2011-10-07

2011 October 7

The Master Resource Report  2011-10-07

U.S. gasoline consumption (page 1 )

The New Saudi Arabia – North Dakota??? (page 2 )

Shell CEO says we need 10 North Seas. (page 3 )

What can rail traffic tell us? (page 3 )

What good is salt at 932°? (page 4 )

Ravenna Capital Management is proud to sponsor the 2011 ASPO-USA Conference.

Note:  Early Registration ends October 7th!

Oil Price Risks

“Saudi Arabia vowed to use “an iron fist” after the government said 11 members of the security forces were attacked and injured during unrest in Awwamiya on Oct. 3.”

The Saudi government blamed an unnamed country for provoking unrest among the kingdom’s minority Shiite Muslims. The unnamed country is Iran of course and the geopolitical risks of something like this escalating are huge. Serious trouble in Saudi Arabia would quickly make Greece into a side show.

Another risk is that Libya takes longer than the market expects to get its high quality crude back online.

“Italian oil major Eni’s largest oilfield in Libya, known as Elephant, may be in ruins, its operations manager Mustafa Abougfeefa said in an interview. The oil field pumped 130,000 barrel per day before the war.” “We cannot promise the field will start producing before the end of the year. Gaddafi’s militia destroyed everything,” Abougfeefa said.

Spare Capacity

Goldman Sachs (GS) released its Energy Watch (commodities research) this week and had some interesting comments on the markets and of course the required oil price forecast.

“The world crude oil market remains exceptionally tight. Over the summer, Saudi produced 9.8 million b/d and the US SPR released 30 million barrels of oil, and yet the oil market remains in a seasonally-adjusted deficit, with inventories outside the United States at the lowest levels in nine years and OPEC spare capacity under 1.0 mmb/d. However, the market continues to focus on the risk of a new economic recession, triggered by the stress on the European financial and banking system. We expect the financial stress in Europe will continue to present headwinds to economic and oil demand growth next year, and we are lowering our 2012 Brent crude price forecast to $120/bbl from $130/bbl as our economists lower their outlook for 2012 world economic growth to 3.5% from 4.3%; we recognize the downside risk to our forecast from a potential European financial crisis.”

So to begin with there is the price forecast. GS lowered its forecast by $10/barrel to $120 for 2012 based on, you guessed it another forecast. They lowered “their outlook for 2012 world economic growth to 3.5% from 4.3%…”, which of course is just as unlikely to actually reality as any other forecast. Maybe if enough forecasts are layered on one another it will somehow increase the odds of success.

The comments that matter were straight forward and probably overlooked by most who read the report since they focus only the price forecast (mistake!). In addition very few appreciate that nearly all of that extra Saudi production was consumed domestically to generate power not export (remember net exports?) “Saudi produced 9.8 million b/d and the US SPR released 30 million barrels of oil, and yet the oil market remains in a seasonally-adjusted deficit, with inventories outside the United States at the lowest levels in nine years and OPEC spare capacity under 1.0 mmb/d.”

Now recall from previous discussion on this page that the OECD countries essentially have zero spare capacity so if OPEC is at 1 million barrels per day that is essentially the sum total of global spare capacity. Based on global crude production of 78 million barrels per day (GS estimate crude only) that puts spare capacity at roughly 1.3% of demand. This along with the lack of true Saudi net exports helps to explain why the US released supplies from the SPR. There is currently no room for demand swings on the upside or further supply disruptions on the downside.