The Jump Off

One of the world’s largest oil producers announced yesterday that it is planning on increasing it’s production this year.  Russian leaders pledge to stimulate oil production:

“You think oil production is declining?” Sechin said during an interview with Interfax on Wednesday, a first for the secretive former Kremlin insider who was thrust into the spotlight with his cabinet appointment this week. “Let’s wait until the end of the year. I’m sure there won’t be a decline, but an increase instead.“

After growing by just 2 percent in 2007, oil production here has been sinking since the start of the year. Most of Russia’s oil comes from Soviet-era fields in western Siberia, which are reaching the end of their natural life spans.

Putin said he expected oil production to increase by 1.3 million barrels a day by 2015. That figure represents over 13 percent of the country’s current oil production, which was nearly 9.9 million barrels a day last year. 

[The essential problem with Russian oil production is that the two exporters are both subsidized by the government and that fractures their cabinet's means of coming to a consistent export policy. I am beginning to suspect that the issue is not so much the decline in the oil fields in Russia but the political instability as Putin and company attempt to wrestle order out of the chaos that country barely keeps at bay. With two competing interests - don't expect Russian production to improve dramatically for a while]

Next the FAO testified before congress that Oil to stay in $100 range for next decade:

 The FAO, which is putting the finishing touches on new 10-year forecasts for commodity prices, expects crude prices of $104 per barrel in 2017, Ali Gürkan, chief of the agency’s trade and markets division, told a Senate committee today.

FAO economists, who predicted at average price of $94 per barrel in 2008, are struggling to understand why prices have surged to that level.

Mr. Gürkan said prices would have to soon drop to about $80 a barrel to make the $94 per barrel prediction come true.

“This is no longer valid,” Mr. Gürkan said of the FAO’s 2008 estimate.

[It's at $125 now, a drop to $80 would seem reasonable only for someone who believes Taleb's assertion that "The market takes the path that causes the most amount of pain to the largest amount of investors".  (DUG: 44.77 +9.60%) is starting to look very cheap to me right now]

Oh yeah. Congress also is forcing the US Govt to stop stockpiling the reserves as they are already at near 100% levels. That’s bound to have an effect on the commodity pricing.

And Big Oil firms aren’t the bandits here? From today’s Globe and Mail:
Well, the world is quickly running out of oil, right?

Not really. The U.S. Energy Information Administration calculates that the world’s proven reserves of oil will last for 50 years at current rates of production but notes that proven reserves are still increasing year over year – as they have for more than 25 years. In the early 1980s, the world’s proven reserves would have lasted for only 30 years at the 1980s rate of production.

[Simple technology in action. Consider this to be an analogue to Moore's Law for the oil drilling industry]

The Takeaway

With (PBR: 15.96 -10.64%)  hiring 80% of all Deepwater rigs, we find that there is about to be a surge in the supplies coming from sources outside of the Middle East that’s not been seen for probably any point in the known history of this commodity:

Petrobras plans to start pumping oil in the first quarter of 2009 from Tupi, the biggest find in the Americas since Mexico’s 1976 discovery of the Cantarell field in the Gulf of Mexico. Petrobras also is evaluating as many as seven nearby fields, including the Carioca prospect, Gabrielli said.

It will take at least a year of additional drilling for Brazil to get a good picture of how much oil there is in an offshore region that includes Tupi, Carioca and other fields, said Lobao, the government minister. Petrobras and other producers have drilled only 15 wells in the region, he said.

Executive summary for the Attention Deficit:

(DUG: 44.77 +9.60%), (PBR: 15.96 -10.64%) seem reasonably priced for the next 10 months. (DUG: 44.77 +9.60%) will need to have the investor withstand some amount of pain as the “volatile price” of oil will claw it’s way up before the big fall.

This is my opinion and it’s for information purposes only. Any sensible investor does their own homework and doesn’t listen to a commentator who comes in last in internet elections on market blogs.