Tag Archives: Oil

Early Holiday Cheer…

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As discussed last week, the latest euro package just announced is unravelling quickly as markets again realize there is no actual substance, and no operational path with regards to carrying any of it out. So things will deteriorate as described until markets again force further ‘action.’

At the same time, the austerity continues to weaken the euro economies, with Q4 potentially going negative, driving deficits that much higher in the process.

The ‘answer’ remains the ECB writing the check, which they’ve sort of seemed to recognize, but they remain (errantly) concerned that reliance on the ECB is inherently inflationary, and thereby violates the ECB’s mandate for price stability. So it won’t happen until things again get bad enough to force it to happen.

The catastrophic risk remains a failure, when push comes to shove, to allow the ECB to write the check as they have been doing to allow it all to muddle through.

The range of outcomes couldn’t be wider. Write the check and not much happens, don’t write the check and there is unthinkable collapse.

Meanwhile, the 1% running the US looks to be trying to take the lead in the global austerity race to the bottom as the Democrats in the super committee on deficit reduction have led off by proposing a $4 trillion deficit reduction package.

Toss in West Texas crude prices heading to Brent levels of about $110/barrel as the strategic petroleum reserve release winds down over the next three weeks and the looks to me like the US consumer crawls back into his foxhole just in time for the holiday season.

Not to mention Japan now darning the torpedoes and buying dollars to take back a bit of the export market they lost by kowtowing to former tsy sec paulson’s demands to not be a ‘currency manipulator’ in the context of still weakening global demand in general.

The number one threat to world order remains a failure to sustain demand. The good news is sustaining aggregate demand is a simple matter once the monetary system is understood. The bad news is there seems to be no one of authority who doesn’t have it all backwards.

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Crude Oil Update

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Still seems to me that the idea that WTI appreciates to Brent as the Strategic Petroleum Reserve release winds down over the next few weeks is playing out as previously discussed. The WTI discount depends on a serious glut condition persisting, and the wind down of the approx 3.8 million barrels a week being delivered from the strategic petroleum reserve will work to reduce the glut by that amount.

If so, WTI is marching towards $110/barrel which seems to me could trigger substantial market reactions.

And about the same time the super committee deficit reduction talks will be in full swing, euro financing stresses elevated, exacerbated by confirmation of the 0 gdp growth forecasts hit the headlines, and further slowdown news from China complicating things as well.

The ‘answer’ remains as simple as it is further away from political reality than ever, even though the right policy responses couldn’t be more attractive to both sides:

The US budget deficit is too small.

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Saudis to pump 10 million bpd

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The Saudis don’t sell in the spot markets, they only post prices to refiners and then take orders at those prices.

That is, they post price and let quantity vary.

So the only way they could definitively get to 10 million bpd would be to change policy and sell in the spot market, which would let loose a downward price spiral until some other producer decided to cut production to stop the fall.

As always, it’s their political decision, and no telling what they might actually do.

Saudi Shows Who’s Boss, to Pump 10 Million Barrels Per Day

June 10 (Reuters) — Saudi Arabia will raise output to 10 million barrels day in July, Saudi newspaper al-Hayat reported on Friday, as Riyadh goes it alone in unilaterally pumping more outside OPEC policy.

Citing OPEC and industry officials, the newspaper said output would rise from 8.8 million bpd in May. There was no immediate independent verification of the story.

The report suggests Riyadh is asserting its authority over fellow members of the Organization of the Petroleum Exporting Countries after it failed to convince the 12-member cartel to lift output at an acrimonious meeting in Vienna on Wednesday.

“The Saudi intention is to show that they cannot be pushed around,” said Middle East energy analyst Sam Ciszuk at IHS. “Either OPEC follows the Saudi lead or they will have problems.”

A proposal by Saudi and its Gulf Arab allies the UAE and Kuwait to lift OPEC production was blocked by seven producers including Iran, Venezuela and Algeria.

The two sides blamed each other for the breakdown in talks. Saudi Oil Minister Ali ali-Naimi called those opposed to the deal obstinate. Iran’s OPEC governor Mohammad Ali Khatibi responded by saying Riyadh had been overly-influenced by U.S.-led consumer country demands for cheaper fuel.

“The hawks in OPEC called their bluff and now it is up to Riyadh to show that they were not bluffing — that they will go ahead unilaterally if pushed,” said Cizsuk.

Saudi Arabia has not pumped 10 million bpd for at least a decade, according to Reuters data, production having peaked at 9.7 million bpd in July 2008 after prices hit a record $147 a barrel. It is the only oil producer inside or outside OPEC with any significant spare capacity.

Asked in Vienna on Thursday whether Saudi would reach 10 million bpd Naimi said: “Just send the customers, don’t worry about the volumes.”

Gulf delegates said Riyadh was planning to pump an average 9.5-9.7 million bpd in June.

Saudi is already offering more crude to refiners in Asia, which, led by China, is driving a global rise in oil consumption.

Forecasts from OPEC headquarters show demand will increase about 1.7 million bpd in the second half of the year from recent cartel output of about 29 million bpd.

Brent crude rose to a 5-week high of $120 a barrel after the OPEC talks broke down. Prices eased after Friday’s Saudi news, last dipping 63 cents to trade near $118.94 a barrel.

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OPEC indecision of no consequence

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It doesn’t matter what OPEC decides with regard to increases.
The only ones with excess capacity, for all practical purposes, are Saudis.
The others have always pumped all they could and let the Saudis be the swing producer.

Historically, the hard part has been to get anyone other than the Saudis to cut production when the Saudis needed help to keep a floor under prices. Invariably the others would cheat and produce to capacity, letting the Saudis carry the burden of reduced sales.

In any case, the Saudis will continue to post their prices to their refiners and fill any and all orders at those posted prices.
And the rest of OPEC will likely keep producing at near max levels.

And most expect Lybia to be back on line in a few weeks or so, in which case Saudi production will ‘automatically’ fall back.

OPEC Talks Break Down, No Deal to Lift Oil Supply

June 8 (Reuters) — OPEC talks broke down on Wednesday without an agreement to raise output after Saudi Arabia failed to convince the cartel to lift production.

Secretary General Abdullah El-Badri said the effective decision was no change in policy and that OPEC hoped to meet again in three months time. No date has been set for another meeting.

“Unfortunately we are unable to reach a consensus to reduce or raise production,” El-Badri told reporters.

Gulf Arab delegates said Iran, Venezuela and Algeria refused to consider an output increase. Non Gulf delegates said Saudi Arabia had proposed an increase on top of April supplies that was too high for them to contemplate.

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in case there is any doubt about how the price of oil is set

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OPEC (and mainly the Saudis) is the only entity with excess capacity, so it is necessarily price setter. Specifically, they post prices to their refiners and who order all they want at that price. They don’t sell in the spot markets. See highlighted text below. ‘Balancing supply and demand’ is price setting.

The higher prices, particularly in euro, are functioning as a drag on the oil importing economies and also starting to show up in their inflation reports, complicating the decision process of the world’s central bankers. The combination of low aggregate demand and cost push price pressures is always problematic with regards to interest rate policy.

Urals Discount Widens as Russia Boosts Output: Energy Markets

By Christian Schmollinger

May 4 (Bloomberg) — Russian and Mexican oil is trading at growing discounts to U.S. and U.K. crude benchmarks as production by nations outside OPEC reaches a record.

Russia’s Urals for loading in the Mediterranean trades at $2.22 a barrel less than Britain’s Brent crude, compared with a premium of 3 cents a barrel on July 24. The discount between Mexico’s Maya grade and West Texas Intermediate was at $10.82 a barrel on April 30, near the widest in 17 months.

Rising output from Russia and Mexico will push non-OPEC supplies up 1 percent this year to an average 52 million barrels a day, according to the International Energy Agency. At the same time, quota violations among members of the Organization of Petroleum Exporting Countries means global production will increase at a time when the need for oil is diminishing.

“Inventories are growing and non-OPEC supply is expanding and OPEC continues to leak,” said Victor Shum, a senior principal at consultants Purvin & Gertz Inc. in Singapore. “Market bulls should be concerned about the supply overhang.”

The U.S., Mexico, China and Russia have been responsible for most of the growth, boosting output for the past five consecutive quarters, according to an April 27 research note by Barclays Capital. Non-OPEC production reached a record high 49.6 million barrels a day in March, according to data from Energy Intelligence Group.
OPEC Less Needed

The IEA lowered its demand estimate for OPEC, which produces 40 percent of the world’s oil, by 200,000 barrels day to an average of 28.8 million barrels a day to balance supply and demand. The group currently pumps 29.2 million a day, according to Bloomberg data.

OPEC’s spare capacity levels have ballooned to 5.645 million barrels a day in April after falling as low as 2 million in July 2008, when crude hit a record $147.27. The group can produce a total of 34.84 million a day and may add 12 million barrels by 2015 by opening 140 new projects, Secretary- General Abdalla El-Badri said in February.

Russia, the world’s largest oil producer, pumped 10.14 million barrels a day in March, a post-Soviet Union high, according to official data. Mexico exported 1.33 million a day in March, the highest since January 2009, according to data from Petroleos Mexicanos.

U.S. production surged during 2009 and into this year as output returned from post-Hurricane Ike shut-ins in September 2008. The country has pumped an average of 4.482 million barrels a day in the first four months of 2010, up 6.6 percent from the average in 2006 and 2007.

Price Pressure

“If the positive momentum carries into the rest of 2010 and starts filtering through non-OPEC output views for 2011, this could result in a more significant source of downward price pressure along the curve,” said Barclays Capital analyst Costanza Jacazio in the note.

Crude oil for June delivery was at $85.94 a barrel at 10:28 a.m. Singapore time in after-hours electronic trading on the New York Mercantile Exchange, retreating from yesterday’s intraday peak of $87.15, the highest since Oct. 9, 2008.

“The pricing has been driven by the expectations of a tighter market over the long-term and the market has put aside the near-term supply overhang,” said Purvin & Gertz’s Shum.
The non-OPEC “momentum raises the crucial question of whether or not it is sustainable,” said Barclays. “If it fades quickly, as we expect, this will likely have limited implications for oil balances and prices, as OPEC stands in a position to handle a short-term rise in non-OPEC output by simply postponing any further increase in volumes.”

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Q3 Update

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With quarter end now behind us,
I am watching for signs of:

The gold bubble bursting
Equity sell off after quarter end window dressing
Crude leveling off after quarter end window dressing
Dollar strength with lingering Eurozone problems and global concern about losing US market share
Post clunker and post first time home buyer credits softening those series
BMA and rates curves flattening
Accelerating M and A
More political unrest as real terms of trade continue to deteriorate


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Contango shrinks- Shell sells by the sea shore

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OPEC cuts starting to bite.

Saudis back in control of price as excess inventory dissipates.

Shell Sells Oil Cargoes, Phibro Tanker Leaves Orkney

by Alexander Kwiatowski

Jan 27 (Bloomberg) — Royal Dutch Shell Plc sold a cargo of crude stored off the U.K. and a vessel hired by Citigroup Inc.’s Phibro LLC left its anchorage in Scotland for the U.S. as the incentive to keep oil in tankers disappears.

Shell sold 600,000 barrels of North Sea Forties crude for delivery in mid-February at Scapa Flow near Scotland’s Orkney Islands to oil trader Vitol Group yesterday, the companies said. The cargo, already on board the supertanker Oliva, has been anchored off the U.K. coast since at least December, according to Bloomberg vessel tracking data.

Oil companies and traders have stored as much as 80 million barrels of crude on tankers

That’s not quite one day’s world consumption of crude.

as the so-called contango, a market where buyers pay more for supplies later in the year than now, allowed them to profit from storing crude. The incentive to store oil on vessels is shrinking as the spread between first- and 12th month crude narrows to about $10 a barrel from $17 in early December.


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Re: Mike Masters on oil on CBS

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(email exchange)

>   
>   On Mon, Jan 12, 2009 at 11:49 AM, Russell
>   wrote:
>   
>   Very compelling argument. Still believe it is the
>   Saudis controlling price?
>   

Has to be, within a range of net demand.

Notice their ‘production increase’ right before the big sell off in July?

>   
>   Makes sense: I remember the Kuwait oil
>   minister saying that he could not explain $140
>   oil. He was not seeing any new demand to
>   drive up price. Everyone said he was lying.
>   
>   A friend was telling me that there was no
>   shortage. In March he was trying to find
>   storage along the Mississippi River. There was
>   no. All tanks full.
>   

Right, never has been a shortage. Just price setting. And the price setters were happy to accommodate the run up until it cut demand, as they were running out of capacity as well.

>   
>   So today we have global demand declining 1
>   million barrels per day.
>   

Right, no big deal. Nothing OPEC hasn’t already adjusted for.

The problem has been the inventory liquidation as prices fell. No telling when that has run it’s course. Futures markets are saying not yet, but getting closer to the end.

The Masters Inventory Liquidation is probably the largest inventory liquidation of all time.

Hopefully it leads to pension funds not being allowed to use passive commodity strategies as investments, but not sure it won’t all come back. There’s still a lot of it going on. I’d vote to have it outlawed.

>   
>   Supply is being cut back. We have the Chinese
>   economy tanking. So are we looking at $25 oil?
>   

Not impossible until the inventory liquidation has run its course. It took about this long in 2006. I didn’t think it would last that long this time, but the liquidation has been a lot larger than back then.

>   
>   If so, we are going to see a violent world at a
>   time of global economic weakness. Russian is
>   struggling, so is Venezuela and Iran. Potential
>   uprisings there.
>   

Yes.

>   
>   Here is the USA it is a true blessing. Without
>   lower oil prices, we would be a serious
>   economic quandary.
>   

It’s already pretty serious! While consumers are being helped, the energy related companies have gotten hurt and helped bring stocks down. Lower crude also makes stronger/USD harder to get overseas, so they stop buying our stuff like they were before. Domestics should pick up that slack as their oil bills go down, but there’s a big lag due to rising unemployment general economic disruption.

>   
>   Who said markets were understandable let
>   alone logical.
>   

Can’t remember. Probably me!


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Re: US DOE Text: To Resume Filling SPR ‘To Capacity

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(email exchange)

Right, just as prices are moving up anyway?

Gasoline demand is barely down now, and seems to have gone up over the last month or so?

Funds are buying/rebalancing to keep their allocation at a given % as crude underperformed last year?

OPEC cuts are real as Saudis move to regain control of price as the Masters Inventory Liquidation (finally!) winds down?

The contango in crude is moderating some indicating undesired inventory is fading?

Lower prices have also reduced prospects of new, high cost, supply coming online?

>   
>   On Fri, Jan 2, 2009 at 11:24 PM, Russell wrote:
>   
>   Saw that today. Sure took their time. I think it
>   will take oil prices higher.
>   

Thanks, was wondering when they’d get around to it.

It only has room for another 25 million barrels, however,

>   
>   On Fri, Jan 2, 2009 at 3:32 PM, EDWARD
>   wrote:
>   

Congressional Prohibition on Filling Strategic Reserve Ran Out

WASHINGTON (MMNI) – The following is an announcement by the U.S. Department of Energy published Friday:

Oil Acquisition Slated for 2009

WASHINGTON, DC — The U.S. Department of Energy today announced
that it plans to take advantage of the recent large decline in crude oil
prices, and has issued a solicitation to purchase approximately 12 million barrels of crude oil for the nation’s Strategic Petroleum Reserve (SPR) to replenish SPR supplies sold following hurricanes Katrina and Rita in 2005.

In addition, DOE is also moving forward with three other SPR
acquisition and/or fill activities in order to fill the SPR as Congress
directed in the 2005 Energy Policy Act (EPAct): refiner repayments of
SPR emergency oil releases following Hurricanes Gustav and Ike; the
delivery of deferred royalty-in-kind (RIK) oil; and the solicitation of
new RIK deliveries in the spring of 2009.

About the SPR:

Currently, the SPR has a storage capacity of 727 million barrels and an
inventory of 702 million barrels (97%) stored in the SPR’s underground
salt caverns located along the Gulf Coast of Louisiana and Texas.
Activities to resume SPR fill are taken in accordance with the
provisions of the Energy Policy Act (EPAct) of 2005, which directs that
DOE fill the SPR to its authorized capacity of one billion barrels, and
advances the President’s agenda to increase the Nation’s energy
security.


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