Just as I predicted two weeks ago, the Nymex oil price is stuck in the 90s ($95.70/barrel). This is not quite high enough to cause a panic, but plenty high enough to cause pain at the pump. The AAA Fuel Gauge national average price for regular unleaded sits at $3.71/gallon. Economists will tell you that people get used to gas prices in the high 3-dollars, having experienced them before and having made adjustments.
Don't you believe it. Incomes are falling, and among those with jobs, many Americans work part-time but need full-time work. Those in the middle- and lower-income brackets continue to get squeezed.
There's no reason to change the alarm level.
Oil Alarm Level — Orange
It is unclear how much longer the oil price will bounce around in the $90s. As I'm sure you're aware, the world is scheduled to end on Tuesday, August 2nd
The dated Brent spot price stands at $116.81, so the spread between Brent and the Nymex price has opened up again. Nobody is quite sure why the differential is so large, but this Reuters article from June 23 gives us some insight into the problems with using Brent as a benchmark.
(Reuters) - Brent's growing momentum as a global oil price benchmark sits at odds with problems frustrating dealers in the opaque physical market that underpins the millions of barrels of daily Brent futures trade.
Production glitches at a key North Sea oilfield have shown Brent is not without local drawbacks that can distort prices, the same sort of problem critics say has bedeviled rival benchmark the New York Mercantile Exchange's West Texas Intermediate (WTI) contract.
Supply from Nexen Inc's Buzzard oilfield has been lower than expected, leading to deferrals and cancellations of cargoes. Buzzard's oil is important for world markets because it is part of the Forties Blend crude stream, which usually sets the "dated Brent" oil benchmark used around the world.
"Clearly with all these deferrals, it raises the issue of the credibility of the benchmark," said Peter Stewart, analyst at KBC Energy Economics. "2011 is proving to be anything but an easy year for the dated Brent marker."
Reduced supply in the North Sea has helped to boost the price of Brent crude futures relative to U.S. crude, analysts say. Brent's premium to U.S. crude last week hit a record high above $23 a barrel.
[My note: That was on June 23. Today the premium is $21.11/barrel.]
Stewart said in a report the spread was related to the "inflated" value of Brent as well as to a sharply weakened price of WTI. The U.S. marker has been depressed by excess inventories at its Cushing, Oklahoma delivery point.
Benchmarks are used in the oil industry to avoid needing to agree an outright price for every deal. Brent has gained momentum in its longstanding rivalry with WTI this year with some of its supporters arguing it is a more global price marker.
Up to 70 percent of the world's physical oil is based on the price of dated Brent. Yet Buzzard itself at full production of about 200,000 barrels per day (bpd) accounts for just 0.2 percent of global supply.
"It's not a good thing -- I think it is a bit daft -- but this is the way benchmarks work," said a North Sea crude trader.
A bit daft? It's totally silly, not to mention insane, that production from a few North Sea oil fields should determine the price of up to 70% of the world's traded oil.
DECLINING SUPPLIES
The shipment of millions of barrels of Forties crude has been delayed in May and June because of the Buzzard field problems, irritating oil traders and boosting prices.
This, temporarily, has exaggerated the steady decline in production of the crudes the Brent contract is based on -- Brent, Forties, Oseberg and Ekofisk, also known as BFOE.
In July, the four were initially scheduled to pump 970,000 bpd, down 10 percent from June's 1.08 million bpd and down 33 percent from 1.44 million bpd in July 2007, soon after Ekofisk became the fourth crude to be included in the benchmark.
On Tuesday, it emerged that more Forties cargoes would be delayed in July. This steepened the backwardation in the Brent futures market -- a structure indicating tight supplies where prompt prices trade at a premium to future prices -- even though the amount of oil is relatively tiny.
C+C means "crude oil plus condensate". Based on EIA data.
Declining production in the North Sea (graph above) is one of the poster children of the peak oil movement. In ten years, production there will be a mere trickle on the world markets. Are we supposed to believe that production from aging fields in the North Sea (like Forties) give us a good price benchmark now? And will do so in 5 years? In 10 years? This is crazy.
What will the oil price be in 2 weeks? God only knows, because the world may end or it may not. I won't hazard a guess.
What strikes me in looking at the Brent production graph is that it started to decline at almost exactly the same time that world oil prices began to rise after being relatively stable since the mid-80s. Which is fitting, since the North Sea, along with Mexico and Alaska, was a big factor in temporarily abating the original oil crisis of the 1970s. Now all three are in steep decline.
Brent production crashing to a trickle within ten years is a dire situation, indeed.
Posted by: Bill Hicks | 07/30/2011 at 11:56 AM