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04/02/2010

OPEC: An Update

Just a quick review of OPEC and current production, which as I’ll explain at the end is critical when looking at the threat posed by Iran and a potential strike on its suspected nuclear weapons facilities, with a corresponding reaction in the oil trading pits.

OPEC was founded in 1960, Baghdad, with the original five countries being Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. Then came Qatar (1961), Indonesia (1962), Libya (1962), UAE (1967), Algeria (1969), Nigeria (1971), Ecuador (1973), Gabon (1975) and Angola (2007).

[For a spell, Ecuador took itself out but came back into the fold in 2007. Indonesia and Gabon left the cartel.]

On March 17, 2010, in Vienna, OPEC opted to maintain its formal production at 24.845 million barrels per day, a figure that is unchanged since December 2008. Of course some OPEC members cheat on the quotas assigned to each so that in February 2009, actual production among the 11 quota-bound members was 26.7mbd.

[Iraq is not bound by any quotas as it continues to rebuild its oil industry. It has the potential to produce substantially more than it currently does.]

So let’s look at the production of crude oil for each OPEC member, Feb. 2010 (millions of barrels per day)

Algeria 1270
Angola 1930
Ecuador 476
Iran 3756
Kuwait 2289
Libya 1542
Nigeria 1963
Qatar 816
Saudi Arabia 8142
UAE 2281
Venezuela 2290

OPEC-11 26753

Iraq 2563

Total OPEC 29316

The common percentage figure bandied about is that OPEC accounts for 40% of the world’s daily production but it’s really closer to 34%-35%, especially if they maintained production at current levels as global oil demand rises to 86.6 mbd from 2009’s est. 85 mbd, per the latest forecast put out by the International Energy Agency. The fourth quarter of 2009 saw the first growth in world demand after five consecutive quarters of decline.

Of the projected 86.6 mbd in demand for 2010, 45.4 mbd comes from the OECD (Organization for Economic Cooperation and Development) countries…the developed nations…while the non-OECD, or developing countries, should account for 41.2 mbd. The non-OECD forecast is up from 2009 demand of 39.5 mbd, while OECD production has been basically flat.

Looking at China, demand was up a staggering 28% year on year in January and is now at 9 mbd, up from 4.8 mbd in 2000. China’s demand is projected to grow to 10.3 mbd in 2011.

As for the United States, demand was down to 18.5 mbd in 2009. Not too long ago, it was closer to 22 mbd.

The OPEC nations account for 3/4s of proven oil reserves around the world, with 72% of this in the Middle East. It is estimated that these reserves would translate into 1,000 billion barrels. While this is a constantly changing figure, in theory most of us don’t have to worry about the world running out of crude any time soon. On the other hand, it’s not always easy getting at this oil and in many price environments it can be cost prohibitive, giving “Peak Oil” adherents (of which I’m one) ammunition.

Turning to Saudi Arabia, the United States imported just 989,000 bd from the Kingdom, down from 1.5 mbd in 2008 and the lowest figure since the early 1990s. But China’s imports from Saudi Arabia hit the 1 mbd target for the first time, and were double 2008’s levels.

Finally, in my “Week in Review” commentary, I have expressed the belief that if oil were to spike in a big way following any attack on Iran’s nuclear weapons facilities (namely Natanz), that would be a terrific time to ‘short’ crude. While I don’t like to give out investment advice, I have firsthand experience in a scenario of this sort when Saddam Hussein invaded Kuwait in Aug. 1990. Oil spiked, but then tumbled as the U.S.-led coalition built up its forces in the region in preparation for expelling Iraq from Kuwait.

The Saudis, as you can see above, are currently producing in the neighborhood of 8.1 mbd. Call it 8.5 mbd. They have actual capacity, though, of 12.5 mbd, or 4 million excess. The last thing the Saudis want is an oil price shock up to $130 (or higher) that would send the global economy spiraling down anew. Ergo, my long held theory has been that Saudi Arabia would announce it is flooding the system with its spare capacity to bring prices back down. Such a statement alone would have the desired effect. Just my opinion.

Sources: Energy Information Administration, International Energy Agency, OPEC, New York Times, Wall Street Journal, Bloomberg

Wall Street History returns next week.

Brian Trumbore



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Wall Street History

04/02/2010

OPEC: An Update

Just a quick review of OPEC and current production, which as I’ll explain at the end is critical when looking at the threat posed by Iran and a potential strike on its suspected nuclear weapons facilities, with a corresponding reaction in the oil trading pits.

OPEC was founded in 1960, Baghdad, with the original five countries being Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. Then came Qatar (1961), Indonesia (1962), Libya (1962), UAE (1967), Algeria (1969), Nigeria (1971), Ecuador (1973), Gabon (1975) and Angola (2007).

[For a spell, Ecuador took itself out but came back into the fold in 2007. Indonesia and Gabon left the cartel.]

On March 17, 2010, in Vienna, OPEC opted to maintain its formal production at 24.845 million barrels per day, a figure that is unchanged since December 2008. Of course some OPEC members cheat on the quotas assigned to each so that in February 2009, actual production among the 11 quota-bound members was 26.7mbd.

[Iraq is not bound by any quotas as it continues to rebuild its oil industry. It has the potential to produce substantially more than it currently does.]

So let’s look at the production of crude oil for each OPEC member, Feb. 2010 (millions of barrels per day)

Algeria 1270
Angola 1930
Ecuador 476
Iran 3756
Kuwait 2289
Libya 1542
Nigeria 1963
Qatar 816
Saudi Arabia 8142
UAE 2281
Venezuela 2290

OPEC-11 26753

Iraq 2563

Total OPEC 29316

The common percentage figure bandied about is that OPEC accounts for 40% of the world’s daily production but it’s really closer to 34%-35%, especially if they maintained production at current levels as global oil demand rises to 86.6 mbd from 2009’s est. 85 mbd, per the latest forecast put out by the International Energy Agency. The fourth quarter of 2009 saw the first growth in world demand after five consecutive quarters of decline.

Of the projected 86.6 mbd in demand for 2010, 45.4 mbd comes from the OECD (Organization for Economic Cooperation and Development) countries…the developed nations…while the non-OECD, or developing countries, should account for 41.2 mbd. The non-OECD forecast is up from 2009 demand of 39.5 mbd, while OECD production has been basically flat.

Looking at China, demand was up a staggering 28% year on year in January and is now at 9 mbd, up from 4.8 mbd in 2000. China’s demand is projected to grow to 10.3 mbd in 2011.

As for the United States, demand was down to 18.5 mbd in 2009. Not too long ago, it was closer to 22 mbd.

The OPEC nations account for 3/4s of proven oil reserves around the world, with 72% of this in the Middle East. It is estimated that these reserves would translate into 1,000 billion barrels. While this is a constantly changing figure, in theory most of us don’t have to worry about the world running out of crude any time soon. On the other hand, it’s not always easy getting at this oil and in many price environments it can be cost prohibitive, giving “Peak Oil” adherents (of which I’m one) ammunition.

Turning to Saudi Arabia, the United States imported just 989,000 bd from the Kingdom, down from 1.5 mbd in 2008 and the lowest figure since the early 1990s. But China’s imports from Saudi Arabia hit the 1 mbd target for the first time, and were double 2008’s levels.

Finally, in my “Week in Review” commentary, I have expressed the belief that if oil were to spike in a big way following any attack on Iran’s nuclear weapons facilities (namely Natanz), that would be a terrific time to ‘short’ crude. While I don’t like to give out investment advice, I have firsthand experience in a scenario of this sort when Saddam Hussein invaded Kuwait in Aug. 1990. Oil spiked, but then tumbled as the U.S.-led coalition built up its forces in the region in preparation for expelling Iraq from Kuwait.

The Saudis, as you can see above, are currently producing in the neighborhood of 8.1 mbd. Call it 8.5 mbd. They have actual capacity, though, of 12.5 mbd, or 4 million excess. The last thing the Saudis want is an oil price shock up to $130 (or higher) that would send the global economy spiraling down anew. Ergo, my long held theory has been that Saudi Arabia would announce it is flooding the system with its spare capacity to bring prices back down. Such a statement alone would have the desired effect. Just my opinion.

Sources: Energy Information Administration, International Energy Agency, OPEC, New York Times, Wall Street Journal, Bloomberg

Wall Street History returns next week.

Brian Trumbore