A weak dollar is driving investors into hard assets like oil, but high inventories and other weak fundamentals argue against a continued price runup.

Oil has returned to the role it held before last year's price collapse—a sanctuary of choice for investors fleeing the dollar. At least for now, that is.

Over the past week, crude surged through the $80-a-barrel barrier for the first time since September 2008. (The benchmark price of a barrel of crude oil ended Friday, Oct. 23, at $80.50.) This follows a breathtaking, yearlong bout of volatility. Since the summer of last year, oil has rocketed to $147, plunged to $32, and just a week ago traded below $70.

Yet many analysts say oil-market fundamentals are so weak that prices won't rise much higher, and may in fact retreat. "This is a dollar-led rally and unsustainable," says Phil Flynn, an oil analyst with PFGBest Research, a futures brokerage.


Another Safe Haven, Gold, Soars by 20%

The dollar is the main driver behind a 15% increase in oil prices over the past week, analysts say. Since March the dollar has fallen 15% in inflation-adjusted value compared with a basket of currencies of its major trading partners. Traders have sought to cushion the fall in the value of the dollars they are holding by buying futures in traditional safe havens. Mirroring crude's climb, gold has soared this year to more than $1,000 an ounce, or by about 20%. "The steady increase in oil prices means that traders want to hold hard assets," said Lawrence Goldstein, a director at the Energy Policy Research Foundation in Washington.

Few experts are predicting a sudden strengthening of the dollar, so oil prices could stay where they are. But the fundamentals are so weak, analysts say, that the price could rapidly fall back below $80 and even further.

When oil prices rocketed past $140 in 2008, the causes lay mostly with the supply-demand balance: There was virtually no spare production capacity anywhere in the world, so that any supply disruption, such as hurricanes in the Gulf of Mexico and the routine militant attacks in Nigeria, pushed prices up.


Plenty of Production Capacity, Oil in Storage

Observers predicting a price spike have pointed to a drop in global oil exploration and production, saying that when economies rebound there will be a shortage. In the U.S., for instance, exploration is down 27.8% from a year ago, with 309 rigs actively drilling, compared with 428 at this time in 2008, according to the Baker Hughes Rig Count. Abroad, there are 8% fewer rigs drilling than there were a year ago—764, down from 831. Major oil companies such as ExxonMobil (XOM), Chevron (CVX), and BP (BP) continue to spend on exploration, while smaller companies have cut back substantially.

But that is just part of the picture, analysts say. For starters, spare production capacity currently runs about 6.7 million barrels a day, according to the International Energy Agency, with Saudi Arabia accounting for 3.8 million barrels, or 56%, of the total.

In addition, oil storage tanks around the world are overflowing and would have to be drawn down before any big price spike takes place. U.S. crude inventories stand at 339 million barrels, up 27.7% from a year ago, reports the U.S. Energy Information Administration. In addition, since mid-September the Strategic Petroleum Reserve has exceeded 725 million barrels, a 27-year record. In fact, there is such a global glut that there is almost no place on land to put all the oil. An estimated 125 million barrels' worth are floating around on tankers scattered over the globe, according to OPEC. Normally, a negligible amount of oil is being stored offshore in ships.

Refineries, too, can ramp up and produce oil products, analysts say. U.S. refineries are operating at around 80% of capacity, among their lowest rates in two decades. "High inventories and weak market fundamentals might eventually weigh on markets" and push prices lower, said Edward Morse, managing director at Louis Capital Markets, a London-based brokerage. So it's possible that crude isn't such a safe haven after all.




[businessweek]

IEA Executive Director Nobuo Tanaka is the man to watch. Now he has told Reuters that the sharp decline in the oil market, with prices collapsing by more than 70 percent is also slowing the search for new sources of oil as existing fields were depleted. If you read blogs like The Oil Drum, this is no surprise. However, it appears to be official:

Tanaka said oil demand may already have peaked in the developed countries of the Organization for Economic Co-operation and Development (OECD) but failure to invest now in renewables could store up problems in the future.

"I don't see much chance it (demand) could come back now, but if we do not invest in renewables now, it could bounce back when the economy starts to grow again," he said.

What's next for Peak Oil?

Coal is no longer the dirty word it once was. And there’s no better indication than the $75.9 million recently pulled in by Luca Technologies, a company that engineers microbes to produce methane gas from coal. This brand of innovation could be good news all around as the incoming presidential administration emphasizes clean-burning energy despite cheap surpluses in the U.S. coal supply.

The round, which will be used to acquire new coal beds in Wyoming’s Powder River Basin (its primary site) and elsewhere around the world, has bumped the company’s valuation to $245.6 million, a 116 percent increase over last year, according to VentureWire. Large chunks of capital came from One Equity Partners ($40 million) and Kleiner Perkins‘ new Green Growth Fund ($20 million), two firms that have exhibited heightened interest in coal.

Luca’s microbes are capable not only of breaking down coal into methane, but also of reviving old coal deposits and natural gas wells. In the Tongue River area of Wyoming, it ran a project that brought 108 natural gas wells back to life — producing more than 1.5 billion cubic feet of gas overall, reports VentureWire. It already counts 630 wells and 20 reclamation projects among its assets, but is actively seeking oil and gas companies looking to hand off their properties, perhaps as a part of a joint-venture deal.

Luca faces several major competitors in the coal gasification field, including Kleiner Perkins-backed GreatPoint Energy, Laurus Energy, and Econo-Power International. But in the larger scheme of things, the jury is still out on the process. After all, it’s not a renewable source of energy — and while relatively cleaner, still produces some harmful emissions. As more money gets poured into cleantech, and alternative means of energy like solar and wind become more practical, coal gasification may increasingly become a stop-gap technology like ethanol — a transient solution worth the bucks right now but perhaps not in the future.

The new money represents Luca’s third round of financing, which also included several undisclosed investors. It last raised funds in October 2007, bringing in $20 million from Kleiner Perkins, Caufield & Byers, Oxford BioScience Partners and BASF Venture Capital. Before that, its first round totaled $3 million in 2006.

[venturebeat]

Every large global corporation currently has a choice. They can try to survive by moving around pennies, or they can use this economy as a wake-up call. One response is a strategy that moves investment away from low-value commodities towards a strategic role in solving problems.

The Oil and Gas Industry, and how they respond to climate change, is an excellent case. From a societal and environmental perspective, we need 'Big Resources' to step up - moving from being largely the problem, to being a big part of the solution. The company that is the first to see business opportunity, rather than focusing on climate as a risk and a marketing problem - will reap the rewards.

Traditional thinkers in the oil and gas industry would tell you that they already provide solutions to our energy demands. And we can likely all agree that oil and natural gas will continue to be a significant part of our future. However, we can also agree that in order to address climate change, we need to develop alternatives to meeting huge energy demand, with carbon reduction. This transition to a lower-carbon economy will inherently reduce our relative reliance on fossil fuels. This is especially true if you assume a global carbon price.

Further - there's the simple fact that oil supplies are finite. Let us say, as the National Petroleum Council's Hard Truths about Energy report does, that by definition there must be a global peak of oil supply. Further, and probably more importantly, carbon price and rapid growth of global population and income will outstrip supply regardless of whether we have peaked. The NPC report also predicts a declining market share for oil and gas through 2030, and a slower growth rate, relative to other energy sources.

There is also the likelihood that investors will shift their analysis on oil and gas. Investors have traditionally valued oil and gas companies based on their access to reserves. As we approach Copenhagen in 2009, embark on new U.S. political leadership, hear China's stated willingness to participate in climate talks, and navigate a volatile economy, investors looking for growth will seek companies that show management leadership that thinks long term and is solving tomorrow's problems in new ways.

All of this is to say that the smart oil and gas company needs a new strategy - and cannot simply put their head in the sand if they are to be in business in 30 years, and enhance the future value of their current share price.

The industry has moved quite a bit from lobbying against legislation to lobbying for federal (and global) consistency. Now it is time for oil and gas companies to move beyond risk avoidance to a view of climate change as an opportunity.

There are three key ways that these companies can create value by proactively addressing the reality of climate change as an opportunity:

- Energy diversification:

Companies should move beyond interesting pilot investments to a serious strategy and gradual shift over time towards a diversified portfolio which includes not only lower carbon-intensive liquid fossil fuels, but also renewable energies that are best suited to oil and gas companies' abilities: specifically geothermal energy and next generation biofuels.

-'Big' mitigation techologies:

Oil and Gas companies, and the industry that supports them (EPC companies such as URS, and technology suppliers such as Schlumberger), know how to drill and extract. Technologies such as Carbon Capture and Sequestration will be essential parts of climate change mitigation - and no other industry is better positioned to scale this technology, and collect a nice reward for doing so (both due to the benefits of enhanced oil recovery and carbon mitigation).

-Leveraging talent:

Oil and gas companies of made up of engineers, energy traders, managers that deliver large-scale resource projects, and deal-makers. All of these skills will be essential to shifting our global energy economy towards sustainability. No other global industry today possesses the capital, talent and ability to create rapid shift in the energy economy . Companies must begin to see their assets beyond the oil field to the service capacity of their talent.

If oil and gas companies wake up to their window of opportunity, there will be significant need for them in the long-term economy. If not, they may end up where U.S. automakers are today - begging for a short-term bailout, because they couldn't shift quickly enough to create products that society really needs.


[triplepundit]