Category Archives: Oil

Comments from the Algeria Oil Minister

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DJ Algeria Oil Min:Increasingly Hard To Understand Market Dynamics

Agreed!

DJ Algeria Oil Min:Oil Markets Increasingly Respond To Financial Speculation

Agreed! The funds involved in commodity speculation dwarf the funds involved in the physical markets

DJ Algeria Oil Min:Market Volatility Makes Energy Investment Difficult

Agreed! The risk of a price collapse is a major factor for long term investment decisions.

DJ Algeria Oil Min: Seeking To Exploit Shale Fields In Algeria
DJ Algeria Oil Min: Will Seek Partnerships To Exploit Unconventional Oil, Gas
DJ Algeria Oil Min:Sonatrach, Partners To Invest $2.5B/Year On Unconventional Hydrocarbons
DJ Algeria Oil Min: Europe Will Need Long-Term Gas Contracts

Yes, long term contract work best for both producers and users to ensure the viability of investments and the stability of supply and price

DJ Algeria Oil Min: No Shortage Of Physical Oil

Agreed! Reinforces the fact that the Saudis are the swing producer/ultimate price setter as previously discussed

DJ Algeria Oil Min: OPEC Will Respond If There’s A Shortage Of Crude

Confirming excess Saudi capacity estimates

DJ Algeria Oil Min: No Requests For Extra Crude From Algeria

Confirming no supply shortages and Saudi price setting

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Libya Libya Libya

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Here’s my take.

As before, all the world actually cares about is the price of oil.

And the internal struggle will wind down with someone controlling the oil.

And whoever gets control of the oil wants the oil for only one reason- to sell it.

In a land of haves and have nots (at all levels), and no understanding of fiscal balance, it’s all about having the oil to sell.

So that means prices go back to where the Saudis want them to be.

My guess, and all anyone can do is guess, is Brent at maybe 100 which puts WTI maybe just under 90 until the glut issues are sorted out.

If this happens, seems-

The long oil long trades reverse.
Food prices back off some.
The view of the economy goes from half empty to half full.
The dollar gets a lot stronger.
Energy related stocks lose, others win.
But a stronger dollar may dampen prospects for US stocks.
Bonds move with stocks.
Attention shifts back to China, Europe, UK, and US fiscal policies, which are all in tightening mode.

And happy birthday to my brother Seth who turns 60 today! He just posted some old family pictures on facebook.

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Saudi Arabia in talks to boost oil output

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Right, as swing producer/monopolist that’s what they necessarily do- set price and let quantity adjust.

But if quantity demanded exceeds their ability to pump they lose control of price on the upside.

>   
>   (email exchange)
>   
>   On Thu, Feb 24, 2011 at 9:43 AM, Greg wrote:
>   
>   Just like you say about the Saudi’s…..
>   

Saudi Arabia in talks to boost oil output

By David Blair, Jack Farchy and Javier Blas

February 24 (FT) — Saudi Arabia is in “active talks” with European oil companies to meet the production shortfall left by Libya, the clearest indication to date that the leader of the Opec oil cartel is about to boost supplies to stop further rises in the oil price, which surged to near $120 a barrel on Thursday.

Riyadh is asking “what quantity and what quality of oil they [the European refiners] want,” a senior Saudi oil official said on condition of anonymity.

Oil traders said the talks signalled that Saudi Arabia realised that the political crisis in Libya was now an oil supply crisis and that the kingdom needed to act quickly and decisively to stop oil prices hurting the global economic recovery.

“You can only expect the price to go up. It is fear of the unknown. The risks are all to the upside,” one senior oil trader said. “Saudi Arabia needs to respond.”

The kingdom is considering two options for increasing supplies. The first would be to boost Saudi production and send more crude through the kingdom’s East-West pipeline, which links the Gulf region with the Red Sea port of Yanbu, for shipment to Europe.

Another possibility, which is currently only being “studied”, would be a swap arrangement, whereby West African oil intended for Asian buyers is redirected to Europe, with Saudi Arabia stepping in to supply the Asian customers.

West African oil, such as Nigerian crude, is very similar to the gasoline-rich Libyan oil, traders said, noting that West Africa is geographically closer to Europe than Saudi Arabia.

“Right now, there are active talks in order to implement what is needed,” the Saudi oil official added. He stressed that the kingdom retained spare capacity of some 4m barrels a day – more than than double Libya’s entire output which totalled 1.58m b/d in January, according to the International Energy Agency.

Saudi Arabia has not yet decided whether to increase its output in response to Libya’s crisis, the official added, saying it would depend on the requirements of European oil companies.

If it proved necessary for Saudi Arabia to produce more, “then that will happen, there’s no problem at all”, he added.

Traders believe Saudi Arabia has the capacity to boost production by at least 1m b/d with just 24 hours notice, meaning that if a decision was adopted now, the oil tankers could be arriving in Europe within 10 days.

The move by the world’s largest oil producer comes as Eni of Italy, the most active foreign oil company in Libya, said on Thursday that oil production from the North African country has plunged to just a quarter of normal levels.

Increasingly panicked buying drove the price of Brent crude futures, the global pricing benchmark, up 6.7 per cent to a peak of $119.79, the highest since August 2008. Traders and investors feared that the near-total shutdown of Libya’s oil industry would leave the global oil market with little supply cushion should the political crisis spread to another major Middle Eastern oil producer.

Paolo Scaroni, Eni chief executive, on Wednesday made the most pessimistic public assessment to date of the impact of the Libyan crisis on the country’s oil output, saying the country was producing only 400,000 b/d, compared with 1.6m b/d before the violence erupted.

“The real phenomenon is there are 1.2m barrels less on the market,” Mr Scaroni told reporters in Rome, adding that the loss of Libyan production was “not a huge thing, but it is something and there is also a sense of general uncertainty in the region which can be the trigger for speculation”.

The shortfall means the world market is enduring its biggest oil crisis since hurricane Katrina in 2005 knocked out most US oil production in Gulf of Mexico.

Traders believe that Saudi Arabia has the capacity to increase production and also the oil of the right quality to meet the shortfall. The kingdom produces so-called Arab Extra Light and Arab Super Light, which through blending could be made to resemble the high-quality, light, sweet oil produced by Libya.

The Saudi move comes as oil prices reached levels that many economists believe will dramatically slow the global economy and potentially trigger a double-dip recession. Oil prices hit an all-time high of nearly $150 a barrel in mid-2008.

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New Drilling Method Opens Vast Oil Fields in US

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Might need to delay ‘peak oil’ a bit.

More interesting, I’d estimate it would take about a 5 million barrel a day ‘shift’ in net demand to dislodge the Saudis as swing producer, as they can only cut production by less than that much to sustain price should that happen.

In other words, a combination of increased non opec supply and reduced world demand of 5 million bpd would force a cut in production of that much for the Saudis to be able to continue to set price, from their current production level of about 8.5 million bpd.

And along with these ‘new drilling methods’ Iraq is looking to add over 5 million bpd in capacity over the next several years.

The question is what will happen with demand, and looks to me the US and Europe are starting to go the other way and reduce gasoline demand via conservation (higher mpg’s in vehicles) and shifting to alternative fuels, directly and indirectly.

So what’s the Saudi’s best move here?
Keep prices high a long as possible and get all the wealth they can before prices collapse?
Or cut price in an attempt to discourage the forces at work that are threatening their pricing power?

New Drilling Method Opens Vast Oil Fields in US

February 9 (AP) — A new drilling technique is opening up vast fields of previously out-of-reach oil in the western United States, helping reverse a two-decade decline in domestic production of crude.

Companies are investing billions of dollars to get at oil deposits scattered across North Dakota, Colorado, Texas and California. By 2015, oil executives and analysts say, the new fields could yield as much as 2 million barrels of oil a day—more than the entire Gulf of Mexico produces now.

This new drilling is expected to raise U.S. production by at least 20 percent over the next five years. And within 10 years, it could help reduce oil imports by more than half, advancing a goal that has long eluded policymakers.

“That’s a significant contribution to energy security,” says Ed Morse, head of commodities research at Credit Suisse .

Oil engineers are applying what critics say is an environmentally questionable method developed in recent years to tap natural gas trapped in underground shale. They drill down and horizontally into the rock, then pump water, sand and chemicals into the hole to crack the shale and allow gas to flow up.

Because oil molecules are sticky and larger than gas molecules, engineers thought the process wouldn’t work to squeeze oil out fast enough to make it economical. But drillers learned how to increase the number of cracks in the rock and use different chemicals to free up oil at low cost.

“We’ve completely transformed the natural gas industry, and I wouldn’t be surprised if we transform the oil business in the next few years too,” says Aubrey McClendon, chief executive of Chesapeake Energy, which is using the technique.

Petroleum engineers first used the method in 2007 to unlock oil from a 25,000-square-mile formation under North Dakota and Montana known as the Bakken. Production there rose 50 percent in just the past year, to 458,000 barrels a day, according to Bentek Energy, an energy analysis firm.

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Enter the Dragon- first published March 29, 2005

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March 2005 Article:

Kudlow’s Guest Commentary:


Enter the Dragon – New Dynamics in the Oil Market

By Tom Nugent and Warren Mosler

Traditionally, the hedgers and speculators have ruled the commodity
markets. But now a new behemoth has stepped in- the institutional ‘long
only,’ ‘real money,’ fund manager, who has incorporated indirect ownership
of raw commodities as an ‘asset class.’ Yes, there are very large commercial
hedgers, and there are very large hedge funds who are speculators, but this
new entrant with $ trillions of assets under management is changing the
landscape.

In a recent Dow Jones Newswires article by Spencer Jakab, entitled
“US Pension Funds Dip Toe into Commodities, Roil Waters” the author
presents his research into the prospective impact of direct investor
involvement in commodities:

“…the advent of new funds that have allowed pension trustees to buy
a basket of commodities without dabbling in futures themselves, has
unleashed a torrent of money — an estimated $50 billion of flows into
indextracking funds in the last two years alone, with estimates of
another $50 billion on the way in 2005.”

What makes these funds qualitatively different is that they buy and,
for all practical purposes, never sell. In fact, most of them continue to net
buy an asset class as a percent of their total assets, which means as their
financial assets grow over time they buy and hold more and more
commodities. And this is exactly what the crude oil markets are telling us.
Even as inventories continue to grow well beyond commercial demand, the
price continues to rise, as pension funds continue to buy and hoard
inventory. And, if allowed to continue, this building inventory will grow
indefinitely and NEVER be used! Yes, price is still a matter of ‘supply and
demand,’ but in this case the demand is to hoard- continuously buy and
store, and NEVER sell.

At the macro level, our own pension funds are buying crude oil to put
away forever, by bidding up the price and depriving us FOREVER from using
the crude oil they purchase. This is truly a bizarre set of circumstances
at the macro level, while it makes perfect sense at the micro level. It is a
classic and colossal case of failure of institutional structure to serve a viable
public purpose.


To make matters worse, this monster has staggering geopolitical
consequences that are currently being played out. Hopefully essays on this
developing story will trigger more of the same that will enlighten our
leadership to these new forces in motion. But be prepared for things to get
much worse before they get better.

*Thomas E. Nugent is executive vice president and chief investment officer of
PlanMember Advisors, Inc. and chief investment officer for Victoria Capital
Management, Inc.

*Warren Mosler is a principal of Valance Co. and associate fellow at the Cambridge
Centre for Economic and Public Policy in the United Kingdom.

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Pre Christmas update

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The good news is the US budget deficit still looks to be plenty large to support modest top line growth.

And as the deficit continuously adds to incomes and savings, the financial burdens ratios continue to fall, and the stage is set for a ‘borrow to spend’, ‘get a job buy a car’, ‘it’s cheaper to own than to rent’ good old fashioned credit expansion.

But most all of that good news may already be discounted by the higher term structure of interest rates and the latest stock market rally.

And there are troubling near term and medium term risks out there that don’t seem at all priced in.

The rise in crude prices is particularly troubling.

Net demand isn’t up, and Saudi production remains relatively low.

So the Saudis are supporting higher prices for another reason. Maybe it’s the wiki leaks, or maybe they just had a bad night in London.

No way to tell, but they are hiking prices, and there’s no way to tell when they will stop.

Crude prices are already up enough to be a substantial tax on US consumers that has probably more than offset whatever aggregate demand might have been added by the latest tax package.

Might explain the weaker than expected holiday retail sales?

Congress will soon have a deficit terrorist majority, with many pledged to a balanced budget amendment.

And the world seems to be leaning towards fiscal tightening pretty much everywhere.

The unemployment benefits program has been extended but benefits still expire after 99 weeks, and less in many states.

Net state spending continues to decline as state and local govs continue to reduce their deficits and capital expenditures.

Catchup in the funding of unfunded pension liabilities will continue to be a drag on demand.

A federal pay freeze has been proposed.

The Fed’s 0 rate policy and qe continue to reduce net interest income earned by the economy.

Bank regulators continue to impose policies that work against small bank lending.

Seems some income has likely been accelerated into this quarter from next year over prior concerns of taxes rising, distorting q4 earnings to the upside and maybe lowering q1 earnings a bit?

Euro zone muddles through with very weak domestic demand, and curves perhaps flattening as markets start to believe the ECB will fund it all indefinitely?

China slows as a result of fighting inflation?

Same with Brazil?

Maybe India as well?

Commodity price slump with demand flattening?

Fed low forever?

Stocks in a long term trading range like Japan?

US term structure of interest rates gradually flattens to Japan like levels?

Relatively weak demand gradually brings on alternatives to over priced crude?

Merry Christmas!!!

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Higher oil prices

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The last I saw domestic gasoline consumption has been looking modestly higher, even as prices are up.
Here’s how I see how that works out:

Assumptions:

1. The US bill for imported crude goes up and consumption doesn’t fall.

2. US consumers have less to spend on other things.

two possibilities:

A) Iran and Saudia Arabia use their incremental winnings to buy US jets and nuclear reactors from US companies.
a) US jobs and paychecks in jets and nukes business increase by the same amount as the oil price hike, so
b) US domestic consumption remains constant.

Summary of results:

More US people working more hours and consuming the same in total.
As a whole that’s a negative outcome.

More exports for the same amount of imports.
Also a negative- declining real terms of trade.

It’s a case of ‘looks good’ (a few more jobs, exports up)
but feels bad (working harder for the same consumption).

Other possibility:

B) Iran and Saudi Arabia don’t spend the dollars
a) Domestic (non oil) consumption falls, so
b) Output and employment falls

This is a case of looks bad and feels even worse.

What actually happens seems to be somewhere in between?
Crude prices up, exports up, and jobs flat.

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