Saudis Boost the Supply

Speculators have been bidding up the price of oil since the last hurricane blew through the gulf and shut down domestic oil production in the region.  Pundits hypothesize on how high the price of West Texas Intermediate (WTI) will go. With the talk of trouble in the Middle East and Israel's threats to bomb Iran, its no surprise that fear of a constricted oil supply line has increased volatility in the price of oil and has again driven the price of crude oil skyward.

Is it any surprise then, that today, Saudi Petroleum in an attempt to stabilize markets, announced their intention to increase oil production to 10 million barrels a day, effectively expanding current Saudi oil exports and global supply. Their stated desire is to help boost the global economy and relieve present fears of potential diminishing supply. This puts Saudi production at 80-85% of current capacity and barely stays ahead of expanding demand from the third world of emerging markets.

Dr. Kent Moors doesn't think this will change the long term fundamentals and sees trouble. First he states that the current retracement (a short term reversal) of prices will not last. He argues "there are no essential fundamentals justifying a downturn. Second, and critical, international demand this year will still come in at more than 88 million barrels per day and exceed 89 million by June of 2013." <http://moneymorning.com/2012/09/19/kent-moors-current-oil-supply-remains-adequate/> Thirdly he raises the specter of quantitative easing from the Fed, the Bank of Japan and the European Central Bank; all adding to inflationary pressures of oil and commodities by increasing the supply of money that is trying to buy them. We all saw what previous rounds of QE1-2 did for the price of staples and groceries. The increased supply of dollars chasing a fixed supply of hard commodities with demand unchanged will increase prices. Its no secret that more of the same will lead to more of the same. He makes a compelling case that the long term price of crude will rise.

Dr. Moors is having dinner tomorrow with Persian Gulf ambassadors. I'd love to be a fly on the wall...

Address of email article https://mail.google.com/mail/u/0/?shva=1#inbox/139e0255c8000bc6
Dr Moors' homepage and archive location http://oilandenergyinvestor.com/archives/#articleIndex


Dr. Tufte said...

Madhatter: a post must have a link to your source. Without that, I'm not sure how to interpret the context of what you're saying. Please edit your post.

madhatter said...
This comment has been removed by the author.
Zach said...

I find the decision of Saudi Petroleum to increase oil production to 10 million barrels a day very interesting. Just thinking economics, if the supply of oil increases while demand remains the same, the price of oil will decrease. Saudi Petroleum must feel that this will maximize their economic profit, or that the demand curve is going to shift to the right allowing them to maintain higher prices. All in all, I'm not against a price decrease in oil.

Dave Tufte said...

Zach: 50/50

This is a very good point. This is more of a political than an economic concern. The Saudis behave this way because they are better managed than most oil countries. Less well managed ones look at a price spike as a way to paper over their past policy errors. It's in the interest of the Saudis to keep prices low as a way to keep other powers, namely Iran, in check.

Dave Tufte said...

madhatter: 100/100 (sorry for forgetting to revisit this one after you added the link).

Another factor to think about is the Saudi's long term expectations for oil prices. Oil sands are not viable below $80/barrel. But, now that we've hit that level, oil production from sands is ramping up everywhere. It may be that the Saudi's think the potential to command prices very far beyond $80/barrel is limited in the future ... so why not increase production now when they can get a little extra money?

The same goes for fracking. But the thing with fracking is that the technology is nowhere near fully exploited. So it isn't clear how low its price floor can go.