Chevron, Saudis Admit Oil Supply Woes
By Nick Hodge | Tuesday, July 12th,2011
Late last month, the International Energy Agency announced it was releasing 60 million barrels of crude oil into worldmarkets.
Obama graciously pledged 30 million of it from our own Strategic Petroleum Reserve (SPR).
Youshould find our wanton oil disbursement a bit peculiar, especiallysince your own government defines the SPR as the“nation's first line ofdefense against an interruption in petroleum supplies.” So tapping itinherently implies we're facing aninterruption in petroleum supply.
Fromits creation after the 1973 OPEC oilembargo up until this summer, thereserve had only been tapped twice:Wereleased 17 million barrels inconjunction with our invasion of Iraq in1991. We released another 11million barrels after Hurricane Katrinaknockedout 95% of crudeproduction and 88% of natural gas output in the Gulf ofMexico in 2005.
This time — only the third time ever — we released more oil than in the two previous eventscombined.
What could be so dire that we need to invoke the “nation's first line of defense against an interruption inpetroleum supplies”?
All Tapped Out
Bloomberg ran this headline this morning:
Middle East Oil Rises on Signs Saudis Won't Offer Extra Supply
But ask anyone who's not a Big Oil employee or a politician, like Goldman Sachs, and they'll say theSaudis can't offer extra supply.
As I toldyou this weekend, Goldman is adamant about its claim that “Saudi oilproduction peaked in 2008 at 9.5 million barrelsper day and will neverreach that level again.”
And it isn't only Goldman that thinks so.
I've told you before about Sadad Al-Husseini, former vice president of the Saudi Arabian Oil Co. (aka Aramco), who said:
Manyof the so-called reserves are in fact resources. They'renot delineated,they're not accessible, they’re not available for production.
Sadad knows the rest of the world is in trouble, too.
Sinceleaving Aramco, he's become something of a Peak Oil prophet. Givensome of the stuff he's said inrecent interviews, I'm surprised thecollective global oil industry doesn't have a price on his head.
He recently offered up this gem when asked why there is so much denial about the world approaching PeakOil production:
If you look at published information — for example, BritishPetroleum’s annual statistical report —it veryclearly shows that from 2003 forward, oil production hashardlyincreased. So the information is there. If you look at some oftheadvertising that Chevron has been putting out for years now,theyclearly saywe’re half-way through the world’s reserves. Theinformation is there.The facts are there.
Oilpricesdid not jump four-fold over a three- or four-year period foranyreasonother than a shortage of supply. Yes, there may have been somerecentvolatility in 2008, but the price trend started climbing way backin2002-2003.So, these are realities and the push-back is a sense thatsomehow themarket is not able to deal with these realities, that somehowpeoplecan’tcope with these realities.
Speaking of Chevron...
After the market closed yesterday, Chevron announced it expects second quarter earnings to riseover the previous quarter, thanks to higher oil prices.
So it's all good, right? Higher oil prices, higher profits, happy shareholders. Everybody can resteasy...
Until you look more closely at the details.
Chevron'sU.S. production in the first two months of the quarter (April/May) wasdown 1.8% from a yearago. Internationally, output decreased 2.4%.
So they produced less oil but made more money because prices are higher.
If that's not a Peak Oil symptom, I don't know what is.
It'sthe same market dynamic that takes effect when any good is scarce, likethose last few tickets to theSuper Bowl or an award-winning Broadwayplay.
Strategic Petroleum, Indeed
Andthat brings uscircuitously back to the strategic petroleum reserve andthe 30 millionbarrels we'rereleasing from it. Remember, that's the mostoil we've ever released atone time. So there must be a serious andimminent threat to globalsupply.
A quick look at who bought that oil and how much they paid serves as further evidence.
Yesterday the Department of Energy announced it had signed 28 contracts to sell thecrude at prices ranging from $104.97 to $109.26 per barrel.
As I write this, oil is trading for $95, begging the question: Why are the companies buying this SPRcrude willing to pay a $15 premium to current prices?
There is only one answer.
They think oil prices are headed much higher.
Here'swho bought some ofthe oil: Exxon Mobil (NYSE: XOM), Shell (NYSE:RDS-A), BP (NYSE: BP),ConocoPhillips (NYSE: COP), Valero (NYSE: VLO),Tesoro (NYSE: TSO),Murphy Oil (NYSE: MUR), Sunoco (NYSE: SUN), MarathonOil (NYSE: MRO),Barclays(NYSE: BCS), Hess Energy Trading Co., Trafigura,JPMorgan (NYSE: JPM),Vitoil, Plains Marketing.
AsI just showed you via the Chevron example, these companies are notincreasing production. Production isdeclining. So they're more thanwilling to pay a small premium for easy supply to keep their refineriesand profits flowing.
The banks, on the other hand, have a different motivation...
Sincethe government doesn'tban purchasers of SPR crude from storing it (eventhough that'scontrary toits intent — but we're talking about thegovernment, so what's new),banks can buy the crude, sit on it, and sellit later for a higherprice.
And that's clearly what JPMorgan, Hess Energy Trading, Barclays, and Trafigura are going to do.
Higher oil prices are coming, folks. And the only way to prevent them from having ill effects on yourbottom line is to put them to use for you — just like those banks are going to do.
Before you go, let me offer one more kernel of wisdom that undeniably proves we're at a major crossroadsfor the oil industry.
Thelast time the SPR was opened back in 2005, the government planned onselling 30 million barrels. Itcould only sell 11 million barrelsbecause of lackluster demand.
This time, companies were banging down the door to buy easy oil at a premium.
Justas these oil majors and banks are executing their contingency plans forthe end of oil (by takingmaximum profits from what's left), you need to do thesame.
Call it like you see it,
