OPEC: Painting a target on the West's back
By Adam Lass
In this article
World (oil) demand is now estimated to rise by 2.0% or 1.7 mb/d in 2007.
May world supply fell by 565 kb/d to 84.9 mb/d.
The calls against El Paso (EP:NYSE) and the XLE that WOW readers are holding should go up dramatically.
OPEC: Painting a target on the West's back
In the past few days, I've noted as to how NOAA is calling for some 33 named storms this year, any one of which could jack oil prices up over $70 a barrel, equating these tropical storms, cyclones and hurricanes to bullets in Mother Nature's own Gatling gun.
And I've called your attention to the sanguinity of those fine folks in the Middle East and Venezuela when it comes to pumping any more oil out of the ground. In essence, they are holding said Gatling gun, wondering if perhaps they should fire off a few rounds in our general direction. You know, just for practice.
However, I didn't really expect when I created this convenient metaphor that the industrialized world would voluntarily paint a target on its own back. And yet that is exactly what has happened.
The International Energy Administration advises some 26 oil-thirsty giants to the hits they are about to take. This is the sort of information that closed societies (worried that some might take advantage) keep to themselves, and democracies anxiously share with both friend and foe.
A few highlights from the report:
“Global oil product demand is revised up to 84.5 mb/d for 2006 and 86.1 mb/d for 2007 (revisions of +250 kb/d and +420 kb/d, respectively). This results from baseline adjustments for non-OECD countries and also has the effect of reducing the miscellaneous-to-balance. World demand is now estimated to rise by 2.0% or 1.7 mb/d in 2007…
“May world supply fell by 565 kb/d to 84.9 mb/d. Seasonal OECD stoppages compounded weaker OPEC crude supply, notably in Nigeria, where outages are near 800 kb/d. Non-OPEC 2007 output is trimmed by 110 kb/d to 50.2 mb/d, with growth of 0.9 mb/d this year…
“Nigerian outages cut OPEC crude supply by 425 kb/d to 30.1 mb/d. While effective spare capacity stands at 2.8 mb/d, refining constraints imply much lower marketable spare capacity. Stronger demand raises 2007's `call on OPEC crude and stock change' by 0.5 mb/d, with the seasonal rise in the call outstripping OPEC capacity additions by 4Q07.”
In case that was too hard for certain folks to understand (I'm thinking here of Iranian Minister of Petroleum Kazem Vaziri Hamaneh, who I have reported as stating that “There is sufficient crude oil in the market, there is no shortage of crude oil. Commercial oil stocks are at a very high level, at a comfortable level. The reason for the price hike is not the level of the crude oil stocks. It's not that problem.”), those rather expansive gentlemen at IEA have done their level best to make our peril quite clear.
For the past four months in a row, they have stated categorically that the industrialized world will run short of oil in the second half of 2007. As IEA analyst David Fyfe put it, “We would very much hope that OPEC production is at its seasonal low at the moment. We definitely do need more crude oil.”
Now Mr. Hamaneh has stated (perhaps somewhat disingenuously) that “we cannot predict what will happen to prices.” Nonsense! Anyone who has taken ECON 101 can tell you what happens when demand accelerates and supply diminishes: Costs go up. And economies slow down.
Perhaps in time, these economies slow down enough to ameliorate those price increases. But not before they experience all the pains that accompany that cyclic disease known as recession.
Be that as it may, there is a short-term corollary: oil stocks such as Chevron (CVX:NYSE), and Exxon Mobil (XOM:NYSE) will go up a good bit. And the calls against El Paso (EP:NYSE) and the XLE that WOW readers are holding will go up dramatically.
***
Adam Lass is the founder and manager of the WaveStrength Group, and is a contributing editor for Taipan Financial News. As the creator of WaveStrength's proprietary analysis system, Adam's expertise has shaped a franchise of successful investment newsletters and services, including WaveStrength Options Weekly and WaveStrength Apex.
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