Grand Game Plays On

The Grand Game, the supply and consumption of world-wide energy, had some interesting developments this week. In natural gas, prices in the U.S. dropped below $3 per million Btu, at approximately $2.90. Gas price has been dropping all summer, as more and more shale gas is brought up out of the ground, and more and more LNG is arriving on U.S. shores. Even with a very cold winter, supplies will be more than adequate to keep the cost of heating homes much lower than in previous winters. The price of crude oil, meanwhile, continues at around $70 per barrel, continuing the complete break with natural gas.

Crude oil prices will drop as the northern hemisphere fall and winter begins, with summer vacations over and school in session. OPEC's main move is to reduce supply, hoping to prop up the price of oil. Maintaining production discipline is more and more difficult for OPEC.

Gasoline demand in the U.S. has already begun its drop, at least two weeks earlier than usual. We should also see fewer gas guzzler cars on the road as some hybrid cars are reaching the trade-in point. Those who buy used cars are finally able to purchase a high miles-per-gallon car, thus further depressing gasoline demand.

An interesting development this week was the announcement by Rentech that their trash-to-diesel process is ready to roll. Rentech signed contracts for 1.5 million gallons per year of their synthetic diesel. This is, to be sure, not much in the vast market for diesel fuel in the U.S., but it is a start. Nation-wide, diesel fuel production is approximately 4 million barrels per day, or roughly 165 million gallons per day. Rentech's production is roughly one-three hundredth of one percent of the total diesel consumed.

Refineries in the U.S. continue to struggle to keep production sufficient to cover their operating costs. With present operating rates at just 84 percent, look for operating rates to drop to 82 or 81 percent. Historically, refining operating rates drop roughly 5 percent during the fall and winter months. They peaked at 87.9 this summer. Some refineries will undoubtedly shut down in these conditions. The economy is not turning around, instead, more banks are failing, more mortgages are underwater, unemployment is still high and growing in many key states, especially California, none of which bodes well for gasoline demand.