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Countdown to 100$ oil (18) - OPEC happy with oil above 50$

by Jerome a Paris Mon Dec 12th, 2005 at 05:36:17 PM EST

Opec is confident oil will stay above $50

The Organisation of the Petroleum Exporting Countries is confident oil demand will be boosted by strong global growth next year and that prices will average more than $50 a barrel.

Energy ministers who are gathering for the cartel's meeting in Kuwait City - where Opec is expected to maintain its present output - contradicted market predictions that oil demand and prices would both drop significantly early next year.

Just 5 years ago, after a terrifying stint when oil went above 30$/bl and briefly threatened to touch 40$/b, OPEC got terrified by such high prices and pledged to keep prices in a band, between 22 and 28$/bl, a level which was then seen as significant higher than it should be.

OPEC was terrified, because the last time prices went up a lot, in the early 80s, they got used way too quickly to all the easy money, which they blew in prestige projects, waste, and entitlements to their populations that would come to bite their asses when prices went down and they had to go in debt to keep people happy and peaceful.

Oil prices went down because the West learnt to use less oil (mostly in the industry and power generation sectors, but also a little bit in the transport and household sectors). They also went down because nobody respected the discipline of the quota, and everybody overproduced, thus increasing supply and contributing to lower prices. Finally, they went down because Saudi Arabia decided to show its muscle and make everybody sweat. As the largest producer, it had taken upon itself to ensure the discipline of the cartel almost all on its own, and its production went down from 9mb/d in the late 70s to less than 5mb/d in the early 80s. But with others simply filling up the gap, it lost revenue as prices were no higher due to that "freeriding" by others. So they opened up the taps in 85, brutally increasing production and flooding the market with their cheap oil. Oil prices dropped from 25$/b to 12$/b, and everybody got the message. Saudi Arabia, as the swing producer with the ability to flood the market, could get prices up AND down.

After that, a pretty long period of price stability ensued, basically since 1985 till 2000, with Saudi Arabia as the mostly Western-friendly "oil central bank" keen on price stability.

But spare capacity, plentiful then, started slowly going down as demand slowly crept up, and started becoming an issue in recent years.

The first price increase in 2000 was mostly an accident, an overreaction by OPEC to their mistake the previous year: in 1998, they made a wrong call on Asian demand, and put too much crude on the market, causing prices to dip below 10$/bl. Shaken by that painful experience, they tightenend up their discipline, with the help of Mexico and Norway, and lowered production as growth kicked in again - thus the price spike in 2000, and their decision to establish a new trading range.

That range worked for 2 years, but was not to last, as China's emergence on the market, after years of basically being self-sufficient, created a massive - and seemingly unexpeted by most - new source of demand. Thus the price increases in the past 3 years, which come from an excess of demand, and not from an artificial lack of supply as in previous cases. Quite simply, Saudi Arabia has become unable to get prices down, and OPEC is simply noting that fact.

They said China's increasing share of global consumption, stronger-than-expected US economic growth and the prospect of refinery shutdowns for maintenance meant prices would stay at today's levels even if Opec continued to pump 30m barrels a day - its highest level in 25 years.

Almost every minister of the 11-member group forecast yesterday that they would decide to maintain current production at today's meeting.

That's what they keep saying - that they could. But it seems that they simply cannot. And they know that nobody else can step in with additional production, so nobody can bring prices down on the supply side. With demand hardly dented with prices at current levels, and growth apparently still going strong in many places around the world, inclusing the two largest importers, China and the USA, they will apparently confident that nobody will come to spoil their party this time.

Adnan Shihab-Eldin, the secretary-general and chief economist of Opec, told the Financial Times: "As a general rule, you have to keep an eye on quarter two but so far demand is expected to be strong as far as economic growth is concerned. With China, the engines [of demand] have changed and the drop in demand is less dramatic than it used to be."

China - which last year overtook Japan to become the world's second biggest oil importer behind the US - consumes mainly diesel and fuel oil for industrial growth and does not see the dip in heating oil demand that comes with the end of winter in the northern hemisphere.

Its economy has continued to grow this year, beating expectations with a 9 per cent rise in the third quarter.

US growth has also been greater than expected. News of a 4.3 per cent rise in the third quarter surprised analysts, who predicted at most a 4 per cent jump, and led to more optimistic forecasts for next year.

And the post-Katrina price increases have already been forgotten, haven't they? But the other effects of Katrina have not gone:

In the US, several refineries ordered by the White House to work overtime to plug the gap in petrol and heating oil supplies caused by Hurricane Katrina will have to shut early next year because they are no longer able to postpone critical maintenance.

This could drive prices higher and has prompted Opec to keep open its taps and allow storage levels in the US to rise.

Benchmark crude futures prices have slipped from this year's highs but remained above $60 a barrel on Nymex on Friday.

A senior Opec delegate said yesterday: "The substantial maintenance shutdowns in the first quarter of next year would mean petroleum product inventories will be drained more quickly than usual."

Which means that I will probably lose my end-of-the-year bet on prices, but not by that many months.

Earlier "Countdown" diaries:

Countdown to 100$ oil (17) - Does it matter politically? A naked appeal for your support
Countdown to 100$ oil (16) - We'll know on Monday
Countdown to 100$ oil (15) - the impact on your electricity bill
Countdown to 100$ oil (14) - Greenspan acknoweldges peak oil
Countdown to 100$ oil (13) - Katrina strikes / refinery crisis
Countdown to 100$ oil (12) - Al-Qaeda, oil and Asian financial centers
Countdown to 100$ oil (11) - it's Greenspan's fault!
Countdown to 100$ oil (10) - Simmons says 300$ soon - and more
Countdown to 100$ oil (9) - I am taking bets
Countdown to 100$ oil (8) - just raw data
Countdown to 100$ oil (7) - a smart solution: the bike
Countdown to 100$ oil (6) - and the loser is ... Africa
Countdown to 100$ oil (5) - OPEC inexorably raises floor price
Countdown to 100$ oil (4) - WSJ wingnuts vs China
Countdown to 100$ oil (3) - industry is beginning to suffer
Countdown to 100$ oil (2) - the views of the elites on peak oil
Countdown to 100$ oil (1)

This morning I saw "OPEC confident prices will stay above $50" on the front page of the FT and though "wow, two years ago everyone was confident that they would stay below $30 and OPEC has spend all of the last year apologizing for not increasing production to bring prices down, but no more". I was wondering how long you'd take to do a diary on it. If the story hadn't been behind s firewall in the afternoon I'd've posted it on the Breakfast thread.

Great diary, and you still have 3 weeks to get to $100 ;-)

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman

by Carrie (migeru at eurotrib dot com) on Mon Dec 12th, 2005 at 06:25:59 PM EST
we're having an early cold snap that has heating oil prices dragging crude up.   The refinery shutdowns in March are also typical.  Mogas will be strong pre may as people will fear a summer shortage, but barring more refinery damage early in the summer, your $100 won't be seen in 2006.

I think you have 3-5 years to wait barring significant political upheaval in the Middle East (Iraq civil war, Saudi production bombed etc).

by HiD on Mon Dec 12th, 2005 at 07:46:49 PM EST

I would say that, given the current baseline trend, we're looking at 2007 at the earliest, IF THERE ARE NO MAJOR INCIDENTS.

However, given the increase in both frequency and magnitude of the Atlantics Hurricane (not a sports francise), I think it is certainly possible.

For that matter, terrorism in the North Sea, Saudi oil fields, any number of distribution pipelines, etc, could have a profoundly bad affect on oil.

So, what are the odds of an incident before late 2007?

Happy little moron, lucky little man. I wish I was a moron, my God, perhaps I am! -- Spike Milligan

by polecat on Mon Dec 12th, 2005 at 09:07:44 PM EST

Ah, now, that's music to my ears.

I don't believe OPEC is "content" with the barrel above $50 but simply grandstanding, trying to preserve the illusion that they still have the situation in control.

It was so blatant that Saudi Arabia is already trying to backtrack.

Asked if Riyadh would carry on producing oil at current levels, Naimi said: "It depends on the customers. If nobody wants 9.5 (million bpd) we can't put it (in the market). If they want 9.5, it's there."

Like Saudi Arabia, OPEC president Kuwait is pumping above its quota. Asked if the Gulf state would produce to its limit, Oil Minister Sheikh Ahmad al-Fahd al-Sabah told reporters: "Yes, and over. We are trying to do maximum production."

Others struggle to meet their output allocation, however, leaving the total oil flow just 200,000 bpd above the ceiling. That is a drop in the ocean for the 84 million bpd global oil market, but analysts saw Monday's deal as a statement of intent.

Spare capacity?

If they want 9.5, it's there.

Yeah, sure, right. BS. It's not there. Period.
by Francois in Paris on Tue Dec 13th, 2005 at 07:41:46 AM EST
great diary....but the fact is that the goal now is to increase the price at a constant speed reaching 100$ in some years. I think the production would allow for it...so I think you are off by some years...

And again any disruption making oil reach 90$ would produce the first serious cut (a nd  easy) oil consumption...after that....

So I will wait some years..

BY the way, I think it is time (or soon) to buy oil for the future if it reaches 40$.. I just do not know how to do it. Normal investments do not allow it.... this would be an interesting question for a diary.. how to buy oil and sell it within 10 years...

jerome ...this is your chance of making us all rich... please help us (and as Migeru would say I am dead serious cause I have some thousands of dollars waiting...)

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Tue Dec 13th, 2005 at 04:02:46 PM EST
First, you shouldn't hold your breath waiting for future periods to trade at $40/bbl.  Right now, the NYMEX futures market for Dec 2012 (furthest out contract) is $57+.  To get that to drop to $40, the front end would likely be more like $30.  That's pretty unlikely. check out nymex.com for info.

If you really want to invest in oil, you can get an account with some stock brokerages to trade on NYMEX("the Merc").  They may want you to prove you have enough trading experience to handle such volatile and risky instruments.  Be advised that the margin requirements are not trivial.

If you want to trade the smallest increment, 1 lot of WTI, you are trading 1000 bbls.  If you go well out the curve, the margin requirment of the NYMEX is $2500-3500 per lot.  So you are putting up about 10% of the value of the oil underlying the contract.  That kind of leverage has pretty sharp risk/reward teeth.  As the trade moves against you, you have to put up more and more cash as margin;  you have to put up more cash as the contract becomes prompt(more volatile) too.  If you call it right you can make big % gains.  A broker may have higher margins than the Merc requires.  I've never tried as an individual so no direct experience.

There is a mini contract on the Merc but it's only half the size of the regular one.  It cash settles so at least you can never be forced to play with "wet" oil although no respectable broker would ever let a neophyte get anywhere near expiry still holding a prompt contract.  Actually, they'd probably force you to close the trade as it would be their ass on the line with the exchange when you couldn't perform.

There are some other things you can do.

  1.  Buy oil trusts like BPT.  I once bought this at $4/share.  Now trading at $70 with huge quarterly dividends.  You are buying a piece of the cash flowing from the ANS field.  and no, I wussed out when I'd doubled my bet.  There are others out there but read the prospectus on anything of this sort VERY carefully.  This isn't an investment for the lazy.  You can lose all your money pretty damn quick.

  2.  Consider shares in oil production companies ie, oil cos without a lot of refining (like UNOCAL used to be before Chevron gobbled them up).  Also drilling/service companies.  Both are trading pretty high.  I don't have the stomach to invest in these folks at these prices.  Not that many are left anyway as the integrated oils keep buying them up.

 Be careful.  There are many reasons 7 year oil is only $57 with the prompt over $61.  Jerome has many good points, but they are only one side of the argument.  Only 6-8 months ago, people on these blogs were all hot to buy Euros at $1.35 because they "just had to be going to $2.00".  Currently it's more like $1.18 so keep that in mind.

have fun!

by HiD on Wed Dec 14th, 2005 at 12:26:47 AM EST
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