The 800 pound gorilla in commodities forecasting predicted much higher prices 2-3 weeks ago with Brent going to $130 by Q3. Events over the last two weeks has caused them to temper that bullishness and call for "choppy" prices in the near term.
Goldman based this new prediction on the potential for Libyan production to rise by as much as 355,000 barrels per day over the coming months. Libyan rebels have pledged to resume shipments from areas they control. It remains to be seen if they can actually do it.
Libya is a large producer of light sweet crude with production of 1.6 mbpd prior to the conflict. That production declined to 200,000 bpd in May. The rebel finance minister predicted two weeks ago they could increase production by 100,000 bpd from fields they control.
Goldman believes exports of 200,000 bpd could resume soon from the fields that remain largely intact. In a report dated June 21st Goldman suggested another 155,000 bpd could potentially be exported at a later date from a second loading port now under their control.
Goldman believes if Qaddafi was removed from power those exports could climb to 585,000 bpd. That would require fields currently held by the government to be freed and returned to production. No timeframe was given but it would not be immediately upon his removal.
The majority of these fields are operated by outside workers and engineers who have fled the country. Peaceful control of the country and the fields would be required before oil companies would begin returning workers to the country. Estimates of 25,000 to 50,000 workers would need to return before full production would resume.
Goldman said bringing back the next 1.0 mbpd would be a lot more difficult. Currently the export terminals are under government controls and reports from the area suggest some of the installations have been badly damaged. Repairs would require the return of workers and engineers and the acquisition of critical parts. The IEA believes it will be 2015 before full production can resume.
Despite Goldman's "choppy" price call they still believe the current decline is temporary. They expect upward pressure on oil prices to resume in Q3 as sustained growth causes inventory levels to decline and OPEC spare capacity to decrease. If it takes 12-18 months for the initial 585,000 bpd of Libyan oil to come back online the demand growth for that period will actually exceed the amount of production coming back online. Demand growth over the next four years the IEA expects it will take for the missing one million barrels of Libyan production to resume is estimated at 6.0 mbpd. This makes the long-term outlook for prices very strong.
The IEA claims they are seeing indications Saudi Arabia is actually boosting production as they claim. It takes 30-60 days for any production increases to end up in the market and increases don't happen overnight. The IEA believes it will take until August for Saudi to reach full production levels.
The IEA said it was monitoring production so they would know if they needed to release some oil from the strategic reserves held by the 28 nations in the IEA. They currently have 1.5 billion barrels in reserve with 727 million in the U.S. alone.
Oil demand in Saudi Arabia is expected to increase by as much as 1.0 mbpd over the next three months as Saudi burns oil to produce electricity to power air conditioners during the hottest part of the year. This means Saudi needs to increase production by another 1.0 mbpd just to cover that additional temporary demand.
The next six months should be interesting in the oil sector. With the UAE and Kuwait also pledging to increase production it will be interesting to see how much they actually contribute. In OPEC there is a lot of bragging about potential production but when it comes down to actually putting barrels on a tanker the real truth should come out.
Kuwait and the UAE only have about 100,000 bpd of claimed excess capacity each so Saudi Arabia is the real swing producer that could actually alter the supply/demand picture.
I am confident the choppy prices will eventually fade because demand is still growing faster than new production so the long-term picture has not changed. Oil stocks remain the best investment you can make today and they will outperform for years to come.
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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 2012-2013 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?