Factors Fueling Oil Prices

Oil continued its upward trajectory, with West Texas Intermediate crude closing at a record $119.37. The futures market is not looking for the oil bubble to pop any time soon, as the entire forward curve is trading above $100 to December 2016.

Crude and other commodity speculation has surged as a hedge against inflation and the falling US dollar. The world hasn’t seen a speculative surge of this magnitude since the late 1970s to 1980. This corresponds to the last time Saturn was in Virgo. Saturn here relates to supply constraints of basic materials needed for daily living. Oil primarily relates to Neptune, as this planetary energy rules chemicals. Neptune rules Pisces, the sign that Uranus has been in since 2003. Because Pisces/Neptune rules the sea, unexpected oil discoveries are likely to be found at much deeper levels further out at sea. Uranus represents sudden and sharp price movements and unpredictable trading patterns.

The quickest way to burst the speculation pushing up oil and commodities is for the Federal Reserve to raise interest rates until the carrying cost of the contracts outweighs possible gains. As long as the Fed continues its overly accommodative monetary policy, oil will continue to have strong support.

Even after removing the speculators out of crude, prices will not fall as far as people anticipate. In order to get crude to crash, clean and economically viable alternative sources will need to enter the energy market. “Peak oil” is a bit of a misnomer. Earth has lots of oil, but the largest supplies are located in the most inhospitable areas of the world – geographically and geopolitically, so crude continues to become more difficult and expensive to extract. In the 1990s it cost $4,000 to add 1 barrel of daily production capacity. Today it’s about $16,000. Production costs at Alberta’s tar sands cost about $65 a barrel. Pluto represents things that are below the surface. In Capricorn from 2008-2024, it represents the reality that oil companies must dig deeper. The greatest yields will be found in the coldest and most inhospitable locations on Earth.

OPEC reiterated at the International Energy Forum yesterday there’s no need to pump more oil now. Exports are not increasing as the development boom in the Persian Gulf nations has caused electricity shortages. Natural gas and water injection used to power the oil fields gets periodically diverted to power plants during peak electricity demand. Uranus rules electricity and power disruptions. Saturn will oppose Uranus between Autumn 2008 and Summer 2010, heightening the likelihood of global power disruptions.

Saudi Arabia:
Supplies more than one fourth of the world’s known recoverable reserves, producing 11 million barrels a day (b/d). The Kingdom plans to increase capacity to 12.5 million b/d by 2009 and then halt capacity expansion. The oil minister told Petroleum Argus over the weekend that the world doesn’t need more Saudi oil through 2020.

Today’s Wall Street Journal talks about how it is becoming more difficult and expensive to continue production yields in established fields. The Saudis have spent $15 billion to reopen their Khurais field that was last in production one Saturn cycle ago. For every 1 barrel of oil extracted, they must inject 2 barrels of seawater into specially built structures. Saudi Arabia’s only other new major source is Manifa, located offshore in the Persian Gulf and expected to come online in 2011. Labor and steel shortages are not helping matters.

Nigeria is Africa’s largest oil exporter at about 2.47 million b/d. It has high quality, light crude, but a fifth of its production is on hold due to escalated violence. Shell declared force majeure* today on April and May delivery contracts, affecting 400,000 b/d after a pipeline at its Bonny fields was attacked. Looking at Nigeria’s horoscope shows that violence will continue to affect production capacity.

In an internal report obtained by the Financial Times last week, Nigeria risks losing a third of its oil output by 2015 unless it can receive investment aid from foreign energy companies. China has already given the government a $500 million loan and is expected to lend an additional $2 billion for infrastructure projects in an effort to win access to energy exploration rights. The primary foreign oil companies in Nigeria are ExxonMobil (XOM), Royal Dutch Shell (RDS-B), and Total (TOT).

After producing 10 million b/d in 2007, the International Energy Agency announced last week that Russian oil output fell for the third month in a row, the first decline in 10 years. Leonid Fedun, the vice president of Lukoil, said Russia needs $300 billion during the next 8 years just to maintain current levels. More sources of oil exist in the harsh conditions of eastern Siberia where no real infrastructure exists.

Blame the Russian government for:

  • 80% of oil revenue is taxed = $27 per barrel. An oil company’s estimated income after all expenses is about $11 per barrel.
  • Companies cannot have more than 51% participation in new oil fields.
  • Rosneft, Exxon’s state partner in the Sakahlin-1 field says Russia is limiting its expansion. Rosneft estimates production will decline 25%+ in 2008.

Brazil: (potential bright spot)
Tupi field discovered in 2007 has estimated reserves of about 8 million barrels.
State owned Petrobas announced last week the unconfirmed reports of potentially 33 billion barrels in a “pre-salt area.” The oil is 6,000+ feet beneath a further 10,000 feet of sand and rocks and a 6,000 feet thick salt layer.

*Declaring force majeure protects the company from litigation if it fails to deliver on its contractual obligations to buyers.

Related Post: “Horsing Around About Oil”

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