OPEC To Consider Quota Adjustment

Jim Brown
 
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OPEC meets in Ecuador on Dec 11th to discuss production quotas and other items of interest. Tanker tracker Oil Movements said OPEC shipments rose +0.4% in November. It was the eighth consecutive month of increases.

Nobody really expects OPEC to change the production quotas when they meet next week but the meeting is always a good source of sound bites for the press. Most of the oil ministers continue to claim $80-$85 is a good price but there are the rabble rousers who are talking up $100. Venezuela, Libya and Iran would like to see oil at $100.

Shipments from Middle Eastern OPEC producers will rise to 23.56 mbpd in the four week period ending on Dec 18th according to Oil Movements. The larger shipments are due to the arrival of colder weather and the demand for heating oil in Europe and the U.S. northeast.

Saudi Arabia is planning on increasing the price for a barrel of Arab Light crude in December by 78-cents. That would increase the price to a $1.15 premium over the average of other Persian Gulf benchmarks. It would also be the highest price since August 2009. This would be the secondprice increase in two months. Remember, OPEC has plenty of oil but they don't have plenty of light crude. When the price of crude breaks the $100 level in 2011 it will be because light crude supplies will be tightening up.

Saudi Arabia's King Abdullah is in New York undergoing surgery to his back. While he is here he delegated the management of Saudi Aramco to his half-brother Crown Prince Sultan bin Abdulaziz. The surgery was said to be a success and the 86-year-old king has begun therapy. Heck just surviving any surgery at 86 should be considered good news.

China is also increasing its demand for OPEC crude. The crack spread for turning crude into gasoil rose to $14.32 per barrel on Nov 15th. That is the highest level since January 2009. This was prompted by a shortage of diesel in China. Analysts believe China will continue to support crude prices as colder weather puts a drain on their supplies.

China's three major state owned oil companies have signed a new set of deals with Venezuela and increasing their planned investments in the country to $40 billion. China National Petroleum Corp (CNPC) said it signed a deal to develop a block in the Orinco basin that is capable of producing 400,000 bpd. The cost to develop the block is estimated to be $16 billion. Reportedly PDVSA, the Venezuelan oil company will be a 60% owner and CNPC 40%.

Sinopec (SNP) and China National Offshore (CNOOC) also signed a deal to develop two blocks in the basin and produce 200,000 bpd.

China bankrolled Venezuela back in April with a $20 billion loan in exchange for future deliveries of oil. Chavez used the money to help him get reelected and buy arms from Russia.

Russia announced crude exports fell -2.5% in November to 20.1 million metric tons of crude. Meanwhile refining output rose +3.1%. This goes along with the concept of the Export Land Model that states crude demand in large producing countries will rise faster than demand in importing countries.

China announced on Friday it was going to tighten monetary policy over the next year. They are becoming increasingly alarmed over rising inflation. China has a runaway real estate boom in progress. In 2009 a record $560 billion of residential property was sold. That is an 80% increase over 2008. The government has been tightening the rules for real estate loans but business is still booming. At the same time China's gold imports are soaring as investors buy gold as an inflation hedge.

During the first 10 months of 2010 more than 209 tonnes of gold were imported. That is nearly a 500% increase over the 45 tonnes imported in 2009. China has actually encouraged retail consumption by increasing the number of banks that are allowed to import bullion. Since then gold has become a very popular hedging tool in China.

Gold hit a high on Friday of $1424 but that is still below the 1980 inflation adjusted peak of $2,300.

China took the lead from South Africa as the largest gold miner. China's gold consumption rose to 450 tonnes in 2009, up from 200 tonnes just a few years ago. Analysts are expecting that to rise to more than 612 tonnes and passing India as the largest consumer.

With the various gold ETFs consuming and hoarding gold the price appears sure to go up. Reportedly the GLD ETF has purchase commitments out for as much as 9 days of future global production because there is a shortage of the actual bullion today. On Thursday Goldman projected a $1750 price for gold in 2011.

Back in the Gulf of Mexico the oil spill moratorium is still in force nearly two months since it was officially lifted. No permits have been issued and as many as six deepwater rigs have either left the Gulf or have announced they will be leaving.

Marathon served notice on Noble Corp it was going to claim Force Majeure on the Noble Jim Day if drilling has not resumed by Dec-31st. The Jim Day can drill in waters up to 12,000 feet and a well dept of 37,000 feet. Noble was scheduled to receive $510,000 per day from Marathon for the contract.

Ensco (ESV) has asked the judge to reopen its suit against the government in respect to the moratorium. Since the halt is still in place even though it is officially canceled Ensco wants the judge to take action against the Dept of the Interior for freezing the permit process. The judge has been favorable to Ensco and Cameron in prior rulings. I suspect he will again rule in their favor and with hostility since the administration has been untruthful with him in the past.

Jim Brown

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