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November 24, 2011

10 Signs That Fossil Fuels Are Changing The Commodities Market

There are a number of different aspects in Commodity markets which are far outpacing expectations, and changing market dynamics because of it. Here are ten of them:

1) North Dakota oil production. It is seemingly on an exponential charge higher due to the discovery of the Bakken oil shale play. Not only has North Dakota oil production quadrupled since 2005, but it is set to become the 2nd largest oil producing state in the US (behind Texas), and is set to surpass the production level of Opec member Ecuador


2) US natural gas storage. Yeah, I know it's an obvious one, but the a decent chunk of the weak natural gas pricing environment can be explained away by the record level that is now stored in the ground.

3) Back to that North Dakota production. Just as natural gas shale discoveries have completely changed the landscape of the natural gas market, the same is in the process of happening to the US oil market. This is reflected in the record level of horizontal rigs being used in the US (horizontal rigs = unconventional plays = shale).

4) Back to that natural gas storage level. A key reason we have reached a record storage level is due to record domestic production. This is due to the ramp up in shale plays and unconventional production – which are able to extract natural gas at much lower costs than conventional plays. This trend of strong production is set to continue, barring a clamp-down on fracking due to environmental concerns.

5) Distillate products supplied - a proxy for distillate demand in the US - is going nuts, as shown in the chart below. This is likely due to a combination of seasonal domestic demand and a significant increase in exports


6) New discoveries of shale gas are blowing the doors off  the estimates of proven reserves on a global scale. In the US, the EIA has increased their estimate for proven natural gas reserves from 353 Tcf  in 2010 to 827 Tcf in the 2011 Annual Energy Outlook, while countries from Poland (600 Tcf) to the UK (200 Tcf) are also experiencing market dynamic-changing discoveries.

7) The loss of confidence caused by the European debt crisis and the oversupply of emissions permits in the system have driven both EU permit and UN permit prices to record lows. According to research by climate campaigners, Sandbag.org, potential oversupply in the system by 2013 could well reach 1.9 billion tonnes - the equivalent of one year's supply.

8) The appetite for energy from emerging markets, and specifically China, is to continue going berserk, according to EIA forecasts. Hark:


9) Despite its reputation as the bad boy of the energy complex, global coal consumption continues to grow. In 2010, Coal provided 29.6% of global primary energy needs and generated 42% of the world's electricity.


10) As mentioned last week, Libyan oil production is surging. After slowing to a trickle in August, production has surged in the past few months after the toppling of the Gadhafi regime, and Colonel Gadhafi's subsequent death. Production is now up to nearly 700,000 barrels a day, with a target of as much as 800,000 by the end of 2011. The IEA is projecting 1.2 million barrels a day by the end of 2012, while the interim Libyan government has targeted a return to pre-war levels by next  June. Given the rapid return of run rates thus far, this cannot be dismissed.

About The Author - Energy Burrito is founded by Matt Smith, Commodity Analyst at Summit Energy. (EconMatters author archive here.)

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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