continued in Q2.

The fundamentals-based Crude Price (yellow line) was $41/barrel in June.  The monthly avg for the USA import-weighted contract price exceeded fundamentals by 70% .... an unduly inflated price considering this premium averaged 43% over the last five years.  The recent high for this metric was 143% in y2K, yet it was only 37% during the July 2008 price spike.  The low point for the factor was 6% (over fundamentals) upon the price collapse at year end (Dec/2008).  The current level of bullishness reflected by this metric has not been seen since late 2002.

One factor for the relatively higher Price is renewed speculation/hedging activity.  A record of 307 thousand long futures contracts was set in early April, compared to 259k volume in March 2008.  A record non-commercial (long/short) contracts volume of 493k was set as well (in early June), much above the 453k level of May 2008.  The net volume (longs minus shorts) set a new record of 135k in January, substantially more than 2008's high mark of 100k.

On the medium term, we expect Crude Prices will escalate to new record highs ... then promptly plunge.  Geopolitical events could spike Price over the $100 threshold as early as 2011Q1, and the monthly Avg will almost certainly cross over in 2011Q1.  Two major forcings are behind this general upward price movement:  (a) a return to secular uptrend of USDollar debasement;  and (b)  ever-rising Extraction Costs.  TrendLiners will recall that this has been our position since late 2008.

The first significant impact of higher prices will be a serious re-collapse of USA New Car & Light Truck Sales.  As illustrated in our Gas Pump chart, this occurred in 1980, 1990 & most recently in 2007Q4, upon attainment of certain Gasoline/GDP ratios - signalled when Crude hit $3.19/gallon gasoline ($86/barrel.  This same threshold will have been breached when the import-weighted monthly average of USA Contract Crude Price passes thru the $92/barrel ($3.42/gal) level ... likely in 2011Q1.  The weak state of the Recovery raises question as to whether the USA economy can absorb such a shock to the auto sector.  Even more doubtful is ability of the rest of the world to take this in stride.  Several G-20 nations may find themselves relapsing into Recession, about the time Price goes thru the $107/barrel level (2011Q1).

The present record for the monthly Avg ($131/barrel) was set in July 2008.  Unsustainable spikes & the Monthly Avg could breach that figure in 2011Q4, but only for several weeks.  Hopefully, sticker shock during this crisis will coax the American Congress & President to address their fiscal mismanagement at that point.  Due to political realities surrounding the timing (Nov 2012 Elections), the Republican Party is poised for good fortunes with respect to potentially slashing the Democratic Majority ... and possibly dethroning Obama himself.

The Barrel Meter model assumes the USD:EUR exchange rate will recover post-crisis to a 0.77 exchange rate (EUR:USD = 1.30).  Political platforms by both Parties will be required to address the Deficits & National Debt during the Election Campaign.  Whatever the outcome of the Race to the Whitehouse, the USDollar debasement should be halted by hard decisions in Washington, to the glee of the investment community, and despite the USDollar's diminishing status as the global reserve currency.

The present price run of Crude's contract price will finally be impeded in 2011Q4.  At that juncture, Price will be blocked by the same Demand Destruction Barrier (DDB) that firmly arrested the 2008 price run.  The negative effects of rising energy costs on the disposable income of consumers and the profits and viability of businesses and institutions eventually takes a toll against the economy.  The Demand Destruction Barrier represents an Crude Price/GDP ratio whereby recessionary feedbacks come to fruition that can enhance economic contractions.  To that end, this $140 peaking of Price could quite likely precipitate an economic contraction should the neither the Fed not mitigate with appropriate Monetary Policy, nor Congress with appropriate Fiscal measures.  As happened in the Summer of 2008, Demand will back off as alternative energies and substitutes are pursued.  With the marginal All Liquids being less required, Avg Price should collapse (as much as 69%/$97) to $43/barrel as international Inventories burgeon ... but alas the secular uptrend will not be thwarted for long.

Rising Extraction costs and diminishing Surplus Capacity will entrench a rising trend thru the remainder of the decade.  Based on an 8.5 year business cycle in play, the USA is likely to see an economic cycle high in 2013Q2 and another contraction in 2017Q3.  The extent of this being a hard or soft landing is dependent on Federal Reserve action.  A 2017 Recession will contribute to temporary softness in Extraction Costs & Crude Price.

In comparison, the similar WTI Futures Contracts for these same 1-yr & 5-yr targets are $80 (down $2 from 30 days ago) & $85 (down $3) respectively today.  Look for the futures prices to rise $40 on the short term & fall $16/barrel for 2015, as they catch up with current realities.  Our comparative figure for the final futures date of Dec 2018 is $74/barrel, much less than the $91 (down $3 from 30 days ago) for today's contract.

Over the long term, rising Extraction Costs is a major forcing.  There will be softness is Crude Price as a result of a probable 2026 Recession.  Most volatility will surround the evaporation of Surplus Capacity.  From its peak of 7.5-mbd in 2011Q1, spare production capacity completely dwindles away by 2023, only rebounding during economic events.  An encounter with $358/barrel is projected in 2033, but a probable 2034 Recession will truncate that spike as well.  Technical obsolescence inspired Demand Destruction should bring about some degree of price stabilization deep into the future.

TrendLines Research Targets for USA's import-weighted contract crude:

TrendLines Research           Price Targets

2010/7/12 Assumptions:
Supply Surplus Capacity Avg Cost Extraction  EUR:USD USD:EUR
July/2011   1-yr Target:  $120/Barrel 87-mbd 7-mbd $27/barrel 1.45 .69
July/2015   5-Year Target:  $69/barrel 91-mbd 5-mbd $34/barrel 1.30 .77
July/2020   10-Year Target:  $90/barrel 96-mbd 3-mbd $48/barrel 1.30 .77
2035 Target   (25-Yr): $319/barrel 101-mbd 0-mbd $170/barrel 1.30 .77

These Targets are based on our projections of future Avg Extraction Cost, Currency Debasement, Hedging Activity, National Inventories, Surplus Capacity & The Media Noise-du-Jour effects on Windfall Profits.  The foundation for much of this data is derived from Peak Scenario 2200 - our peak oil depletion model.

If your firm/institution requires written validation of a future price forecast in the 60-day to 40-year time frame, feel free to contact our analyst, Freddy Hutter.

Components of the USA Contract Crude Price

The Barrel Meter offers a visual depiction of the TrendLines Research analysis of the components that comprise the USA Contract Crude Price.  By studying the forcings that affected Price from 1999 to 2007, our model was able to dissect in real time the factors in play during the historic 2008 spike.  Importing future Surplus Capacity stats from our Peak Scenario 2200 production profile to the Barrel Meter model allows us to combine forecasts of each of those components and reasonably project Crude Price 25 years into the future.

USA Contract Crude Price Spike - using the TrendLines Barrel Meter, it is possible to dissect the $94 spike (from Jan-2005) to $131/barrel PEAK (July 2008) & collapse back to $37 (Dec-2008):

  $131 PEAK Forcings:

$94 SPIKE Forcings:

$37 TROUGH Forcings: $70 "Today" Forcings: $140 2011Q4 Forcings:
Windfall Profits via Media Noise $33 $28 $ 0 $25 $72
Hedging/Speculation Activity $ 3 $ 1 $ 2 $ 3 $ 3
Tighter Inventories $ 9 $ 6 $ 3 $ 6 $12
Tighter Surplus Capacity $31 $23 $6 $ 3 $ 3
Currency Debasement $31 $29 $ 3 $ 9 $24
Weighted Extraction Costs $24 $ 7 $23 $24 $26

The TrendLines Price Targets are based on our projections of future Avg Extraction Cost, Currency Debasement, Hedging/Spec Activity, National Inventories, Surplus Capacity & the effect of the Media's noise du jour on Windfall Profits


Highlights

July/2011 - 1-yr Target for USA Contract Crude Price:  $120/Barrel

July/2015 - 5-Year Target:  $69/barrel

July/2020 - 10-Year Target:  $90/barrel

2035 Target (25-Yr):  $319/barrel

 

USA New Car Sales collapse:  2011Q1 @ $92/barrel crude ($3.42/gal gasoline)

Return of G-20 Recessions 2011Q1 @ $107/barrel

Potential Spike to $100/barrel:  2011Q1

Next Potential Spike past record $131/barrel:  2011Q4

Sustained Prices over $100:  2021Q3

Sustained Prices over record $131:  2023Q1


Backgrounder ~ It has been our position since 2004 that Crude Prices in excess of $70/barrel were not sustainable in the Global Economy.  As alternative substitutes become more available, this recessionary barrier should rise by about $5/barrel ($ .24/gallon gasoline) per year.  It is also clear that the auto industry and the vibrant USA economy shut down when crude hit $86/barrel & gasoline breached $3.19/gallon.  The Oil Cost/GDP ratio that inspired this event is poised to repeat in 2011Q1:  $92 Crude & $3.42 gasoline.  These thresholds should be respected.

Lower energy prices assisted in bringing an end to the USA Severe Recession in July 2009 (to be announced by NBER Aug 3 2010).  But, present spiking activity in Crude Price and gasoline jeopardizes the pace of both the global & USA economic Recoveries.  The main downward forcing on Crude Price after attaining new records was the onset of Demand Destruction.  The concept of Demand Destruction had eluded most analysts and pundits leading up to the events in 2008.  Excessively high product pricing robbed businesses, institutions and consumers of their profitability, viability & disposable income.  Conservation, alternative energy and substitution strategies flourished.  And they will again should price outreach its place.  The most positive outcome of this last episode was the extinguishing of an overly generous Lack of Surplus Capacity premium along with the dispelling of Peak Oil rumours.

TrendLines Research has assisted many stakeholders recognize that All Liquids will enjoy an ever increasing pace for approx two decades, to be followed by a very manageable Post Peak decline.  With a return to healthy Surplus Capacity, Marginal costs are irrelevant at this time and thus assures a reasonable pricing regime.  Knowledge of these two factors allows policy makers to conduct their research and due diligence and make long term decisions in a less hurried environment.

July 13 2010 ~ Today's chart replaces EIA's AEO with its IEO 2010, raising the 2035 target to $224 from $204/barrel.

Also revised from our April chart is Freddy Hutter's monthly update of the TrendLines Barrel Meter.  It  maintains the position the current price run will be halted at $140/barrel in 2011Q4, plunge to $43, and continue a secular price rise to an ultimate $358 in 2034.  The current price run is pushed by debasement of the USDollar and reflects investor concern over future Federal Deficit/Debt to GDP ratios.  The correction has its foundations in TrendLines confidence in its ominous Demand Destruction Barrier.  Price softness will occur during probable Recessions in 2017, 2026 & 2035.  The latter event results in a 2035 target of $319/barrel (up from $315).  Significant forcings include ever-rising Extraction Costs & the exhaustion of Surplus Capacity in 2023.  The Barrel Meter imports data on projected extraction costs, spare production capacity & business cycles from our Peak Scenario 2200 model.  A similar analysis for gasoline prices is featured via our Gas Pump presentation.


2010/4/12 Backgrounder ~ We're pleased to add a contribution by IHS to our Crude Oil Price Forecasts presentation. Authored by Mary Novak, it is by far the most conservative of the long-term studies with a 2030 target of only $111/barrel.


2010/1/10 ~ We've inserted what the Barrel Meter describes as a significant reference threshold - the Demand Destruction Barrier (DDB).  It demarks the apparent Oil-Cost/GDP ratio where rising prices are inevitably reversed by sea changes in user conservation and substitution.  This invisible ceiling halted the epic 2008 spike at $131/barrel.


2009/12/14 Backgrounder ~ As we introduce Adam Sieminski's price study, it mirrors our sentiment that current crude prices are poised for at least a 15% downward correction to better reflect underlying fundamentals.  The chief energy economist of Deutsche Bank (Washington) projects contract prices to reach $182/barrel by 2035.

Seeing the global Recession subsiding more quickly, IEA bumped up its 2015 forecast seven bucks to $73 this week.  Their long term targets mostly skim a tad below Deutsche Bank, rising to $158 by 2030.  EIA released its 2010 AEO in mid-December.  Converse to IEA, its path straddles above the Deutsche Bank course, rising to $203 in 2035.

Disagreement that a constraint mechanism such as the Demand Destruction Barrier exists separates conventional price forecasting from those within the McPeakster fraternity.  For illustration purposes, we include their three showcase predictions to demonstrate the divergence.  Monthly updates by a "joker" over at theOilDrum (aka Ace) have been trimmed recently, but still warn the cult following of a spike to $188/barrel within 40 months!  From here, we deteriorate to contributions by two members of the Lunatic FringeJeff Rubin (ex-CIBC World Markets) foresees "sustained pricing" of $215 by 2012 & Matt Simmons (investment banker) sports infamous speculation of $300 by 2014 & $573/barrel ($600 WTI) in "much less than 20 years".


For comparative purposes, all TrendLines projections are re-based to EIA's import-weighted USA Contract Price (nominal USDollars/barrel), approx 5.3% less than WTI. Its July 2008 peak of $131 was followed by a December bottom of $37/barrel. WTI has been a playground for neophyte speculation for several years and as such WTI can be 12% higher or $6% less than the USA contract price. In June the Contract Avg comprised imported prices ranging from $65/barrel for Mexico Maya Heavy to $79 for Indonesia Minas Light.

 USA Gasoline Price/gallon Components:

 

July 2010 2011Q1 2011Q4
Demand Destruction Barrier $4.21 $4.29 $4.42
New Car Sales Collapse Threshold $3.35 $3.42  $3.52
Retail Pump Price $2.84 $3.42 target $4.42 target
Wholesale $2.15    
Taxes $ .49    
Profit $ .20    
Metrics:      
Contract Crude $1.71    
Gross Margin (Retail less Crude) $1.12    
Margin (Retail less Wholesale) $ .68    
Crack Spread $ .43    

the TrendLines Gas Pump

USA New Car Sales Poised to Collapse in Q1 upon $3.42/gallon gasoline  ($92/barrel)

July 14th ~ During 2005 & 2006, gasoline touched $3/gallon and fell back.  It didn't in 2007Q4, and that helped push the American economy (already anaemic due to the Housing Bubble's assault on family disposable income) into a Technical Recession.  It is little known that this price event contributed to the collapse of USA New Car Sales (see BEA chart below) and light vehicle/parts imports from Canada.

It should be of grave concern that the same Pump-Price/GDP ratio underlying that episode of consumer behaviour is being re-approached.  The failure of Congress/Obama to address America's structural deficits & mounting national debt is troubling to the global investment community (especially bond vigilantes) and is responsible for the USDollar's secular decline that commenced in May 2004.  As shown in the Barrel Meter table above, USD debasement was the largest forcing ($29) among components during the $94/barrel price spike (2005-2008).  As the Dollar falls, crude oil pricing rises.

As a Pump-Price/GDP ratio, the New Car Sales Collapse Threshold rises along with GDP over time, and gasoline will attain the same danger zone @ $3.42/gallon ($92/barrel USA contract crude).  Our Barrel Meter projects this Price will be surpassed as early as 2011Q1.  Fortunately, a second Pump-Price/GDP ratio will halt the current price run @ $4.42/gal in 2011Q4.  This Demand Destruction Barrier is the same threshold that reversed the July 2008 price run @ $4.11 per gallon.  It demarks the point where substitution and conservation measures by consumers and commerce attains critical mass.  A decimation of New Car& Light Truck sales this Winter would be a major factor in the economy's relapse into double-dip, and as such is reflected in our Recession Meter.

This month's Retail Price of $2.84/gal is comprised of $2.15 Wholesale refinery product & a $ .68 Margin.  In turn, Margin is made up of $ .49 Taxes & $ .20 Profit.  One would think the retailers are getting very rich, eh.  Well, analysis reveals Margin is only up from $ .54 in January Y2k.  Taxes & Profit are up from 42 & 13 cents at that time.  In other words, nominal Profit today is virtually unchanged.

The post-Y2k Crack Spread (diff betw Wholesale & Contract Crude) for Refiners can be seen ranging from $1.06 & $ .18 ($44 & $8/barrel) and is currently $ .43/gallon ($18/barrel).  When this figure drops below $ .48/gallon ($20/barrel), Refiners prefer to produce diesel and import less expensive gasoline.  This current lack of profitably is behind the recent shuttering and sell-off of facilities.

The GasBuddy chart below provides higher resolution, but uses WTI ... a (playground) metric which is at times over $8/barrel higher than the import weighted contract crude price as measured by EIA and featured in all TrendLines Research charts & discussion.  WTI has exceeded the weekly USA contract crude price by an avg 4.5% in 2010.

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