Best of the Week
Most Popular
1.How U.S. Dollar Destruction Threatens the Global Economy - Steve Forbes
2.Why UK House Prices Will Continue Rising - 'It's Immigration Stupid' - Nadeem_Walayat
3. Bitcoin Price at Beginning of a Move up? - Mike_McAra
4.Gold Price to Plunge, Visiting Fort Knox - David_Hague
5.Silver Price Forecast - Metal to Gain Ground in August on These Factors - Jim Bach
6.Gold And Silver Will Rise With US Dollar Demise, Just Not Soon - Michael_Noonan
7.Bitcoin Price Strong Move Possible - Mike_McAra
8.Israel Gaza War Crimes - Soldier's Ordered to Shoot Civilians Including Children - C4News - C4News
9.UK House Prices Crash Warning - Daily Mail Cognitive Dissonance - Nadeem_Walayat
10.UK House Prices Boom - Top Quick Cheap Tips to Help Sell Your Home - Nadeem_Walayat
Last 5 days
President Obama Strongest Statement Yet on Israel Gaza War - 20th Aug 14
Peak Gold? Russia To Surpass Australia As World No 2 Gold Producer - 20th Aug 14
AI, Robotics, and the Future of Jobs - 20th Aug 14
Stock Market Investors What's Your Exit? - 20th Aug 14
The Gold War - Thinker, Trader, Holder, Why? - 20th Aug 14
Ukraine Interest Rates Soars to 17.5% As External Debt Cannot be Repaid - 20th Aug 14
Rising Interest Rates and The End of Stimuland - 20th Aug 14
Inflation Watch: $245,000 to Raise a Child in United States - 20th Aug 14
Inside the Stunning Deal That Put Apple and IBM on the Same Side - 20th Aug 14
The US Gold in Fort Knox is Secure, Gone, or Irrelevant? - 19th Aug 14
Bitcoin Price On The Brink of a Possible Reversal - 19th Aug 14
Why Tesla Stock Price Will Double in the Next 12 Months - 19th Aug 14
Europe's Economic Malaise: The New Normal? - 19th Aug 14
The Coming U.S. Economic Collapse Will Trigger a Revolution - 19th Aug 14
Market Bubbles, Bubbles Everywhere - 19th Aug 14
This is Your Economic Recovery With and Without Drugs - 19th Aug 14
Stock Market Strong Start to Jackson Hole Week - 19th Aug 14
Iraq, Ukraine - Oh, What A Tangled Mess We Weave - 19th Aug 14
How to Apply Moving Averages as a Trading Tool - Video - 18th Aug 14
Why Short Stock Traders Are Losing Money This Week - 18th Aug 14
Stock Market Rally May be Complete - 18th Aug 14
Why Chinese Citizens Invest In Gold - 18th Aug 14
Palladium Reaches 13-Year High Over $900 oz as Gold Trading Volumes Surge 66% - 18th Aug 14
Understand and Profit from Surging European Volatility - 18th Aug 14
No Escape from The Dollar as The Currency Standard - 18th Aug 14
Stock Market New Highs Less Certain - 18th Aug 14
German Stock Market DAX About To Drop - 18th Aug 14
Stay on Board - Stock Market Big Picture - 18th Aug 14
Europe Economy Is Tanking, QE Is Coming - 18th Aug 14
Are You Ready for The Greatest Technology Revolution Yet? - 17th Aug 14
Why King Coal is Bigger than Oil or Gas - 17th Aug 14
U.S. Empire of Death and Lies - 17th Aug 14
Ukraine - Whose Spin Are We Caught Up In Here? - 17th Aug 14
Time Decay And No Escape For Abenomics - 17th Aug 14
India BSE SENSEX The Party Is Over In Bombay - 17th Aug 14
Stock Market Uptrend Looks Underway - 17th Aug 14
The Key Role Of Conspiracy Theory In Dumbing Down Society - 17th Aug 14
The Federal Reserve in Denial Mode - Bond Market Explained - 17th Aug 14
Stock Market Ukraine-Triggered Volatility, But a Flat Finish - 16th Aug 14
Stock Market Investors Conditioned To Catch The Falling Knife - 16th Aug 14
Decline And Fall Of The CO2 Crisis - 16th Aug 14
Gold Stocks Major New Upleg - 15th Aug 14
Don’t Assume What Is “Unseen” Doesn’t Exist - 15th Aug 14
HUI, Gold and Silver; Fun With Monthly Charts - 15th Aug 14
Cry for Argentina: Fiscal Mismanagement or Pillage? - 15th Aug 14
New 'LBMA Silver Price' - Still Not Transparent - 15th Aug 14
America the Neighborhood Bully Recklessly Throws its Weight Around - 15th Aug 14
The Single Best Investment for the Semiconductor Tek Stock Boom - 15th Aug 14
The Something For Nothing Society - Inflation and Getting Paid NOT to Work - 15th Aug 14
Forecasting Ability of the Elliott Wave Principle - Trader Education - 15th Aug 14
The Most Hated Stocks Bull Market - 15th Aug 14 - Puru_Saxena
America's First Oil Sands Producer and Other Natural Resources Surprises - 15th Aug 14
Life and Times in Propagandistan - 15th Aug 14
The Biggest Lesson from Microsoft’s Recent Battle with the US Government - 15th Aug 14

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

The Biggest lie in Stock Market History Revealed

Can Saudi Arabia Pump Enough Crude Oil ?

Commodities / Crude Oil Aug 14, 2013 - 10:04 PM GMT

By: Andrew_McKillop

Commodities

PREVENTING OIL SHOCK – OR CAUSING IT
One of Wikileaks' most celebrated revelations, in 2011, was a confidential mail from a US diplomat in KSA (Kingdom of Saudi Arabia) stating that he had been convinced by a Saudi oil expert named Sadad al-Husseini using data from as far back as 2005 that the nation's oil reserves are overstated by nearly 40%. The diplomat was certain that KSA could not “keep a lid on oil prices”.


To be sure, there was no need to consult Wikileaks or the State Dept to hear that – for at least a decade Matthew Simmons, author of books including  Twilight in the Desert: The Coming Saudi Oil Shock  published in 2005 has worked the theme of Saudi exaggeration or lying about its oil reserves. Simmons main argument was that over and above the political uncertainty of reliance on Middle Eastern oil, the reserve decline rates for conventional or first-generation oil in the region should raise our awareness of the physical unreliability of Middle East oil. Due to the huge dominance of KSA in Middle East oil and Arab world politics, this firstly concerns the Kingdom before it concerns the rest of the region.

One certain and sure problem is that since the 1980s, sparked by the Iran-Iraq war, Arab OPEC producers in the heavily Saudi-dominated OAPEC organization started regular, usually large and sometimes huge “reserve revisions”. KSA's own recoverable oil reserves depending on what date, as well as what source inside the Kingdom provides the data could range from 250 – 350 billion barrels (250-350 Gb). More bizarre, the reserve number never declines – it only grows despite KSA producing roughly 3.65 Gb-a-year, about 10 million barrels-a-day (Mbd). As reported by the Financial Times June 11, KSA is presently producing “nearly 9.7 Mbd”.

After the 1980s OAPEC round of reserve revisions, only upwards, nearly all other OPEC nations did the same, joined by most major non-OPEC exporters. Consequently there is no “true” unambiguous number for world oil reserves.

UNABLE TO PREVENT PRICE RISES – OR UNWILLING?
What is important to note is that the Saudi oil decline “analysis” can be applied almost word-for-word to joint-No 1 or close No 2 world oil producer Russia. This only underlines that anything concerning world oil and oil prices concerns the Dominant Pair, producing a combined total of about 25% of world total oil output.

In Russia's case, even more than KSA, the role of conventional oil reserves versus “assisted recovery” tapping secondary or tertiary reserves utilising steam-assist, water flood, chemicals, compressed gases and other means to enhance and increase recovery from “tight” source rocks or declining conventional reserves is a constantly moving frontier. This makes the definition of Russia's recoverable oil reserves at least as variable as for KSA but in both cases, and anywhere else in the world – notably US, Canadian and Venezuelan shale oil extraction – higher oil prices expand the recoverable reserves, and lower prices do the opposite.

The 2011-vintage Wikileaks revelation has resurfaced as the oil price has soared in recent weeks to well above $100 a barrel, with the main media-friendly explanations being a very slight recovery of global oil demand and above all tensions in the Middle East and Arab North Africa. With totally predictable timing, KSA has announced it will either maintain highest-possible production, or increase it. For as long as this does not prevent oil prices rising, KSA will “almost regrettably” enjoy especially large windfall revenue gains. Russia ditto.  Comparison of the dominant pair can start with their ultra-different oil production trends (source: Gregor Macdonald)

As the charts show, Saudi production is “managed” but Russian production is much less compressible, explaining the meaning of the key price setting term: “reserve or spare capacity”. Also, the Saudi chart shows the limits of its wide “discretionary output” capability. The key major difference between KSA and Russia is therefore simple – KSA can “open the tap” provided it has previously cutback output – making the Swing Producer role of KSA one of the most basic, fundamental oil price-setting factors.

Consequently, news and views, opinions and spin on the subject of KSA's production intentions and policies are a must-item for oil market brokers and traders. What we find, possibly not surprisingly, is a permanent shroud of intrigue on these intentions and policies. Reported regularly in all global business media, Ali al-Naimi, oil minister of KSA has since 2007 said the Kingdom has identified projects to increase oil production capacity to 15 Mbd, but since early 2013 Mr Naimi says production capacity will not be increased beyond the current theoretical maximum of 12.5 Mbd “in the next 30 years”. As AFP and other agencies reported from Riyadh, July 28, Saudi billionaire prince Alwaleed bin Talal, a nephew of King Abdullah has warned that global demand for the kingdom's oil is clearly dropping, urging revenue diversification and investment in nuclear and solar energy to cover domestic and local energy consumption. See also my article: http://beforeitsnews.com/energy/2013/07/saudi-royal-sounds-alarm-on-fracking-2450748.html

AND WHAT ABOUT OIL DEMAND?
The OPEC Secretariat – heavily influenced by Saudi views – reported in its monthly report for June that it anticipated “higher demand in absolute terms, primarily due to the structural change in the seasonal pattern”, during the second half of the year, also adding: “The expected global economic recovery in the second half of this year could also add more barrels to seasonally higher global consumption”. Scarcely designed to lend credibility to its oil demand growth forecast it placed at 0.8 Mbd to June 2014, this featured the Secretariat's belief that the summer driving season demand peak would not continue to shrink. It also said: “Growing use of air conditioning in the summer, particularly in the developing countries, has also pushed (forecast) third quarter demand higher”.

Surprisingly or not, the OECD's IEA energy watchdog agency regularly produces reports forecasting imminent increase in global oil demand, very similar to the Secretariat, noting that an 0.8 Mbd increase on current world total demand of about 89.75 Mbd (32.75 Gb per year) would represent an 0.89% increase. One major problem for both the IEA and the OPEC Secretariat, and a plus for Prince Alwaleed is that global oil demand is structurally shrinking – and new oil reserves and resources are available. Overpriced oil, unsurprisingly, encourages conservation and substitution including output from new, previously too-expensive oil sources.

To be sure, global oil demand – except during sequences such as 2008-2009 and 2009-2010 – now rarely changes at a year average rate above 1%. The potential for multi-year zero demand growth is high, signaled by Prince Alwaleed's claim in his six-page letter to his uncle the King and oil minister al-Naimi that world oil demand may attain perfect zero growth by 2015.  Risk is supply-side and the deepening intensity of what was Arab Spring but is moving towards Arab Civil War certainly opens the door to supply cutoff risk.

Even as US shale oil output has surged, KSA's discretionary or spare capacity has proven crucial in meeting supply shortages. It raised output during the 2011 civil war in Libya, and in 2012 raised production to a 30-year high slightly above 10 Mbd as US-led sanctions reduced exports from Iran. Saudi action, and posturing in Egypt have the potential for unintended political consequences and the crisis-atmosphere has seeped into Riyadh think tanks and policy parlors. One result is further tightening by Saudi Aramco on the sale of its crude, ensuring only end-users obtain it to restrict their ability to resell barrels, another may be a permanent cap on KSA's maximum capacity.

Overall and due to the total opacity of oil market trading – shown by increasing action by regulators in Europe and the US to rein in abuses – oil prices effectively tell us little or nothing about fundamentals and everything about speculation. Middle East supply risk is however rising, making it likely KSA will keep output at high or very high rates – while “regretting” the high prices that the political risk premium adds to oil. Leaving the last word to al-Naimi, his “preferred market equilibrium price” which has disappeared from all speeches, interviews and comments he gives for over 9 months, was $75 a barrel. At that price level Prince Alwaleed's so-called pessimism is likely unfounded but above it, KSA will go on losing demand volume if not revenues.

By Andrew McKillop

Contact: xtran9@gmail.com

Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Co-author 'The Doomsday Machine', Palgrave Macmillan USA, 2012

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2013 Copyright Andrew McKillop - 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 advisor.

Andrew McKillop Archive

© 2005-2014 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

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

Free Report - Financial Markets 2014