Peak oil Mirage
The closer we get to peak oil the further it goes away. As high prices collapsed when the global economic system fell apart the world is now awash in oil. Back around the beginning of this decade Fed Chairman Alan Greenspan warned that peak natural gas production in this country could put us in a competitive disadvantage. Now it appears that some of the same ideas that took us from peak natural gas to an abundant supply could also change the supply outlook for oil. The Financial Times is reporting that, “A band of entrepreneurial oilmen have found an economic way to extract oil from shale rock, fuelling a frenzy for prospects that has pushed up lease prices and lifted hopes of the first rise in onshore U.S. oil production in decades”. The Times says, “These small independent oilmen had used hydraulic fracturing and horizontal drilling to triple estimates of U.S. natural gas supplies and are now applying that same technology to get oil from shale rock”. The FT says that the method could add one million barrels of oil a day to U.S. supplies in five to eight years replacing 10% of U.S. crude imports. And that might just be for starters. Experts expect that those technologies are only going to get better. The FT points out that the U.S. Geological Survey estimated in 2008 that the Bakken Shale that cover North Dakota and parts of Montana has from 3bn to 4.3bn barrels of undiscovered oil technically recoverable with the new technology. That is a 25-fold increase over its 1995 estimate of 151 million barrels of oil and now represents the largest U.S. oilfield outside Alaska. It is very possible that with the combination of new production methods both onshore and offshore the dogma of peak oil must be re-examined.
Oil prices continue to struggle as markets like gold continue to prosper. As consumer confidence fell the confidence that the Fed would print more money increased. The Fed is trying to change the mood and the malaise that is creeping back into the nations psyche so confidence is of utmost importance. Yet that confidence in stimulus does not seem to be impacting oil as the bearish mood seems to be increasing. In fact one big time market player is big time short. The Financial Times and Reuters News reported that the state owned Mexican oil company PEMEX is instituting a hedging program because of its belief that oil could be getting ready for a big time sell off. Reuters and the Financial Times reported that PEMEX is executing a hedging program with oil options that has increased implied volatility and the cost of downside strikes in recent weeks. They say that assuming the details are correct, PEMEX has paid for downside protection much closer to current prices than it did last year. According to the Financial Times, the producer has reportedly hedged at around $65-70 per barrel. According to reports Goldman Sachs, Barclays Capital, Deutsche Bank and JP Morgan have already hedged an estimated 100-150 million barrels with a lot more than expected.
Say what you want about PEMEX as an oil company and how they are run, but in the past they and their hedges have been golden. When oil prices were surging and everyone was talking about $200 a barrel PEMEX was betting on a big drop selling their future 2009 oil production at $70 a barrel and estimated their budgets on $70 barrel oil. At that time the New York Times reported that PEMMEX spent $1.5 billion dollar on put oil options and when oil went below $30 they stood to make $10 billion. Could PEMMEX big bearish bet be another ominous sign for the oil market? Perhaps it will be a major sell off in oil that inspires the Fed to act aggressively on the next round of quantitative easing. We know for most people oil prices impact their day to day attitudes about inflation and or deflation expectations. With record supply and PEMMEX being very bearish we might be getting ready for a big time washout.
Phil Flynn is senior energy analyst for PFGBest Research and a Fox Business Network contributor. He can be reached at (800) 935-6487 or at email@example.com