Racing Toward "Peak Sweet"™

Jim Brown
 
Printer Friendly Version

In the wake of Libya's production halt Saudi Arabia promised to provide any Quantity and Quality of oil refiners need to compensate for the shortfall. Unfortunately Saudi does not have any light, sweet crude. Angola and Nigeria, countries that also produce light crude, immediately announced they had none to spare. Plenty of oil available but none of it is sweet.

I already pointed out last week that Saudi Arabia did not have any light, sweet crude to fill the Libyan shortfall. (Read article here: Quality Or Quantity?

Saudi's plan was to produce additional sour crude and swap it for light crude produced by someone else. That plan fell apart rather quickly after Angola and Nigeria said this weekend they had no light crude to spare. An official at the National Nigerian Petroleum Corporation said "We have received numerous expressions of interest" from European companies as a substitute for Libyan crude. In response they were forced to say, "We have none." Nigeria has very little spare capacity due in part to the constant attacks and disruptions by the MEND rebels. Hardly a month goes by that Shell or another producer does not have to shutdown a pipeline because of an attack. That prevents the oil companies from building up any material reserve because they are always behind the supply curve.

An official at the Angolan oil company Sonangol also warned there was no excess production available. "We just sold our last tanker last week."

To make matters worse both Angola and Nigeria are set to produce at reduced levels due to technical issues and maintenance for the next several months.

Get ready for at least a temporary peak in light sweet crude production or Peak Sweet™ as I called it last week.

The U.S. is not really going to be hurt by the halt in Libyan crude production because only 5% of Libya's output goes to the USA. The country hurt the worst will be Italy at 32% and Germany at 14%. Ireland is also a big importer in the "rest of Europe" category.

Libya's Crude Oil Exports (From Unicredit Bank)

Saudi Arabia announced it was raising output by 700,000 bpd over the 8.6 mbpd it produced in January but so far nobody knows where the oil is going.

A more likely rescue will come from the IEA, which has said it is ready to open strategic supplies and make them available to the European refineries in order to keep Brent prices from going through the roof and knocking the global economy back into recession.

The Libyan situation is still in flux. Gaddafi refuses to step down even though there are now demonstrations inside Tripoli calling for his removal. It must be getting near the end because his private nurse, a young, buxom blond and former stripper from the Ukraine who never leaves his side demanded to be flown home and her wish was granted.

The opposition government in Libya has already promised to keep the oil flowing but without oil workers that is more easily said than done. Germany and Britain both flew commando teams and cargo aircraft into remote areas of Libya over the weekend to airlift out workers that were stranded and could not escape the country. It was done at night under the cover of darkness and without approval or notification of Libya. One airplane received small arms fire but returned safely with its passengers. I doubt they will be going back to Libya to pump oil until the country is a lot safer.

There are conflicting statements about how much oil production is actually offline but several analysts have said it was near 75%.

What this production halt has highlighted for the entire world to see is the shortage of light sweet crude. For years OPEC and Saudi Arabia have been claiming there was "plenty" of oil and the oil markets were "well supplied." I have contended in my oil reports since 2007 that this claim was untrue because oil is NOT generic. You can't take oil from one field or country and use it interchangeably with oil from another location. Each field has a different grade, weight and sulfur content than any other field. It is not like swapping a Coke for a Pepsi. Some grades would be more like swapping a bottle of white Zinfandel for a carton of chocolate milk.

I believe this current problem with Libya's production is going to change the oil market for years to come. Even when Libyan production returns there will be new knowledge by consumers and investors alike that we are rapidly approaching Peak Sweet™ and that will be the straw that breaks the back of the global economy. While there is excess heavy, sour crude it will take years and hundreds of billions of dollars to convert existing refineries to process that dirty oil. European countries will not allow it because of the pollution and tons of sulfur and chemicals that will be produced every day from refining heavy crude. That means the European countries will be left in a bidding war for the remaining supplies of sweet crude and the refinery upgrades will have to be done in countries desperate for any volume of crude supplies and not so picky about pollution.

Peak Sweet™ is coming if it is not here already!

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?

Archives:200920102011201220132014201520162017