Russia Hits Peak Oil

Rob Mackrill - Tue 15 Apr, 2008

A Russian oil executive has admitted Russian oil production has hit a peak

Peak Oil theory gets a shot in the arm...

Russia was the new frontier for oil production a few short years ago. Not any more it seems, according to an FT report today...

Russian oil has peaked already according to Leonid Fedun, vice-president of Russian oil giant Lukoil,

10m barrels a day from the world’s number two oil producing country is as good as it gets in his lifetime he reckons. He’s 52 but given the average life expectancy of Russians that may not be too long. And it’s not going to be stable. Oil rich Western Siberia is more like Mexico and the North Sea i.e. output is sliding fast. “The period of intense oil production growth is over” claims Fedun. They’ve sucked up the oil fast and now the party’s over.

The Russian government has admitted so far to oil production growth “stagnating” but not that it has “peaked” says the FT so this is news to those less intimately familiar with Russian oil reserves. It’s a blow. In recent years, increased Russian production has helped offset the additional and growing demand from Asia and help keep a lid on the price of crude. So, if Mr Fedun right, this particular brake on the price has reached its limit. Future new production for Big Oil increasingly rests on ‘unconventional’ sources such as the 54,000 square miles of black rock that comprise the Athabasca Oil Sands in Alberta, Canada.

Such public admissions do nothing to weaken the oil price, so are self-serving in the short-term to producers such as Lukoil. But contributing factors such as the fortunes of the dollar are outside their control. The fact the greenback is near record lows against the euro ahead of further economic news pending adds further upside as does a supply disruption in Mexico in a tight market. "We just don't have the big cushion any more that we used to have,” Robert Nunan of Mitsubishi in Tokyo tells CNBC. And in the old days when the rich nations slumped, so did global demand. These days as the song said: ‘It ain’t necessarily so’. China’s diesel imports went up 49% in March. Eugen Weinberg, an analyst at Commerzbank AG tells Bloomberg:

“The predominant market view is that the emerging economies will overcompensate for any possible demand slump in OECD countries.”

This is bad news for inflation and casts doubt on how much this is a late cycle phenomenon and lagging indicator. If the west slumps but the eats continues regardless, commodities may not – and certainly haven’t yet - ease off like they used to.

Sweet light crude hit an all time high of $112.48 yesterday. Brent hit an all time high of $110.45. Pump prices ain’t coming down anytime soon even with the now mandatory 2.5% biofuel content.

Elsewhere on the oil patch, Downing Street is said to be keeping a close eye on Chinese stake-building in BP. The purchases are via a sovereign wealth fund which has already a 1.6% holding in French oil company Total. Their stake in BP has reached almost 1%.

European stocks are positive this morning as Silvio Berlusconi wins a third term in the Italian election and in spite of a fall in formerly bullish German business confidence. The FTSE 100 is 73 points higher in early afternoon trade at near 5,900 as Tesco proved its supermarket chain is a sound defensive play in difficult times. It cheered the market, and no doubt shareholder Warren Buffett, by beating analysts’ estimates with a 12% increase in profits to £2.8bn. Plus it is creating another 30,000 jobs across the group. Perhaps it can soak up some of those City redundancies in the process.

Tesco’s main growth drivers came from their businesses in Asia and eastern Europe. Good news from their newly launched US operation – Fresh & Easy – where its performance has confounded the doubters, sales are “ahead of budget” and is selling more per square foot than local rivals.

Not a boast department store Debenhams may be making right now. Interim profits have fallen more than 12% and sales fell slightly on a like-for-like basis. CEO Rob Templeman says it’s a “tough trading environment, particularly in clothes”. He sees slowing sales as a result of shoppers feeling the impact of tighter credit rather than a weakening economy. He makes the point that the credit squeeze has developed fast so could be reversed quickly too. Perhaps but the Bank of England has not developed yet the taste of dramatic action along the lines of that instigated by the Fed. The effect of a quarter point cut while the UK mortgage market appears to be fast disappearing looks like fiddling while Rome burns.

The Royal Institute of Chartered Surveyors throw their thoughts into the house price debate today. Not good they say. Worst we’ve seen it for a long time. Since we started keeping records in 1978, in fact. 78.5% more surveyors are reporting falls than rises says Bloomberg. I don’t know about you but I find that a bit of a tricky stat to get my head around. Presumably for every 100 surveyors reporting rises, 178 or so are reporting falls. Whatever the technicalities “the situation is serious and getting worse,” in the eyes of David Stubbs, an economist at RICS tells Bloomberg. Lower interest rates are needed to restore confidence he says. Of course, but then from recent evidence that doesn’t seem to be doing a great deal to help as base rates ease while mortgage rates (from the dwindling number of deals available) tighten. The latest inflation read provides some welcome encouragement for Mervyn King. Though still 50bps above target, CPI held steady in March at 2.5%, better than the 2.6% expected by analysts.

Gordon Brown sat down with mortgage lenders this morning and rarely can incentives on all sides been greater and more urgent to sort out a deal to get things moving again. Brown will not want the taxpayer on the hook for the risk of dodgy mortgage assets via the Bank of England but the commercial banks and in time things should return to some form of normality. But that won’t happen until normal service can be resume in interbank lending. Given that Libor has actually firmed slightly since the 25 basis point cut last week to 5.93% this looks some way off yet.

This credit squeeze is almost eight months old and past credit squeezes have lasted 9-18 months according to David Smith in The Sunday Times. As we know from our investments, of course, the past is not necessarily an accurate guide to the future. J P Morgan see the pall of the credit crisis infecting financial markets for the next ten years at least as regulation increases on commercial banks and central banks tighten their grip.

Regards,

Rob Mackrill
The Daily Reckoning