Tag Archives: Oil

May 2008 Saudi oil output up

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2008-06-06 Saudi Oil Production

Saudi Oil Production

This does not bode well for oil prices.

Increased Saudi output means demand has increased at current prices, and the Saudis (and Russians, etc.) remain firmly positioned as ‘price setter’.

The Saudis continue to have the only excess supply, with about 1.5 million bpd excess capacity.

The Mike Masters sell off seems to be over. Actual legislative effort could cause a subsequent temporary sell off but will not dislodge the Saudis from total control.

The only thing that can dislodge their ability to set price is a net supply response in excess of 5 million bpd, which is highly unlikely in the near future.

Any efforts to increase aggregate demand to support growth will also function to support prices.

My twin themes remain:

  1. Weakness (low domestic demand supported by exports) as GDP muddles through. No recession yet, but could happen down the road should exports falter.
  2. Higher prices as Saudis remain as price setter, continuously hiking prices, and inflation continues to march higher, and our real terms of trade and standard of living continues to deteriorate.

‘Solutions’ remain:

  1. pluggable hybrids – this switches demand from crude to coal, and dislodges the Saudis from being price setter.
  2. dropping the national speed limit to 30 mph for private ground transportation. (Just heard JKG dropped the national limit to 35 mph during WWII)

Biofuels continue to link crude to food, and the political response to food shortages and markets allocating life by price is likely to continue to be ‘cash’ payments regardless of inflationary consequences. The body count is likely to exceed that of WWII over the next few years and is probably already in the millions.


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Reuters: Saudi Arabia Pumps Extra Oil to Match Demand

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Saudi Pumps More Oil

(Reuters) Top oil exporter Saudi Arabia has boosted supply to help meet the world’s need for fuel and may further increase output later if needed, a senior Gulf OPEC source said on Wednesday.

Yes, they set price and then sell all that’s demanded at their price. The fact that they are pumping more means demand has increased at current prices.

OPEC’s 13 members, especially core Gulf producers, are taking their output cues from global oil demand rather than sticking to production targets, said the source familiar with Saudi thinking.

“Whenever there is demand it will be met by OPEC,” he said. “The majority of OPEC producers definitely don’t like this high oil price because it is neither in their interest nor in the interest of the global economy, and it’s especially painful for the developing world.”

U.S. crude hit a record above $135 a barrel last week, prompting consumer countries such as the United States to renew their plea for more oil from the Organization of the Petroleum Exporting Countries.

OPEC’s leading producer Saudi Arabia has been adjusting supply to match demand since August last year when prices were around $60 and it was pumping around half a million barrels per day (bpd) less than now.

Saudi Oil Minister Ali al-Naimi said earlier this month output would rise by 300,000 bpd and hit 9.45 million bpd in June. Riyadh is pumping about 9.1 million bpd this month, the source said.

Global demand is likely to increase this year by about one million bpd, with demand picking up in the third quarter, the senior Gulf OPEC source said, which explains the current Saudi production increase.

Last September OPEC agreed a 500,000 bpd increase in its formal output targets, with Saudi Arabia providing the greatest share. The group holds its next official conference on Sept. 9 in Vienna.

That’s a long way off.

Most OPEC members would like to see lower prices, but there was little they could do as the market was responding to factors beyond supply and demand, the source said. If those fundamentals dictated the price, oil would cost around $60 to $70 a barrel, the source said.

And the pundits believe this ‘source’.

The world oil market balance is similar to that in 1999, when the price was less than $20, he added.

The oil market has risen in large part because of increasing doubt over production capacity and global oil reserves, the OPEC source said.

That concern was unwarranted, he said, but helped to explain a roughly $5 premium for crude prices for delivery in 2016 compared with the prompt contract now trading at about $126 a barrel.

A wave of investment activity has also been fueled by the weakness of the U.S. currency and lower U.S. interest rates, which adds to the appeal of dollar-denominated commodities.

“This big rush to oil futures is definitely leading to higher and higher prices,” he said. “So adding more or taking less oil from the market will not change the oil price since the sentiment of investors in the futures market is pushing for higher prices.”

Everything but the obvious: Saudis are swing producers, setting price and letting quantity adjust.


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Reuters: Congress passes bill to sue OPEC for antitrust violations

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Didn’t know this would be enforceable?

House passes bill to sue OPEC over oil prices

by Tom Doggett

(Reuters) The House of Representatives overwhelmingly approved legislation on Tuesday allowing the Justice Department to sue OPEC members for limiting oil supplies and working together to set crude prices, but the White House threatened to veto the measure.

The bill would subject OPEC oil producers, including Saudi Arabia, Iran and Venezuela, to the same antitrust laws that U.S. companies must follow.

The measure passed in a 324-84 vote, a big enough margin to override a presidential veto.

The legislation also creates a Justice Department task force to aggressively investigate gasoline price gouging and energy market manipulation.

“This bill guarantees that oil prices will reflect supply and demand economic rules, instead of wildly speculative and perhaps illegal activities,” said Democratic Rep. Steve Kagen of Wisconsin, who sponsored the legislation.

The lawmaker said Americans “are at the mercy” of OPEC for how much they pay for gasoline, which this week hit a record average of $3.79 a gallon.

The White House opposes the bill, saying that targeting OPEC investment in the United States as a source for damage awards “would likely spur retaliatory action against American interests in those countries and lead to a reduction in oil available to U.S. refiners.”


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Re: Sauding spending

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(an email exchange)

>
>   On Mon, Apr 21, 2008 at 9:23 AM, Scott wrote:
>
>   Backed by high oil prices, Saudi Arabia is embarking
>   on a massive spending program focused predominantly
>   on infrastructure projects. The value of announced
>   investment projects so far is $862 billion.
>

Thanks, looks like maybe they’ve figured it out as suspected (jack up price and spend the USD) which improves their real terms of trade while hurting ours and keeps US GDP higher to please policy makers who think it’s all a good thing.

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Changing Tides

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I’ve been thinking that when the Fed turns its attention to inflation it will find itself way behind that curve, which it is by any mainstream standard, and that the curve then gets negative from a year or two out as markets anticipate rate hikes followed by falling inflation and rate cuts.

Didn’t know exactly how it would get from here to there, how long it would take or exactly when it would happen.

I never thought the Fed would let it go this far. Especially Governor Kohn, who has been through this before in the 1970s with Burns, Miller, and Volcker. This FOMCs inflation tolerance lasted a lot longer than I expected, even with a weak economy and perceived systemic risk.

Won’t be long before the mainstream comes down hard on this FOMC for letting the inflation cat out of the bag with a high risk, untested, counter theory strategy of aggressively cutting into a triple negative supply shock. The mainstream will see it as a ‘hail Mary’ move. If it works, fine, if not it was a foolish error with a major price to pay to fix it.

Maybe they just got what will turn out to be overconfident in their inflation fighting ability. Kind of a ‘we know how to do that and can do it anytime’ attitude.

Wrong. They will soon find out it is not so easy.

Maybe they got confused and saw the tail risk as that of the gold standard era when there were real supply side constraints to money to deal with.

Also, they probably blamed the whole 1970’s thing on labor unions; so, maybe they got blind sided this time because they thought without unions wages would be ‘well contained’ and therefore there would be no inflation.

Wrong on that score as well. It was about oil before, and it is about oil now.

And the fact is, they have no tools for fighting inflation. They think they do (hiking rates), but higher rates just make it worse by raising costs and jacking up rentier incomes. (Incomes of savers who do not work or produce = more demand and no supply)

The inflation broke in the early 80’s only because of a supply response of about 15 million barrels of crude per day that buried OPEC and caused prices to collapse for almost 20 years. (And even during the 20 years of low oil prices and falling imported prices inflation still averaged around 3%.)

That kind of supply response is not going to happen in the near future. I expect the Saudis to keep hiking and inflation to keep getting worse no matter what the Fed does. It is payback time for them from being humiliated in the 1980s, and they are also at ideological war with us whether we know it or not.

Markets might have a false start or two with the interest rate response and flattening curve, just to not make it too easy.

Also, as before, there could be an equity pullback when it is sensed the Fed is going to seriously fight inflation with hikes designed to keep a sufficient output gap to bring inflation increases down.

And along the way everything goes up, including housing prices, during a major cost push inflation. Even with low demand. Just look at all the weak emerging market nations that have had major inflations with weak demand, high rates, etc. etc.

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Re: Pension fund passive commodity strategies

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(an interoffice email)

>
>   On Wed, Apr 9, 2008 at 4:05 PM, Pat wrote:
>
>   What about the continued allocation increases from non-end
>   users of commodities? From what I’ve read allocations by
>   pensions have gone higher even with the rising prices as well
>   as a whole host of new entrants (ETFs, HF’s, etc…) Are these
>   compounding the problem or are they the root of the
>   commodity price inflation?
>
>

passive commodities are part of the landscape for sure:

  1. put upward pressure on competitive commodity spot prices
  2. put downward pressure on the $
  3. add to gdp
  4. in general, help ‘monetize’ saudi crude price hikes
  5. put upward pressure on crude futures
  6. serves no public purpose
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Bloomberg: Russian Oil Fund Should Be Tapped for Pensions

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While relatively small, investing in pensions vs. ‘spending’ reduces aggregate demand. And ‘liquidity’ for the banking sector can readily be increased independently of these funds as needed.

Russian Oil Fund Should Be Tapped for Pensions, Kudrin Says

by Maria Levitov and Alex Nicholson

(Bloomberg) Russia’s Finance Minister Alexei Kudrin said the country’s oil fund should be used for financing pensions rather than boosting liquidity in the banking sector.

“The fund should not ensure liquidity. This is not its aim,” Kudrin said in Moscow today. Investing the $33 billion National Wellbeing Fund abroad and using returns to finance pensions is “the only correct way to use the National Wellbeing Fund,” he said. The government would always help to restore liquidity if this was required, he said.

Russia will eventually invest a small portion of the National Wellbeing Fund on the domestic market, once it becomes more stable and less dependent on oil prices, Kudrin said. Five percent of the fund may be invested in Russian securities “in the future” and that amount could gradually be increased he said.

The fund will not be invested in the Russian market this year, he said.

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Central bank debate: Is it inflation or deflation?

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Here’s how the inflation can persist indefinitely:

  1. In addition to the India/China type story for resource demand, this time around nominal demand for commodities is also coming from our own pension funds who are shifting more of their financial assets to passive commodity strategies.

    Pension funds contributions have traditionally been invested primarily in financial assets, making them ‘unspent income’ and therefore ‘demand leakages.’ Other demand leakages include IRAs (individual retirement accounts), corporate reserve funds, and other income that goes ‘unspent’ on goods and services.

    Supporting these demand leakages are all kinds of institutional structure, but primarily tax incentives designed to increase ‘savings’.

    These come about due to the ‘innocent fraud’ that savings is necessary for investment, a throwback to the gold standard days of loanable funds and the like.

    A total of perhaps $20 trillion of this ‘unspent income’ has accumulated in the various US retirement funds and reserves of all sorts.

    This has ‘made room’ for the government deficit spending we’ve done to not be particularly inflationary. In general terms, the goods and services that would have gone unsold each year due to our unspent income have instead been purchased by government deficit spending.

    But now that is changing, as a portion of that $20 trillion is being directed towards passive commodity strategies. While the nature of these allocations varies, a substantial portion is adding back the aggregate demand that would have otherwise stayed on the sidelines.

    That means a lot less government deficit spending might be needed to sustain high levels of demand than history indicates.

    And, of course, the allocations directly support commodity prices.
  1. We are faced with the same monopoly supplier/swing producer of crude oil as in the 1970’s.

    Back then the oil producers simply accumulated $ financial assets and were the source of a massive demand leakage that caused widespread recession in much of the world. And didn’t end until there was a supply response large enough to end the monopoly pricing power.

    But it did persist long enough for the ‘relative value story’ of rising crude prices to ‘turn into an inflation story’ as costs were passed through the various channels.

    And a general inflation combined with the supply response served to return the real terms of trade/real price of crude pretty much back to where they had been in the early 1970’s.
  1. This time around rather than ‘hoard’ excess oil revenues the producers seem to be spending the funds, as evidence by both the trillions being spent on public infrastructure as well as the A380’s being built for private use, and the boom in US exports- 13% increase last month.

    This results in increased exports from both the US and the Eurozone to the oil producing regions (including Texas) that supports US and Eurozone GDP/aggregate demand.

    At the macro level, it’s the reduced desire to accumulate $US financial assets that is manifested by increasing US exports.

    (This reduced desire comes from perceptions of monetary policy toward inflation, pension fund allocations away from $US financial assets, Paulson calling CBs who buy $US currency manipulators and outlaws, and ideological confrontation that keeps some oil producers from accumulating $US, etc. This all has weakened the $ to levels where it makes sense to buy US goods and services – the only way foreigners can reduce accumulations of $US is to spend them on US goods and services.)

    The channels are as follows:

    1. The price of crude is hiked continuously and the revenues are spent on imports of goods and services.
    2. This is further supported by an international desire to reduce accumulation of $US financial assets that lowers the $ to the point where accumulated $ are then spent on US goods and services.

    For the US this means the export channel is a source of inflation. Hence, the rapid rise in both exports and export prices along with a $ low enough for US goods and services (and real assets) to represent good value to to foreigners.

  1. This is not a pretty sight for the US. (Exports are a real cost to the US standard of living, imports a real benefit.)

    Real terms of trade are continually under negative pressure.

    The oil producers will always outbid domestic workers for their output as a point of logic.

    Real wages fall as consumers can find jobs but can’t earn enough to buy their own output which gets exported.

    Foreigners are also outbidding domestics for domestic assets including real estate and equity investments.
  1. The US lost a lot off aggregate demand when potential buyers with subprime credit no longer qualified for mortgages.

    Exports picked up the slack and GDP has muddled through.

    The Fed and Treasury have moved in an attempt to restore domestic demand. Interest rate cuts aren’t effective but the fiscal package will add to aggregate demand beginning in May.

    US export revenues will increasingly find their way to domestic aggregate demand, and housing will begin to add to GDP rather than subtract from it.

    Credit channels will adjust (bank lending gaining market share, municipalities returning to uninsured bond issuance, sellers ‘holding paper,’ etc.) and domestic income will continue to be leveraged though to a lesser degree than with the fraudulent subprime lending.

    Pension funds will continue to support demand with their allocations to passive commodity strategies and also directly support prices of commodities.
  1. Don’t know how the Fed responds – my guess is rate cuts turn to rate hikes as inflation rises, even with weak GDP.
  1. We may be in the first inning of this inflation story.

    Could be a strategy by the Saudis/Russians to permanently disable the west’s monetary system, shift real terms of trade, and shift world power.
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