Balancing Act---Sanctions, Venezuela, Trade War and Demand

[William Edwards + 708]

1 minute ago, D Coyne said:

William,

So I guess you have confidence in the OPEC reserves, with no independent audits since 1979, your faith is surprising.  It will be interesting to see how much spare capacity really exists for OPEC.  So far the maximum trailing 12 month average output for OPEC was in Sept 2017 at 34,138 kb/d (C+C output from EIA data).  This might be surpassed in the future if Libya, Venezuela, and Nigeria get their acts together and there is not too much decline from the very mature Middle east Supergiant fields, we will have to wait and see.

My confidence begins with the fact that in the sixties, when the major international oil companies actually operated Aramco, I held a position in a major oil company that actually decided and implemented the capacity additions to Aramco's production capacity. On purpose and by design, we authorized and installed production capability to provide for at least 20% more capacity than what we expected to be needed, to provide for contingencies and unexpected demands. Aramco has continued that practice fo the past fifty years, although the ownership of Aramco is now KSA. So I have some reason for my position that their 20% spare claims are justified.

By the way, you will never know how much spare capacity actually exists, unless you can see it reduced to zero. Up to that point, the number is mere speculation. But it matters not. One barrel of spare is enough. To put that pointy in perspective, my guess is that you do not even notice the amount of spare fuel in your car's tank until it gets close to your "bottom" point. Enough is plenty!

[D Coyne + 305]

2 hours ago, William Edwards said:

...

To your statement "In fact my chart suggests why oil prices were high in 2011 to 2014 and why they were much lower in 2015-2017." No surprise her since historical data might "suggest" a lot of things to a lot of people, most of whom have not or cannot discriminately analyze the data. If you want to know the real explanation of why oil prices were lower in 2015 than 2013, I can tell you. But the data prove that inventory levels were not the cause, but the result.

Cause and effect cannot be proven, only theorized as there are no controlled experiments in the economy.  What is your hypothesis for why oil prices fell in 2015?  I suppose one could say it was because an OPEC cut was expected and did not materialize.  I would counter that the reason a cut was expected was because OECD stock levels were clearly surging and there was more oil being produced than consumers wanted at prevailing price levels (hence the rise in oil stocks).  Even if the rise in stocks was not immediately apparent, it was expected and eventually confirmed which kept leading to lower oil prices that were sustained for quite a while.

[ceo_energemsier + 1,818]

17 minutes ago, William Edwards said:

My confidence begins with the fact that in the sixties, when the major international oil companies actually operated Aramco, I held a position in a major oil company that actually decided and implemented the capacity additions to Aramco's production capacity. On purpose and by design, we authorized and installed production capability to provide for at least 20% more capacity than what we expected to be needed, to provide for contingencies and unexpected demands. Aramco has continued that practice fo the past fifty years, although the ownership of Aramco is now KSA. So I have some reason for my position that their 20% spare claims are justified.

By the way, you will never know how much spare capacity actually exists, unless you can see it reduced to zero. Up to that point, the number is mere speculation. But it matters not. One barrel of spare is enough. To put that pointy in perspective, my guess is that you do not even notice the amount of spare fuel in your car's tank until it gets close to your "bottom" point. Enough is plenty!

What you worked on was in the 60s sounds about right ,  but since then what would have precluded ARAMCO not  add to the safety, security and capabilities of their production system?

To that 20% capacity, I would add an additional 15-25% developed and maintained over the years.

ARAMCO had taken steps to keep on adding to the spare capacity and as well as development of not just strategic but extremely strategic production storage facilities within their boundaries.

I was privileged to have knowledge of some of those oil storage facilities during the entire  EPC  process (LSTK).

So their  storage capabilities are also very sheltered from the global information and data availability for all to see.

 

Edited May 2, 2019 by ceo_energemsier
correction

[William Edwards + 708]

9 minutes ago, D Coyne said:

Cause and effect cannot be proven, only theorized as there are no controlled experiments in the economy.  What is your hypothesis for why oil prices fell in 2015?  I suppose one could say it was because an OPEC cut was expected and did not materialize.  I would counter that the reason a cut was expected was because OECD stock levels were clearly surging and there was more oil being produced than consumers wanted at prevailing price levels (hence the rise in oil stocks).  Even if the rise in stocks was not immediately apparent, it was expected and eventually confirmed which kept leading to lower oil prices that were sustained for quite a while.

And I would say that the price drop occurred because the unsound price bubble finally collapsed. I am able to substantiate my theory. Can you substantiate yours? I know that you cannot because the data reject your hypothesis.

[William Edwards + 708]

4 minutes ago, ceo_energemsier said:

What you worked on was in the 60s sounds about right ,  but since then what would have precluded ARAMCO not  add to the safety, security and capabilities of their production system?

To that 20% capacity, I would add an additional 15-25% developed and maintained over the years.

ARAMCO had taken steps to keep on adding to the spare capacity and as well as development of not just strategic but extremely strategic production storage facilities within their boundaries.

I was privileged to have knowledge of some of those oil storage facilities during the entire  EPC  process (LSTK).

So their  storage capabilities are also very sheltered from the global information and data availability for all to see.

 

Thanks for the additional input.

[D Coyne + 305]

10 minutes ago, William Edwards said:

My confidence begins with the fact that in the sixties, when the major international oil companies actually operated Aramco, I held a position in a major oil company that actually decided and implemented the capacity additions to Aramco's production capacity. On purpose and by design, we authorized and installed production capability to provide for at least 20% more capacity than what we expected to be needed, to provide for contingencies and unexpected demands. Aramco has continued that practice fo the past fifty years, although the ownership of Aramco is now KSA. So I have some reason for my position that their 20% spare claims are justified.

By the way, you will never know how much spare capacity actually exists, unless you can see it reduced to zero. Up to that point, the number is mere speculation. But it matters not. One barrel of spare is enough. To put that pointy in perspective, my guess is that you do not even notice the amount of spare fuel in your car's tank until it gets close to your "bottom" point. Enough is plenty!

If we take the case of Saudi Arabia, the proved reserves when operated by Aramco in 1979 were 110 billion barrels.  Very little oil has been discovered in Saudi Arabia since 1979, since that time 138 billion barrels of oil have been produced.  The 2P reserves in 1979 were 177.5 Gb, so there might be as little as 40 Gb of 2P reserves.  If there has been some reserve growth (perhaps 1% per year on average as a guess) then there might be 130 Gb of 2P reserves in Saudi Arabia.

Basically we don't know.  We can assume the spare capacity is what is claimed, we will find out in time.  US tight oil is likely to peak by 2025 at the latest and then may decline fairly rapidly.  At that point we find out if the Saudis were blowing smoke, better if we were prepared for the possibility that I am correct, oil prices will tell the tale, they will be North of $150/b in 2019$ if I am correct by 2027.

[William Edwards + 708]

Just now, D Coyne said:

If we take the case of Saudi Arabia, the proved reserves when operated by Aramco in 1979 were 110 billion barrels.  Very little oil has been discovered in Saudi Arabia since 1979, since that time 138 billion barrels of oil have been produced.  The 2P reserves in 1979 were 177.5 Gb, so there might be as little as 40 Gb of 2P reserves.  If there has been some reserve growth (perhaps 1% per year on average as a guess) then there might be 130 Gb of 2P reserves in Saudi Arabia.

Basically we don't know.  We can assume the spare capacity is what is claimed, we will find out in time.  US tight oil is likely to peak by 2025 at the latest and then may decline fairly rapidly.  At that point we find out if the Saudis were blowing smoke, better if we were prepared for the possibility that I am correct, oil prices will tell the tale, they will be North of $150/b in 2019$ if I am correct by 2027.

And if we have a worldwide depression, and if oil demand falls 25%, and if Saudi production drops to 2 MMB/D, then their current capacity will last longer than the demand for their oil. How does that scenario feel? It is just as likely, or more so, than yours. Please open your mind to reality, or tell me your underlying motivation for your rose colored glasses.

[D Coyne + 305]

5 minutes ago, William Edwards said:

And I would say that the price drop occurred because the unsound price bubble finally collapsed. I am able to substantiate my theory. Can you substantiate yours? I know that you cannot because the data reject your hypothesis.

The Data is from BP Statistical review of world energy

https://www.bp.com/en/global/corporate/energy-economics/statistical-review-of-world-energy.html

and the EIA

https://www.eia.gov/beta/international/data/browser/#/?pa=00000010000000000000000000000000000004&c=0000000000000000000000000000000000g&ct=2&tl_id=5-A&vs=INTL.5-2-OECD-TBPD.A&cy=2016&vo=0&v=H&end=2018

When stocks are below normal levels as they were from 2011 to 2014, oil prices will rise, how do we know it is a bubble (a three year bubble) and not that demand would have been more than supply (a physical impossibility) at any oil price that was lower.

You have no data for demand and supply at lower prices during that period, so where's your data?

[William Edwards + 708]

1 minute ago, D Coyne said:

The Data is from BP Statistical review of world energy

https://www.bp.com/en/global/corporate/energy-economics/statistical-review-of-world-energy.html

and the EIA

https://www.eia.gov/beta/international/data/browser/#/?pa=00000010000000000000000000000000000004&c=0000000000000000000000000000000000g&ct=2&tl_id=5-A&vs=INTL.5-2-OECD-TBPD.A&cy=2016&vo=0&v=H&end=2018

When stocks are below normal levels as they were from 2011 to 2014, oil prices will rise, how do we know it is a bubble (a three year bubble) and not that demand would have been more than supply (a physical impossibility) at any oil price that was lower.

You have no data for demand and supply at lower prices during that period, so where's your data?

I have neither the time nor the inclination to give you a primer-grade education on reading and analysing data, but I will give you a hint. Please look at the monthly inventory data for the year 2014, apply your supposed cause and effect, and explain the actual results versus your projection. Also, it would be instructive for you to review the price profile during the 1980 to 2018 time period that you presented earlier, on days supply of stocks, and see how you explain the fact of highest stock levels during the period of highest prices. Prices should be adjusted for inflation, of course.

[D Coyne + 305]

4 minutes ago, William Edwards said:

And if we have a worldwide depression, and if oil demand falls 25%, and if Saudi production drops to 2 MMB/D, then their current capacity will last longer than the demand for their oil. How does that scenario feel? It is just as likely, or more so, than yours. Please open your mind to reality, or tell me your underlying motivation for your rose colored glasses.

William,

For the period that we have good data (1950-2018) and the biggest drop in demand was from 1979 to 1983 at 15% over that 4 year period.  As you well know there was a severe supply disruption due to the Iranian revolution and the Iran-Iraq War which drove oil prices up sharply roughly doubled the price from 1978 to 1979 and thereby reduced the demand for oil as prices remained very high (around $100/b in 2017$) until 1981 and then prices gradually came down as stock levels increased above normal levels signaling the need for lower prices so that supply was reduced to the level of demand.

I have no idea when there will be another severe recession, my guess is about 5 years after peak oil (2025) so about 2030.  If proper Keynesian policy is followed the recession might only be as bad as 2009, impossible to predict.

Eventually World C+C demand will drop by 25%from the peak of about 86 Mb/d to about 64 Mb/d, but probably not until 2048.

[ceo_energemsier + 1,818]

51 minutes ago, William Edwards said:

Thanks for the additional input.

Not to exclude the strategic reserves KSA maintains in key refining regions of the world to supply their customers from. They keep stored oil reserves in NWE, Singapore, China, Japan and in the US and in the Caribbean either through leased tankage and or owned facilities and via JVs as they are doing with India and China as well.

They also maintain an efficient fleet of tankers, mostly VLCCs , owned operated by VELA ,  which can also be used as floating storage.

[William Edwards + 708]

5 minutes ago, D Coyne said:

William,

For the period that we have good data (1950-2018) and the biggest drop in demand was from 1979 to 1983 at 15% over that 4 year period.  As you well know there was a severe supply disruption due to the Iranian revolution and the Iran-Iraq War which drove oil prices up sharply roughly doubled the price from 1978 to 1979 and thereby reduced the demand for oil as prices remained very high (around $100/b in 2017$) until 1981 and then prices gradually came down as stock levels increased above normal levels signaling the need for lower prices so that supply was reduced to the level of demand.

I have no idea when there will be another severe recession, my guess is about 5 years after peak oil (2025) so about 2030.  If proper Keynesian policy is followed the recession might only be as bad as 2009, impossible to predict.

Eventually World C+C demand will drop by 25%from the peak of about 86 Mb/d to about 64 Mb/d, but probably not until 2048.

It would vastly improve your perception if you matched the timing of events accurately. The cessation of Iranian production occurred many months, almost a year, before the trading world, inspired by the US government, caused the upward price movement. Possibly I have some advantage over you by having lived through that period, both as an oil and a futures participant. Your chart is nice, but to understand the cause and effect on pricing you need a more expanded time scale. The time period 1975 through 1988, by quarter, is very instructive.

[D Coyne + 305]

40 minutes ago, William Edwards said:

I have neither the time nor the inclination to give you a primer-grade education on reading and analysing data, but I will give you a hint. Please look at the monthly inventory data for the year 2014, apply your supposed cause and effect, and explain the actual results versus your projection. Also, it would be instructive for you to review the price profile during the 1980 to 2018 time period that you presented earlier, on days supply of stocks, and see how you explain the fact of highest stock levels during the period of highest prices. Prices should be adjusted for inflation, of course.

William.

I don't have access to monthly inventory data, the quarterly data suggests that the futures market anticipated the stock increase that would occur in the first quarter of 2015.

From the Sept 2014 OPEC Oil Market report, page 78, the chart below shows that OECD stocks were rising strongly, the futures market no doubt anticipated continued increases in stock levels indicating supply was outpacing demand, in addition supply had been rising strongly over that period, these trends lead the futures market to anticipate the need for lower oil prices.

[William Edwards + 708]

2 minutes ago, D Coyne said:

William.

I don't have access to monthly inventory data, the quarterly data suggests that the futures market anticipated the stock increase that would occur in the first quarter of 2015.

From the Sept 2014 OPEC Oil Market report, page 78, the chart below shows that OECD stocks were rising strongly, the futures market no doubt anticipated continued increases in stock levels indicating supply was outpacing demand, in addition supply had been rising strongly over that period, these trends lead the futures market to anticipate the need for lower oil prices.

Your explanation of the futures market anticipating stock levels is from the world of dreams. Futures traders are usually not competent to interpret inventory numbers when they actually appear three months after the fact. So I reject your explanation on that grounds alone. But more importantly, I think that if you look carefully you will note that the inventories started building AFTER the price swoon began. If the data do not show you that, then either I or the data or your eyesight need corrected. Please assist. It will help if you superimpose crude price on your inventory chart.

[D Coyne + 305]

8 minutes ago, William Edwards said:

It would vastly improve your perception if you matched the timing of events accurately. The cessation of Iranian production occurred many months, almost a year, before the trading world, inspired by the US government, caused the upward price movement. Possibly I have some advantage over you by having lived through that period, both as an oil and a futures participant. Your chart is nice, but to understand the cause and effect on pricing you need a more expanded time scale. The time period 1975 through 1988, by quarter, is very instructive.

The scenario presented shows my expectation for future oil output, that is all.  The model takes oil discoveries and reserve growth to date and attempts to model future discoveries with guidance based on the research of Jean Laherrere, Steve Mohr, and Paul Pukite and the development of oil reserves from discovery to production (based on the models developed by Paul Pukite).  That model does not depend on price movements, it uses past discovery and production of C+C as its primary drivers.  The point was to show my expectation for when oil output will fall to 25% of the peak output.

The price of oil will sometimes move based on events, such as the big OPEC drop in output in late 1977 and early 1978, but there may have been reports from oil majors that all was well and output would be restored that assured the markets, output did indeed recover by early 1979 before the more sustained decline.  My model doesn't go for that kind of detail and only considers annual data, it is more of a big picture, long term model.

[Jan van Eck + 7,558]

2 minutes ago, D Coyne said:

The scenario presented shows my expectation for future oil output, that is all. 

I am puzzled by this discussion.  The largest known reserves are sitting in Venezuela.  The second largest is apparently Canada.  Then you get to KSA.  Now what is blocking the first two is politics and recovery costings.  OK, so once you get past your "peak oil" point, which I interpret is for pumped oil excluding oilsands and Venezuelan heavy crude, the price may rise and that would unleash V. and Canada.  Then you have plenty for hundreds of years  (albeit you have to pay for it).  

Please explain to me the errors in the above descriptive. 

[D Coyne + 305]

17 minutes ago, William Edwards said:

Your explanation of the futures market anticipating stock levels is from the world of dreams. Futures traders are usually not competent to interpret inventory numbers when they actually appear three months after the fact. So I reject your explanation on that grounds alone. But more importantly, I think that if you look carefully you will note that the inventories started building AFTER the price swoon began. If the data do not show you that, then either I or the data or your eyesight need corrected. Please assist. It will help if you superimpose crude price on your inventory chart.

Mr Edwards,

Chart below has Brent which started to decline in May, note the strong increase in stock levels from April to May, the general increase from Jan to July after a steep decrease in stock levels over the Sept to Dec 2013 period.  In addition World output was increasing at 1254 kb/d over the Jan 2013 to June 2014 period about 460 kb/d above the Jan 1982 to June 2014 annual trend (794 kb/d/year).  All these factors lead the futures market to lower oil prices.  It became pretty clear from stock levels from 2015 to 2017 that the futures market had it right, there was indeed a glut which continued until mid 2018.

[D Coyne + 305]

1 hour ago, Jan van Eck said:

I am puzzled by this discussion.  The largest known reserves are sitting in Venezuela.  The second largest is apparently Canada.  Then you get to KSA.  Now what is blocking the first two is politics and recovery costings.  OK, so once you get past your "peak oil" point, which I interpret is for pumped oil excluding oilsands and Venezuelan heavy crude, the price may rise and that would unleash V. and Canada.  Then you have plenty for hundreds of years  (albeit you have to pay for it).  

Please explain to me the errors in the above descriptive. 

Jan,

We have known about these reserves for a long time, did we see a huge increase from 2011 to 2014 in Canadian oil sands output?

Not as I recall.  The model includes oil sands, it is assumed they are developed slowly as has been the case in the past.

Have you seen CAPP forecasts?  My model matched those and for Venezuela I assumed something similar delayed by 10 years (as far as start of ramp).  There is a separate tight oil and oil sands model combined with a model for conventional oil.

Chart with lto and extra heavy (xh) model below.  xh combines output from Canada and Venezuela.

[William Edwards + 708]

1 hour ago, Jan van Eck said:

I am puzzled by this discussion.  The largest known reserves are sitting in Venezuela.  The second largest is apparently Canada.  Then you get to KSA.  Now what is blocking the first two is politics and recovery costings.  OK, so once you get past your "peak oil" point, which I interpret is for pumped oil excluding oilsands and Venezuelan heavy crude, the price may rise and that would unleash V. and Canada.  Then you have plenty for hundreds of years  (albeit you have to pay for it).  

Please explain to me the errors in the above descriptive. 

No errors there, Jan, in my view. Others have to speak for themselves.

[D Coyne + 305]

1 hour ago, William Edwards said:

No errors there, Jan, in my view. Others have to speak for themselves.

William,

He assumed incorrectly that the C+C in my chart does not include extra heavy oil. The assumption was incorrect.  The scenario matches actual output through 2018, assumes Venezuelan output grows slowly for the nest 5 to 10 years due to political problems (this is likely too optimistic as Venezuelan extra heavy output will likely decline from 2018 to 2020 and perhaps longer. For Canadian oil sands I assume the CAPP forecast is followed through 2030 and that output continues to grow beyond that at about the 2020-2030 rate of increase.  Tight oil output is based on a careful study of the US tight oil plays where we have good data from shaleprofile.com (ND Bakken. Eagle Ford, Permian, and Niobrara) with an estimate of other US tight oil plays (URR about 10 Gb).

I assume only 200 Gb for extra Heavy oil because I expect by 2060 EVs and autonomous driving will reduce demand for crude oil to the point where expensive extra heavy oil will no longer be profitable to extract.  At this point your estimate of $20/b (2019$) may prove correct. 

[William Edwards + 708]

2 hours ago, D Coyne said:

William,

He assumed incorrectly that the C+C in my chart does not include extra heavy oil. The assumption was incorrect.  The scenario matches actual output through 2018, assumes Venezuelan output grows slowly for the nest 5 to 10 years due to political problems (this is likely too optimistic as Venezuelan extra heavy output will likely decline from 2018 to 2020 and perhaps longer. For Canadian oil sands I assume the CAPP forecast is followed through 2030 and that output continues to grow beyond that at about the 2020-2030 rate of increase.  Tight oil output is based on a careful study of the US tight oil plays where we have good data from shaleprofile.com (ND Bakken. Eagle Ford, Permian, and Niobrara) with an estimate of other US tight oil plays (URR about 10 Gb).

I assume only 200 Gb for extra Heavy oil because I expect by 2060 EVs and autonomous driving will reduce demand for crude oil to the point where expensive extra heavy oil will no longer be profitable to extract.  At this point your estimate of $20/b (2019$) may prove correct. 

We shall keep watching and studying.

[Tom Kirkman + 8,860]

On 5/1/2019 at 3:15 AM, ceo_energemsier said:

 Thanks for the lively , neuron firing discussions!

This is one of @William Edwards fortes, if one chooses to examine his arguments and viewpoints.

It's actually more neuron firing when you don't agree, but make the effort to try to understand the differing viewpoint.   Agreement is not necessarily the object.  It's more of the willingness to make the attempt to look at differing viewpoints, and how those viewpoints might be correct or might be incorrect, or more likely, some shade in between.

[ceo_energemsier + 1,818]

This article refers to the buyers of term Saudi crude buyers requesting additional volumes on top of their contracted volumes. These are built into a contract for emergencies as a contingency.  Also note that buyers are asking for the extra crude even before the producer sets their OSP.

So the producer is now able to set an asking price and volume as well, as Aramco will be the one approving the additional volume of oil to these buyers. This was discussed at great length under a different topic as to which party is capable of price and volume setting. It is obvious here that the producer is doing or will be doing both.

-----------------

Top Oil Buyers Want More Saudi Crude

by  Bloomberg

Thursday, May 02, 2019

(Bloomberg) -- Oil refiners in Asia are asking Saudi Arabia for more crude as the world’s top consuming region deals with supply disruptions from Iran to Venezuela, according to people with knowledge of the matter.

Customers are seeking additional cargoes for loading in June and July from OPEC’s biggest producer, the people said, asking not to be identified because the information is confidential. The requests are for supplies on top of what the refiners are due as part of term contracts with state-run Saudi Aramco, they said.

The scramble for shipments comes just as the U.S. tightens its squeeze on Iranian flows, with sanctions waivers for several buyers such as China and India coming to an end on Thursday. Unexpected disruptions to supply from Russia and Nigeria as well as turmoil in OPEC member Venezuela are also adding to fears of a crunch.

Prices have seesawed in the past week on uncertainty over how Saudi Arabia will respond. The U.S. administration has said the kingdom will pump more, but Saudi Oil Minister Khalid Al-Falih has been less clear-cut. He has pledged to keep the market balanced, but also signaled that OPEC and its allies including Russia could extend output curbs until the end of this year.

Some Asian refiners are asking Aramco, known officially as Saudi Arabian Oil Co., for more crude even before the producer sets the cost for the cargoes, the people said. The end of the U.S. exemptions that allowed purchases from Iran has caused a headache for processors in the region, who are being forced to seek potentially costlier alternatives.

“The market looks well supplied right now, but we’ve yet to see the full impact of what happens with Iranian volumes,’’ said Mohammad Darwazah, a director at Medley Global Advisers in New York. “Saudi Arabia will likely push more exports to Asia in June.”

Official selling prices for June-loading shipments are expected to be announced only by the end of this week. Usually, buyers will request supplies a few days after the company sets prices for the month.

Aramco’s press office declined to comment.

The market could suffer a loss of as much as 900,000 barrels a day of Iranian oil, according to Goldman Sachs Group Inc., after the U.S.-issued waivers expire. The resulting shortfall is expected to be offset by higher production from core producers in the Organization of Petroleum Exporting Countries and Russia, the bank said, while warning of higher price volatility in coming months.

In a Twitter post last month, U.S. President Donald Trump reassured global markets that “Saudi Arabia and others in OPEC will more than make up the oil flow difference in our now full sanctions on Iranian oil.”

Last month, the kingdom cut production by about 500,000 barrels a day more than required by the pact with fellow OPEC members, so it could increase output significantly without violating the deal.

“They’ve got some room for maneuver,” said Darwazah. “The U.S. can push Saudi Arabia to take away Iranian market share in Asia, and they will do that when needed. Politically, the Saudis are probably quite happy.’’

[William Edwards + 708]

39 minutes ago, ceo_energemsier said:

This article refers to the buyers of term Saudi crude buyers requesting additional volumes on top of their contracted volumes. These are built into a contract for emergencies as a contingency.  Also note that buyers are asking for the extra crude even before the producer sets their OSP.

So the producer is now able to set an asking price and volume as well, as Aramco will be the one approving the additional volume of oil to these buyers. This was discussed at great length under a different topic as to which party is capable of price and volume setting. It is obvious here that the producer is doing or will be doing both.

-----------------

Top Oil Buyers Want More Saudi Crude

by  Bloomberg

Thursday, May 02, 2019

(Bloomberg) -- Oil refiners in Asia are asking Saudi Arabia for more crude as the world’s top consuming region deals with supply disruptions from Iran to Venezuela, according to people with knowledge of the matter.

Customers are seeking additional cargoes for loading in June and July from OPEC’s biggest producer, the people said, asking not to be identified because the information is confidential. The requests are for supplies on top of what the refiners are due as part of term contracts with state-run Saudi Aramco, they said.

The scramble for shipments comes just as the U.S. tightens its squeeze on Iranian flows, with sanctions waivers for several buyers such as China and India coming to an end on Thursday. Unexpected disruptions to supply from Russia and Nigeria as well as turmoil in OPEC member Venezuela are also adding to fears of a crunch.

Prices have seesawed in the past week on uncertainty over how Saudi Arabia will respond. The U.S. administration has said the kingdom will pump more, but Saudi Oil Minister Khalid Al-Falih has been less clear-cut. He has pledged to keep the market balanced, but also signaled that OPEC and its allies including Russia could extend output curbs until the end of this year.

Some Asian refiners are asking Aramco, known officially as Saudi Arabian Oil Co., for more crude even before the producer sets the cost for the cargoes, the people said. The end of the U.S. exemptions that allowed purchases from Iran has caused a headache for processors in the region, who are being forced to seek potentially costlier alternatives.

“The market looks well supplied right now, but we’ve yet to see the full impact of what happens with Iranian volumes,’’ said Mohammad Darwazah, a director at Medley Global Advisers in New York. “Saudi Arabia will likely push more exports to Asia in June.”

Official selling prices for June-loading shipments are expected to be announced only by the end of this week. Usually, buyers will request supplies a few days after the company sets prices for the month.

Aramco’s press office declined to comment.

The market could suffer a loss of as much as 900,000 barrels a day of Iranian oil, according to Goldman Sachs Group Inc., after the U.S.-issued waivers expire. The resulting shortfall is expected to be offset by higher production from core producers in the Organization of Petroleum Exporting Countries and Russia, the bank said, while warning of higher price volatility in coming months.

In a Twitter post last month, U.S. President Donald Trump reassured global markets that “Saudi Arabia and others in OPEC will more than make up the oil flow difference in our now full sanctions on Iranian oil.”

Last month, the kingdom cut production by about 500,000 barrels a day more than required by the pact with fellow OPEC members, so it could increase output significantly without violating the deal.

“They’ve got some room for maneuver,” said Darwazah. “The U.S. can push Saudi Arabia to take away Iranian market share in Asia, and they will do that when needed. Politically, the Saudis are probably quite happy.’’

This is probably a good time for us to be reminded of a significant fact of the oil pricing mechanism. In today's world, Saudi Arabia is still the swing producer. That means that Aramco is the supplier of the last increment of supply needed to fulfill the supply balance, after everyone else has supplied all that they can sell. That also bestows upon the Saudis the ultimate decision on the price of that increment, which then becomes the global price of oil. That price is Aramco's choice. It can follow the futures traders or is can be an independently-set number of the Saudi choice. It can be higher than today's number or lower than today's number. It is entirely the Saudi choice. Aramco chooses and the world industry follows. Of course, demand level, and the quantity needed for that last increment, follow the price. And in our current marginal pricing system, all other prices follow that price.

Now what will the Saudis do? They relinquished the role of picking the number thirty years ago. Will they be sufficiently astute to return to established pricing? I doubt it. So I expect nothing will change. They will supply the oil and the futures traders will set the price. And current indications are that there will be more suppliers trying to sell at a lower price than there is demand, so a price war still seems in the works as each producer continues to shout "Every man for himself!". We shall soon see, and the IMO 2020-dictated sour crude surplus is just around the corner..

[D Coyne + 305]

11 hours ago, William Edwards said:

We shall keep watching and studying.

Mr Edwards,

Looking through the September 2014 OPEC Oil Market Report I found the following two charts from pages 86 and 87.  I remember distinctly thinking in Sept 2014 that OPEC would cut output and prices would increase, history tells us my expectation was incorrect, they did the reverse and increased production to regain market share and drove prices even lower.  There were certainly signs by Sept 2014 that the market was oversupplied based on the charts below on the balance of supply and demand.