China (Platts) -- October 29 - Nov 2 2007

By reporters at Platts, the energy information division of the McGraw-Hill Companies. For more information about Platts' information products in China, contact Platts at china@platts.com, or call its representative office in Guangzhou at (+86) 20 2881 6588.

The wheels may be wobbling and a few clouds may be gathering on the horizon for market bulls, but the bandwagon that seems to be taking headline crude oil futures relentlessly towards a watershed $100 per barrel level carried on purposefully last week.

Critically, the peak oil debate that has started to frame the current rally in crude futures attracted new data to consider on November 2.

A Platts survey showed third-quarter global production of oil liquids at seven key publicly traded international majors declined 6% from last year, with output down 664,000 b/d at a time when some officials are calling for increased production from OPEC.

Amid that and other bullish news for oil, a record-breaking week for crude oil ushered in fresh all-time highs for heating oil and gasoil futures, as well as opening the door to a quiet but significant 16% appreciation in the price of US natural gas futures.

For the record, December WTI crude futures closed last week on the New York Mercantile Exchange at $95.93 per barrel, while December Brent closed out at $92.08 on London's ICE Futures. Both were all time highs, and represented gains of about 4% or so in value from the week before.

But perhaps more significantly, front-month WTI and Brent oil futures are around 60% higher than where they were at the start of 2007, and -- in the case of WTI -- more than 65% above where they were trading this time last year.

For any investor, trader or industry participant, those kinds of returns are simply impossible to overlook. Even without a bout of weakness in stock markets and the US currency.

But while traders kept the bit between their teeth and kept $100 in sight, the rally was starting to look at least a little bit wobbly.

Refiners around the world started to complain loudly that their refining margins were not keeping up, a sign that crude prices have started to test upper limits.

Without a rapid response in refined product prices, which have been rising but not always by the order of magnitude seen in crude oil, refiners might start to cut their own production more deeply than they have already.

The key effect would be to push more crude back into the spot markets, something that could cool crude prices significantly. With refiners now looking past the winter to the start of next year, run cuts ahead of the traditionally-weak second quarter could begin early.

Of course, the trend towards refinery run cuts could add spectacularly to the bullish trend if refined product stocks start to fall before the winter is done in the northern hemisphere, pushing product prices higher in the process.

Ironically, given the noise coming from oil refiners, the biggest gains in oil prices last week were seen in heating oil futures (up 6%), gasoil futures (up 6%) and gasoline futures (up more than 7%).

Majors still struggling to maintain production

Peak oil enthusiasts took note of the disappointing production results from the majors, with Charles Maxwell, the senior oil analyst for Weeden & Company, warning that the downturn simply underscores fundamental changes afoot that the major producers want to ignore.

"They can't tell you why this is happening," said Maxwell, a noted peak oil lecturer and observer. "It's like a tennis player who can't explain why he is losing to someone he has beaten all the time. They haven't figured it out." He said he was surprised to see the decline emerging in production data earlier than he had expected, and predicted the implications include continued rising oil prices.

The implications of the data appear more complicated than indicated by the raw numbers. For example, the largest producer, ExxonMobil, said a reduced share of actual production from African entitlements were to blame for its 4% downturn in the quarter. Excluding those special factors, ExxonMobil said its liquids output actually would have risen 3%.

Besides ExxonMobil, the Platts review focused only on liquids production comparisons for integrated majors BP, Shell, Chevron, ConocoPhillips, Eni and Marathon Oil. It determined those companies reported collective liquids output of 10,338,000 b/d for the quarter ended September 30, down from 11,002,000 b/d in the same period a year ago.

Liquids production fell at six of the seven companies and stood flat at Chevron, leaving Barclay's Capital analyst Paul Horsnell to question the ability of the international oil companies to respond to increasing demand and pricing.

"Barclays Capital has taken a very deadbeat view on non-OPEC supply growth in recent years, mainly due to our view that the rate of decline in mature fields was being underestimated by consensus," said Horsnell, responding by email from London to questions. He added: "The weakness appears consistent to us with what has been a long period of output under-performance."

In a short report October 31, Horsnell had noted a 9% decline at Shell and wrote: "To announce a 9% fall in crude oil output and then put higher prices down not to any fundamentals but to speculation does seem a little strange to us."

Horsnell wrote: "After years of rising prices, the announcement by a major oil company that field decline rates were enough to counteract all of the accumulated supply response to higher prices and were at the heart of a large crude oil output reduction, might be seen as a further signal that prices have not yet been bid up enough."

The review comes just four months after a study by analysts at Bear Sterns revealed that 2006 marked the third consecutive year in which the major oil companies failed to fully replace production.

Updated: November 5, 2007