Saudi Arabia Ready to Start Pumping More Oil

[William Edwards + 708]

4 hours ago, Tom Kirkman said:

I adore reading these discussions, and look forward to William's carefully measured responses.

(I am quite familiar with Edward's views, and tend to agree with him on many topics of oil price fundamentals, but my job as a moderator is to remain neutral - yet encouraging - to everyone.  Have at it mates : )  This should be an interesting debate indeed.)

I fear that you have set your expectations at too high a level, Tom. Bhimsen has ventured too far into the non-defined areas of supposition, thereby leaving the practical world and following his mind into the imaginary world, that I can not spare the time to debate the limitless possibilities of "suppose...". My simple mind prefers to dwell in the more completely defined practical world where some semblance of reality can be observed.

[William Edwards + 708]

4 hours ago, Bhimsen Pachawry said:

The industrialisation relies on cheap fossil fuel energy replacing muscle energy. Money is a way of measuring human labour (both quality and quantity) that one can buy. Fossil fuel is cheap because they are produced by natural forces and hence no human labour is involved. All one has to do is dig it out and then sell it. The only human labour involved is in the process of digging it out and transportation.

Lets take an example- 1 litre diesel can propel 2 tonne car for 20km. Taking the amount o diesel that can be made equal to 150 litre per barrel, at the cost of $75 a barrel, the cost of diesel comes to be $0.5 per litre. So, for travelling 200km with 2ton load, one will need $5 of diesel and 4 hours of time. Whereas if the same was done by muscle power (oxens pulling a 2ton cart), the labour involved will be much higher and the input requirement, logistics would be much higher.

So, the key to the improvement of standard of living is the price of fossil fuels being low and hence getting the work done with minimal cost. This pricing of fossil fuel is what leads to prosperity and high economic production in industrial society. With ever growing population and industrialisation of the developing and underdeveloped countries, the demand for more energy always exists. But, the supply is limited by the producers which in turn result in the price being hiked.

Since oil is always undervalued compared to the alternatives by tens of times, the potential break even price for oil and alternative may result in oil price reaching even above $1000. It is this "fictional" undervalued pricing that keeps the industrialisation going. If the oil is ever allowed to reach its actual price, then the recent hundred years would not have been so drastically different than the further past days.

The artificially low price of oil is the reason for today's large economy. Oil can never be sold at its true potential price and is not a market commodity. As I have said before, oil is a political commodity.

While I enjoy mental exercises as much as the next person, Bhimsen, I cannot afford to spend much time in that arena. It is better that I stick to considerations and discussions of the tangible, practical world and leave the world of theoretical and supposition to others like you. You see, in my simple view, the value that I assign to any commodity is meaningless until that commodity is put into commerce. Which is worth more, the never-to-be-produced oil under the Saudi Arabian desert or the over-abundant sand which covers the reserves? Either can be assigned any value that the assignor chooses, but that assignment has no practical meaning.

[Bhimsen Pachawry + 72]

2 hours ago, William Edwards said:

While I enjoy mental exercises as much as the next person, Bhimsen, I cannot afford to spend much time in that arena. It is better that I stick to considerations and discussions of the tangible, practical world and leave the world of theoretical and supposition to others like you. You see, in my simple view, the value that I assign to any commodity is meaningless until that commodity is put into commerce. Which is worth more, the never-to-be-produced oil under the Saudi Arabian desert or the over-abundant sand which covers the reserves? Either can be assigned any value that the assignor chooses, but that assignment has no practical meaning.

This way of thinking is short sighted and refuses to value the concept of investment. Saving the oil is to be considered as an investment as the oil can be used for various important purposes with available technology. On the other hand, the sand has very little value in terms of current technology.

Not assigning value to investment is akin to belittling the seeds which are stashed away to be sown for the next crop season. Indeed, the seeds stashed away has no value today but if it is sold for a price today, then a certain death by starvation is waiting tomorrow.

[Eric G + 3]

Good to be on board and a part of the forum

[Tom Kirkman + 8,860]

5 minutes ago, Eric G said:

Good to be on board and a part of the forum

Great to see you here, Eric : )

[Eric G + 3]

Hi Tom, thanks for the welcome.

Certainly oil is stirring subject as my background and remit go back a long way working overseas and where I have spent a lot of my working life in the Middle East, my business is shipping and transport and to expand and hop into a big balloon called EPC Projects.

sadly 3 years ago the oil price dropped like a stone and I go caught up in the mess .. Many professional expats like me lost jobs virtually overnight although by the time it happened I had already cut 3 years in Dammam, Saudi Arabia and I have to say I really like Saudi it's very safe and a great place to work and i'am currently doing all I can to secure new work back in KSA or any other gulf state. Spent heaps of Time working in Jubail, Jeddah and Rabigh, Jizan also winning mega refinery projects.

on these jobs one is looking at shipping 240,000 freight tons of cargo from all over the world to the Jobsite and taking care if the customs clearance and in kingdom transport and includes the super heavy cargoes where we contract in specialist heavy transport companies as some of the large refinery, and LNG Towers can be 1500 tons in weight and over 60 mtrs long. Worked on Qatar on some of the worlds largest LNG Trains and also in Nigeria.

being a ex merchant navy officer I got involved working in Ghana doing bunkering of marine gas oil to FPSO,s and supply vessels and where on occasions I went along as Marine Superintendent to make sure the STS ship to ship operation was carried out safely and manage the commercial sale, payment side to the bunkering operations and tanker management.

I'am still looking to continue working as I just had 3 years out of work, the market is picking up, .. Good news for everyone in the industry as I feel a realistic price is better than a low price which kills mega investments and thousands of extremely important jobs and damages economies and infrastructure investments.

i hope that my knowledge overseas and substantial skill sets may open new opportunities for me so I can get back to work soon and return to the Gulf a region I really love and where I always feel at home.

So, I hope all you guys and ladies out there have some snapshot of what I do .. For sure i'am going to enjoy being on board and make lots of new friends from my home in Baku, Azerbaijan or my next work location... So any help to get me working hard again will be much appreciated.

looking forward to hear !

 

[Tom Kirkman + 8,860]

Eric, now is a great time to snag work in O&G, after 3 years of bloodbath hell.

Best of luck in your job hunting.  With your experience, you should be snapped up soon by headhunters, with the ongoing, exuberant bull run.

[Jason Lavis + 55]

William, since Bhimsen didn't answer your question:

"And the meaning of your final sentence, "The price variation is caused by increasing demand and supply quota." completely escapes me. Can you re-phrase this statement?"

... In his (literal but shakey) textbook answer about a different question...

I might be able to assist. Here's a possible re-phrase:

"Prices moves are influenced by supply and demand"

.

I wonder what price Bhimsen would put on oil in relation to horsepower? I believe that it would be a more recent comparison than manpower.

PS Congrats on the moderator position Tom! Every week, you seem to be able to leverage your single man power into the force of at least 10 men, 2 horses, a barrel of oil and 2 barrels of beer!

[William Edwards + 708]

2 minutes ago, Jason Lavis said:

William, since Bhimsen didn't answer your question:

"And the meaning of your final sentence, "The price variation is caused by increasing demand and supply quota." completely escapes me. Can you re-phrase this statement?"

... In his (literal but shakey) textbook answer about a different question...

I might be able to assist. Here's a possible re-phrase:

"Prices moves are influenced by supply and demand"

.

I wonder what price Bhimsen would put on oil in relation to horsepower? I believe that it would be a more recent comparison than manpower.

PS Congrats on the moderator position Tom! Every week, you seem to be able to leverage your single man power into the force of at least 10 men, 2 horses, a barrel of oil and 2 barrels of beer!

Thanks for the assistance, Jason. I suspect that your re-wording of his statement accurately reflects his opinion, since it reflects the conventional "wisdom". Of course, it is glaringly incorrect. In fact, the reverse is the true reality. The price influences the supply and demand figures, not vice versa. 

Regarding the use of manpower instead of horsepower, maybe we need to know where, geographically, Bhimsen got his education.

[Tom Kirkman + 8,860]

1 hour ago, Jason Lavis said:

PS Congrats on the moderator position Tom! Every week, you seem to be able to leverage your single man power into the force of at least 10 men, 2 horses, a barrel of oil and 2 barrels of beer!

Thanks Jason : ) 

I don't know what to say (that might be a first ... )

[Randall Mohammed + 2]

I would be very weary of any price predictions made by the banks. I've seen these predictions in the past and they have been way off track. The bankers are in the business of making money, whether it's shoring the market or going long either way they win. They are not in the oil business. Recall the $20 and $10 predictions back in 2015. On the issue of supply shocks pushing oil prices above $80 isn't sustainable. Agreed that it's in the interest of Saudi for balancing their fiscal budget and valuation of their IPO. Wars cost money, social handouts cost money and I'm certain they want to replenish the billions they withdrew from their wealth fund. Sanctions wouldn't take effect until November so in the interim I expect to see Iran selling as much oil as possible. Post sanctions we have to wait and see if Saudi kicks in to support the supply deficit. How much Iranian oil will come of the market I don't know. That depends on the severity of the sanctions, whether China and India will be pressured to curtail buying and whether the European IOCs will cut their investments in E&P. 

[William Edwards + 708]

44 minutes ago, Randall Mohammed said:

I would be very weary of any price predictions made by the banks. I've seen these predictions in the past and they have been way off track. The bankers are in the business of making money, whether it's shoring the market or going long either way they win. They are not in the oil business. Recall the $20 and $10 predictions back in 2015. On the issue of supply shocks pushing oil prices above $80 isn't sustainable. Agreed that it's in the interest of Saudi for balancing their fiscal budget and valuation of their IPO. Wars cost money, social handouts cost money and I'm certain they want to replenish the billions they withdrew from their wealth fund. Sanctions wouldn't take effect until November so in the interim I expect to see Iran selling as much oil as possible. Post sanctions we have to wait and see if Saudi kicks in to support the supply deficit. How much Iranian oil will come of the market I don't know. That depends on the severity of the sanctions, whether China and India will be pressured to curtail buying and whether the European IOCs will cut their investments in E&P. 

Well said, Randall. Actually, when one considers the experience levels and the credentials of bank analysts, as well as news media reporters, the prudent person would not hire these people to give advice on such significant topics as the price of crude. But, surprisingly, most industry participants are quite content to accept their ill-founded advice for business guidance. Congratulations on being more judicious than most.

[Mahyar + 16]

I don't believe the world will be facing a crisis of oil price in 2018. At present, there is no currency crisis in Asia which could decrease demand for oil in Asia. And, oil glut isn't threatening because OPEC members can't increase output , especially in view of the fact that low demand season is approaching.

[Manfred Kruger + 40]

Supply and demand are the simple theoretical inputs that drive oil price movements.  In practice there are many other more complex drivers, such as geopolitics and analysts expectations that influence prices. Remember the “lower for longer mantra” that the bank analysts were espousing recently? Even though they were wrong, they did force many of the shale producers to hedge at lower prices driving prices lower than necessary.

IMHO it makes a lot more sense to listen to the Saudis. They may not have as much influence over oil prices as they had pre-shale, but historically they have always had their way with oil prices both up and down. Right now they want higher prices and I think that it would be very foolish to dismiss their wishes until they change their mind.

[PeterfromCalgary + 60]

The Saudi's don't want to penalize Donald Trump's United States for reimposing sanctions on Iran as they strongly support his decision.  So they will probably pump more oil to keep prices moderate.  The wild card is how much excess capacity the Saudi's have.

[DanilKa + 443]

as per great Euan Mearns of Energy Matters, KSA ability to ramp up is limited to 0.49 Mbpd

There are not too many oil gushers there; it takes money and time to build up spare capacity. Incentive to do this was somewhat absent lately so I wouldn't bet on them stepping to the plate in a tune of Iran's oil production (4M) or even exports. From my memory, when OPECRu cuts were imposed, they all produced near peak capacity; natural prod'n decline didn't go anywhere.

I like "springboard" setup of the comparative inventory (posted on May 9th) and hope rally isn't over yet.

[William Edwards + 708]

20 minutes ago, DanilKa said:

as per great Euan Mearns of Energy Matters, KSA ability to ramp up is limited to 0.49 Mbpd

There are not too many oil gushers there; it takes money and time to build up spare capacity. Incentive to do this was somewhat absent lately so I wouldn't bet on them stepping to the plate in a tune of Iran's oil production (4M) or even exports. From my memory, when OPECRu cuts were imposed, they all produced near peak capacity; natural prod'n decline didn't go anywhere.

I like "springboard" setup of the comparative inventory (posted on May 9th) and hope rally isn't over yet.

Surely I have missed something. You are not seriously basing your analysis on three or four years of data, are you? Try fifty years to be believable. If that assessment shows ANY correlation between inventories and prices, you had best re-check your data source.

And if the Saudi producing ability has suffered sufficiently in the past couple of years for them to have only 500 MB/D of spare capacity, then I will be very surprised to learn that fact.

[William Edwards + 708]

3 hours ago, PeterfromCalgary said:

The Saudi's don't want to penalize Donald Trump's United States for reimposing sanctions on Iran as they strongly support his decision.  So they will probably pump more oil to keep prices moderate.  The wild card is how much excess capacity the Saudi's have.

I suspect that the Saudis will continue to do what they have done for most of the past 50 years. They will fill all the tankers that present themselves to the Saudi loading docks. If these tankers previously expected to load in Iran, so be it.

[Randall Mohammed + 2]

4 hours ago, DanilKa said:

as per great Euan Mearns of Energy Matters, KSA ability to ramp up is limited to 0.49 Mbpd

There are not too many oil gushers there; it takes money and time to build up spare capacity. Incentive to do this was somewhat absent lately so I wouldn't bet on them stepping to the plate in a tune of Iran's oil production (4M) or even exports. From my memory, when OPECRu cuts were imposed, they all produced near peak capacity; natural prod'n decline didn't go anywhere.

I like "springboard" setup of the comparative inventory (posted on May 9th) and hope rally isn't over yet.

 

3 hours ago, William Edwards said:

I suspect that the Saudis will continue to do what they have done for most of the past 50 years. They will fill all the tankers that present themselves to the Saudi loading docks. If these tankers previously expected to load in Iran, so be it.

Correct me if I'm wrong but doesn't Saudi hold the title of swing producer and by definition a swing producer is a producer that can put 2Mbpd on to the market in 90 days. From the compliance chart above as at Feb Saudi has spare capacity of 2.18Mbpd. If this is true then they could step in a fill the supply deficit assuming its in the 500,000 to 1Mbpd. How much they are will to give up is left to be seen.

 

[William Edwards + 708]

16 minutes ago, Randall Mohammed said:

 

Correct me if I'm wrong but doesn't Saudi hold the title of swing producer and by definition a swing producer is a producer that can put 2Mbpd on to the market in 90 days. From the compliance chart above as at Feb Saudi has spare capacity of 2.18Mbpd. If this is true then they could step in a fill the supply deficit assuming its in the 500,000 to 1Mbpd. How much they are will to give up is left to be seen.

 

I have a different definition of "swing producer". Mine is "the producer who supplies the last necessary and significant increment of supply to the global system. I include no quantitive requirement, although the term"significant" implies some quantitative requirement. But we completely agree that there will be a problem of supply only if the Saudis withhold supplies below their ability to pump.

Edited May 15, 2018 by William Edwards

[DanilKa + 443]

3 hours ago, William Edwards said:

Surely I have missed something. You are not seriously basing your analysis on three or four years of data, are you? Try fifty years to be believable. If that assessment shows ANY correlation between inventories and prices, you had best re-check your data source.

And if the Saudi producing ability has suffered sufficiently in the past couple of years for them to have only 500 MB/D of spare capacity, then I will be very surprised to learn that fact.

would you use inflation-adjusted dollars for 50 years? kinda defeats a point when your measuring stick is somewhat elastic... Switch of the production balance from ME to US is already having large impact on price sensitivity to the spare production capacity (explained to me by Geoffrey Cann).

Life is full of surprises...

 

[Mahyar + 16]

I don't agree that Saudi Arabia is still a swing producer. In Nov. 1997, Saudi Arabia, Kuwait and UAE changed their oil policy and insisted on the sensitive issue of market share (within OPEC) and on increasing OPEC's output ceiling.

[Guillaume Albasini + 851]

To be a swing producer you must be able to increase your production AND be able to export it. to the markets abroad

Given the current pipeline bottlenecks the US can't play this role.

 

[William Edwards + 708]

6 hours ago, DanilKa said:

would you use inflation-adjusted dollars for 50 years? kinda defeats a point when your measuring stick is somewhat elastic... Switch of the production balance from ME to US is already having large impact on price sensitivity to the spare production capacity (explained to me by Geoffrey Cann).

Life is full of surprises...

 

Of course I use inflation-adjusted dollars in my fifty-year assessments. Fortunatey a barrel is the same size over time. The mechanism that deals with price, supply and demand is stable as well, although the individual elements have great variability. Knowing the relationship is the key. As in any system with great variability, it takes many data points to define the system. In the case of the business of oil, three or four years is only a snapshot when you need an extended movie to get the picture. Geoffrey may have only seen the trailer.

[William Edwards + 708]

5 hours ago, Mahyar said:

I don't agree that Saudi Arabia is still a swing producer. In Nov. 1997, Saudi Arabia, Kuwait and UAE changed their oil policy and insisted on the sensitive issue of market share (within OPEC) and on increasing OPEC's output ceiling.

The role of swing producer is not determined by words, but by resources and actions. The Saudis continue to have the production resources and persist with the actions that bestow the role of swing producer upon them. Your agreement is not necessary. You may wish to reexamine your definition of swing producer.