1. Production and Prices

Last week started with falling oil prices based on rumors the Saudi’s would push for a second 500,000 b/d increase in OPEC production at the summit meeting. This was followed on Tuesday by a new IEA forecast that their previously forecasted increase in world oil demand would be reduced by 500,000 b/d this quarter and 300,000 b/d in 2008 because of higher prices and slower economic growth.

In its monthly Oil Market Report, the IEA said “there are strong indications that high prices are depressing demand and signs of higher output from Saudi Arabia, Iraq and Nigeria.” They also reported that OECD stockpiles fell by 29.5 million barrels in September and possibly a further 21 million in October.

The weekly US oil stocks report showed a surprising 2.8 million barrel gain in US crude stockpiles because of increased imports. Distillate fuel stocks were down by 2 million barrels so overall the report had little effect on prices.

By Friday however, oil was rising again based on a falling dollar, colder weather in New England, and emphatic representations by OPEC that they would not increase production quotas at the summit meeting. The week ended with oil above $95 a barrel.

Remarks by several officials that the organization can no longer do anything about high prices led to several wire service headlines that “OPEC has lost control”.

2. OPEC’s Summit

Unlike the periodic meetings of oil ministers that review production quotas, the third-ever OPEC Heads of State summit this past weekend dealt with longer term policy issues such as the place of the US dollar in oil sales and OPEC’s relationship to global warming. Prior to the meeting several oil ministers repeated the mantra that the oil markets were adequately supplied and that high prices were due to the falling dollar and speculators.

In his opening statement the group’s secretary general reassured the members that “petroleum resources in member countries are sufficient to meet demand in the medium to long term.”

The more militant members of the organization, Venezuela and Iran, used the meeting to make political statements. Iranian President Ahmadinejad said $100 was the proper price for oil, while Venezuela’s President Chavez garnered headlines by warning of $200 oil if the US attacked Iran. Chavez went on to say that OPEC should become a political organization that would use oil prices and availability as a weapon to gain the political goals of its members.

Chavez’s remarks brought an instant rejoinder from Saudi King Abdullah who said oil should not be used as a tool for conflict and that OPEC has always acted wisely. The king, however,
supported the concept of $100 oil, suggesting that the Saudis are in no hurry to increase production in response to appeals from oil importers.

The “highlight” of the conference came when a private meeting was inadvertently broadcast into the press room, allowing reporters to eavesdrop for half an hour on a debate about dropping the US dollar as the basis for oil prices. As could be expected, Venezuela and Iran are in favor of dropping the dollar while Saudi Arabia rejoins that such an action could prompt a further decline and harm OPEC.

If there is was a single theme to the meeting it seems to be that all sides agree that current oil prices are “fair” given the demand for, given the scarcity of the resource, surging worldwide demand, and limited options for OPEC to impact prices anyway. Some commentators see this agreement leading to much higher oil prices in the near future.

Although there was no mention of the dollar in the final communiqué, after the meeting Iran’s oil minister said that “we have agreed to set up a committee consisting of oil and finance ministers from OPEC countries to study the impact of the dollar on oil prices.”

3. Saudis Mount a PR Offensive

As an adjunct to the OPEC summit meeting, the Saudis made a major effort to convince the world that their oil production has not peaked and that indeed the kingdom will continue to be the swing player in the world oil market for years to come.

Prior to the summit, Oil Minister Naimi told a press conference that fears of a crude shortage were groundless and there was no reason to push prices to current record levels. “The prices today have really no relation with the fundamentals,” he said. “I believe OPEC in general and Saudi Arabia in particular has demonstrated their ability to respond very quickly to any disruption. So I don’t foresee the tightness (in the market) that pessimists are talking about.”

Saudi Arabia will continue to maintain surplus crude production capacity of 2 million b/d and is working on its plans to achieve 12.5 million b/d of total capacity by 2009, Naimi said. The country is producing close to 9 million b/d currently. He also said Saudi Arabia would soon add 500,000 b/d of light crude production capacity.

To back up the Oil Minister, Saudi ARAMCO’s CEO, Abdullah Jum’ah, said in a speech that more than 30 years of doomsday forecasts have been put forward about the petroleum industry and have since been proven false. He offered a statistical basis for his argument that forecasts for the ultimate recovery of conventional oil resources have actually increased over time. Addressing the 20th Congress of the World Energy Council, Jum’ah “demonstrated” that there will be enough conventional and non-conventional liquid energy resources for decades to come.

The Saudi’s then flew 100 foreign journalists on a visit to the new Shaybah oil field on the edge of the “empty quarter”, hundreds of miles from the nearest town. According to the Saudi’s the field is now producing 500,000 b/d of light crude and this will increase to 750,000 b/d by the end of next year. Advances in horizontal drilling allowed the Saudi’s to exploit the field by positioning rigs on salt flats rather than shifting sands. The Saudi’s say Shaybah has 19 billion barrels of proven reserves.

Riyadh left some journalists with the impression that the kingdom has much more oil in unexplored areas beyond the dunes. Others, more skeptical, note that the Saudis have allowed western oil companies to do exploratory drilling in the Empty Quarter for many years with no known successes.

PR will only carry the Saudi’s so far. This week, Saudi Oil Minister Naimi reiterated pledges that Saudi Arabia will deliver 1 million barrels of oil a day to China and keep the world well supplied. With most responsible observers expecting shortages within the next 36 months, it will not take long to separate PR from reality.

4. Energy Briefs

  • According to the IEA, world production of total liquids in October increased by 1.4 million b/d from September resulting in total world liquids production of 86.5 million b/d, — the all time high liquids production. Many analysts are skeptical of this number and want to await confirmation from other sources.
  • Concern is increasing that the dollar’s weaknes may augur the end of the U.S. currency’s reign as the world’s currency for trade, financial transactions and central-bank reserves. The dollar’s share of global reserves fell from 71 percent in 1999 to 64.8 percent in the second quarter this year.
  • The Movement for the Emancipation of the Niger Delta (MEND) is claiming responsibility for Thursday’s attack on an oil pipeline owned by Shell at the Forcados export terminal. MEND said it sent some of its commandos to the facility to “nibble” at the oil installation until it is no longer able to function properly and meet its obligations for oil exports. ExxonMobil evacuated the families of staff at its main Nigerian oil export terminal after an armed attack.
  • FedEx issued its second profit warning in two months on escalating fuel costs and meager demand for US freight, sending the company’s shares lower and darkening the outlook for the world’s largest economy. The company’s fuel costs total $1.15 billion.
  • The US Air Transport Association says that for the first time jet fuel has become the single-highest cost component for US carriers at 25.4 per cent of all operating costs.
  • The Bush administration plans to push for new sanctions against Iran after the U.N. nuclear watchdog agency reported yesterday that Tehran is providing “diminishing” information about its controversial nuclear program, U.S. officials said.
  • Algeria won’t meet its target to raise oil output capacity to 2 million barrels a day by 2010 according to Oil Minister Khelil who told reporters “at 1.5 million, that’s where we’ll be stabilizing,”.
  • China’s commerce ministry warned on Thursday that a slowing US economy would trigger a drop in Chinese exports that would mark a “turning point” for China’s rapid economic growth.
  • Rising costs and labor shortages will temper production growth from Canada’s oil sands. The National Energy Board expects production from the oil sands to rise to about 2.8 million barrels a day by 2015 from about 1 million barrels a day last year. The new estimate is down 200,000 barrels a day from a forecast the NEB released just last year.
  • Economists said record oil prices were likely to continue pushing inflation higher, predicting prices could rise this month by as much as 1 per cent to an annual rate of 4.5 per cent.
  • The IEA cut its October estimate for Mexican oil production by over 80,000 b/d due to storm-related production halts in the Campeche Sound.
  • China’s oil imports increased 16.5% over October 2006 and brought the total crude import figure for the first 10 months of the year up 13.8% compared to last year. The October imports, however, were the lowest since February and contributed to a growing shortage of diesel.
  • Britain’s combined average daily oil and gas production in the North Sea is down 10 percent from the previous month and 8 percent from a year ago.
  • Russia’s transportation fuels market is facing its biggest crisis in almost 20 years as severe shortages forced some retailers to close their filling stations.
  • Iraqi’s Oil Minister reports that production is now running 2.5 million b/d, up from 2.0 million due to the improved security situation.
  • Zambia will shut down its one oil refinery for 12 days due to shortages of crude oil feed stock and start importing refined production to make up for the loss.

Quote of the Week

[Background: The dollar has fallen almost 15 percent against the euro in the past 12 months. Iran and Venezuela were lobbying to switch from pegging the price of oil in US dollars to a basket of currencies, including the dollar. “There will be journalists who will seize on this point and we don’t want the dollar to collapse instead of doing something good for OPEC.”
       —Saudi Foreign Minister Al-Faisal during a closed meeting accidentally broadcast to an adjacent press room.