Oil to $60.....by January?

[Gordo]

Re: 500,000 bpd decrease in global refinery output

Gordo: No personal offense intended, but for someone who is apparently shorting crude oil, this statement shows a remarkable lack of understanding of what is going on physically and politically in OPEC.

Poor, poor, OPEC, GRG55, they're so misunderstood.

[GRG55]

Re: 500,000 bpd decrease in global refinery output

Poor, poor, OPEC, GRG55, they're so misunderstood.

$60 in January unlikely, but plenty of time to hit $70 by May 15.

[Gordo]

Re: 500,000 bpd decrease in global refinery output

$60 in January unlikely, but plenty of time to hit $70 by May 15.

That's the spirit, GRG55. How about a new thread "Oil to $60......by June".
Doesn't have quite the same ring to it.

[GRG55]

Re: Oil to $60.....by January?

This seems a bit of a stretch, but who knows for sure. SeeForbes.com article from 11/12/07 below.

Oil at $100 a barrel? No way, says one defiant expert. Expect $60 crude--soon.
War in Iraq, destabilization from Turkey, unquenchable thirst for energy in Asia, millions of fuel-slurping SUVs still cruising American highways. No wonder oil prices have jumped above $90 a barrel on the new York Mercantile Exchange, on their way to $100.
Not so fast. According to some longtime observers, we will soon see $60 oil. Their argument is that the main driver of price spikes is something hardly mentioned these days: a miscalculation by the world's most important supplier, Saudi Arabia. And within the next two months that miscalculation will be corrected and oil prices will drop. "It's sure getting set up for a hard fall," says George Littell, partner at Groppe, Long & Littell, a Houston firm that has advised oil drillers and investors on the outlook for crude prices since 1955.
Here's how Littell sees it. Last year Saudi petrocrats thought demand would slacken at the same time that oil production rose from sources outside the Organization of Petroleum Exporting Nations. They cut back Saudi production from 9.5 million barrels a day in March 2006 to 8.5 million a year later in order to keep supply and demand balanced and crude prices hovering around $60 per barrel.
The Saudis got one part of the equation right. The International Energy (otcbb: IENI.OB - news - people ) Agency puts world demand at 85.9 million barrels a day, up only slightly from 2006. And among the 30 industrialized nations that make up the Organisation for Economic Co-operation & Development, demand has fallen by 100,000 barrels a day over that period.
But the Saudis overestimated non-OPEC production. While companies of many oil-producing nations are pumping cash into the declining oilfields of the North Sea, the Gulf of Mexico and elsewhere, those projects haven't contributed as much crude as analysts expected. "If demand is less, what's got to be driving the price of oil is lower OPEC production," Littell concludes. "It's a miscalculation on their part."
Check out the relationship between prices and production in the accompanying chart. The Saudis hold the key to long-term oil prices since they are one of the few exporters--Kuwait and Abu Dhabi are the others--with the ability to increase production significantly. Littell says the Saudis realized their mistake and began pumping more oil in May. At the most recent OPEC meeting on Sept. 11 members agreed to boost production by another 500,000 barrels a day starting Nov. 1. That increase included a bump in the Saudi quota to 8.9 million barrels a day.
How long before we get some relief? It takes at least a week for the Saudis to complete the paperwork necessary to ship oil to new customers, including arranging letters of credit and other financial details. Then the oil rides in a ship across the Atlantic for 30 days. Add them together and Littell expects the impact of all that additional oil to hit U.S. markets in a couple of months or so. The Saudis "didn't plan on $80 oil," he says. "They wanted to keep it around $60 and did the wrong thing."
Not everyone buys this argument. Certainly not the speculators who've been kicking up the price of oil on the NYMEX for more than a year. Leo Drollas, chief economist at the Centre for Global Energy (otcbb: GEYI.OB - news - people ) Studies in London, believes that oil prices will fall eventually, but not until the middle of next year. Refiners are still trying to refill inventories that dropped to the lowest levels since 2003 after an unexpected cold snap in North America at the beginning of this year. The increase in OPEC quotas, Drollas calls "too little, too late." Besides, he says, "We're facing a winter with low [inventories], and the market's woken up to this." The mess in Iraq, which ships 1.5 million barrels a day through the Persian Gulf, and brinksmanship by Iran may keep prices from falling quickly.

Caught a few bits of an interview with Henry Groppe on BNN out of Toronto this morning. Wasn't able to catch all of it, perhaps someone else may have seen the whole thing and can fill in more info. FWIW here's what I picked up:

• Price will (is) ration(ing) consumption (imagine that );
• Recessions don't cause low energy prices, high energy prices cause recessions (that's what he said folks);
• Consumption patterns everywhere continue to adjust to the rising price of energy, with wide response differences in different economies (his firm expects to issue a study to clients later this year with details on this);
• Official reserves of some OPEC countries are overstated by 50%, "When they go to get that oil, it won't be there" (I think I have that quoted accurately);
• Expects economic growth, and returns on investment across the globe to be quite a bit lower, than everyone has come to expect based on recent experience, for many years to come, in part due to higher energy prices;
• Stated that energy was one of the few sectors that he expected would generate higher than average returns "for the next ten years" (note he said energy, and not petroleum or oil only - although the interview seemed to be only about petroleum);
• Recommended that investors should hold both oil and natural gas, if they are invested in petroleum;
• Does not see any realistic possibility of significant displacement of petroleum for transportation fuel "in our lifetimes" (Followed up by saying he plans to live quite a while longer ;)). "There's 835 million automobiles in the world fleet, with a half-life of 15 years. It takes a long time to change that out".

[Gordo]

Re: Oil to $60.....by January?

Caught a few bits of an interview with Henry Groppe on BNN out of Toronto this morning.

Thanks, GRG55, but Henry and his buddy George Littell are going to lose some credibility come Feb 1. May have to start using their predictions as a contrarian indicator.

[metalman]

Re: Oil to $60.....by January?

Thanks, GRG55, but Henry and his buddy George Littell are going to lose some credibility come Feb 1. May have to start using their predictions as a contrarian indicator.

global oil demand up 2% a year since 2004 while oil prices went up 400%...

"The prices of oil and other commodities are surging primarily because of the weak dollar. Between mid-2003 and the beginning of 2008 oil has zoomed from $25 a barrel to almost $100. Real demand in oil didn't suddenly massively increase to justify a nearly fourfold rise in price. The best indicator of inflation is gold. In this same time period the yellow metal has zoomed from around $350 an ounce to more than $800 an ounce. More than $50 of the per-barrel price of oil today comes from inflation and the speculation that inflation induces."

http://www.forbes.com/forbes/2008/0128/017.html

how could "Henry and his buddy George Littell" not understand this? did they really think bush and ben were going to crash the economy in an election year? why not wait until the stupid dems take it over?

[bart]

Re: Oil to $60.....by January?

Thanks, GRG55, but Henry and his buddy George Littell are going to lose some credibility come Feb 1. May have to start using their predictions as a contrarian indicator.

No guarantees of course, but betting against Groppe since 1955 has not been a winning strategy.

[Gordo]

Re: Oil to $60.....by January?

No guarantees of course, but betting against Groppe since 1955 has not been a winning strategy.

Don't know about since 1955, but I know that betting on Henry and his partner, George Littell, has not been a winning strategy since November, 2007.

[bart]

Re: Oil to $60.....by January?

Don't know about since 1955, but I know that betting on Henry and his partner, George Littell, has not been a winning strategy since November, 2007.

Au contraire - oil is lower now than the November 2007 or January 2008 peaks.

And Groppe is not talking about shorter terms like that either.

[rj1]

Re: 500,000 bpd decrease in global refinery output

South Africa has shut down its gold mines for lack of fuel...

You are dead wrong on this one and I know that cause I follow South African news somewhat.

The reason the gold mines were shut down was cause there is not enough power generation to meet the needs of consumers and businesses That's not lack of fuel, that's lack of electricity due to poor planning on the part of Mbeki and his government because they made a decision five years to not build new powerplants despite their economy's growth and eventuall need for it...and it's come back to bite them in the ass.

http://www.mg.co.za/articlePage.aspx...ews__business/

South Africans can expect current load-shedding by Eskom to continue, if not worsen, for at least the next four weeks. The state-owned electricity utility, however, cautioned that this might be extended due to excessive rain.

Eskom, which met major industrial customers and the six metro mayors on Tuesday, proposed a three-phase recovery period that would include load-shedding, at least in the initial phase.

"We do foresee load-shedding," said Minister of Public Enterprises Alec Erwin, adding that Eskom and the government aim to move towards a more predictable system, but in the interim there will be load-shedding and later power rationing.

Boost to mines
Eskom promised on Tuesday to boost supplies this week to mines crippled by power failures, but warned it will soon have to start rationing electricity.

Power cuts have halted most mining in the country, a major producer of gold and the world's top platinum miner, driving prices for precious metals to historic highs and badly shaking confidence in prospects for the continent's biggest economy.

Eskom will increase electricity to mines by up to 90% by the end of the week, Erwin said on Tuesday. Mines, forced to shut last week, currently have only 75% of their energy needs. "During the course of Thursday we will revamp up to 90%," Erwin told a press conference.

He said Eskom will also start to ration supplies for customers from March.

AngloGold Ashanti, the world's third-biggest gold producer, said it had restarted production at one of seven mines by diverting power from elsewhere. Its main rivals in South Africa were unable to restart their mines.

"We expect to have 60% of our normal production back by Thursday," said AngloGold's spokesperson, Steve Lenahan. But he added: "If we don't restart all our mines soon, employees are in danger of being sent on unpaid leave."

[rj1]

Re: 500,000 bpd decrease in global refinery output

Rajiv,

The Saudis and their Gulf allies have $2.5 TRILLION in profits from oil in the last few years.

They should have built the refineries themselves.

Prediction-In the face of the world wide fuel crisis, if OPEC doesn't increase production by a substantial amount on Feb. 1, I predict some smart politicians will start calling for the break up of OPEC.

The extra 2 mbpd is there. If not now, when: if not them, who. We'll find out real soon.

The Saudis are well-funded by our government because we need friends regardless of the consequences due to the resource oil, we need a regional counterweight against Iran, and the Sauds and Bushes are good friends. We won't do jacks***.

And here's another reason. We gave them $20 billion in November, and Northrup Grumman is not going to take too kindly to the notion of an order getting canceled cause some politician got off his ass for once and spoke a big game while doing nothing.

Tuesday, November 20, 2007

Saudi Arabia Wants a Littoral Combat Ship Fleet



In July I pointed out that Saudi Arabia was interested in the purchasing the Littoral Combat Ship, specifically the General Dynamics version. Saudi Arabia has been advertising since 2005 that they were interested in purchasing 4-6 Patrol Frigates and 6-8 Corvettes in 2007. 2007 would be year two in a three year massive military purchasing spree, which started with Army and Air Force purchases in 2006 and will conclude in 2008 with athe purchase of new submarines. It was originally thought Saudi Arabia was going to purchase the French FREMM, but it appears the Multi-Mission Combatant (MMC) version of the Littoral Combat Ship (LCS) is getting all the attention lately.

The Saudis are not known for the skill of their military commanders. Their military is among the most spectacularly equipped in the world, which only serves to emphasize the poor quality of its leaders, soldiers, airmen, and sailors. This lack of large scale proficiency is Saudi Arabia's weakness.

That is why with the $20 billion in spending discussed for Saudi Arabia, most of it will ultimately go for training. We are already seeing a lot of this with the purchases so far, if you read the details of the specific purchases for the Saudi Air Force and Army over the last year and a half, you will notice the price is far and above the equipment costs. That is because Saudi Arabia understands that it needs better military training, something our defense industry provides, and is working on that problem.

When you talk about naval vessels, it is noteworthy the MMC version of the Littoral Combat Ship has a crew roughly a third of the Riyadh-class frigate. Not surprising then, in leading up to the purchase of Littoral Combat Ships, it was disclosed that Saudi Arabia is looking for as many as 12 warships and is looking to spend between $11 - $13 billion dollars, which as you might guess, is high for 12 Littoral Combat Ships because it includes training costs.

The coming sales may include Patriot anti-missile battery upgrades for several countries, plus a new class of shore- patrolling warships for Saudi Arabia's eastern fleet, according to retired Air Force Lt. Gen. Jeffrey Kohler, who held talks on the matter before stepping down in August as the Pentagon's top arms-sale official.

The warship piece "of the so-called package could run as high as $11 to $13 billion and take well over a decade before delivery of the last ship" of up to 12 vessels, he said in a telephone interview.

Eastern Fleet. Iran. Iran has risen far enough for both Riyadh and Washington's tastes. With the minimal crew size of the LCS MMC, a well trained crew of sailors would be able to field a formidable force of LCS MMCs to curb Iranian influences at sea in the Persian Gulf. The LCS MMC could be the right tool for Saudi Arabia to push back against Iran in the Gulf, something the US is tired of doing without regional assistance. While it has been reported that Lockheed Martin was pushing the LCS at the Dubai Air Show, the characteristics of the General Dynamics MMC LCS previously discussed for Saudi Arabia.

Principal Characteristics:

LOA: 127.6m

Beam: 31.6m

Draft: 4.4m

Displacement Full Load: 3120MT

Max. Speed (Light Load): >40 knots

Range: Cruise @16 knots: 4,500 nm

Sprint @ 36 knots: 1,500 nm

Mission Bay: 1,100 sqm (11,800 sqft)

Flight Deck: 1,030 sqm (11,100 sqft)

Accommodation: 110 personnel

Armament Options Include:

32 Missile Vertical Launch System

1 57mm Gun (Forward)

8 Harpoon Missiles

2 Close-in Weapons systems

6 ASW Torpedoes

Propulsion and Electrical:

Gas Turbines (2)

Diesels (2)

Waterjets (4) and Retractable Azi Thruster

Diesel Generators (4)

While there is legitimate reasons why the JDAM should be discussed, and perhaps not be given to Saudi Arabia within the context of the current proposed defense sales, the MMC version (either GD or LM) of the Littoral Combat Ship is the most appropriate defense sale the US is making to the region outside of Patriot missiles. The name of the game in the Persian Gulf is security. The MMCs proposed supposedly come not only with AEGIS but additionally a ~1000 sq meter modular command center (which I've heard rumors is intended for MIW), which to me appears absolutely perfect for both the defense and security requirements of the maritime environment of that region.

[Gordo]

Re: 500,000 bpd decrease in global refinery output

And here's another reason. We gave them $20 billion in November, and Northrup Grumman is not going to take too kindly to the notion of an order getting canceled cause some politician got off his ass for once and spoke a big game while doing nothing.

Don't know what good selling them weapons is when they won't fight. We've lost 3,000 dead in Iraq and they haven't lost a man.

In the first Irag war, before the fighting started, they were in the "front" lines and our troops were right behind them (for political reasons). Our troops were told, "When the fighting starts, don't shoot the first Arabs you see running toward our lines, shoot the ones right behind them."

[rj1]

Re: 500,000 bpd decrease in global refinery output

Don't know what good selling them weapons is when they won't fight. We've lost 3,000 dead in Iraq and they haven't lost a man.

Per listed forces in "The Coalition of the Willing", they never committed a single troop. The only reason the Saudis supported us in the first Gulf War was because they were wary of Hussein's power and how he could project it against them after he annexed Kuwait. That didn't exist this time around as the Saudis had the best of both worlds: the Sunnis (closer to the Saudis then the majority Shiites) controlled Iraq, Saddam was a toothless tiger and convenient whipping boy, and Iraq was a buffer state with Iran. So they really didn't have a dog in the fight, as their only real reason to support our efforts is just cause we've bought them off.

[GRG55]

Re: Oil to $60.....by January?

global oil demand up 2% a year since 2004 while oil prices went up 400%...

"The prices of oil and other commodities are surging primarily because of the weak dollar. Between mid-2003 and the beginning of 2008 oil has zoomed from $25 a barrel to almost $100. Real demand in oil didn't suddenly massively increase to justify a nearly fourfold rise in price. The best indicator of inflation is gold. In this same time period the yellow metal has zoomed from around $350 an ounce to more than $800 an ounce. More than $50 of the per-barrel price of oil today comes from inflation and the speculation that inflation induces."

http://www.forbes.com/forbes/2008/0128/017.html

how could "Henry and his buddy George Littell" not understand this? did they really think bush and ben were going to crash the economy in an election year? why not wait until the stupid dems take it over?

Groppe had an interesting take on this issue as well. He said that his firm also used to think that a large portion of the oil price increase was due to US Dollar depreciation. He said they studied this more closely and were surprised when they concluded that only about 10 million bbls/d of total global consumption of 85 million barrels is "directly effected by the US $". I am not really sure what he meant by that, but he went on to describe how European refiners don't pass on the full increase they see because petrol prices are already so high. Maybe someone else saw the interview and understood it better than me, or has access to their research and can explain this comment.

One thing I did understand, however, was his next comment. He used different words, but it was the same thing I've posted a few times here: "We can't burn virtual barrels". He was absolutely clear that his view is supply now dominates, the price is being driven by the need to restrict demand down to available supply, and future supply of conventional crude will decline (no timeline given) and the price of energy will continue to be well above what the world has been used to in recent decades (hence his belief the world will experience a number of years of lower growth and lower returns on investment).

Finally, in closing, a personal (not Groppe) observation. Commodity pricing always behaves such that the first barrel (or bushel) of shortage drives up the price of all the barrels, and it works in reverse as well. That's one of the reasons commodity prices tend to alternately skyrocket and collapse over history. We can be quite certain the US Fed was inflating its money supply in 1986, and in 1999, but that didn't stop oil prices from falling over a cliff on both those occasions - so I have a wee bit of trouble with those that say that "$50" of the price is just inflation...

[Guest]

Re: Oil to $60.....by January?

GRG55's comment below is one of the most cogent comments of the drivers of the petroleum price in the 2000's - on this entire website - as long as I've been reading it.

iTulip's thesis on the primary drivers of the petroleum price is in urgent need of an overhaul. The implications behind Mr. Groppe's comments are massive - specically to the fundamental components of CPI indexes going forward.

I don't have a reputation around here for being tactful, so I won't attempt to be: I have found iTulip's coverage and interpretation of this entire question most narrow, purist and verging upon the academic.

I reiterate, despite widespread disbelief among readers here (because iTulip does not yet endorse the idea of "other large factors in the petroleum price rises", and readers here refuse to believe anything which iTulip has not yet formally endorsed for their uncritical consumption) - I reiterate - iTulip's assessment of the fiat currency inflation factor in petroleum prices has greatly overrated the fiat paper money factor, despite increasingly more explicit suggestions from just a tiny handful of us that this did not seem by any means the whole story.

They resolutely remain within entrenched, narrow, almost academic definitions of an issue which is going to grow to become one of the largest issues of the next 20 years, as few here would today deny.

The issue Mr. Groppe points out is a very large one - affecting all of the bubble dynamics which iTuliper's otherwise so assiduously study. And yet, the intellectually slack refusal of almost all contributors here to never question iTulip's long standing (since 2006 or even much earlier?) viewpoint on the principal drivers of petroleum prices being merely fiat money persist and contradict all the appartently industrious and independently minded pursuit of the "hard truths" which this community prides itself on.

By asserting everywhere that fiat inflation encompasses all the real news occurring in energy price rises, iTulip effectively shuts down the entire curiosity or discourse which might lead to a genuine examination of the massive financial repercussions to come OUT OF the fundamental petroleum price rises yet to come - which Mr. Groppe, in his 50 years acquired wisdom in this industry, is so aptly pointing out.

The majority of iTuliper's find the entire concept Mr. Groppe describes slightly alien and implausible - i.e. "not in accordance with iTulip theory" - namely "oil prices now have a very real, absolute price rise component, which promises to get ever larger in the coming years". The reason so many iTuliper's frankly disbelieve this thesis, is due to iTulip's inadequate coverage of the issue.

GRG55, in his sporting and gentlemanly way, is pointing this out, but few are curious as to the really large economic implications - because those very real price rises, functioning apparently to large degree independently of fluctuations of fiat paper volumes will be the future (very large - ten years from now) drivers coercing massive inflationary currency response from governments.

QUOTE:

<< He said they studied this more closely and were surprised when they concluded that only about 10 million bbls/d of total global consumption of 85 million barrels is "directly effected by the US $" >>

iTulip needs urgently to overhaul it's thesis of the primary factors governing the petroleum price. Dismissing Henry Groppe's analysis requires a good deal more chutzpah than dismissing mine. And it's no coincidence that the soaring price of all other comodities are governed by the price of the energy required to produce them. If the petroleum price goes up 400% in four years, and barely more than 10% of that price rise was due to the fiat petrodollar inflating, how much of that 400% oil price rise can we rationally expect gets passed onto the production cost of every other commodity uynder the sun?

As far as I'm concerned the entire iTulip thesis of fiat money causing the entire commodity upcycle is screwed up, but it sure is tough to find a soul around here with a glimmer of skepticism about that.

Kudos to GRG55 for posting this. I don't imagine a lot of people will pay attention to the implications.

Groppe had an interesting take on this issue as well. He said that his firm also used to think that a large portion of the oil price increase was due to US Dollar depreciation. He said they studied this more closely and were surprised when they concluded that only about 10 million bbls/d of total global consumption of 85 million barrels is "directly effected by the US $". I am not really sure what he meant by that, but he went on to describe how European refiners don't pass on the full increase they see because petrol prices are already so high. Maybe someone else saw the interview and understood it better than me, or has access to their research and can explain this comment.

One thing I did understand, however, was his next comment. He used different words, but it was the same thing I've posted a few times here: "We can't burn virtual barrels". He was absolutely clear that his view is supply now dominates, the price is being driven by the need to restrict demand down to available supply, and future supply of conventional crude will decline (no timeline given) and the price of energy will continue to be well above what the world has been used to in recent decades (hence his belief the world will experience a number of years of lower growth and lower returns on investment).

Finally, in closing, a personal (not Groppe) observation. Commodity pricing always behaves such that the first barrel (or bushel) of shortage drives up the price of all the barrels, and it works in reverse as well. That's one of the reasons commodity prices tend to alternately skyrocket and collapse over history. We can be quite certain the US Fed was inflating its money supply in 1986, and in 1999, but that didn't stop oil prices from falling over a cliff on both those occasions - so I have a wee bit of trouble with those that say that "$50" of the price is just inflation...