October 8, 2004
Good Morning

• · Hydrocarbon prices were mixed overnight. Access crude oil up $.13 to $52.80 per barrel. Access natural gas down 2.5 cents to $7.230 per mcf.

• The “rotating powder keg” continues to reveal itself, yesterday in the form of a two-day “warning” strike against Shell by the PENGASSAN union in Nigeria. The news helped the market touch $53.00 per barrel at yesterday’s opening, but the market was unable to push higher when the unions announced that production would not be impacted. This morning, word is out that the strike will be suspended automatically later today.
  
• The strike was called to warn Shell not to implement extensive job cuts that the company was planning. We had flagged this precise situation some time ago in our notes, based on discussions with one of our contacts. At that time, we wrote that if Shell went through with the cuts, the unions would attempt to shut in all of Shell’s production. It remains to be seen what, if any, impact the warning strike will have in terms of Shell’s employment plans, but it is clear that despite yesterday’s benign action and the “peace” between rebel forces and the government, Nigeria will remain a serious and potential powder keg for the foreseeable future.
  
• Elsewhere, we touched base with a few of our contacts, and we wish to pass on some brief thoughts we gathered yesterday. First, in terms of China demand, one of our sources who looks at preliminary official data and through modeling devises a “snapshot” of the demand picture suggested that in August China implied demand growth may have slipped into single digits. However, we must caution that the data can be subject to revision and severe month to month fluctuations. Also, as we indicated previously the way that product demand is measured in China, i.e. on an implied basis based on refinery operations and import flows, the fact that refineries were on turnaround over the summer may have skewed demand growth downward. Also, we have previously indicated that we should look for some acceleration in demand growth in this quarter due to harvesting and fishing diesel demand, which may more than offset what appears to be some easing of diesel demand to fuel local electric generators that have exploded in number due to shortages on the national electricity grid. In any event, it will be interesting to see what the IEA publishes regarding China when their monthly report is issued on October 12.
  
• In terms of Saudi Arabia, we have discussed previously, which has recently received press, the fact that due to new projects coming onstream, Saudi Arabia now has sustainable capacity of around 11.0 MMB/D. We had also indicated, however, that the new capacity was pegged to replace retirements in older fields. However, the Saudi Aramco Board has great flexibility in terms of when this will occur, with the wells eventually to be shut down and not plugged and abandoned. The Board has decided that depending upon prices and the need for Saudi crude oil next year, the older well shutdown can be delayed until 2006. Therefore, unless prices start to weaken substantially, Saudi sustainable capacity will remain at 11.0 MMB/D for all of 2005.
  
• Finally, we wish to repeat a point we made yesterday in our weekly natural gas storage report. The fact that distillate demand growth has slowed materially over last year in combination with robust storage fills despite the impact of Ivan suggests there is the possibility that overall energy demand growth has finally begun to slow due to either, or a combination of, conservation and a slowdown in manufacturing activity. We continue to emphasize, however, that it is premature to draw firm conclusions.
  

William H. Brown, III