Oil: Russian Production Topping Out
by Dr. Joe Duarte
|Thursday, November 11, 2004
Russia: Oil Production Top Two Years Away
Russian oil production could peak in two years, according to Yuri Shafranik, head of Russia's Oil and Gas Industrialists' Union and a former energy minister. According to Forbes, Shafranik said "the International Energy Agency forecasts that Russia will sustain oil production growth for the next two or three years, after which it is likely to decline, the Interfax news agency reported."
["Oil production has almost peaked, and further growth is only possible if price trends are good, so exports will be automatically restricted two years from now,"] Shafranik was quoted as saying by Interfax.
Shafranik was referring to the International Energy Agency's October report. According to the Wall Street Journal: "The International Energy Agency has raised its forecast for Russian crude oil output by over 20% to 10.4 million barrels a day by 2010, as producers continue to reap benefits from rehabilitation of existing fields, the agency said in a report published Tuesday. But despite further revisions for its production for the next 25 years, the prospects for Russia are ["very uncertain,"] the report added. The overall pace of growth is slower than it was in the past five years. And it is expected to fall further from 2020-2030, requiring investment in developing new fields to replace old reserves, the IEA said in its biannual World Energy Outlook. ["The pace of production growth is expected to slow in the near term as most low-cost opportunities to boost output - the 'low hanging fruit' - have now been exploited,"] the report said."
There was little response to the remarks. And oil prices remained below $50 per barrel, even after the technical snap back rally on 1-10.
The reason for the apparent calm is that neither the IEA or Shafranik said that Russia, the world's number two producer behind Saudi Arabia, is running out of oil. What he said is that oil production, or the conversion of the stuff that comes out of the ground and gets processed into gasoline, diesel fuel, and other products is not likely to expand. In fact, "Shafranik cautioned that Russia still possesses unexplored oil fields and he said production could be sustained by direct foreign investment."
There were no details offered as to whether Russia needs rigs, drills, detection software, personnel, or new refineries. What is known is that there is a huge pipeline bottleneck and a lack of port access, which makes the logistics of transporting oil out of Russia quite challenging.
Whether the Kremlin put Shafranik up to the remarks or not is something to ponder, but not decipherable. But since he is a former minister, we can assume that some Kremlin connection, like with everything else in Russia, is plausible.
What is certain is that Russia is looking for foreign money to finance what it sees as a necessary expansion in exploration and production of oil on its homeland.
The timing of the remarks are important for several reasons. 1) They come at a time when the U.S. is starting a new offensive in Iraq, and presumably the war on terrorism. 2) They come at a time when oil is some 10% off of its recent highs, and there is the potential for at least a short term glut in the world. 3) Putin is likely to be looking for a quid pro quo from Bush given the former's open support for the latter during the election season. 4) At some point, Iraqi oil will be back on line, and then supply will really boom.
This, in our opinion, is the opening salvo of a likely campaign from Russia with a clear message. We have oil, but need your money and your expertise (translated we want you to take the risk).
Reaction has been muted, meaning that at this point, global, especially U.S. oil companies are still smarting from the bureaucratic snafus with Yukos, as well as other projects, including the Sakhalin debacle in which Russia wanted to strip oil companies of drilling licenses unless the companies ponied up new and very large sums of money.
What is likely to be the next step, if we are correct, is some kind of official government announcement about the need for investment. The response, meaning, which group of bureaucrats gets their pony tail is a wad over the situation, will tell us a lot more about what's next.
For now, we expect very little to happen. If indeed Russian oil production will top out in two years, we expect the world to mostly deal with it when the situation arrives.
Oil Markets : 50 Day Moving Average Still Holds The Key
The market rallied on 11-10. But the evidence is still clear. Crude oil supplies are rising, despite the fall in gasoline and distillates. This still points to a refinery problem, not a supply problem. The likely outcome will be a move toward some kind of balance. If crude supply continues to build, the refinery bottleneck won't be able to keep prices steady to lower.
December crude fought its way back to the 50 day moving average on 11-10, but was lower in overnight trading suggesting that the 50 day moving average is still the key.
A break below $47 could mean that a trip to $45 is on its way. That should shave a few cents off the price of gasoline per gallon.
For now, there is plenty of supply, stable demand, and a major refinery bottleneck at work. This should get worked out in the next few weeks barring a sudden ice age erupting.
The key level to watch is the $48-$49 area and the 50 day moving average. These former support levels are now resistance.
Oil stocks stabilized, and should be carefully watched here.
The Philadelphia Oil Service Index (OSX) moved back above 116, now a key support level. For more details on trading the energy sector visit our energy timing page, featuring our highly effective OIH timing model and our Top Ten Energy Stock List.
The Amex Oil Index (XOI) moved back to 700, and above its 50 day moving average, key pivot points. Support is at 686. For immediate analysis, including stock picks, and the latest in technical analysis of the entire energy complex, our subscriber section has a full complement of recommendations in oil service and the rest of the energy complex.
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