Author: Vincent Fernando

Here’s a nice forecast of the world’s current account imbalances from an IMF research paper, shown to the right.

What’s the message?

China and oil producers are likely to become an even larger global imbalance when it comes to trade surpluses. As a percentage of global GDP, China’s current account surplus could increase 50% to 0.9% of global GDP. Oil exporters’ trade surpluses will more than double to 0.7% of global GDP.

Obviously the China forecast shown will depend heavily on how the yuan-dollar rate plays out in the future. We could easily see China become a net importer if the yuan were hiked substantially for example.

But the oil forecast seems less subject to wild swings, which means that oil could become a far larger part of the global trade imbalance debate, on the scale that China currently is. Thus if the above scenario plays out, expect OPEC and nations’ oil dependence to come under substantial fire, even more so than they already are. Nevertheless, we’ll just highlight that the IMF paper mentioned actually expects overall global imbalances to ease. We’re just using one of their tables to suggest that in some places they could worsen.

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At a recent Cambridge Energy Research Associates conference, Exxon executive Tom Walters made it unflinchingly clear that his company believes natural gas is in for a long-term growth phase in North America.

Rig Zone:

Walters joined a group of industry leaders to address a global gas plenary on “The Role of Natural Gas in the Future Energy Mix.” He noted that despite the effects of the recent economic downturn, the long-term outlook for natural gas is positive. “We expect global energy demand to increase nearly 30 percent in the next 20 years. By 2030, global gas demand will be around 140 billion cubic feet per day higher than 2009,” he said.

The major driver of this demand is power generation, which will account for more than half of the gas demand growth, Walters said. He also emphasized the environmental benefits of natural gas as a source of power generation. “Natural gas is a cleaner burning source of fuel and power generation that over the next 20 years will continue to form an increasingly important role in the global energy mix. This can be attributed to its advantages of lower carbon emissions and greater flexibility into power generation.”

For anyone investing in the space, it’s good to see large energy names like Exxon betting on North American natural gas alongside you.

The author owns shares of Chesapeake Energy (CHK), a natural gas play.

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• Oil Is A Snooze, The Energy World Is Totally Obsessed With Natural Gas
• Gazprom Thinks It Will Steal 10% Of The U.S. Gas Market Since The American Shale Gas Revolution Will Fail
• Does This Mean Natural Gas Is A Raging Buy?

The Organization of Petroleum Exporting Countries (OPEC) just hiked their 2010 oil demand forecast by about 13%, due to stronger than expected demand from developing nations (‘non-OECD’ nations).

OPEC:

World oil demand is expected to grow by 0.9 mb/d in 2010, following a contraction of 1.4 mb/d in the previous year. This represents an upward revision of 0.1 mb/d from the previous assessment. Oil demand has been highly dependent upon the pace of the global economic recovery. OECD demand is still expected to remain at negative growth around 0.15 mb/d, while non-OECD demand is projected to grow by 1.0 mb/d, driven by China and the Middle East region.

Total world oil demand is slated to grow by just over 1% this year:

Yet even with the upward revision to OPEC’s oil demand forecasts, there is far too much spare oil production capacity right now. This is why if OPEC didn’t exist, with its production restrictions, oil prices would be far lower than where they are now:

However, despite this relative improvement, the projected demand for OPEC crude is still much less than current OPEC production by around 1.5 mb/d. If only part of this surplus were translated into OECD commercial inventories, this would result in further stock build, adding to the already inflated levels of more than 90 mb above the five-year average. Indeed, OECD stocks have already showed a contra-seasonal build in January, driven by both crude and products.

Always keep the above fact in mind. Oil prices are high simply due to market manipulation via the OPEC cartel. If oil had a free market, supply would massively outstrip demand.

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See Also:

• A Close Look At OPEC Strategy Reveals That They’re 100% Short-Term Focused, And Sure Of Peak Oil
• It’s Dog Eats Dog As Cash-Hungry OPEC Nations Ditch Production Quotas And Just Crank Out Supply
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Russia’s state-controlled giant Gazprom believes that its seaborne Liquefied Natural Gas (LNG) exports can take as much as 10% of the American natural gas market by 2020.

But isn’t U.S. shale gas technology promising an era of overly abundant American natural gas?

Perhaps, but Gazprom thinks that shale gas development efforts could fail:

Bloomberg:

“Shale gas and LNG are competitive in one price range,” Gazprom Deputy Chief Executive Officer Alexander Medvedev said in an interview in Paris yesterday. “The market will say who will be in the market and with what.”

…

The company has no reason yet to revise its target for U.S. market share given the costs and possibly negative environmental impact of developing shale gas, Medvedev said. Gazprom’s output will depend on market conditions, he said.

…

U.S. shale gas could displace significant volumes of LNG, potentially growing to a similar scale as the entire current global LNG market by 2015, JPMorgan Chase & Co. said in a report on Feb. 9. The unconventional resource is “a complete game changer” in the U.S., BP Plc CEO Tony Hayward said in January at the World Economic Forum in Davos, Switzerland.

Gazprom is waiting for “full clarity” on U.S. developments, and isn’t considering acquiring U.S. shale gas assets, Medvedev said.

So they’ll wait and see if shale fails or not due to environmental reasons in the U.S..

If it fails, they’ll ship LNG to the U.S. and go for 10% share. If it doesn’t then they’ll try and buy into U.S. domestic shale assets, but will probably end up paying a hefty price by then to take part.

The author owns shares of Chesapeake Energy (CHK), a shale play.

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GM is recalling 1.3 million vehicles across North America due to a potential power-steering problem that may have caused 14 crashes:

Reuters:

U.S. safety regulators opened an investigation on January 27 into approximately 905,000 Cobalt models in the United States after receiving more than 1,100 complaints of power steering failures. The complaints included 14 crashes and one injury.

The recall covers the 2005-2010 model year Chevrolet Cobalt and 2007-2010 Pontiac G5 in the United States; 2005-2006 Pontiac Pursuit sold in Canada, and the 2005-2006 Pontiac G4 sold in Mexico, GM said in a statement.

…

GM said the affected vehicles can be still be “safely controlled” but it may require greater steering effort under 15 mph. Drivers will see a warning light and hear a chime if the power steering fails.

“After our in-depth investigation, we found that this is a condition that takes time to develop. It tends to occur in older models out of warranty,” GM Vice President of Quality Jamie Hresko said in the statement.

So power steering starts having problems in old vehicles past warranty, when one is driving at a slow 15 mile per hour. Doesn’t sound like much of surprise for anyone who has ever driven an old car. We’re all for safe cars, but the auto industry is clearly in a state of heightened paranoia post the Toyota witch-hunt. There are far more hazardous auto-related issues to be focusing on, such as drunk driving and bad road design.

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European shale-derived natural gas could become a reality far sooner, and in far larger quantities, than markets expect.

In a Securities and Exchange disclosure from last Thursday Chevron confirmed that it won new rights to explore Poland for potential shale gas:

Rigzone:

Noted in the annual report, Chevron has acquired rights to explore for natural gas in the Grabowiec concession, located in the southeastern part of Poland.

The confirmation follows Chevron's announcement in December that the company was awarded three five-year exploration licenses for the Zwierzyniec, Kransnik and Frampol concessions, also located in Poland, to explore for unconventional gas resources, Dow Jones reported.

In December 2009, the Environment Ministry of Poland granted Chevron permission to carry out seismic studies and exploratory drilling up to 3,500 meters underground, as well as to develop shale gas resources.

Keep in mind that Chevron isn't alone in Poland. Exxon, Conoco, and Marathon are there as well investigating shale's potential. Which means that Polish shale is likely chock full of gas:

No Hot Air:

This is getting too big to ignore. One company takes a gamble, two might be foolish, three might simultaneously jump on a band wagon and drive off a cliff. But there is a critical mass of companies in Poland. Something is going on, and it's unlikely that many companies will be wrong all at the same time.

It's still not clear how much shale gas Poland could have, but Russia has to be worried. While it is known that Europe doesn't have the massive shale deposits of the U.S., it could still have enough to substantially reduce its reliance on Russian gas.

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• America's Massive Shale Gas Revolution Hits Canada Threatening LNG Glut
• Energy Giant Total Drops $800 Million On Chesapeake's American Shale Revolution
• New York City Kills The Shale Gas Revolution

It’s not just America that could face massive over-supply of natural gas due to new shale-gas extraction technology.

Companies are investigating the potential for shale gas in Canada as well, and it’s already drastically changing the supply/demand dynamic industry expects.

Rigzone:

In Canada, EnCana Corp. (ECA), Nexen Inc. (NXY) and Talisman Energy Inc. (TLM) are among several companies gaining traction in the Horn River and Montney shale formations, both in British Columbia. “Shale gas has a fairly short history of production,” Dawson said. “[Companies] are projecting stable production for 20 to 30 years, but we don’t have a history of that kind of long-term production to say that with any certainty.”

In just six months Canada went from an expected under-supply situation to vast over-supply expectations:

Over the course of six months last year, Canada’s National Energy Board shifted from a prediction that the decline in conventional gas output would far outstrip new shale supplies, to saying that shale gas could satisfy domestic demand “far into the 21st century” and spur exports of liquefied natural gas.

The shifting landscape is forcing investors to rethink projects. A gas shipping terminal in the city of Kitimat on Canada’s West Coast was originally planned to import gas, but in 2008 the terminal owners, Kitimat LNG Inc., realized that shale gas could boost Canada’s output and redesigned it to export LNG. The C$4.1 billion project is scheduled to begin construction this year, and to begin operation in 2014.

Yet the potential shale gas revolution in the U.S. means that Canada will have to find global buyers for any natural gas exports, via Liquefied Natural Gas (LNG):

“Our view is that you need all the shale gas, you need all the frontier gas and you probably need LNG [imports] on top of that,” TransCanada Chief Operating Officer Russell Girling said at a recent conference in British Columbia. Girling said any excess supplies will be eaten away by the decline in conventional gas, the growing demand from Canada’s oil sands industry–which uses natural gas to create steam for bitumen extraction, and new demand from utilities and the transportation sector.

Too much gas or not, Canada will likely have to find more customers for its gas, since its traditional buyer, the U.S., is oversupplied. Recent NEB data show that Canadian gas exports to the U.S. declined 11% in the first 11 months of 2009 compared with the same period a year earlier.

Thus there’s risk of a future seaborne LNG glut should shale gas really take off in North America.

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• Cancer Fears Plague America’s Shale Gas Revolution
• Energy Giant Total Drops $800 Million On Chesapeake’s American Shale Revolution
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The combination of good and bad news should drive oil prices out of their recent trading range and up towards $95, according to David Greely at Goldman. The global economy had some notable upside surprises from the U.S. and Japanese economies recently, and will also benefit from oil supply disruptions in the North Sea, France, and Venezuela

Goldman: This week, WTI crude oil timespreads continued to strengthen off positive economic news from the 1st and 2nd largest developed market economies – the United States and Japan. The United States reported positive year-on-year growth in industrial production for the first time since the start of the recession, and Japan reported its economy expanded at a 4.6% annual rate in 4Q2009, well above the consensus expectation of 3.5%, led by strong exports. Further, negative supply news, including a disruption in North Sea crude oil production, reduced Venezuelan fuel oil exports due to a power generation crisis, and the potential for a refinery strike in France, suggests a tighter near-term supply-demand balance.

...

We continue to expect that improving near-term oil market fundamentals will continue to tighten WTI timespreads. Consequently, we believe the more important trading range for WTI crude oil prices is not the low $70-low $80/bbl range they have traded in since last October, but rather the $85-$95/bbl range that long-dated WTI crude oil prices have been trading in over the same time period (see Exhibit 2), and we continue to expect that as the near-term fundamentals of the oil market continue to improve, strengthening timespreads will lift WTI crude oil prices into this $85-$95/bbl range.

Oil bulls can thank French unions and Mr. Chavez.

There was also news this week that the Venezuelan power generation crisis is beginning to spill over to the broader oil market, with PDVSA likely to reduce exports of diesel and fuel oil as it tries to increase domestic power supplies. The crisis was precipitated by a drought which has left water levels in Venezuela’s Guri Dam 33 feet below last year and at less than half its capacity. The Guri Dam powers the world’s third-largest hydroelectric plant, which provides 73% of Venezuela’s electricity. If the water level were to fall another 82 feet before the dry season ends, power generation at the plant would come to a standstill.

...

However, in the near-term, reduced runs at the French refineries could accelerate the draw on petroleum product inventories while reducing the draw on crude inventories. As product inventories remain much higher than crude oil inventories relative to normal, this could accelerate the process of reducing the overhang and product inventories and rebalancing the market.

Add my twitter for hand-picked research and analysis like this: @vincefernando

(Via Goldman Sachs, Energy Weekly, David Greely, 21 February 2010)

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Politicians love to kick a pariah while he’s down. Especially in this economic environment. “Just give us a shared enemy to beat,” they implore.

Well they got one with Toyota, and even more reputation-destroying details are emerging.

WaPo:

In June 2004, the automaker and NHTSA officials discussed a chart showing that Toyota Camrys with new electronic throttles had 400 percent more complaints regarding “vehicle speed.”

Moreover, according to investigators, Toyota could have seen from its database of consumer calls that floor mats and sticky pedals didn’t explain all the reports of unintended acceleration. Approximately 70 percent of the sudden unintended acceleration events in Toyota’s customer database involved vehicles that are not subject to recalls.

Are unintended acceleration events simply an unfortunate fact of driving? One wonders if U.S. automakers would be able to survive the level of scrutiny Toyota is being subject to.

Moreover, there are probably bigger fish to fry first. The government so far attributes 34 deaths to acceleration incidents with Toyotas since year 2000. This is tiny in relation to the 43,313 U.S. auto fatalities in 2008 alone, and a complete drop in the bucket relative to the cumulative 383,082 U.S. auto accident deaths from 2000 – 2008. Thus Toyota acceleration accidents account for just 0.0089% of fatalities. As a survivor of a major car accident, we wish Toyota-level scrutiny went into all the other reasons people are injured in accidents — which are one of the most likely causes of death for young Americans.

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After plunking down $62 million in ads aimed at twisting American opinion to support alternative energy legislation he’s conveniently pre-positioned to profit from, T. Boone Pickens must feel like $100 is chump change:

SF Gate:

Pickens said he’d made a $100 bet with CNBC’s Jim Cramer that his alternative-fuels legislation would get passed by Memorial Day. I said I’d take the bet, too. Not because I know a thing about energy, but because if I collect $100 from T. Boone Pickens, the man who epitomized greenmail in the deal-making ’80s, I’ll be able to brag about it. If I lose and have to pay him money, well, it feels like somehow I’m going to be doing that anyway.

Investing is a lot more profitable when you can bend regulation in your favor, tycoons around the world know this already.

But when you can convince people that somehow your version of regulatory manipulation occupies a ‘green’ moral high ground, you’re golden. Cramer will probably lose this bet, which in this case unfortunately means the public will lose it as well, but for far more than $100.

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• Wanna Supply Energy For Those Electric Cars? We’ve Got A Huge Bolivia Problem
• Buffett Sells Down Energy Stocks, Pours Into Defensives
• T. Boone Pickens And Cowboy Athletics Sue Over "Charitable" Life Insurance Policies

Investing in Russia isn’t getting an easier these days, furthering our view that the nation should be tossed from the BRICs acronym.

A investment consortium including BP could soon lose its license for one for he world’s largest and most promising gas fields in Russia, Kovytka, in what looks to be an indirect expropriation of the $20 billion project.

Ostensibly, the argument is that BP hasn’t sped up the project as required. Yet conveniently, it was hampered from doing so by Gazprom.

Times:

Viktor Vekselberg, one of Russia’s richest men and one of the four billionaire investors, told the country’s President Dmitry Medvedev on Friday that a state inspection at Kovykta was “clearly not supportive for the investment climate in our country.” He warned that revoking its license to develop the field, which has 2 trillion cubic metres of gas, will only damage the reputation of Russian in the eyes of foreign investors, whom the Kremlin is trying to attract.

But Russia’s Natural Resources Ministry has consistently warned TNK-BP to speed up development or lose the rights to Kovykta. The joint venture has argued that it cannot ramp up output to the required levels because Gazprom has a monopoly on exports to nearby China. It would need to build pipelines costing billions of dollars to reach its Asian markets.

…

An acrimonious row between the Russian investors and the former chief executive, Robert Dudley, led British management to accuse Russian authorities of harassment and flee the country.

You’d imagine that energy investors would learn to give up on a nation like Russia, especially when management is forced to flee the country.

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• Jury Awards 10 Plaintiffs $10 Million Each From "Shocked" BP
• Marc Faber, Hugh Hendry, And Nassim Taleb Go At It In Russia
• Roubini: What Russia Needs Is A Good Crisis, So It Can Fix Itself

Exxon Mobil (XOM) announced today that in 2009 the company's proven reserves increased by 133% of the amount of oil produced.

Exxon now has 23.3 billion oil-equivalent-barrels of reserves comprised of about half liquids and half gas. It's the largest amount in the company's history.

Amazingly, Exxon, who has been accused in the past of being too conservative in terms of exploration and development, has been finding more oil than it produces for each of the last 16 years, to the dismay of peak oil proponents.

Exxon Mobil: “ExxonMobil is an industry leader in reserves replacement,” said Rex W. Tillerson, chairman and chief executive officer. “We have replaced more than 100 percent of production for 16 consecutive years, reflecting our strategic focus on resource capture, a disciplined approach to investment and excellence in project execution. Adding new reserves ensures that ExxonMobil will continue to develop new supplies of energy to meet future demand and support economic growth and improved standards of living."

The annual reporting of proved reserves is the product of the corporation’s long-standing, rigorous process that ensures consistency and management accountability in all reserves bookings.

The corporation’s reserves additions in 2009, the highest in the decade, reflect new developments with significant funding commitments as well as revisions and extensions of existing fields resulting from drilling, studies and analysis of reservoir performance. Reserves additions from the Papua New Guinea LNG project and the Gorgon Jansz LNG project in Australia totaled almost one billion oil equivalent barrels. Proved additions were also made in many other countries including Canada, the United States, Angola and Norway.

Read more here >

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• Saudi Oil CEO Comes Out Swinging In Davos: 'We Don't Believe In Peak Oil'
• What Is Peak Oil?
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T. Boone Pickens continues to openly lobby for alternative energy legislation that will make him a lot of money, and it doesn’t seem to be generating much flak.

He’s definitely a sharp person.

He’s showing us how blatantly manipulating legislation and the use of tax payer dollars for personal profit is perfectly fine with the public if it has to do with alternative energy:

Drive On:

“They [The Obama administration] haven’t done anything but support me,” said Pickens at a press conference at the National Automobile Dealers Association meeting in Orlando today. Pickens, among other things, contributed to the Swift Boat Veterans group that ran ads against Sen. John Kerry, D-Mass., in his 2004 presidential challenge against President George W. Bush, although he sounded positively neutral in the 2008 race.

…

He’s behind legislation to offer $65,000 tax incentives for conversion of 8 million 18-wheel long-haul trucks from diesel fuel, which is largely made from imported oil, to natural gas, which is almost entirely U.S. produced. Pickens says he thinks the plan has a good chance of bipartisan support in Congress. And he says he thinks that truck-stop operators will be willing for fork over the $1.5 million or more per station to install natural-gas fueling equipment. “It’s peanuts” in the scheme of things, Pickens says.

Read more here >

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A major moratorium on U.S. domestic oil and gas exploration expired in 2008, yet its extension is now being considered. Thing is, despite vigorous alternative energy efforts, the U.S. will remain extremely dependent on fossil fuels through 2030.

This is even assuming that the U.S. pushes alternative energy at the same time, according to a report on the moratorium by the Science Applications International Corporation (SAIC) and Gas Technology Institute (GTI).

Which means that if renewed environmental bans prevent American energy demands from being met domestically, the country will be forced to import its fossil fuel needs. This could cost nearly $2.4 trillion according to SAIC and GIT’s detailed, publicly available moratorium report.

SAIC & GIT: Accounting for the updated oil and gas resource base, maintaining the moratoria until 2030 will decrease cumulative U.S. GDP by $2.36 Trillion – an average annual reduction of 0.52 percent.

…

Environmental concerns about domestic resource development have been well documented. However, a comprehensive integrated analysis of the socio-economic and environmental effects of not developing the moratoria/restricted areas for oil and natural gas has been missing at both national and regional levels.9 What has been needed – and is provided herein – are assessments of key social and economic indicators, including impacts on energy prices and supply, impacts on employment and household income, impacts on industrial shipments and GDP, and the impacts on imported oil and natural gas and the level of payments to OPEC.

GasMoratorium_EXESUMMARY

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In a February auto industry presentation, Goldman shows how both Ford and Honda once had nasty recalls of their own in the past, yet recovered.

 

Thus Toyota, in the long run, is likely to do so as well -- it just might take a few years for both market share and the stock to fully recover:

At some point the stock is cheap. Toyota is trading at a low Price to Book (P/B) ratio according to Goldman, even going back as far as 1995:

Still, we'd point out that Toyota his a much lower Price to Book during March 2009, when markets hit their recent lows. While it looks relatively small on the chart shown here, it equates to Toyota ADR shares' 52-week low being near $57 vs. $76 now. Thus while media pessimism may seem substantial, Toyota shares aren't exactly in crisis mode. They might be cheap, but they don't look deeply oversold at all.

The author does not own shares in Toyota.

Add my twitter for a filter of analysis-only like this: @vincefernando

(Via Goldman Sachs, Global Auto Industry Update Presentation, February 2010)

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Nigeria’s new president Goodluck Jonathan could help pacify Nigerian rebels who have long made Nigeria a treacherous place for oil companies, and he knows it.

That’s because he’s the first Nigerian president who hails from the ethnic minority in Nigeria’s oil-rich Niger Delta, where all the trouble is.

Even while serving as just acting president, he already met with international oil executives on Thursday to plan Nigeria’s oil future.

WSJ:

Under the peace program that began last summer, the Nigerian government has essentially paid militants to lay down their arms. However, the delta’s main militant group recently called off its cease fire because of its unhappiness over how little money the government is putting into the region.

Wale Tinubu, chief executive of Oando PLC, Nigeria’s biggest nonstate energy company by revenue and oil production, said he thinks Mr. Jonathan’s ascent to power could spur the reconciliation process between the government and militants.

“Jonathan will make a renewed push towards peace in the Delta and I do believe that will reassure investors in the oil industry,” said Mr. Tinubu who wasn’t at Thursday’s government meeting.

Peace could yield enormous dividends. Nigerian oil production could rise as much as 50%:

U.K. consultants Wood Mackenzie estimate that Nigeria’s actual oil production could hit three million barrels a day by 2016 from just over two million day currently, representing a sharp revision downward from projections a few years ago.

For Saudi Arabia and OPEC (of which Nigeria is a member), new production capacity in cash-hungry nations (such as is happening in Iraq), will only make efforts to restrict oil production even harder than they currently are.

See why we believe Nigeria is a huge, unappreciated growth story: Meet the MAVINS >>

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During a Wednesday meeting in New Delhi, Iraq offered to increase the amount of oil it provides India by 60%, under long-term contract.

“They have the reserves and they have the plans to raise output significantly,” explained IOC Chairman Sarthak Behuria after the meeting. “They told us they would be ready to offer us longer contracts after five years.”

Any long-term bilateral supply contract with India would surely rile OPEC.

That’s because it would help Iraq avoid falling under the grip of OPEC-imposed quotas. The more Iraq can reach large end markets for oil on their own, the more they can simply do as they please when it comes to production.

Iraq is making it very clear that they aim to be the world’s top oil producer within a decade, whether Saudi Arabia likes it or not:

UPI:

“We are desirous of a strategic partnership” with India, Hariri said. “By strategic partnership we mean a long-term relationship.”

Iraqi Oil Minister Hussain al-Shahristani wants to boost oil production from its current level of some 2.4 million bpd to 10 million-12 million within the next decade.

That’s more than Saudi Arabia or Russia is currently producing, and could threaten OPEC producers unless Baghdad accepts a quota. But Shahristani has made clear he will not accept any limitation of production that would impede national reconstruction.

He insists too that any quota must take into account Iraq’s reserves. These are currently pegged at 115 billion barrels, ranking fourth after Saudi Arabia, Canada and Iran.

But industry analysts believe that Iraq is sitting on unexplored reserves that could double that total, eclipsing even the long-dominant Saudis.

On Jan. 29 Shahristani boasted in Baghdad: “We cannot find a reason to prevent Iraqi production from becoming higher than any other OPEC state, or even states outside OPEC. “We expect this to happen over the next six to seven years with coordination and agreement with other OPEC producers.”

Read more here >

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• Stratfor: An Iraqi Oil Renaissance May Destroy OPEC
• Cash-Hungry Iraq Quadrupling Oil Production, OPEC Fears Price Collapse
• Foreign State-Owned Energy Companies Dominating Iraq’s Oil Revolution, Leaving U.S. Ambitions In The Dust

The International Energy Agency’s (IEA) latest oil market report paints a picture of crumbling production quota compliance among OPEC members. Compliance fell to just 58% in January from 61% in December.

Nations such as Algeria, Ecuador, Qatar, and Venezuela are paying little heed to OPEC efforts at limiting crude oil supply:

Moreover, as shown above by the difference between Jan 2010 Supply and Sustainable Production Capacity, OPEC surplus production capacity is enormous. This adds a further incentive (in addition to economic hardship in certain OPEC nations) to produce more oil than set forth by OPEC — which means more oil supply to help ease prices worldwide.

IEAFeb2010

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See Also:

• This Is Where Your Oil Comes From
• Foreign State-Owned Energy Companies Dominating Iraq’s Oil Revolution, Leaving U.S. Ambitions In The Dust
• Oil Starting Its Growth Engines

Have no doubt about it -- U.S., European, and Chinese stimulus was great news for OPEC in 2009 since it kept oil demand up without using OPEC's money.

 

Thus tightening, both in the U.S. and China particularly, is a huge challenge for oil prices in 2010.

OPEC's February market report makes it clear that the cartel is very concerned U.S. oil demand forecasts could miss expectations as the U.S. government begins tightening.

OPEC: In the major OECD countries, the recovery is far from self-sustaining and remains largely dependent on continued government support.

...

Uncertainty about the pace of the US economic recovery is creating some downward risk on the country’s oil demand this year. Cold weather managed to increase demand for heating oil and fuel oil, but declining demand for diesel and gasoline resulted in negative growth in January. The 1% or around 180 tb/d forecast growth for US oil demand for the whole year may not material ise. Given several obstacles demand growth could be as little as 100 tb/d for the total year (see Graph 2). The main risk remains the recovery path of the US economy which in turn is dependent on the degree of government fiscal and monetary support and its success in lowering the unemployment rate, a main determinant of consumer sentiment and private consumption.

If the USA only achieves OPEC's 'Low' demand growth scenario (shown in the upper right corner chart), this would equate to 0.08 million barrels per day (mb/d) of lower growth. It sounds small at first, but that's equal to Latin America's entire 2010 demand growth:

Furthermore, China is also at risk of missing OPEC expectations due to its own version of monetary tightening. The country's 2009 economic growth was driven by an enormous stimulus package. Yet in 2010 the Chinese government is focused on slowing things down:

In 2010, oil demand is forecast to grow by 4.5%, or 0.37 mb/d. Nevertheless, the government is keen to curb the nation energy use, an aim incorporated in its current five year plan. However, there is some uncertainty about oil demand growth. Slower-than-expected growth in the global economy could impact China’s exports and industrial production, dampening the need for oil. Internal measures to slow down the economy may also affect oil demand.

Thus OPEC is getting anxious, especially since production quota compliance amongst its own members fell to just 58% in December (countries need cash during hard times), and world oil supply is surging:

Add my twitter for a filter of analysis-only like this: @vincefernando

(All charts and excerpts from OPEC's February 2010 report)

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See Also:

• OPEC Freaking Out As Half Its Members Stop Following Production Quotas
• OPEC's Oil Price Falls For Tenth Straight Day
• OPEC Has Way Too Much Oil For 2010

Chinese high-speed trains are killing airlines as they open for new high-traffic routes.

Bloomberg:

Competition from trains that can travel at 350 kilometers per hour (217 miles per hour) is forcing the carriers to cut prices as much as 80 percent at a time when they are already in a round of mergers to lower costs. Passengers choosing railways over airlines will also erode a market that Boeing Co. and Airbus SAS are banking on to provide about 13 percent of plane sales over the next 20 years.

…

China Southern cut economy-class tickets to 140 yuan ($21) from 700 yuan on flights between Guangzhou and Changsha after a high-speed train started on the route in December. The trip now takes 2 1/2 hours by train instead of 9.

“The high-speed train is invincible on this route,” said Tom Lin, 30, a civil servant in Guangzhou, who opted to travel by rail. “There’s no doubt it’s more convenient for trips to the cities along the line. Airlines can’t compete with trains for the spacious seats.”

One wonders if they are charging fees that recoup both their ongoing costs and their initial investment cost, which can be quite expensive. If airlines have to slash ticket prices down to $21, something tells us that neither planes or trains are covering their costs.

If rates are uneconomic, made possible by government support, (we believe this is highly likely to be the case, but feel free to enlighten us) then Chinese airline vs. train competitiveness will come down to simply who can grab better subsidies. As stated in the article, the outcome will also effect the Chinese market aspirations of Boeing and Airbus.

Yet it all sounds like a pretty good deal if you’re traveling in China right now. Read more here >

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See Also:

• China’s Stupendously Modern Train System Down For Three Hours Because Someone Smoked A Cigarette
• China Launches World’s Fastest Train That Blows Away Anything We’ll Ever See Here
• Inside The Comcast-NBC Train Wreck: How The Curse Of The Moguls Struck Again