Best of the Week
Most Popular
1. Market Decline Will Lead To Pension Collapse, USD Devaluation, And NWO - Raymond_Matison
2.Uber’s Nightmare Has Just Started - Stephen_McBride
3.Stock Market Crash Black Swan Event Set Up Sept 12th? - Brad_Gudgeon
4.GDow Stock Market Trend Forecast Update - Nadeem_Walayat
5.Gold Significant Correction Has Started - Clive_Maund
6.British Pound GBP vs Brexit Chaos Timeline - Nadeem_Walayat
7.Cameco Crash, Uranium Sector Won’t Catch a break - Richard_Mills
8.Recession 2020 Forecast : The New Risks & New Profits Of A Grand Experiment - Dan_Amerman
9.Gold When Global Insanity Prevails - Michael Ballanger
10.UK General Election Forecast 2019 - Betting Market Odds - Nadeem_Walayat
Last 7 days
Why Record-High Stock Prices Mean You Should Buy More - 20th Nov 19
This Invisible Company Powers Almost the Entire Finance Industry - 20th Nov 19
Zig-Zagging Gold Is Not Necessarily Bearish Gold - 20th Nov 19
Legal Status of Cannabis Seeds in the UK - 20th Nov 19
The Next Gold Rush Could Be About To Happen Here - 20th Nov 19
China's Grand Plan to Take Over the World - 19th Nov 19
Interest Rates Heading Zero or Negative to Prop Up Debt Bubble - 19th Nov 19
Plethora of Potential Financial Crisis Triggers - 19th Nov 19
Trade News Still Relevant? - 19th Nov 19
Comments on Catena Media Q3 Report 2019 - 19th Nov 19
Venezuela’s Hyperinflation Drags On For A Near Record—36 Months - 18th Nov 19
Intellectual Property as the New Guild System - 18th Nov 19
Gold Mining Stocks Q3’ 2019 Fundamentals - 18th Nov 19
The Best Way To Play The Coming Gold Boom - 18th Nov 19
What ECB’s Tiering Means for Gold - 17th Nov 19
DOJ Asked to Examine New Systemic Risk in Gold & Silver Markets - 17th Nov 19
Dow Jones Stock Market Cycle Update and are we there yet? - 17th Nov 19
When the Crude Oil Price Collapses Below $40 What Happens? PART III - 17th Nov 19
If History Repeats, Gold is Headed to $8,000 - 17th Nov 19
All You Need To Know About Cryptocurrency - 17th Nov 19
What happens To The Global Economy If Oil Collapses Below $40 – Part II - 15th Nov 19
America’s Exceptionalism’s Non-intervention Slide to Conquest, Empire - and Socialism - 15th Nov 19
Five Gold Charts to Contemplate as We Prepare for the New Year - 15th Nov 19
Best Gaming CPU Nov 2019 - Budget, Mid and High End PC System Processors - 15th Nov 19
Lend Money Without A Credit Check — Is That Possible? - 15th Nov 19
Gold and Silver Capitulation Time - 14th Nov 19
The Case for a Silver Price Rally - 14th Nov 19
What Happens To The Global Economy If the Oil Price Collapses Below $40 - 14th Nov 19
7 days of Free FX + Crypto Forecasts -- Join in - 14th Nov 19
How to Use Price Cycles and Profit as a Swing Trader – SPX, Bonds, Gold, Nat Gas - 13th Nov 19
Morrisons Throwing Thousands of Bonus More Points at Big Spend Shoppers - JACKPOT! - 13th Nov 19
What to Do NOW in Case of a Future Banking System Breakdown - 13th Nov 19
Why China is likely to remain the ‘world’s factory’ for some time to come - 13th Nov 19
Gold Price Breaks Down, Waving Good-bye to the 2019 Rally - 12th Nov 19
Fed Can't See the Bubbles Through the Lather - 12th Nov 19
Double 11 Record Sales Signal Strength of Chinese Consumption - 12th Nov 19
Welcome to the Zombie-land Of Oil, Gold and Stocks Investing – Part II - 12th Nov 19
Gold Retest Coming - 12th Nov 19
New Evidence Futures Markets Are Built for Manipulation - 12th Nov 19
Next 5 Year Future Proof Gaming PC Build Spec November 2019 - Ryzen 9 3900x, RTX 2080Ti... - 12th Nov 19

Market Oracle FREE Newsletter

$4 Billion Golden Oppoerunity

An Epic Energy Crunch, Global Crude Oil Demand Exceeds Production

Commodities / Crude Oil Jul 18, 2011 - 02:57 AM GMT

By: Puru_Saxena

Commodities

Best Financial Markets Analysis ArticleThe majority of the world’s developed economies are growing at a sluggish pace, yet the price of NYMEX crude is trading around US$100 per barrel.  Interestingly, the price of Brent Crude (the price most nations pay) is even higher!

You may recall that during the last oil spike in 2008, world governments blamed those wily speculators.  Therefore, in order to diminish speculation, the authorities banned leveraged ‘long’ oil exchange traded funds. 


It is notable that a few months ago, the price of NYMEX crude (once again) spiked to US$115 per barrel and this caused the politicians to panic.  This time around, the governments could not blame the speculators so, a few days ago, they decided to dump 60 million barrels of crude on the market from their strategic petroleum reserves.  This ‘oil pour’ created a lot of sensational headlines in the media and caused the price of crude to drop sharply.  However, this decline proved to be short-lived and the oil price bounced right back up again.

Political manipulation notwithstanding, the truth is that the fundamentals for petroleum are wildly bullish and all the governments put together will not succeed in suppressing the price of oil. According to the International Energy Agency, the world is likely to consume 89.3 million barrels of liquid fuels per day in 2011 (Figure 1) and in May, global production came in at 87.68 million barrels per day.  Thus, you can see that output is failing to keep up with rising worldwide consumption and the 60 million barrels ‘oil pour’ represents less than a single day’s usage!

Figure 1: Global oil demand exceeds production

Source: International Energy Agency

Bearing in mind the fact that global usage of liquid fuels will only increase in the future, one does not need to be a rocket scientist to figure out that the world will need to raise its production. So, in this editorial, we will evaluate whether the oil producing nations will be able to rise to the challenge.

When reviewing crude’s supply picture, it is important to realise that several oil producing regions are already past their peak flow rates and have entered an irreversible decline.  For instance, it is no secret that the North Sea, Mexico, Indonesia and a host of other areas are past their prime. In terms of future production growth, all eyes are now fixated on OPEC which claims to have almost 5 million barrels per day of spare capacity.  Nobody really knows whether OPEC is capable of increasing production by such a large amount but Saudi Arabia keeps insisting that it can ramp up daily output by approximately 3.5 million barrels (Figure 2).

Figure 2: Saudi Arabia holds the key!

Source: www.theoildrum.com

Now, given the fact that the vast majority of Saudi Arabia’s super-giant oil fields are extremely old, one has to wonder whether the nation is capable of boosting production. According to some reports, Saudi Arabia is struggling to maintain its current flow rates and in a desperate attempt to maintain reservoir pressure, it is pumping huge amounts of water into its ageing oil fields. 

More importantly, we are of the view that Saudi Arabia has grossly overstated its oil reserves and it is extremely unlikely that the nation has 270 billion barrels of petroleum.  After all, the Saudi reserves have never been audited and a recent report by WikiLeaks suggests that the Saudis have inflated their oil bounty by 40%!

The proof of the pudding is in the eating and when one reviews Saudi oil production data, it becomes clear that despite all the rhetoric, its flow rate is in decline!  Figure 3 shows that Saudi oil production reached a high in 2004 and ever since, it has been heading south. 

Figure 3: Why is Saudi oil production declining?

Source: www.theoildrum.com

If Saudi Arabia is indeed sitting on humungous oil reserves and it has the ability to raise output, why has production failed to climb above the level recorded seven years ago? 

Now some may argue that the Saudis are deliberately keeping a lid on production, but we have a different view.  Call us sceptics, but we believe that Saudi Arabia is already stretched to the limit and will find it hard to increase production.

Unfortunately, if Saudi Arabian oil production is close to its peak, then the world simply cannot produce more crude. Furthermore, when you take into account the ongoing depletion in the world’s existing oil fields, it becomes clear that the world is heading into an epic energy crunch.

Under these circumstances, we believe that the price of oil will appreciate considerably and the impending surge will cause the next worldwide recession. However, as long as the global economy is expanding, the oil bull will charge ahead and it is likely that the all-time high recorded in 2008 will be left in the dust. Accordingly, we are maintaining our overweight investment position in upstream energy companies, oil services firms and nuclear energy plays.

Although we are aware that nuclear energy is currently out of favour and many are unsure about its future, we are convinced that there is no Plan B.  With the finite supply of liquid fuels, the world will need to generate more electricity and nuclear energy is the only viable option. Sceptics may want to note that if France can generate over 75% of its power from nuclear energy and do so without any accidents, then the rest of the world can surely do the same.  It is notable that with the exception of Germany, most other nations are going ahead with their nuclear programs and this is good news for the sector.  In summary, we view the panic fueled sell off in the nuclear sector as a great opportunity for the patient investor.

Puru Saxena publishes Money Matters, a monthly economic report, which highlights extraordinary investment opportunities in all major markets.  In addition to the monthly report, subscribers also receive “Weekly Updates” covering the recent market action. Money Matters is available by subscription from www.purusaxena.com

Puru Saxena

Website – www.purusaxena.com

Puru Saxena is the founder of Puru Saxena Wealth Management, his Hong Kong based firm which manages investment portfolios for individuals and corporate clients.  He is a highly showcased investment manager and a regular guest on CNN, BBC World, CNBC, Bloomberg, NDTV and various radio programs.

Copyright © 2005-2011 Puru Saxena Limited.  All rights reserved.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Allan Pierce
18 Jul 11, 10:18
IEA dumps 60 million barrels

"a few days ago, they decided to dump 60 million barrels of crude on the market from their strategic petroleum reserves."

Really? Get your facts straight! Eventually, IEA will release 60 million barrels. At present, only 2 million barrels have been released.


mangal mani vyas
19 Jul 11, 09:26
oil politics

this means only one thing ... Be prepared for more restless mid east , more bloodshed in name of ethnic, religious and territorial disputes. The only reason will be oil


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules