Incoherent Reporting from WSJ

I just finished reading an article from the Wall Street Journal that left me shaking my head. I think the article is subscription only, but you can find it for now at:

Oil tops $90 on range of worries

The story made a number of unusual or misleading claims that were then sometimes contradicted within the story. Here is one example:

The events — which included a statement by a top OPEC official to The Wall Street Journal that the world’s oil cartel doesn’t see a need to check the price surge — might not have moved oil markets dramatically by themselves.

That’s not remotely what that OPEC official reportedly said. What he said was that the price was being driven by speculators and geopolitical events, and that bumping up supply wouldn’t help. In fact, the story itelf contradicts that claim a couple of paragraphs later:

“We have no price band or price target,” Mr. El-Badri said on the sidelines of a meeting with Chinese energy officials in Beijing. “If it persists for a longer period, then we start worrying.”

So, what he said was that they will start worrying if the price stays where it is. That sounds to me like they recognize the need to check the price surge, provided it has staying power. I suspect what they want to avoid doing is having to promise new production each time the price surges – especially if speculation and geopolitical events are helping that surge.

Another statement in the story has been wildly misinterpreted/misreported:

Then came the comments from OPEC’s Mr. El-Badri, suggesting that the cartel didn’t plan to step up production to add supplies to the world market.

Again, very misleading. What he said was that right now they don’t have plans to bump up supply beyond the 500,000 barrels that they have already promised. Yet many are reporting the above statement as if they have rescinded what they have already promised.

“We’re in an extremely tight supply situation,” said Ann-Louise Hittle, a Wood Mackenzie oil-market analyst. That, she said, was giving credence to “peak oil theory” and the idea that supply won’t be able to meet growing demand.

Partial credit. Peak Lite says exactly that – supply won’t be able to meet growing demand. Peak Oil says that supplies have actually peaked and are falling.

This year, the situation has become worse. OPEC placed constraints on its production starting last November, driving up oil demand by 1.3 million barrels a day in 2007, according to Wood Mackenzie.

That doesn’t make much sense. OPEC constrained production, and this drove up demand? More likely demand grew as it has been growing, and OPEC’s cuts caused the supply cushion to evaporate. It has nothing to do with the cuts driving up demand. In theory, it could happen if people thought they needed to hoard, but OECD stocks have actually fallen slightly this year. That means it is unlikely that the constrained production drove up demand.

OPEC ministers have complained in recent weeks that the latest price surge has little to do with fundamentals such as supply and demand. They argue that the price increase is driven more by market speculation, the falling U.S. dollar and refining bottlenecks.

Which is why they are saying that there isn’t much they can do about it. In truth, there is. If they have the spare capacity, they could flood the market and collapse the price. Secondary factors or not, if they said they were putting a million and a half more barrels on the market, the price would come down in a hurry. So I don’t fully subscribe to their position that they can’t do anything about the price.

8 thoughts on “Incoherent Reporting from WSJ”

  1. You didn’t mention a key part of the article:

    Traders next reacted to a report from Oil Movements, a British company that monitors oil-tanker traffic in an effort to get around the secrecy of major oil exporters such as Saudi Arabia and Kuwait. The company’s weekly report, which went out in the morning, said OPEC shipments for the first 10 days of November appeared to be “well below the October equivalents.”

    The report estimated that October OPEC shipments were likely to be about 300,000 barrels a day more than their September level, “but early indications for next month are that there may be nothing more to come.” The world consumes more than 80 million barrels of oil a day, but a minor disruption can have an outsize effect because the margin between supply and demand has narrowed in recent years.

    IMO, the market is growing increasingly skeptical that OPEC has any significant excess capacity (and that they are willing to use it), and the Oil Movements report is feeding that skepticism. Even if they do have spare capacity, at this point there’s really no danger of non-OPEC producers taking market share away from OPEC, so why put more oil on the market?

  2. Secondary factors or not, if they said they were putting a million and a half more barrels on the market, the price would come down in a hurry. So I don’t fully subscribe to their position that they can’t do anything about the price.

    Two questions, if you have a moment to answer:

    1) Do you think that, in the current climate, the markets might not respond to the promise of more oil, but actually wait to see production figures rise? If there’s so much skepticism about what KSA can or will do, it seems like they may have lost their ability to drive the market purely on their statements.

    2) It seems likely to me that if they did in fact drop an extra 1-2 mbbl/day on the market, they would then be forced to sustain that production for some period of time (a few months, at least). Otherwise, the price dip that would accompany the realization that there was excess crude available might be followed by a backlash and a price jump when that extra was removed.

    These two issues are related, because if #1 is true, then the time window for #2 is extended by the necessity to demonstrate that, yes, the extra oil is actually there and available.

    What I’m getting at is this: There’s alot of speculation among Peak Oilers about whether KSA has peaked, is in decline and hiding it, etc.

    It seems to me unlikely that KSA is so thoroughly peaked that they couldn’t open the taps more if they wanted to. However, in order to control the market, I think they would need to not only increase production, but sustain it over a significant period of time. And it’s not clear that they can do that, at least not without pushing their wells really hard and risking long-term losses in production.

    If that’s the case, then it seems reasonable to claim that KSA has effectively peaked, even if they haven’t actually run into the hard physical limit just yet. Sort of analogous to the difference between world Peak and Peak Lite.

    Thoughts?

  3. IMO, the market is growing increasingly skeptical that OPEC has any significant excess capacity (and that they are willing to use it), and the Oil Movements report is feeding that skepticism.

    Of course we have the contradictory pieces that 1). Petrologistics, another tanker tracker, contradicts the Oil Movements report; and 2). Asian refiners have gone on record and said they are getting 100% allocations for the first time all year. Both pieces point toward higher production.

    Even if they do have spare capacity, at this point there’s really no danger of non-OPEC producers taking market share away from OPEC, so why put more oil on the market?

    Easy. If they throw the world into recession, they will destroy demand. I think this is exactly what Saudi seeks to avoid, as they have seen it before.

  4. If there’s so much skepticism about what KSA can or will do, it seems like they may have lost their ability to drive the market purely on their statements.

    Oh, I think that’s true. There is a lot of skepticism about whether they can do what they say they can do. I believe they can, but that doesn’t mean I have a skeptical bent as well. I wouldn’t bet my life that they can do it.

    It seems likely to me that if they did in fact drop an extra 1-2 mbbl/day on the market, they would then be forced to sustain that production for some period of time

    I think if they put the crude on the market, even for a short period of time, it would calm the markets. The markets are agitated right now because there is so much skepticism surrounding supplies. If Saudi said “Look, here are 2 million barrels. We don’t think the market it calling for that much, but there. You can see that we have it.” I think even if they backed it off from there, a lot of the fear premium would be gone.

  5. RR-
    My sentiments exactly. As a former daily reporter, I would like to defend a little bit the WSJ reporters; reporters have to write on deadline, often in just hours, and editors want “an angle.” I will say the WSJ seems to “be on the side” of the “tightening oil markets” story. But, in fact oil prices are in a bull market, so who can say the WSJ has been wrong.
    I do wish somebody would write a definite, or at least very strong, piece on the role that hedge fund speculation is playing in oil prices. I suspect it is very important, but would love to see an in-depth story with interviews of commodity hedge fund managers. How much are they playing with?
    And, I still see almost zero reporting to the effect that oil demand appears to be falling. Look at latest motor gasoline reports for the US – we are using less gasoline, four-week period compared to four-week period, than last year. (RR: You formerly reported on motor gasoline use, but lately cut back. Would be great to get your input here).
    Lost in the shuffle is the fact that oil use worldwide grew by 3.1 percent (2004), then 1.4 percent in 2005, then 0.7 percent in 2006. Now, U.S. demand appears to have turned the corner (down). Given the experience of the 1980s, we can expect global demand to keep falling, possibly for as long as oil prices stay high. I concede I do not know where high is, but I suspect anything over $70. I used to say $60, but the dollar has done the “Bush dump.” Sheesh, the way the dollar is going, maybe $80 is high.
    My guess is that due to Thug Oil, $80 is the new $40, so we may see $80 for years. So, I suspect that means oil demand will fall for years.
    Someday oil cracks, but when?
    Warning to investors: The fact that I now think we may have sustained high oil prices may be a sign we are at peak prices.
    (By the way, energy consultant James Williams recently sent out some charts showing production in Thug States. We are down 5 mbd just in Libya, Iran, Iraq, Venezuela and Russia, from pre-thug highs).
    If you are a true-blue Peak Oiler, this should be good news, as it means doomsday is postponed for decades. Doomsday charts usually assume 2.2 annual growth in oil demand. Replace that with 1 percent annual declines in demand and you get a much different picture.
    By the way, check out US export volume (by container). Radically up at ports of Long Beach and Los Angeles.
    I am still upbeat about the future. I see solar, wind and geothermal and nuke power in abundance going forward, and PHEVs will mean we can transport goods. Actually, I see a world cleaner and more prosperous.
    An interesting question: Let us assume we do move to PHEVs, and oil demand falls radically. (Seems likely, no?)
    The oil-rich nations have made huge investments in Western economies. They have a claim on our assets forever, due to spate of higher oil prices from, say, 1980 through 2020.
    How many generations do we honor those claims of oil-rich nations? Or, can our grandchildren expropriate at 10 cents on the dollar? Venezuela comes to America.

  6. Benjamin Cole wrote:

    I am still upbeat about the future. I see solar, wind and geothermal and nuke power in abundance going forward, and PHEVs will mean we can transport goods. Actually, I see a world cleaner and more prosperous.
    An interesting question: Let us assume we do move to PHEVs, and oil demand falls radically. (Seems likely, no?)

    If oil demand is declining yearly due to current high prices, why would one presume that investment in these alternatives would increase as well? Oil and coal are still the cheapest and most efficient. Wouldn’t demand destruction today result in increased consumption down the road?

    Without AGW as a backdrop, what real reason is there to dump cash into alternatives? There’s the energy security argument of course, but how strong is that? Alternatives are generally more costly, have numerous issues to be sorted before they scale effectively, and aside from biofuels, tend to address concerns of electricity supply as opposed to liquid transport fuels.

    Without $90/bbl oil for a sustained period, pickup trucks still remain fairly attractive, assuming one still owns a garage to park it in.

  7. Anonymous-
    I am not sure I get the drift of all your questions. I don’t know what is “AGW.”
    I think higher fossil oil prices will spur myriad investments in all technologies that decrease oil consumption or presents alternatives. I expect PHEVs to be a big success in the event of $120 bbl oil. (I think PHEVs should first be sold as luxury cars. You pay for the privvie of snubbing gasoline stations and those smelly time-wasting pumps).
    I expect to keep the screws on, we will have to tax gasoline consumption in the future, much more heavily than now. There will be a glut at some point, undercutting cleaner and more-efficient technologies.
    A mean-spirited side of me hopes that as soon as we are in the clear, we expropriate oil-thug state ownership of US assets. Hey — that is how we pay for the transition to cleaner and more -effiient technologies.

  8. AGW – anthropogenic global warming, to differentiate it from natural climate variability.

    I think higher fossil oil prices will spur myriad investments in all technologies that decrease oil consumption or presents alternatives.

    This is happening now, but not to extent necessary. Also, if a glut is soon upon us, I wonder how cleantech financiers will react.

Comments are closed.