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Trading Lessons

Libyan Oil Is A Red Herring: Unless The Saudis Have a Sulk…Or Worse!

Commodities / Crude Oil Mar 01, 2011 - 04:50 AM GMT

By: Andrew_Butter

Commodities

Best Financial Markets Analysis ArticleAccording to dispatches the recent events shut-down 75% of Libya’s oil exports. If the situation deteriorates into a full blown civil war then the output could dwindle to nothing.

On top of that, when the UN Security Council starts talking about sanctions; you know you are in for a long haul. What that really means is whilst they “disapprove” they won’t do anything of any practical value to help resolve the violence; case-in-point Iran; which has had sanctions in one form or another for thirty years; and look what that “achieved”.


Part of the problem is that no-one (at least not in any place nice), wants to have Gaddafi, so the sewer-rat has so where to turn and he has his back against the wall, and rats are always dangerous in such circumstances. Oh well perhaps Berlusconi will oblige, or perhaps those two best-buddies can trot off hand in hand to some place with a surplus of empty “luxury” real estate, plenty of prostitutes, and a relaxed attitude to all-cash transactions? There you go Muammar, just slip me a couple of million (mate) and I’ll set the whole thing up for you.

Come to think of it, the worst thing the U.N. could have done was go after Gaddafi’s money BEFORE he got out. Now I’m going to have to ask for hard cash to deliver my services (small denominations please).

But aside from all that, could this be the end of the world as we know it? Will oil prices shoot up to $200 a barrel (WTI), and will America have to find (i.e. borrow), an extra $250 billion a year of foreign exchange just so that the lights stay on?

Hardly, or if they do, it will be nothing to do with Libya.

Round numbers Libya produces (produced) about 1.5 million barrels a day of oil which represents about 2% of what is currently being pumped worldwide.

Lose that “colossal” source of supply, and if everything else is equal; then according to the most reliable (and fiendishly complex) supply/demand model ever known to mankind; (FOOT=3.33% x TOAD/OIK), a loss of 2% of supply will jack up the price of WTI by a “terrifying”  $1.7 a barrel.

http://www.marketoracle.co.uk/Article24849.html

That’s about how much any self-respecting “God’s Worker” can manipulate the price over lunch, (up-or-down, same difference).

Sure $98 WTI and counting is 15% over the “fundamental”, at least the one determined by the principles of Parasite Economics. That’s the one about how much “milk” you can squeeze out of Daisy before she starts to MOO really loud and then tries to  kick over the bucket. But $98 is just speculation and it’s nothing to do with the supply/demand dynamics (although that doesn’t mean it will stop at that price).

http://www.marketoracle.co.uk/Article10998.html

BUT!

The real problem may be that the Saudis might be; let’s just say….a mite “displeased” by the trajectory of the recent (and not so recent) turn of events.

FIRST the Americans invaded Iraq and installed (horror) an approximation of a “Western-Style-Democracy”. Which is exactly what Ayatollah Sayyed Ruhollah Mostafavi Moosavi Khomeini was trying to do a quarter of a century ago; so that what are essentially ethnic Iranians could take over Iraq, which they now have.

THEN America refused to “cut of the head of the (Iranian) Serpent”, (well that’s what Wiki-leaks said they said).

THEN they threatened that if the Egyptian army opened fire on civilian protesters, they would cut off the $15 billion a year they had been paying to prop up the said army. In that regard, you have to ask yourself, is there any POINT in a megalomaniac despot having an army at all, if they won’t shoot civilians when push comes to shove?

THEN…the coup-de-whatever, to cap it all, some “loose cannons” started hinting rude things about the way Bahrain is governed. And even worse, “someone” obliquely suggested that it might be a good idea to have another one of those darn “Western-Style-Democracies” over there; in which case the “essentially” ethnic Iranians would take over too, just like they did in Iraq.

No one has been so impolite as to even hint that the Saudis might be “better-off” with a “Western-Style-Democracy” (as in Tony Blair’s famous line “We (the Royal “We”), are better-off without Saddam Hussein”). Although the penny has started to drop in some quarters where the pennies tends to drop last, that there might be a latent potential source of “instability” inside the bosom of the “fairy-godmother-of-last-resort”, who, until recently could be relied on to make sure oil prices were kept “fair”.

It (Saudi Arabia) has a Shiite minority estimated at between 10 percent and 15 percent of the population, according to Human Rights Watch. Most live in the Eastern Province, where state-owned Saudi oil company Saudi ARAMCO is based, and in which they constitute 75 percent of the population

http://www.businessweek.com/news/...

Actually if you extrapolate from the GCC Demographic Data-Book that 10% to 15% is more like 20%.

That’s not an “estimate”, that’s based on a study commissioned by Unilever (for market research) and was once the definitive guide to the Saudi population structure, which was then (and still is) TOP SECRET.

But you can work it out by births & death statistics (reliable) plus large-sample random dialling telephone research (funny how if you use a sweet-talking Yemini girl to do that you get a 95% hit rate on unsolicited calls, and if the respondent is asleep they will often call her back later).

But that’s all bye-the-bye, the big story is that this time last year the Saudi’s were saying that $75 WTI was “fair”. More recently the whispers have been around the $100 mark, although they promised to “act” if things got out of hand. Yet last month Saudi pumped 2% less oil than the month before that.

Perhaps it’s time for some people (who shall remain nameless), to show a little bit more “respect”, if they want to pay a “fair” price, for oil?

Or perhaps it’s worse than that?

There have been some malicious and totally unfounded rumours flying about, of late (under the “cloak” as one might say), that Saudi Arabia doesn’t actually have the capacity to make sure that the price of oil is “fair”, if push comes to shove.

Of course it’s insane to even speculate on whether America’s most favoured friend would be putting out porky pies on such a sensitive issue, just so that they got the respect they deserved.

But what if; what if the capability to “make things “fair”” was just one more mirage? In that case the “fair” value of oil would be how much it would cost, in today’s money, to bring in the 20 million to 30 million barrels a day of “yet-to-be-discovered” oil, that the IEA say will need to be discovered over the next five to ten years.

That’s over $150 a barrel (WTI).

Interesting times!

Of course all bets are off if the Saudi’s decide that $150 WTI is “fair”.

By Andrew Butter

Twenty years doing market analysis and valuations for investors in the Middle East, USA, and Europe; currently writing a book about BubbleOmics. Andrew Butter is managing partner of ABMC, an investment advisory firm, based in Dubai ( hbutter@eim.ae ), that he setup in 1999, and is has been involved advising on large scale real estate investments, mainly in Dubai.

© 2011 Copyright Andrew Butter- All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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