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Mexican Production Disappoints Again in July - Big Time
The game plan for Mexican oil production was that declines of 15% or so in the giant Cantarell field would be offset in 2008 and 2009 by increases in a couple of smaller and newer fields, keeping production about level until 2010, when total Mexican production would decline. That does not seem to be happening. In actual fact, Cantarell production seems to be starting to decline much faster. The decline rate was running nearly 20% in May and June and now July production at Cantarell is reported to be down by 36%. That meant that total Mexican oil production was actually down an astounding 12% resulting in a 22% drop in Mexican exports in July (presumably due to increasing domestic oil consumption in Mexico - the Export Land Model at work again.) Below are posted a couple of reports - one from The Oil Drum with well deserved exclamation points and another more terse one from Reuters.
Free Fall in Mexico!
Canatrall production is down 36%!! and exports are down by 22%!!, this is much sharper then expected:
Pemex July Oil Output Falls 12% as Cantarell Declines (Update2)
By Thomas Black
Aug. 21 (Bloomberg) — Petroleos Mexicanos, the third- largest supplier of oil to the U.S., said production fell 12 percent in July from a year earlier as output declined at Cantarell, the world’s largest third-largest offshore oil field.
July’s daily output dropped to 2.782 million barrels from 3.166 million barrels in the same month last year, the state- owned oil company, known as Pemex, said today on its Web site. In June, Pemex produced 2.839 million barrels.
Daily production at Cantarell, which first began pumping oil in 1979, plummeted 36 percent in July to 973,668 barrels from 1.526 million, according to an Energy Ministry Web site.
Faster-than-expected declines at Cantarell prompted Pemex to lower its oil production target in July for the second time in as many months. The Mexico City-based company reduced its 2008 daily production target to 2.8 million barrels from 2.9 million.
For the first seven months of the year, Pemex produced 2.845 million barrels a day, 10 percent less than a year earlier. Cantarell’s daily production was 1.127 million barrels, 472,000 barrels lower than the same period last year, Pemex said.
Crude exports in July fell 22 percent to 1.377 million barrels a day from a year earlier. Daily exports were 1.415 million barrels in June.
Link:
http://www.bloomberg.com/apps/news?pid=20601086&sid=ai6dbfOBvt.c&refer=n…
It looks like Mexico is following the worst case scenario we predicted in January 2007 (http://graphoilogy.blogspot.com/2008/01/update-on-mexico-export-land-mod…):
Here is the updated chart for this forecast, I was predicting 2.93 mbpd for 2008 (C+C):
It seems that the HL was too optimistic for once, it’s possible that we get 2.84 mbpd in 2008 (-200 kbpd compared to 2007 or the equivalent of two Canadian tar sand megaproejects).
And this from Reuters:
Mexico oil output, exports fall in Jan-July period
Thu Aug 21, 2008 1:32pm EDT
MEXICO CITY, Aug 21 (Reuters) - Mexico’s crude oil production dropped 10 percent in the first seven months of 2008 to an average of 2.845 million barrels per day (bpd), state-owned energy monopoly Pemex said on Thursday.
Pemex said in a release that crude oil exports in the January-July period dropped 16.3 percent to an average of 1.443 million bpd. (Reporting by Cyntia Barrera Diaz; Editing by David Gregorio)
Tags: peak oil energy investments
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13 responses so far ↓
1 KV // Aug 23, 2008 at 7:21 am
In light of Jim’s three posts on oil production from OPEC, Russia and Mexico, and our struggle to understand what controls the oil price, the following article (published in Time) on how oil prices may be set and role of futures in controlling (rigging) oil prices may be helpful.
According to the authors, future leverage can be as high as 300:1, and billions of barrels of oil is traded daily, much of it speculative trading similar to currency trading, but significant portion through hedges to control oil price, not the supply and demand one might expect. Oil has displaced gold peg for the currency. Future exchange hide identities of all players, hence, all the rigging activities. Transparency in future trading would price the oil more according to supply and demand.
My take? Futures in any commodity increase volatility and bring speculative elements as seen in gold, silver, steel, cotton, and currencies. It seems that the world demand is exploding for everything yet the economies of the world are expanding at single digit level at best, and many below the real inflation. May be 21st century bubble is like tulips, futures.
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Ari J. Officer studies financial mathematics at Stanford University. Garrett J. Hayes studies materials science and engineering at Stanford University
Friday, Aug. 22, 2008
Are Oil Prices Rigged?
By Ari J. Officer and Garrett J. Hayes.
We’ve all read that speculators are driving oil prices artificially high — a claim that gets more interesting in light of oil’s recent fall below $115. But maybe we’re looking at it from the wrong perspective. Suppose that major suppliers in the oil industry are these manipulative speculators.
Is it possible that oil prices are rigged? You bet. Here’s how:
Just how would you raise prices if you were an oil supplier? Controlling the supply — as in the 1973 OPEC embargo — has become less effective with more sources of oil worldwide. And oil suppliers clearly cannot raise prices by controlling demand in the physical oil market; ultimately, they need to sell their oil, not buy it. However, with the market inefficiencies that we expose here, oil suppliers can regain the upper hand by artificially inflating demand using a different market. To understand this mechanism, we must take a glimpse into the future — the futures market, that is.
The price of oil reported in the news is actually the price of oil in the futures market. In this market, traders do not exchange physical barrels of oil, but instead trade contracts which obligate them to exchange oil at a quoted price at a specific date in the future, usually months in advance. Such a contract allows companies to hedge positions by locking in prices early. Airlines might buy futures contracts to reduce their exposure to rising fuel prices. Conversely, oil companies might sell futures contracts to assure a profit against future price drops. It’s all about reducing risk and uncertainty. But what if oil suppliers were instead buying oil futures, compounding their own risk and reaping enormous profits from the explosion in the price of physical oil?
The futures market has become the public driving force in pricing oil. But the vast majority of oil consumed in the world is purchased through private deals, given the massive undertaking of physically delivering millions of barrels. However, a series of private deals cannot establish a market price. Because pricing in the futures market is transparent, in that trade activity is publicly available, it establishes the widely accepted benchmark for the price of oil. In other words, the futures market serves as the price discovery mechanism for the oil the world consumes.
Thanks to margin in the futures market, you can trade ten times more oil than you could otherwise afford. For only $9,000, you could control more than $140,000 of oil at recent highs.
All told, about one billion barrels of oil are traded daily through futures contracts at the New York Mercantile Exchange (NYMEX). This volume significantly overshadows the 80 million barrels of oil consumed each day worldwide. Yet this large volume of trading is misleading. Most of the trades are just noise: speculators going for quick profits, taking a position, and closing it out immediately.
A better measure of the size of a futures market is the open interest, the total number of outstanding positions. For contracts ranging from next month to a decade from now, there is a total of one billion barrels accounted for from the total number of outstanding positions. Interestingly enough, more than 30 billion barrels of oil are actually consumed each year. Despite all the volume, the claims realized through open interest pale in comparison to the actual consumption of oil. The futures market is much smaller than the real oil market. When you consider margin, the amount of money actually invested is even smaller. Indeed, one dollar invested in a long-term position in the futures market carries the leveraged weight of more than $300 in the physical oil market.
The point is, it would only take about $9 billion to control the entire long position in oil. That sounds like an enormous amount of money, but some of the major individual players in oil are bigger than the market itself: Sultan Hassanal Bolkiah Muizzaddin, of Brunei Shell Petroleum, is worth about $23 billion; Saudi Prince Alwaleed Bin Talal Alsaud is worth about $21 billion; Russian Vagit Alekperov of LUKoil is worth about $13 billion. No, we’re not implicating any of these guys in market rigging; in fact the list of billionaires with that kind of swag is long. The point is that anyone in that category could clearly handle the risks of the oil futures market, and they might even be willing to take delivery on oil. With suppliers holding back their large stakes in oil before delivery, those speculators and hedgers on the other side (those who have sold oil) will need to pay higher prices to get out of their positions. Oil suppliers’ ties to the oil market itself give them a unique advantage in cornering the market.
Why would these individuals or their companies risk their own money and reputations, should they be discovered? They don’t need to. There’s an anonymous investment vehicle — the hedge fund — with which they can even risk other investors’ money for futures speculation. Although we’re all affected by oil prices, we as oil consumers don’t set the prices. Herein lies the problem. The futures market that serves as a price discovery mechanism for the physical oil market is open only to the elite. We trust these elites to determine the prices, but who are they? Who are the so-called experts? Hedge funds, oil companies, OPEC — the very people who profit from massive, consistent increases in prices. Notice a conflict of interest?
All an oil supplier would have to do to raise prices is buy up futures contracts.
It’s not even that risky. Either the suppliers/investors risk an insignificant fraction of their gargantuan fortune, or they entice other investors to share the risk. With virtually unlimited resources and an actual tie to the underlying commodity, oil suppliers are in a far better position to accomplish this manipulation than, say, the Hunt brothers were during their attempt to corner the silver market in the 1970s.
It is in every oil supplier’s best interest for prices to go up. Oil is a finite commodity. The world will eventually become more efficient and develop alternative energy sources. In the meantime, suppliers want to squeeze out as much profit as possible from their limited resources. Even if they know that the price of oil is too high (to the point of reducing demand) it is not in their interest to correct it. By setting prices in the smaller but more “trusted” futures market, oil producers realize multiplied gains on their physical oil sales.
Prices in the futures market — and, indeed, any real-life market on a standardized good — do not form where actual supply meets actual demand; they form where perceived supply meets perceived demand. Participants in the futures market merely represent the world around them. A veil has been placed over the public’s eyes, and they accept this illusion of a fair price.
Unfortunately, the price set by the all-too-small futures market transcends oil to influence the entire American economy. Our oil-dependent economy is shaped by oil’s arbitrarily determined price. In many ways, oil has become a pseudo-currency. Similarly, with oil traded internationally in U.S. dollars, the dollar is pegged against oil. While squeezing American industry, high oil prices also devalue the dollar. With the state of our economy reflected in the price of oil, it has become a new standard for valuing America. We are slaves to this black gold standard.
The American market system, purportedly a free market despite its flaws and gross inefficiencies, has opened this vulnerability. The oil suppliers may tighten the noose, but we tied it around our throats long ago. Hiding behind the wall of anonymity, the perpetrators profit and achieve their own ends, bringing down America in the process.
The futures markets is a closed book that needs to be opened beyond price transparency to participant transparency. After each contract has expired, NYMEX and other exchanges should reveal the participants in each trade. Tear down the wall of anonymity, and long positions will, we believe, connect back to oil suppliers, who should theoretically be sellers of oil, not buyers.
Is this vulnerability a reality? Is economics so wrong in applying its supply-demand theory that we might confuse corrupt manipulation with fair pricing? There’s motive, opportunity, and greed at play. Why would we expect anything else?
Ari J. Officer studies financial mathematics at Stanford University. Garrett J. Hayes studies materials science and engineering at Stanford University
http://www.time.com/time/business/article/0,8599,1834888,00.html
2 jkingsdale // Aug 23, 2008 at 7:41 am
Every futures contract that is bought needs to be sold before the period ends. I don’t buy this idea of “rigging” the market other than on a very short term basis and not as a conspiracy. Yes, a group of speculators can become enthusiastic and drive up futures prices, but that is a Greater Fool theory of investing. Ultimately real supply and demand rules the market. Anyway, that is my view and a math student at Stanford doesn’t change it.
3 paultaut // Aug 23, 2008 at 8:08 am
What else is new? Supplies are being rigged by the Producers? Damn right they are. What are you going to do about it? Refuse to buy any?
Idiocy personified. The Oil Embargo of the 70’s showed the Control that the Producers can exert. Nowadays, they don’t even have to go that far. A 10% decline in production from the major producers will suffice. I do not have a clue as to where you an expect a 10% increase.
The fact that the Media is compelled to use studies by students makes me worry more than anything else.
4 KV // Aug 23, 2008 at 9:27 am
Jim,
Future contracts that are not backed by actual production are inherently speculative and gain and loss are dependent on the market-price volatility of underlying commodity. Further, one can always close a position by appropriate action realizing loss or gain depending on the tea leaves read.
Market in futures contracts itself is governed by supply and demand, and is exceptionally transparent: bid and ask prices and sizes, open interest, and duration as well as price volatility and associated calculations are all at a click away. Even the historical data are at a click away.
If I understand correctly, the authors’ claim that the oil prices are determined by the supply and demand of future contracts themselves (and not necessarily by the actual oil production and demand), it could result in positive feedback to the oil price pushing it ever higher, which in turn, pushes the futures higher, until bets are too high to cover, reversing the scenario possibly suddenly. Simply higher and higher volatility.
I observe that this is the case in almost all commodities. To a lesser extent, I am also beginning to notice the same in stock options, in which I have some experience.
After your comment, I did a quick check on the authors, and yes, Mr. Officer is a math student at Stanford. I am surprised that Time published the article: yet, I find they do have an interesting thesis which can be addressed if there is transparency in who are the producer-players. Most E&P MLPs and Canadian Trusts routinely hedge their production and they state in their presentations.
5 robert essian // Aug 23, 2008 at 11:33 am
All of this is indeed entertaining fodder for the believers and discenters.
The market will always decide by the fundamental principle of supply and demand.
Oil is in fact in serious decline and demand is in fact rising so again everything else must be considered (by me) as fluff.
It’s fun fluff though because I get to yell at my lap top, agree to disagree and ad my two cents worth.
Most importantly I anticipate what we as a Nation are going to do about it. Personally, I have high hopes…Peace
6 KV // Aug 23, 2008 at 1:38 pm
RE - I must state that “supply and demand” is something economics 101 class teaches; marketing 101 teaches managing “supply and demand” to maximize profits without allowing alternatives to succeed.
For the first time, we are able to even think to replace oil. In 1970s, there were no wind, no solar, not even biofuels as options.
7 robert essian // Aug 23, 2008 at 2:41 pm
KV, all things are possible including the manipulation of numbers.
Interpreting those numbers with a lack of true data makes all numbers speculative.
So many stories, theories,thesis will be rampant to prove all angles. All will appear plausable.
In the end we must use the materials and information we have gathered from resourses we trust and then make up our own minds.
Added to that decision will be a wealth of knowledge accumulated by lifes experiences.
Some authors have speculated that we never landed on the Moon so you just have to either believe or not.
Some authors believe Kenedy was shot with a single bullet and some have speculated it was a conspiracy.
In the end we have to form our own positions and I have stated mine.
Now to be clear when I group all information such as this in my fluff pile it is because after reading it I acknowledge that indeed the numbers support it but without any stretch of my imagination I choose to move on to a more realistic scenario based only on my respect of others in the same industry.
To conclude I too am happy that we have other options such as wind, solar and everything else so that we in can move forward and live a more certain life. That way I can mange my profits made from this oil embalance in relative piece why I research my next purchases based on what I learned in eco 101 and supply and demand…Peace
8 paultaut // Aug 23, 2008 at 3:35 pm
Solar stocks were around in the 70’s.
I do enjoy pulling the Tails of Bulls and Bears alike.
I traded options in the early 80’s but haven’t for over 15 years, except on the writing side.
Whats you current win/total percentage KV? In my day, anyone with 3 out of 10 was considered to be a Guru.
9 robert essian // Aug 23, 2008 at 4:48 pm
Matt Simmons has this Peak Oil thing down to a science. If anything he has been too conservative based on what’s happening in the world. There is no one around that can match his research and numbers.
I spent a couple of hours re-reading his numbers in his book “Twilight in the Desert” and trust he is closer to the truth than anyone on the planet…Peace
10 KV // Aug 24, 2008 at 3:16 am
Paultaut: I grant that most numbers are imperfect. A measure of imperfection is the probability that a given set of numbers are “sufficiently perfect” to continue their use. In investing, imperfection is measured through volatility and I will leave it there.
On win/loss percentage: diversification rules, so my measure is how much cash-flow the investments create, and how much more than (real) inflation and taxes is realized. In aggregate, cash-flow is about 12% of the total investment, this includes interest, dividends, option premiums, and, realized gains and losses. The portfolio size is increased by inflation, the rest is for taxes and fun. Nothing stays in portfolio if it exceeds a preset %age loss. No position is greater than 5% of portfolio. Assume that preset loss is 10%, and investment is at 5% of total portfolio value, the maximum loss that investment may create is 0.5%. Similar rationale applies in taking gains. I hope, this answers your question.
11 paultaut // Aug 24, 2008 at 1:13 pm
There is no way to check on Saudi claims on what their reserves actually are. The 250 billion estimate has been unchanged for 30+ years. Meanwhile the Pecking order within Opec was based on the implied Reserve of each member. They gave the outside world an estimate of what each Opec member had without any studies which would verify their claims.
No one really knows what is actually buried out there.
PS the major oils are unwilling to drill in Iraq because of safety concerns. China is willing to take the risk and is in the negotiation process as I write.
What a waste of American lives.
12 paultaut // Aug 24, 2008 at 1:21 pm
On Mexico, news flash, illegals are fleeing the US at an accelerating pace. Apparently, they are finding difficulty obtaining jobs and Companies are under more pressure to go American.
Despite all of the naysayers, the US economy is decellerating
quickly. Please take a look at the Chart of EZPW or Easy Pawn.
13 Sylvicultura Oeconomica » Blog Archive » Shocking oil production declines in Mexico // Sep 4, 2008 at 8:02 am
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