2011 June 10

The Master Resource Report  2011-06-10

Forecast of Canadian oil production.    (page 1 )

GM and a $1 gas tax?    (page 2 )

More on Opec & Saudi oil production.   (page 3 )

Geothermal in Japan.   (page 3 )

Flywheels and idling.   (page 4 )

Opec – So which is – Can’t or Won’t….?

Plenty of ink and blog space was devoted to the Opec announcement that the member’s quotas would remain unchanged and that the meeting was anything but a happy club gathering. However the really important question was not addressed or even acknowledged. Can Opec really raise production by anything other than a token amount? After all they are all cheating on the quota now anyway so how much more do they have.

As the Financial Times indicated the day before the meeting. “If Opec decides on Wednesday to raise quotas by anything up to 1.3m b/d, this will only formalise existing overproduction, rather than increase the availability of oil to the market.  For actual output to climb, Opec would have to raise its official limits by more than 1.3m b/d.”

Given that most of the members are overproducing their quotas now it would leave one to believe that other than a small group led by Saudi Arabia none of them have any capacity to raise production even if the quota were increased? This is especially true for Iran and Venezuela.

Therefore if countries like Iran and Venezuela that voted to maintain the quota were shown unable to increase production it would lay bare the reality of their capacity. This would weaken their position but also bring into doubt a fundamental assumption in the market that Opec truly has meaningful spare capacity today.

Since Opec’s own estimates for a global “call” on Opec’s crude supply is forecast to rise by 2.1 million barrels per day in the third quarter of this year it would clearly indicate that Opec is incapable of controlling supply and price on the upside by meeting that “call”.

Remember there is no surplus capacity in the OECD/non-Opec producing countries. Any production capacity that is available in those countries is online and flowing at these prices. Are there any wells capable of production in the U.S. or Canada that are not producing with prices over $100/b?

So what is the response from the U.S., the world’s largest oil importer to the news that Opec will not be increasing its production quota? Stupid is the only thing I can call it.

In a brilliant demonstration of the U.S. lack of understanding of the situation the nation and world are facing concerning crude oil supplies Senator Edward Markey “called for the US to consider releasing emergency oil reserves to keep prices down.”

Nice plan Senator. What happens when the emergency oil reserve runs out and you have a real emergency like a natural disaster? What is the maximum flow rate from the SPR? Would it really impact global prices? Is the purpose of the SPR simply to influence oil prices? Clearly he has no sense of the scale of the global oil supply and what is needed to meet growing consumption.

The reality is that unless something changes concerning supply Opec has its collective back up against a wall concerning its ability to increase exportable oil on the global market. The difference between consumption and oil available to be brought onto the global market is narrowing towards the 2% level at which point price will begin to take on a life of its own.

Of course there is one other possibility, another global recession. In that case the world will have to wait a little longer find out if Opec “Can’t” or “Won’t”.

Is there a worse business model?

According to the Financial Times Giovanni Bisignani, director general of the IATA “…told the Iata annual meeting in Singapore that the airlines’ collective profit margin would fall to 0.7 per cent on forecast revenues of $598bn, compared with last year’s “pathetic” 3.2 per cent on revenues of $562bn.”

That dismal forecast is based on the assumption that the average price of oil will be $110/b. With Brent climbing back to $120/b after the Opec news IATA’s forecast may prove optimistic. Oh well so much for a profit margin of 0.7 per cent.

Note: Clients and Advisors of Ravenna Capital Management currently hold puts on various airlines.