No Shortage In the Market According to OPEC

Jim Brown
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After two days of conversations among OPEC leaders the production question was answered on Wednesday. 'There is no shortage in the market" and OPEC is not going to increase production.

Obviously the greed of OPEC countries is overpowering their economic thinking. With analysts around the world warning oil prices over $100 will cripple rising demand and slow or even kill the economic recovery, OPEC is determined to squeeze every last dollar out of a barrel of oil.

If there was no shortage why are prices so high? Oil is one of the most actively traded commodities on the planet. The full sized CL contract averages volume of 350,000 front month contracts per day on the Nymex. Brent crude on ICE trades another 200,000 contracts per day. Add in the various other exchanges and the complete futures cycle for years into the future and the E-Mini contracts and there are easily more than one million contracts traded per day. With that kind of volume speculation to the point of sustaining prices long term is nearly impossible.

Numerous agencies looked into the speculation claims by OPEC after the 2008 spike. Nobody found any smoking guns and the claims died. The exchanges have raised the margin required more than one since 2008 so that less capitalized traders cannot over leverage or churn the market.

The speculation claim by OPEC is a cleverly disguised way to dodge responsibility for high prices. It is the fault of the secret speculators not your friends at OPEC.

Oil prices are high because supplies are shrinking. We don't have a shortage of oil but excess capacity is shrinking. Saudi's oil minister said today they have 3.5 mbpd of excess capacity. I found that interesting since in the recent past they have claimed between 4.5 and 5.2 mbpd of excess capacity. Did the minister err in his calculations? I seriously doubt it.

By stating a slightly lower capacity it subtlety raises the risk in the future and causes prices to rise. It was a way to say, "no problem we have all the oil you want" but at the same time update the market with their current outlook.

So OPEC has blessed the current $115 price on Brent crude as a "fair" price. If they did not think it was fair they would have at least given lip service to the problem and announced a token production increase.

Saudi Arabia Day of Rage

Friday is D-day in Saudi Arabia. Dozens of websites and Facebook pages have been calling for a revolutionary demonstration against the government on Friday and again on March 20th. I am sure you have heard by now that Saudi Arabia expressly forbids public demonstrations and has promised to crack down hard on any public gathering.

In fact Saudi fired on a group of demonstrators in the city of Qatif on Thursday and threw percussion grenades into the crowd to break up the gathering. This was only a few hundred demonstrators not the expected tens of thousands for Friday's protest.

Saudi has also activated 15,000 National Guard troops to help police the streets. Several news stories claim the regular police have told various groups they will not fire on demonstrators because they believe in the cause. The National Guard troops are probably not going to be so nice.

Saudi has been contacted by numerous organizations and country leaders asking them to not use violence to breakup the demonstrations. All requests have fallen on deaf ears. Saudi has zero tolerance to political dissent. That is one of the things demonstrators are asking for is the right to express their views.

The demonstration is expected to start sometime after 8:AM ET on Friday so our markets will be reactive to the news when they open.

If the demonstrations are crushed and people hurt it could cause an even bigger uprising. The potential for civil disobedience possibly resulting in damage to oil facilities is slim but the market always assumes the worst.

If Saudi somehow escapes through the weekend without a major event with lots of negative news then the price of oil may decline even though Libya is attacking its own oil facilities and ensuring production will be offline even longer.

Libyan Update

A Chinese VLCC oil tanker, the Gulf Sheba, was told to leave the Libyan port of Es Sider on Wednesday because its expected cargo of 2.0 million barrels of light crude had been cancelled. The Libyan National Oil Company claims the country is still producing 500,000 bpd of its recent 1.6 mbpd capacity but there is no independent confirmation.

Gaddafi supporters attacked the Es Sider terminal on Wednesday igniting stored fuel but Libyan state TV blamed it on al Qaeda and the rebels. The burning storage tanks were shown on TV and produced another rebound in oil prices.

News events do control oil prices because of the added security premiums or scarcity fears and this weekend is going to be a prime opportunity for some market moving news from Saudi Arabia and Libya.

Jim Brown

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