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Japan Oil Use Likely to Remain High through Summer

Japan – a resource constrained, island economy that has long been challenged by its lack of natural resources.  Japan is a major importer of food supplies, basic commodities, and especially energy resources including coal, oil and liquefied natural gas (LNG).

Following the Fukushima crisis, which essentially eliminated Japan’s nuclear power production abilities, Japan’s use of oil has dramatically increased.  According to data from J.P. Morgan Global Commodity Research, February saw Japan’s oil use (for power generation) spike by 520 kbd yoy; an amount roughly the equivalent to China’s projected 2012 oil demand growth (500 kbd).

Looking ahead to the summer months, Japan is making a concerted effort to prevent power shortages and blackouts.  Will oil consumption rise as a result? Many analysts agree that oil use in power is the single largest demand-side uncertainty during the summer peak demand period of July and August.

Even though selected nuclear reactors are scheduled to go back into operation come summer, it is unlikely that the additional power generation will make a dent in Japan’s summertime oil consumption levels.  It is estimated that only 6 of Japan’s 54 closed reactors will be opened by the summer.  Japanese utilities could still burn up to 800kbd of oil for power generation during July and August, despite the inclusion of these reactors.

Furthermore, the Fukushima crisis has altered the way Japan structures its power production, particularly as related to oil.  Prior to the accident, oil supplies were largely allocated for peak demand periods, when power plants had to ramp up to satisfy the highest levels of consumer electricity use.  Now, oil is often utilized for peak and mid-range use, resulting in a larger, more consistent demand profile.

Oil’s involvement in this earlier process stage has kept demand levels up.  Summer heat will result in heavy demand for air-conditioning, thus amplifying the daily demand peaks.  Oil will be relied upon to meet demand and avoid power outages.

Many uncertainties remain.  Weather patterns (such as major heat waves) could complicate matters or ease the burden.  Implementation (or lack thereof) of power conservation measures may also have an impact on usage.

As part of our macro investment strategy, we keep a close eye on energy resource consumption patterns around the globe and take note of changing trends.  Learn more about our sector focus by clicking here.

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Data Suggests Global Economy “More Vulnerable than Ever” to Price of Oil

Rising oil prices have had significant negative impact on the global economy, according to new economic research.  As oil prices approach historical highs, the global economy may suffer from another “price shock,” warns Dr. Minqi Li, associate professor of economics at the University of Utah.

Dr. Li’s regression analyses of world economic growth rate versus change in world oil consumption suggest that the global economy has not, in fact, become less dependent on oil in recent years, contrary to much previous research.

Furthermore, Dr. Li’s models show that world oil supply has become much less responsive to oil price increases.  As seen in the graph above, from January 1994 to May 2004, an oil price increase of $0.97 on average brought about an additional influx of one million barrels of oil to the world’s daily supply.  From June 2004 to November 2011, however, it took an increase of $11.80 dollars to bring about the same increase in daily oil supply.  The observed “world oil supply curve” has dramatically steepened by nearly 12 times.  This may have serious ramifications for future global economic growth.

“If world oil production does peak and start to decline in the near future, it may impose a serious and possibly an insurmountable speed limit on the pace of global economic expansion,” says Dr. Li.

To ensure sustained global economic progress despite the challenges of rising oil prices, we must seek out opportunities in the “Bridge Period” as emerging energy technologies become more cost effective, and traditional energy production becomes cleaner and more energy efficient.

Learn more about Investing in the “Bridge Period” by clicking here

 
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Posted by on March 27, 2012 in Commodities, Oil

 

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United States & Europe Vulnerable to High Oil Prices

“Given the limited reserves of oil in the Member States, the EU is a net importer of crude oil,” reports the European Commission.  Given the high energy dependency amongst many  EU member nations, higher oil prices may be a serious drag on peripheral economies.

The graphic below better illustrates the troubling extent of this issue:

U.S. Treasury Secretary Timothy Geithner also cited rising oil prices as a key point of economic concern for the United States in recent remarks in New York.

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Posted by on March 21, 2012 in Oil

 

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The Puzzle Pieces of the World's highly connected Food, Energy and Debt Issues

When thinking about the world’s interlocking food, energy, debt and security challenges, it is vital to recognize the importance of China. It is also important to take note of the current strengths and weaknesses in the world’s largest economic blocs: doing so reveals the shape of the pieces in a jigsaw puzzle and how they may fit together harmoniously.

  1. Europe is (1) long Mediterranean debt that might find stronger bids at lower prices, and (2) short capital and a coordinated fiscal policy.
  2. The United States is (1) long dollars, natural gas, and food, and (2) short of tens of millions of jobs.
  3. China is (1) long US Treasuries ($1.2Tn, or 38% of its F/X reserves), and (2) structurally short of many primary commodities.

Natural gas is one of the markets that can bring these pieces together for mutual benefit. As a result, historic events are unfolding in natural gas markets that will likely alter the composition of global GDP over many decades.

The US and Canada— (as the world’s first and third largest producers) —have moved significantly in 2011 toward building gas export supply chains (and gas-related plastics, fertilizer, and chemical chains) that will deliver gas into Asia at prices based on North American gas, not world oil. This is a titanic change from prior pricing schemes and represents an important evolution for world trade and future inflation expectations among consumers, given the nearly US$100 per boe price differential between Asian oils and North American gas basis.

Until now, a lack of political willpower and physical infrastructure prevented this price gap from being arbitraged, to the economic disadvantage of all parties. This is now changing rapidly, aided by the fact that North American policymakers with green credentials also see an environmentally-sound pathway for capturing this economic return.

The United States is now the world’s largest natural gas producer, having surpassed Russia in 2009. The US is also the world’s third largest crude oil producer. Casual observers would likely be surprised to learn that the US could become the largest oil producer in the world in just a few years, if it so chose to make the necessary investment in undeveloped resources in order to surpass Saudi Arabia and Russia (Exhibits 2 and 3). Including NGLs and condensates, US petroleum output is 1.42mbd behind Saudi Arabia and 1.69mbd behind Russia.

To be continued …..

 
 

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Canadian Oil Sands Output May Triple by 2035

Did you know that the largest source of oil imports to the United States comes not from Saudi Arabia, Venezuela or Russia, but from Canadian oil sands?

Following Saudi Arabia and Venezuela, the oil sands of northern Alberta, Canada are the world’s third largest crude reserves.  Over the next 25 years, Canada’s national energy regulator forecasts production from these oil sands will triple.

Currently, oil sands production contributes 1.5 million barrels out of Canada’s 2 million barrels per day (mbpd) total oil exports.  By 2035, Canada’s exports are predicted to rise to 5mbpd, with the majority of the increase coming from oil sands output.  Oil shale reserves such as the Bakken region in Saskatchewan will boost total output as well.

Major energy companies such as Suncor Energy, Royal Dutch Shell and Canadian Natural Resources have already embarked on mining projects in the oil sands region. Although the projects are capital intensive, the region’s promise is likely to draw much more private investment.

This positive outlook for Canadian oil sands comes despite the United State’s recent decision to delay approval for TransCanada Corporation’s Keystone XL pipeline, which would pump oil produced in the Alberta region to refineries in Texas.  Concerns over possible environmental and water contamination, particularly related to the crucial Ogallala Aquifer, have prompted the administration to push back the decision by as much as 18 months.

Read the full article here…

 
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Posted by on November 29, 2011 in Commodities, Oil, Policy

 

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Energy & Water – "The Real Blue Chips"

The latest Energy Bulletin from the Post Carbon Institute discusses “Energy and water – the real blue-chips” and important implications for investors:

“The two most important natural resources are water and energy.”

“In most cases, each is required to procure the other.  First, we use water directly through hydroelectric power generation at major dams, indirectly as a coolant for thermoelectric power plants, and as an input for the production of biofuels.”

“By sector, the two largest consumers of water in the United States are agriculture and electrical power plants.  If we count only fresh water, fully 81% of U.S. use is for crop irrigation.”

“For American corn production, an average of 2,100 gallons of irrigation water is required per bushel which yields 2.7 gallons of corn-based ethanol.  This means that 206 gallons of water is needed per gallon of gasoline substitute, ethanol, before refining.”

“Several studies suggest that up to two-thirds of the global population could experience water scarcity by 2050.  The shortages will be driven by the agricultural sector, which is currently responsible for up to 90% of global fresh-water consumption.

“Water shortages could become much more acute if there is widespread adoption of energy-production technologies that require water as a significant input, such as biofuels.”

“If large quantities of water are diverted to energy production because the market dictates this as society’s priority, there would be a significant loss of food production and a decline in human welfare.”

According to data from the Institute, the water requirements for energy production are substantial. Conventional petroleum extraction requires 10-40 liters of water per megawatt hour of energy, oil refining can demand 80-150 liters of water, and enhanced oil recovery can require a staggering 7600 liters of water per megawatt hour.

Coal integrated gasification, closed loop nuclear cooling processes and natural gas combined cycle plants can require upwards of 20,000 liters of water per megawatt hour.  The production of ethanol from irrigated corn can demand between 2 and 8 million liters of water!

Energy and water resources are tightly integrated.  It is impossible to have one without the other.  Water and energy demand is rising, yet reserves are dwindling, resulting in resource stress and an exciting opportunity set for investors.

Read more about investing in water and natural resources

 

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$100/barrel oil will be "new sustainable norm": Barclays

According to the latest International Energy Agency (IEA) data, the world’s demand for oil is slowing at a time when supplies are modestly increasing.  The world registered a zero increase in demand for the month of June and 100,000 barrels a day in new production coming online from Saudi Arabia.   As a result, the IEA has downwardly revised its global oil demand forecast this year by 100,000 barrels per day (bpd).

Market swings have sharply reduced the barrel price of oil to the mid $80 range.  With sluggish demand, are these low oil prices here to stay?

Barclays Capital answers this question with a firm “no.” In a recent global energy outlook report, Barclays energy analysts predict oil prices will likely trend higher in the near term.  “Over the next 12 months, as the current risk-off trade subsides, we expect oil prices to be on a rising trend from $100-$130 a barrel, even with potentially slower economic recovery in OECD countries,” said Barclays analysts regarding the advanced economies.

Amrita Sen, Barclays energy strategist in London, sees global oil demand on a “solid upward trajectory” largely as a result of “structural changes in non-OECD countries.”  In other words, the oil needs of the developing world will continue to support higher oil prices.

In spite of the demand slowdown noted by the IEA, Barclays believes – and we agree – that the overall macro picture supports a higher oil price.  Oil suppliers have yet to truly catch up with the new emerging economy demand structure, particularly in Asia.  By 2012, Barclays  expects to see evidence of sustained supply capacity tightness.  By then, $100 a barrel oil is likely to be the “new sustainable norm.”

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Posted by on August 22, 2011 in Oil

 

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