TJ,
The post below is from Big Dog. How pervasive do you think the Chinese slowdown will be? Is most energy consumption marginal?
Cheers, D
RBC Capital
On Oil...
Intermediate-term oil likely to stay above $50/bbl.
Longer-term, number of forces in play portend an oil price drop.
Increased Saudi investment.
Higher Iraqi output.
Lower Chinese demand.
On Saudi Arabia...
Simmons book about oil supply peaking in Saudi Arabia only helps the Saudis by fanning the flames of uncertainty.
STRATFOR's view is that Saudi is not quite yet at the peak, but wouldn't mind if everyone thinks they are.
Desert Smoke Screens
Higher oil prices clearly benefit the Saudis, but they consistently craft an image of wanting lower oil prices.
They may prefer stable oil prices but absolutely love high prices.
They don't seem to worry about damaging the economies of the West.
Cash is King, Literally
They use cash to buy off factions of terrorism risks internal to the country.
Uncertainty is a Friend
Uncertainty adds to increasing oil prices - maintaining the highest level of secrecy to supply and capacity by OPEC has been standard and fundamental to the alliance.
That is why the Saudis are very secretive - in order to either hide their peaking supply or hide how well they are doing.
An assumption that the Saudis are hiding impending shortages ignores the possibility that the Saudis WANT people to believe they are running out of oil, in order to keep prices high.
Bottom-line, the real state of Saudi reserves is impenetrable.
Actions Speak Louder than Words
The Saudis are acting in two ways:
As if they can increase production and
That they want to increase production.
Time will tell whether recent Saudi capacity increases result in building production or controlling production.
Supply Disruption Threats?
Two potential military targets could be the Saudi's main oil-loading platform or their pipeline.
If either were attacked it would be reasonable to expect spikes in oil prices.
Saudi production is so robust that neither potential attack would interrupt oil production for more than a couple of months at most.
Since Al Qaeda has (monetary) relations with Saudi royalty, it is unlikely that it would carry out an attack on oil resources.
Saudi Government Succession
Between the US invasion of Iraq and Al-Qaeda operations, the Saudi royal family has realized its vulnerabilities.
Succession has been orderly and will continue to be even as the next generation takes the reins.
Factions have realized that they need the Royal house of Saud more than they need to pursue personal advantages.
Cash has soothed internal strife.
Riding the Crest
Saudis are great beneficiaries of higher oil prices.
They fully understand that the greater the uncertainty of the peak capacity, the more they are able to manage Al-Qaeda in the short-term.
The Saudis feel like they mismanaged the first time oil prices went high (in the 70's), but feel like they can manage oil prices above $50/barrel for longer.
The biggest danger to Saudi Arabia comes not from internal or Al-Qaeda, but from Iran.
On Iran...
STRATFOR doesn't believe there is a "war premium" on oil prices, but an "Iran premium."
Iranian oil production is a profitable enterprise in the current commodity environment.
Nuclear threat is more of a bargaining chip to get the US government to bend on Iraq, which has been unsuccessful.
Reality of the matter is that if Iran was really trying to build a nuclear device, they would be doing it in complete secret. It makes no sense to announce plans to develop one.
Even if Iran was building nuclear weapons, STRATFOR does not believe that the country would halt oil production - they need the revenue too much.
On Iraq...
Iraq is the great wildcard in the oil supply.
STRATFOR believes that Iraq capacity could easily be doubled.
The ability of Iraq to build production is dependent on investment, which is threatened by political stability.
Much of Iraq's oil reserves have not yet been explored.
What has been explored in the country has not been optimized.
However, due to the murky political situation, it will probably be several years until Iraqi production comes online.
We the People
The chief threat to the Iraqi constitution is Iranian influence.
Iran wants to marginalize the Kurds in the North and the Sunnis in order to see an Iraq that is either pro or neutral to Iran, e.g. a pro-Shiite pro-Syria Iraq government.
The US needs substantial Sunni participation in the government and a constitution written such that they could block pro-Iran leanings.
If the Sunnis do not participate in the government and the Shiites are able to both control the government and develop the oil fields in the South, this benefits Iran.
STRATFOR is moderately optimistic that there will be a settlement whereby the Kurds, Shiites, and Sunnis can come to an equal-sharing compromise.
The Politics of Oil Investment
If a compromise can be reached, there will be a surge in investment and Iraq oil will represent a surge of oil supply.
The future of Iraq's oil supply revolves around the political decisions being made now.
Question at hand - how much oil will be available and when will it come online?
On China...
STRATFOR takes a contrarian view that the China economy is a bubble on the verge of bursting.
Foreign investment in China has been collapsing over time.
The Chinese domestic investors have been parking money in offshore banks, then reinvesting in China in the form of offshore third parties, which means that foreign investment money is not truly from foreign sources.
STRATFOR estimates that 50% of China's foreign investment comes from these offshore sources.
The remainder of Chinese investment is mostly not US and Europe, but from other countries in Asia.
In short, the amount of foreign investment in China is equal to the amount of foreign investment in France.
Proof...
Markets indicate that China is in deep trouble.
Chinese slowdown (that government has tried to keep quiet) is starting to become evident in the form of political unrest.
Although China has substantial dollar reserves, Japan also had huge dollar reserves in the 1990's and that didn't help them.
Western press is still wildly enthusiastic on China, but shouldn't be.
Therefore, STRATFOR does not see China as an ongoing driver of higher oil prices.
Gaming the System
The recent devaluation of the yuan is meaningless - it still basically remains pegged to the dollar.
The main goal was to head off the protectionist sentiment in the US.
Chinese are involved in a desperate game (to deceive) to:
Present the Chinese economy as better that it is.
Demonstrate domestic strength to encourage foreign investment.
Validate trading partnerships through a token devaluation of the yuan. |
