There has been a lot of speculation lately over whether the Saudi oil production cuts over the past year have been voluntary. I have argued that they were voluntary based on a combination of what was happening with inventories last spring (crude inventories were very high and trending higher), and then price (started falling in the summer and fell for the rest of the year). But I think we will soon know for sure.
This is subscriber information from the daily OPIS report, so I will only post a small portion of the report:
Over the past five weeks, there has been a fundamental shift in the oil Market — a shift that has resulted in increasingly higher prices. The shift has to do with basic fundamentals; not speculation, not hedge funds, not futures trading. Oil supplies in the U.S. have dwindled sharply in the past five weeks, more than some people may realize.
According to the EIA, in the U.S., total company-held oil inventories have shed 87.4 million barrels since OPEC’s 0ct. 20 meeting. By the end of the first quarter of 2007, stocks will be 100 million barrels below end-September 2006 levels, the EIA forecasts. Meanwhile, demand has been higher than normal, so the “supply cushion” has been depleted.
Over the past five weeks total product inventories have dropped nearly 60 million barrels, an average of more than 10 million barrels per week. Gasoline supplies, which comprise the largest part of the U.S. petroleum stock base, have shrunk as well. Inventory dipped almost 4 million barrels this week leaving supplies 8 million barrels under year-ago levels and less than 3 million barrels over the five-year average for this time of year.
What we are seeing right now is a combination of falling inventories and rising prices. This should provide both the opportunity and the motive for Saudi to increase production. Demand will really kick up in April and May, when refineries are coming out of their turnarounds. If the current trend continues, the Saudis are going to be called upon to bump up production pretty soon.
If they don’t, then I will conclude that at least for the time being, they can’t. That may mean that their production has peaked, either due to geological constraints, or because they failed to anticipate demand and didn’t bring their projects online soon enough. I have seen the announced projects they have in the pipeline, and they won’t be enough to satisfy demand any time soon. If their current reduction is involuntary we are in for some tough sledding ahead, resulting in all kinds of price records this year. I might start thinking about buying a more fuel efficient vehicle if I hadn’t just bought one.
I’ll repeat my question here from the “Why Are Gas Prices Rising?” post:
So, we need inventory levels to come down. If inventory levels come down, that says that the market is being undersupplied, which, combined with higher prices, should give the Saudis ample motive for increasing their production.
Robert, its my understanding that inventory levels in OECD countries are coming down (or at least forecast to fall to multi-year lows) or am I misinterpreting this graph?
http://www.eia.doe.gov/emeu/steo/pub/gifs/Slide24.gif
If true, we have one piece of the puzzle (falling inventories) and while oil prices are not rising they are at historically high levels and have been flat (around $60/bbl) for many months. Global oil production is not falling either, but has been flat also for several years.
Its going to be an interesting (northern) summer and hurricane season.
Robert, its my understanding that inventory levels in OECD countries are coming down (or at least forecast to fall to multi-year lows) or am I misinterpreting this graph?
Yes, they are coming down. I believe we are going to have a supply/demand crunch pretty soon that should prompt the Saudis to open up a bit. We will see if they can.
By the way, USA Today and WSJ both wrote essentially the same thing today: That Saudi would need to open the tap soon.
Robert
I believe we are going to have a supply/demand crunch pretty soon that should prompt the Saudis to open up a bit. We will see if they can.
Back a few weeks ago before the winter coldsnap hit and gas was briefly at or below $2.00 per gallon, many speculated the Saudis were pumping full blast in an effort to destabilize the Iranian economy (home of the dreaded Persian Shi’ia) by driving down the price of crude.
Could it be that after their max effort of a few weeks ago, the Saudis are now in a recovery period of slumping performance, and may not be able to open up?