IEA Versus Saudi Arabia, Round Two

Jim Brown
Printer Friendly Version

The International Energy Agency too aim at Saudi Arabia and OPEC again this week with a claim the cartel was already pumping more oil than they claimed. OPEC's Secretary General again blasted the IEA claiming inconsistency.

The IEA announced on Tuesday they had discovered Saudi Arabia and probably Kuwait and the UAE had been producing more oil than claimed over the last several months in order to keep prices lower. Obviously if this is true they did not pump enough given the spike over $90.

The IEA, which advises 28 nations on energy matters, told their members "It appears Saudi Arabia has been making more crude available to the market over the past six months, judging by export data from independent tanker trackers." The IEA claims were contrary to claims made by Saudi's biggest customers and views by other analysts and consultants surveyed by Reuters, which showed production had been flat.

IEA claims are normally perceived as gospel by the mainstream press when it comes to future demand and production but when it starts making statements counter to OPEC claims there is far less credibility.

The agency claims Saudi's output in December rose to 8.6 mbpd from 8.5 mbpd in November. The agency also claimed Saudi Arabia, Kuwait and the UAE lowered prices to customers to make their oil more attractive to buyers. This is apparently factual because I saw the prices changes in several places last month. You have to wonder why these countries are lowering their individual selling prices when overall prices have been continually rising.

Reuters OPEC survey claims Saudi was producing 8.25 mbpd for the past six months and the official OPEC claims have them at 8.3 mbpd. Obviously Saudi has to report to OPEC on how much they produced and there is little trust between OPEC members. One could easily understand why a country producing more than its allotted quota would like to report less production to avoid criticism. OPEC has had to resort to independent reports and tanker tracker firms in the past to estimate how much oil each country was producing because internal reports submitted by members were not accurate.

OPEC countries need prices over $80 to cover their operating budgets. They are not likely to allow production, even unreported production to endanger that $80 level.

The recent comments by Saudi's Oil Minister al-Naimi suggesting that OPEC produce more oil to keep high prices from killing the economic recovery are right inline with the claims by the IEA of extra production.

A major challenge with OPEC cheating on its production quotas is the risk of using up their excess capacity without any official notice they were dipping into that capacity. The IEA claims OPEC excess capacity has now dipped under 5.0 mbpd and some analysts believe it is now under 4.0 mbpd. The consensus in the peak oil community is that the excess capacity of "usable oil" is already under 2.0 mbpd. That is the preferred grades that most refineries are setup to process.

The IEA must be searching for something to write about to keep them relative in today's environment. The second story today is comments from the IEA Chief Economist Fatih Birol in Davos Switzerland. Birol claimed "Current and future fundamentals are responsible for the rise in oil earlier this month. Financial markets do play a role in order to trigger these trends but the question mark in the markets mind is whether growth in demand will be met in a timely manner." Normally speculators are blamed for the rise in prices but that would eliminate the need for OPEC to increase production. Apparently the IEA has decided to abandon the speculator excuse in favor of demand growth. That fits their mandate better and will enable them to sell more reports.

Birol then launched into a climate change warning claiming we are only a couple degrees away from disaster. Recently climate change has been in a lot of the IEA reports and occupied a large amount of the pages produced. I believe this is an effort to distract the public from the coming peak oil problem. If they hide the details in plain but buried under hundreds of pages of useless information and climate change propaganda then they can always point back to the details later and say "we told you this was coming." With Brent crude trading just under $100 the signs are clear there is trouble ahead. If anyone other than OPEC had any extra light crude the price would not be $100 today. The refiners who buy crude are not stupid. If there was an alternative to paying $99 for Brent they would be buying it by the tanker full. Bernstein's reiterated their price target for 2011 at $130. If there was available oil on the market that price would never be obtainable.

Jim Brown

This newsletter is only one of the newsletters produced by OilSlick each day. The investment newsletter is also produced daily and contains the current play recommendations in the energy sector. Stocks, options and futures are featured. If you are not receiving the "Play Newsletter" please visit the subscribe link below to register.

Subscribe to Energy Picks Newsletter

See a list of our closed plays from 2010 here: Closed Positions

The OilSlick Newsletter is based on the expectations for global oil production to peak and begin to decline in the 2012-2014 timeframe. This is called "Peak Oil." This is the point where global production of conventional oil supplies can no longer be supplemented by enough oil sands production, deepwater oil production, biofuels and natural gas liquids to offset the decline in existing fields. The roughly 6% annual decline of existing production due to depletion is larger than the rate of new discoveries and new production being added each year. The Peak Oil countdown clock is ticking and time is growing short. Peak Oil is coming, are you prepared?