OPEC Needs Higher Oil Prices

OPEC Needs Higher Oil Prices

by Tony D’Altorio, Investment U Research
Thursday, April 7, 2011

OPEC is about to make history.

According to the International Energy Agency, the oil cartel will make $1 trillion in export revenues this year, a new all-time high. Talk about a gusher!

Oil now costs more than $100 a barrel. And oil production has been on the rise as well.

If that status quo remains, OPEC can expect a very good 2011.

Its heady situation once again emphasizes oil’s importance in the global economy. And its significance will only grow as developing nations – from China to India to Brazil – demand more energy.

But there are plenty of other factors at play that will keep oil prices high going forward…

OPEC’s Spare Oil Capacity Seeping Away

Supply disruptions present the most immediate concern for markets.

Libya used to be the world’s 12th largest oil exporter, producing about 1.6 million barrels of high-quality crude oil daily. Since war first broke out there, Saudi Arabia and other leading OPEC members have rushed to offset the shortfall.

Yet OPEC’s spare capacity is still dwindling – now to under four million barrels a day.

That’s much better than the 500,000 barrels a day after Iraq went offline in 2004 following the 2003 U.S. invasion. But it’s also well below the 2009 peak of seven million, and it could drop even further.

In reality, OPEC could use up its entire spare capacity as protests continue to spread.

Take Bahrain, Oman, Syria and Yemen, which are all experiencing unrest. Alone, they don’t produce that much but, together, they contribute 1.5 million barrels a day.

If they go offline, oil prices will rise.

That’s partially due to the oil market demanding a bigger price premium every time OPEC’s spare capacity shrinks. That premium will go towards offsetting the risk that another big disruption will force the system to run at full capacity.

Why OPEC Needs Higher Oil Prices

Also affecting prices, certain oil-heavy governments are turning toward populist policies to quell political unrest.

Take Saudi Arabia’s King Abdullah, who is boosting public spending and handouts. That includes one-off bonuses for public sector workers and building half a million homes at affordable prices.

Together, those actions cost $129 billion, equal to over half the country’s oil revenues last year!

Many veteran oil watchers expect the extra spending to lift Saudi oil revenue needs to a percentage basis closer to Venezuela or Iran’s. Both countries are well-known oil price hawks, always pressing for much higher prices.

In Saudi Arabia’s case, it will likely pay for its spending spree by tapping its $450 billion in reserves. But even then, prices will have to average $83 a barrel this year for it to balance its budget.

Just a decade ago, it only needed $20 a barrel to achieve that same goal…

Higher Oil Prices Are Here to Stay

Unfortunately for consumers, higher oil prices are here to stay. The Institute of International Finance notes that Saudi Arabia will only be able to balance its budget if oil prices are at $115 a barrel in the future.

And it isn’t the only one that needs prices to climb further.

Other members of the six-nation Gulf Cooperation Council are announcing similar spending plans. Kuwait, for one, will issue a $4,000 one-off bonus per citizen and free food staples for more than a year.

Such social spending will press oil prices higher still. It will also reduce available funds for state-owned oil companies to invest into adding future production capacity.

And as governments in the region continue to feel under threat from social unrest, they are less and less likely to cut into public energy subsidies. Those policies have made fuel cheaper than water in many of those countries.

Subsidies have led to runaway domestic growth in oil demand. Over the past decade, that demand has dented the region’s ability to export oil.

For example, oil demand in Saudi Arabia has doubled over the past 15 years. That transformed the country into one of the world’s top 10 oil consumers.

If the trend continues – and it probably will – the larger Middle East will have less and less oil to export every year. And that means higher and higher prices for everyone else.

Good investing,

Tony D’Altorio


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Commodities: OPEC minister admits cartel’s ability to control oil prices is limited

Trading April 7th, 2011 by IFandP Newsroom

Prices unless otherwise stated are for the close of April 6.

2012 baseload German power: €60.19/MWh, up 0.12%
2012 CIF ARA Coal: €132.50/t, down 0.38%
Front-month UK natural gas: GBp61.59/therm, down 0.20%
EU emission allowances (EUAs) for December 2011 delivery: €17.16/t, up 0.26%
Certified Emission Reduction(s) (CERs) for December 2011 delivery: €13.12/t, up 0.37%
Brent crude oil futures for front-month 2010 delivery: US$122.13/bbl, down 0.1%, as of 10:30 GMT, April 7
WTI crude oil futures for front-month 2010 delivery: US$108.93/bbl, up 0.2%, as of 10:30 GMT, April 7

Latest buzz
According to the EIA’s latest “This Week in Petroleum” report, US crude inventories rose by 2mbbl. Crude refinery inputs rose slightly to 14.371mbpd, but are still considerably below the 14.604mbpd seen in the same week of 2010. Average retail gasoline prices rose to US$3.684/gal, and stockpiles fell by 300,000bbl to 216.7mbbl. Distillate inventories rose by 200,000bbl to 153.5mbbl.

Despite this news, oil futures advanced on Wednesday, with sweet light crude for May delivery climbing by US¢49, or 0.5% to settle at US$108.83/bbl on the NYMEX. ICE Brent crude gained US¢8 to settle at US$122.30/bbl.

One interesting development that could pave the way for higher price rises in future, was an admission by the UAE’s oil minister, Mohammed bin Dhaen al-Hamli that “there is little we [OPEC] can do in terms of price control.” Speaking at an oil conference in Paris, he went on to say that: “International Markets are choosing to ignore market fundamentals and bet on the worst case scenarios.” His comments were echoed by Iraq’s deputy prime minister for energy affairs, Hussain al-Sharistnai.

“All that OPEC can do is provide the market with the oil it needs and it is doing that,” he said.

Such opinions suggest that OPEC is unlikely to act to bring oil prices down through hiking output further and are likely to prove supportive of prices in the short-term. Also speaking at the conference was the IEA’s Didier Houssin, who argued that the current oil market is very different from that seen in 2008, when OPEC spare capacity was less than 2mbpd. He said that it is currently around 4mbpd and global inventories were comfortable, particularly in the US. However, he pointed out that with the refinery maintenance season coming to an end, “Tightness for supplies, especially sweet crudes may be more difficult to manage in the coming months.”

Oil prices have retreated this morning, due to mounting concerns over the potential for demand destruction and a focus on a European Central Bank meeting scheduled for later today. A Reuters poll of analysts has predicted that the bank will boost interests rates by 25 basis points from the current record low of 1.0%. Further negative pressure is coming from the expansion of NATO operations in Libya.

China announced yesterday 5% increases in retail gasoline and diesel prices, which have come into force today, the fourth increase since October. However, the rise in fuel product prices in China is still lagging behind the increase in international crude prices, suggesting that the Chinese central government is attempting to rein in inflation.

US natural gas for May delivery extended its losing streak to a fourth day, settling down US¢8.5, or 2%, to US$4.146/mBtu, a three-week low, suggesting that traders are awaiting the release of EIA inventory data tomorrow. Also weighing on the market is the return to warmer temperatures for much of the country, with Meteorologists at Frontier Weather predicting average or warmer than usual temperatures across the eastern two-thirds of the US to last through to mid-April. A Platts survey has predicted that the EIA will report a 49-53bnft3 withdrawal from storage for the previous week. The Colorado State University Hurricane outlook is predicting an active hurricane season for the Gulf of Mexico, which could provide some support in the months to come. It puts the odds of a major hurricane making landfall at around 47%, compared to an average probability of 30% for the last century.

David Knox, CEO of Santos Ltd, has said that Japanese utilities will likely increase their purchases of LNG by 10% over the next few years, to fill the gap in their energy supply left by the closure of nuclear power plants. Santos and its partners including Total SA are currently building an LNG project in the Australian state of Queensland, which is expected to ship its first cargo in early 2015. It also has a stake in Exxon Mobil’s PNG LNG project in Papua New Guinea, which is due to start exporting LNG in early 2014. Mr Knox and Origin Energy’s CEO Grant King have predicted that Australian LNG exports could triple to 60Mta by 2017 and could possibly hit 100Mta by 2020.

The Dec11 EUA contract spent much of Wednesday trading in a €17.10-17.30/t range, given the absence of clear direction from a somewhat muddled energy complex. The contract eventually settled up 0.23% at €17.16/t, while Dec13 and Dec14 contracts lost 0.31% and 0.48%, respectively, due to expectations that the ECB will increase the eurozone base rate. This means that the premium commanded by the Dec13 contract has fallen by 4.3% to €2.21/t, from an intraday 19-month high of €2.36/t. The EU Commission is currently considering early sales of Phase III EUAs via the European Investment Bank, prior to the establishment of a single, EU-wide, emissions registry. The EIB is expected to sell 300m EUAs from its reserve prior to 2013 with the revenue generated, going to national governments to assist in renewable energy and CCS projects. Currently, although utilities are seeking 2013 carbon credits to allow them to hedge forward sales, there are few traders able to sell them in the volumes required according to Emmanuel Fages of Orbeo.

CER prices rose to a slightly larger extent than their EUA counterparts, causing the Dec11 and Dec12 CER-EUA spreads to narrow by €0.01 to finish at -€4.04 and -€5.11, respectively. The UN climate talks in Bangkok reached an impasse yesterday. After the presentation of an agenda by the G7 and China, aimed at finalising the agreements made last December, Annex I countries have responded by saying that it does not address all the agreements and is seeking to resolve issues too quickly. The US envoy to the talks Todd Stern has warned that a legally-binding treaty is “unworkable” and has argued that national policies should be the primary drivers behind emissions reductions.

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April 7, 2011

WTI oil trading firm over $108, OPEC unable to help out

US WTI oil prices open Thursday’s trading session firm over $108 a barrel, while OPEC ministers brushed aside worries that high oil prices would slow economic growth, saying there was little they could do to rein in triple digit crude oil prices.

Latest WTI Oil Price

US Light crude oil futures for May 2011 delivery was trading at $108.33, 05.55 GMT this morning in electronic trading on the NYMEX. WTI oil futures ended yesterday’s session up 0.7 percent at $108.74 a barrel.

All That OPEC Can Do?

“All that OPEC can do is provide the market with the oil it needs and it is doing that. We have not seen any slowdown in growth.” said Iraq’s Deputy Prime Minister for Energy Affairs Hussain al-Shahristani.

“The fundamentals are all okay with regards to supply. The stocks are all at a healthy level. With regards to speculation, that is nothing that OPEC can do anything about. But apparently that is the main reason why oil prices are at these levels.” said Qatari Energy Minister Mohammed Saleh al-Sada.

Asked if OPEC would increase oil production when it meets in June, Sada said “Raising output will happen if there is a problem with supply, and that is not the case.”

Oil Trading at 2011 Highs

Both US WTI and the European benchmark, Brent oil futures remain at two and a half year highs, mainly due to falling oil output from Libya and concerns about possible future oil supply problems from several countries in the Middle East.

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