Oil Market Structurally Bullish

Jim Brown
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Goldman's Jeffrey Currie, head of commodity research said, "Long term and medium term we are still structurally bullish." Currie is only one of several high profile analysts who have reiterated their bullish views on the energy sector in the last couple weeks.

Currie is not just a trend following analyst. He understands the problems ahead. He says the oil market will see critical shortages in 2012 as global demand increases faster than excess capacity. These critical shortages will be made worse because of the conflict in Libya. The shortage of Libyan light sweet crude could last for a long time. The Libyan national oil company said last week that several installations have been severely damaged by rocket attacks by Qaddafi troops in an effort to prevent the rebels from selling oil to fund their revolution. He said all the installations would remain closed and production locked down until after the war ended in order to prevent further damage in case of attack.

Currie said volatility in the oil markets will begin to stabilize next month once the market gets clearer signs on U.S. growth and the pace of monetary policy tightening in China. He said the commodities market is going through a "rough patch" on weakness in macroeconomic data.

He believes oil demand will continue to rise even if the U.S. ends the QE2 program on schedule. "If the growth generated by QE2 is sustainable, even if there is some moderation after QE2, then demand will continue to rise. Underlying growth should be intact.

He believes Saudi production is currently in the "vicinity" of 2008 levels but their spare capacity is not expected to decline to 2008 levels for another 6-12 months.

In Saudi Arabia the demand for oil consumption is growing every day. One reason is the heavy subsidy of oil and water prices by the Saudi government. Gasoline only costs 12-cents per litre and that is cheaper than bottle water. The same subsidy system also holds down the cost of water and electricity in a country without any lakes or rivers and where every building is air-conditioned.

As Saudi's population rises, and it is growing rapidly, it requires more of Saudi's oil resources to provide for its own citizens. Officials warn that continuation of these subsidies will eventually push Saudi into its own energy crisis when internal consumption forces a decline in export volumes.

Saudi sees the subsidies as a way of redistributing the oil wealth to the common citizen. This makes it a highly political concern because once the squeeze begins and prices are forced higher the population is not going to be friendly. With revolts and unrest all across the region we have seen a sample of what Saudi may look like in the years ahead. Saudi's population has grown from five million in 1965 to more than 25 million today. The population is still growing rapidly but has slowed from explosion levels in the 1990s. In 1995 the average Saudi woman gave birth to 5.0 children. In 2005 that had declined to 2.9 births per woman.

The king just unveiled a $135 billion package of additional stimulus benefits in order to keep the peace. They will have to sell a lot of oil at much higher prices to pay for these stimulus packages.

The Saudi government spends more than $20 billion a year just holding down water prices. Saudi burns more than one million barrels of oil per day to desalinate water. They spend another $15 billion on subsidizing electricity costs.

According to Hashim Yamani, president of the King Abdullah Atomic and Renewable Energy City, Saudi's internal oil demands will rise to more than 8.0 million barrels per day by 2028. They currently consume 3.2 mbpd for their own use. In March they produced 8.292 mbpd. With oil production expected to rise to eliminate Saudi's excess capacity by the end of 2012 it means every barrel they consume internally will be one less barrel available for export.

This problem exists at smaller ratios in other OPEC countries. I have written before about the "Land Export Model" and the impact of rising internal consumption decreasing export capacity as fast or faster than oil depletion itself. When you factor in depletion and increasing internal consumption plus growth in demand from Asia the future of supply is going to become very complicated by the end of 2012. Yes, as Currie predicts, supplies will become critically short in 2012.

Jim Brown

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The OilSlick Newsletter is based on the expectations for global oil production of light sweet crude to peak and begin to decline in the 2012-2014 timeframe. I am calling this "Peak Sweet™" instead of Peak Oil. This is the point where global production of conventional light sweet crude supplies can no longer be supplemented by enough oil sands production, deepwater oil production, biofuels and natural gas liquids to offset the decline in existing fields. The roughly 6% annual decline of existing production due to depletion is larger than the rate of new discoveries and new production being added each year. The Peak Sweet™ countdown clock is ticking and time is growing short. Peak Oil will arrive shortly thereafter. Are you prepared?