re:Barron's article
Fred Leuffer had some interesting points. He seems to think that an increase or decrease in oil production by OPEC takes 1 year to reach developed markets.
His main argument is that OPEC wants oil prices to go to $18. He says that OPEC wants uncertainty. He seems to be in the crowd that believes that there are potential new sources of non-OPEC oil around the world just waiting to be pumped at these higher prices.
I think $18 oil is a memory that won't be repeated. The reason is simple math. OPEC was producing near capacity last winter (so close to capacity that several OPEC countries were producing below quotas). OPEC is now pumping 1.5 mbpd less than last winter. Seasonal demand will increase around 3.0 mbpd from this quarter to the fourth quarter. If non-OPEC oil doesn't come to the rescue in a big way, OPEC will have to pump 1.5 mbpd ABOVE last year's levels that were near capacity. Also, if Iraq is still not pumping in the 4th quarter, there is no way supply will meet demand below $30 a barrel.
Also note that Brent oil is priced near WTI. To me this means that if there is any excess oil it is not in Europe but in the U.S. API reports are just based on U.S. data. One has to ask about Asian oil inventories and Latin American oil inventories, etc.
But, finally, if you subscribe to the "peaking of conventional oil theory", non-OPEC oil has peaked or is currently peaking. If this is true, OPEC has absolutely no reason to keep oil prices volatile and uncertain. There are no potential rising levels of non-OPEC production to fear. If non-OPEC oil production is no longer a factor, that would go a long way in explaining the new "price band" mechanism that OPEC uses. The price band is designed to keep prices stable.
In the short term, if indeed there is a 20-30 million barrel "glut" of oil in the U.S., it will evaporate in 5 weeks of cut-off Iraqi production (1 down, 4 to go).
Spin seems to still be king in Washington D.C. If there is one thing the government needs right now it is lower oil prices (the U.S. is already near a recession). Something tells me that recent "analysts" talking of $18 oil in the face of an Iraqi stoppage, is just spin promoted by uncle Sam.
You know, I have always wondered why even though the U.S. dollar is depreciating a little each year due to inflation, that oil price levels are always supposed to be $18 ???? Costs to produce oil are affected by inflation and there has to be a bottom floor on total costs to produce oil (just because it takes finite energy to pull it out of the ground, ship it, etc). Oil is not like semiconductors which get exponentially cheaper to produce every generation. |
