Time For The Sauds To Nut Up

It was inevitable, but the tentative deal that OPEC struck to curb production is falling apart. Iran wants to keep increasing output to get back to their pre sanction levels, Libya seems to have it together enough that they can increase output, Venezuela has manipulated their bond market enough to keep the creditors off their backs for another year. Even Nigeria seems to have made enough peace with the Avengers that production is on the rise. But the death knell is Iraq. They are in the process of taking back Mosul from ISIS, and want to increase production to pay for this military action. So this deal looks doomed, and the price of oil will drop back under $50. Unless somehow Saudi Arabia unexpectedly decides to grow a pair and slash their production. There is precedent for them to do it. Shaving a few million barrels per day off of their output would bring the market into stability and would drive the price per barrel up to the $70 per barrel range. It would bring them some goodwill with a lot of countries and show that they are still a power in the market. And knowing that they legitimately have a few million barrels per day in reserve would give them a lot more clout when they threaten to flood the market. Even if they cut production, they would still be the largest producer in OPEC and the de facto power within that organization. And if the price of oil does come back up the rest of the member countries would have enough financial breathing room that they would be more amicable to production decreases of their own, and the orders of the Sauds. However it makes too much sense and the Sauds are too bitter and petty, so the deal next month will fall apart and the current status quo will remain.

Make OPEC Great Again

The seventies were a different time man. Back then the US had just hit peak oil, you could count your car’s MPG on your hands, Russia was just warming up, the Canadian oil sands were just a gooey sludge, and OPEC had all the power in the world. US oil demand was continually increasing and with their unexpected peak in production, quickly needed other sources of oil. The Sauds and OPEC took advantage and created the 1973 oil crisis. These Arab countries were flexing their newly discovered political and economic muscles, and had the US over a barrel (pun 100% intended). Never before and probably never again would such a militarily powerless group be able to pressure the US like that economically. With OPEC still producing a sizeable fraction of the world’s oil, why are they not still the economic power that they once were. And the reason is progress. Back in the seventies, the OPEC countries were mostly all poor and undeveloped with small tribal populations and few major cities. Back in the day exerting their influence on the global stage was far more important than profit margins. These countries had no one to answer to. The populaces were small and poor and the leaders barely had to answer to them. And after multiple world wars in their region and the meddling of foreign powers these countries were all eager to make a name for themselves. They had a chance to stick their thumbs in the eyes of the imperial powers and gladly took it. It is a different world these days. All of those countries have grown up and have booming populations that require ever increasing amounts of GDP. And through neglect and hubris most of their economies are completely controlled by their respective oil industries. So when the current oil crisis hit, they all were more concerned with market share and the bottom line than exerting influence. OPEC countries have all become to corporately minded. The fear of losing market share to a  rival is now far more important than wielding influence. They have all become so tied to oil profits that they are no longer able or willing to make large production swings to correct the market. So they all produce as much as they can in order to try and stay in the black while further depressing the price. The price of oil will no longer be corrected by any OPEC actions, but by the changes in production of the global market. The actions of the past year and especially the past month have shown that OPEC is no longer able to function as one entity and make changes to affect the market. OPEC is for all intents and purposes dead as a global political force.

Alaska And The Problem With Pipes

The US has long known that there were oil reserves in Alaska. In the early part of the century when the US Navy was transitioning from coal to oil, Alaska was marked as being of strategic importance due to its reserves. However due to its remoteness and inhospitable environment it was left untapped. That changed with the oil embargo in the seventies. The US needed more domestic oil and needed it quick. People started poking around in the north shore of Alaska and fully realized the potential of Prudhoe bay. The only problem was how to get the oil out. There was too much pack ice for traditional tankers. So what to do. Build a pipe and transport the oil further south to a clear harbor. And thus the Trans-Alaskan pipeline was born. This 4ft diameter pipe is designed to transport millions of barrels per day and has done so for over thirty years. However its future is not looking so bright. And for an unexpected reason. Alaska is no longer producing enough oil. Alaskan oil comes out of the ground warm and enters the pipe at around 45 degrees Celsius, it then enters the pipe and gets pumped along at around 4mph. The pipe is designed to handle over two million barrels per day, and in the early eighties that much was flowing through it. However due to the natural decline of the field, only around a half million barrels travel through the pipe now. And this is approaching the lower limit of what it can handle. Much less and the oil will start to cool too much and start separating, creating blockages and freezing in the pipe. There was a hope that arctic drilling would start and provide a fresh influx of oil through the pipe. All of those plans are shelved and Alaska is stuck with the ever decreasing amount that is coming out of Prudhoe bay. So now they have to start looking at other ways to keep it flowing. Either installing heaters or and insert to shrink its diameter. Or just hoping that global warming kicks in enough that the waters of northern Alaska remain ice free. It will be interesting to see what happens.

China To Keep On Keeping On

The amount of oil in the US petroleum reserve appears to have peaked and has actually been slowly been decreasing over the past few weeks. Despite a few new gulf rigs coming online, US oil production remains flat. But OPEC is still producing at record levels and there is still a global surplus, so where is all this extra oil going? To the same place it has been going for the past two years. China. It has long been known that China has spent the last two years using cheap oil prices to rapidly building their reserves from almost nothing, to several hundred million barrels. But there has always been secrecy about it. And a fear that they would declare themselves full and stop adding to it, creating an out of control glut. It was assumed that once they hit around 500 million barrels, they would be done. It now appears that they are far from it.
The tanks they have been using all have a floating roof design. Using satellite data and tracking the shadows in the tanks, the west has been able to figure out what China is actually up to. And its kind of surprising. They have way more oil than anyone gave them credit for. An estimated 600 million barrels in surface storage. Plus an unknown amount that is stores in caves underground. But that is not all. They are not anywhere near full capacity. From what was spotted, China has a current storage capacity of some 900 million barrels. Potentially double what the US keeps. They realized that oil is at a price far below what it should be, and have been using this deflated price to buy as much as possible for years. They have even cut domestic production way back. It is really impressive that they were able to buy this much yet not tip off the markets or cause the price to spike. It will be interesting to see what they do in the years ahead. If they will just draw on these stockpiles when the price spikes, or use it to make the market appear flooded while they gobble up cheap futures contracts. That is an absurd amount of oil, and if China has ever proved anything, it is that they will do what they can to make a buck.

Iran's New Deal

Well now it looks like Iran has finally caved. They issued a new oil contract for $2.4 billion. There are not really any details about it yet, but it sounds like they are now playing ball. If so, this is a big. Iran is one of the last bastions of cheap undeveloped crude. Even at $50 oil, they have a lot of profitable fields. Big petro companies will be giving them a look. It will be interesting to see what, or if the Saudi response is.

Iraq?

The tentative deal that OPEC cooked up this week was bound to fail, but not by the country that I assumed. It looks like it will be undone by Iraq of all countries. At the meeting OPEC rolled out their numbers showing how much all the member countries were producing. And will use those number to determine how much each country will need to cut production by. Well Iraq is now taking offense to those numbers, saying that their output was underestimated by some 200k to 400k barrels per day. Those are big numbers if true and if Iraq is told to roll back to where OPEC wants them to be, that could be almost a half million barrels a day of production that would need to be shelved. This has the secondary effect of other member countries saying that their numbers were low balled as well, starting a chain reaction that undoes everything. It will be interesting to see how this plays out. If a back door deal with Iraq will happen, or the whole deal falls apart like is expected. Either way, this shows that OPEC is nowhere near the cohesive force that it once was and the Sauds no longer have the control they once had.