Further Confirmation Oil Is Plentiful?

Jim Brown
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Be careful when you read the headlines because there is normally a hidden meaning. Headlines from OPEC countries are guaranteed to be hiding the real truth and trying to foster their agenda to keep oil prices moving higher while putting the blame for these prices on someone else.

We heard on Sunday from Saudi Arabia's oil minister that "oil" production in Saudi Arabia had been reduced by -800,000 bpd in March because the market was well supplied. This is old news since two different sources released this information early last week and that info helped push prices lower on Monday.

Oil ministers from Kuwait and the United Arab Emirates echoed Ali al-Naimi's concerns about oversupply and said the high oil prices were out of OPEC's control.

Al-Naimi said Saudi produced 9.125 mbpd in February but cut production to 8.292 in March because there were no buyers for the oil. Truth or fiction?

We always have to remember that OPEC's definition of oil is "any" oil produced. Heavy, light, sweet or sour, it is all "oil" to OPEC. This is how they can stand in front of a microphone with a straight face and say there is too much oil in the market. There is too much because if is mostly the wrong kind of oil. Most of Saudi's oil is heavy sour crude.

When Libyan production was shutdown Saudi promised to produce in "any quantity and quality" needed to fill the void. Since they don't have the same quality as Libyan oil they had to blend some different types to come close to the Libyan characteristics.

They took some Arab super light, sour and blended it in some form to try and create a Libyan replacement. The Libyan oil varies from 0.01% to 0.07% sulfur content (very sweet) and the special Saudi blend was 0.5% sulfur. (sour) When they offered it to the European refiners to replace the Libyan oil they were turned down. Nobody wanted it. European refiners are very restricted on what kind of oil they can refine because of pollution rules.

Saudi produced two million barrels of this oil and then quit due to lack of buyers.

This does not mean there are no buyers for light sweet crude. It just means there are no buyers for sour crude.

I have contended for sometime that we are not facing a peak oil crisis today but a "Peak Sweet™" crisis due to the loss of 1.6 mbpd of light sweet crude from Libya.

The OPEC nations want us to believe that oil prices are high because of speculation in the oil markets. By constantly claiming the oil market is "well supplied" they are trying to divert attention away from them and onto those evil speculators. While they are doing this they are laughing all the way to the bank.

Since oil prices are benchmarked to WTI (West Texas Intermediate), a light sweet crude or Brent, also a light sweet crude, the OPEC nations benefit because it raises the price they get for the heavy sour crude.

OPEC is not our friend. The entire reason for OPEC is to manage the price of oil to their advantage. Based on comments last week you can bet they are NOT going to recommend a production increase when they meet in June. It is not in their best interest as long as they can continue to claim it is just speculation.

OPEC "cut" production by 4.5 million barrels in December of 2008. At least that is what they claim. However, they never achieved more than a 70% compliance with the cuts and today that compliance is around 57%. That means they are actually producing nearly two million barrels per day over quota making their actual reduction something in the range of 2.5 mbpd.

Last week Goldman said they believed OPEC excess capacity was only 2.0 mbpd and far less than the 4.7 mbpd OPEC claims.

Obviously if OPEC excess capacity is only 2.0 mbpd then nearly all of that capacity will come from Saudi Arabia. No other OPEC country claims they have any material excess capacity. Iran and Iraq have the reserve capability but they don't have the production ability because of failing equipment, deteriorating fields and sanctions. Basically they don't count and will not count in the excess capacity argument for years into the future. So, if all the excess capacity is coming from Saudi Arabia then it is all sour crude and not the kind the world needs to solve the problem.

For Saudi to continue to say they will pump whatever is needed to keep prices reasonable and then NOT do it makes those who believe them complete idiots. Remember $75-$85 is a fair price? With Brent over $120 the latest comments from some OPEC ministers has been $115-$120 is a fair price. Is it a fair price to them because they can't do anything about it or even worse they won't do anything about it.

So what is the real answer? Is OPEC lying about their millions of barrels in excess production capability?

Remember, Halliburton's claims last month that Saudi Arabia was increasing its rig count from 90+ to more than 125. The majority of those rigs were going to a field that only produces heavy sour crude. They are spending billions of dollars in a crash program to produce more heavy crude that nobody wants. What is wrong with this picture?

This is clear evidence they don't have the capacity they claim and they definitely do not have any excess capacity of sweet crude.

They are lying about the market being well supplied. If there were two million barrels of excess capacity in light sweet crude we would not have the problem of high prices we have today. There would be no $20 security premium because of Libya and unrest in the other MENA countries.

Remember the next time you hear an OPEC member claim the market is "well supplied" they are not telling the truth. It is a carefully orchestrated plan to shift the blame for high prices away from their lack of available production and onto the evil speculators while they pocket the proceeds.

Jim Brown

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The OilSlick Newsletter is based on the expectations for global oil production of light sweet crude to peak and begin to decline in the 2012-2014 timeframe. I am calling this "Peak Sweet™" instead of Peak Oil. This is the point where global production of conventional light sweet crude 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 Sweet™ countdown clock is ticking and time is growing short. Peak Oil will arrive shortly thereafter. Are you prepared?