Does the Middle East Matter?

Does the Middle East Matter?
By Peter Glover
Energy Tribune
Sep. 19, 2007

The May and June issues of the British magazine Prospect hosted a fascinating spat over the strategic importance of the Middle East. In May, “The Middle of Nowhere” by Edward Luttwak, a senior advisor at the Center for Strategic and International Studies in Washington, D.C., made the case that “despite its oil this backward region is less relevant than ever, and it would be better for everyone if the rest of the world learned to ignore it.” Strong stuff.

Enter David Strahan, author of The Last Oil Shock, with a June letter demolishing Luttwak’s critical claim that the importance of Middle East oil is declining, summed up in his pithy counter-assertion, “It’s the oil, stupid.” We agree with Strahan’s conclusion, but with two amendments. Not only does Middle East energy still matter, it will soon matter increasingly – and…it’s the oil and gas, stupid.

As Strahan says, many of Luttwak’s political points “ring horribly true.” Luttwak attacks the oft-repeated fallacy that solving the Israeli-Palestinian conflict is the key to resolving Arab/Muslim-Western tensions. Luttwak also uses statistics to bolster his point that the region is “remarkably unproductive” with a correspondingly low per capita income as a result: “Despite its oil wealth, the entire Middle East generated under 4 percent of global GDP in 2006 – less than Germany.” But it is in his assertion that the region’s relevance is diminishing because “global dependence on Middle Eastern oil is declining,” and the assumption that the region’s energy reserves are unimportant, that Luttwak ultimately gets it badly wrong.

Strahan rightly points out, “Luttwak claims the Middle East is irrelevant because it produces little but petroleum. Hasn’t he heard that oil provides 95 percent of all transport energy and that spikes in oil price have precipitated every major recession in the last 30 years?”

Luttwak comments: “The region produces under 30 percent of the world’s crude oil compared to almost 40 percent in 1974-75. In 2005, 17 percent of American oil imports came from the Gulf, compared to 28 percent in 1975.” True enough. But as Strahan counters, “This is unlikely to last. Non-OPEC production will peak by 2010 or soon after. According to the International Energy Agency, the U.S. Department of Energy, Exxon Mobil, Shell and PFC Energy…OPEC will soon have to provide a much bigger proportion of global supply – almost 50 percent by 2030 according to the IEA – mostly from the Middle East.” However, Strahan acknowledges: “There are well-justified fears that OPEC output will also peak within the next decade…so dragging global oil production into terminal decline. Since OPEC controls 75 percent of known reserves – overwhelmingly concentrated in the Middle East – this can only make the region more critical, not less.” While ET concurs that the region’s importance is growing, we do not agree with Strahan’s overly alarmist view of what he terms the “imminent extinction of Petroleum Man,” central to his thesis in his book, The Last Oil Shock. (A timely, though poorly written, corrective to Strahan’s peak oil theory can be found in the recent The Battle for the Barrels by Duncan Clarke, Profile Books.)

Where Is Oil Headed?

Where Is Oil Headed? A Contrarian Says $45 [Pt.I]

Where Is Oil Headed? A Contrarian Says $45 [Pt.II]

OPEC Says $80 Oil Won't

OPEC Says $80 Oil Won't Last Due to `Fundamentals'
Sept. 14 (Bloomberg)
By Fred Pals

OPEC, whose members produce more than 40 percent of the world's oil, said crude at $80 a barrel won't last because ``fundamentals'' don't support the price.

``I don't think the price will stay at $80,'' Secretary General Abdalla el-Badri said today at a press conference in Vienna. ``The fundamentals don't support that.'' The price of $80 a barrel is ``too high,'' he added.

The Organization of Petroleum Exporting Countries unexpectedly agreed to increase oil production by 500,000 barrels a day at a ministerial meeting in Vienna on Sept. 11. The increase, which will be added to the current 26.7 million-barrel-a-day output of 10 OPEC members, starts Nov. 1.

Oil prices gained after OPEC's decision to raise supply, when the U.S. Energy Department reported the country's stockpiles of crude fell more than expected last week. That suggested the increase may not be enough to meet demand as winter approaches in the Northern Hemisphere. Hurricane threats and an attack on Mexican pipelines have also driven up oil prices over the past few days.

Crude oil for October delivery traded down 18 cents at $79.96 a barrel at 9:06 a.m. local time on the New York Mercantile Exchange. The contract rose above $80 a barrel yesterday for the first time, touching $80.20.

December Meeting

El-Badri declined to comment on whether OPEC would discuss raising output again at its December meeting if crude prices remained near their current levels. ``Of course, we will discuss supply, demand and inventories, as usual,'' he said.

OPEC is not pursuing any specific price target or range, El- Badri said. ``It has been a long time ago since we've had a range,'' he said. OPEC having a specific target is ``rubbish.''

Angola, the African nation which joined OPEC on Jan. 1 this year as its 12th member, is expected to have a production quota next year, and El-Badri said he hopes to announce that level at OPEC's December meeting. He declined to comment on whether Angola would get a quota as soon as it reached production of 2 million barrels a day.

Exxon Mobil Corp., BP Plc and other international oil companies see Angola as a growth area. They're finding it harder to expand oil and gas production in other resource-rich countries such as Russia and Venezuela.

The Energy Report

The Energy Report
Phil Flynn
September 13, 2007

Oil at 80. Are the stars out tonight? I can’t tell if it’s cloudy or bright and that may depend on whether or not you're long oil. The bullish stars came into perfect alignment in an explosive trading session that sent oil out of this world. Oil surged to an all time not inflation adjusted high of $80.00 a barrel in a day that saw all the energy products soar.

Oil seemed on a mission to fulfill some technical destiny of $80.00 a barrel. It was a price level that was denied this summer as logistical issues kept oil undervalued for most of the summer. But sometimes things are written in the stars and the just wont be denied. It would be easy to point to yesterday’s wildly bullish inventory report as the main reason for the oil market's star search but in reality that was only a small part of the overall story. The market got just about anything a bull could want and perhaps even more.

Even before yesterday's inventory report the market had a strong upward bias. Oil had closed the day before at a record high as it laughed in the face of the OPEC production increase. Why did they raise production? Because OPEC cares. What they care about is a bit uncertain but they say they care all the same. Abdullah el-Badri, OPEC’s Secretary General, said that, “our message to consumers is that we are concerned and we care, and that is why we are raising production". Can you feel the love. Ah gee. OPEC cares about me! I feel special. And of course with OPEC - as always - the devil is in the details. And what you can sure about is what OPEC really cares about is covering their behind.

OPEC raised production because mainly they fear the backlash if the world goes into a recession. The IEA and the market have been sending signals to the cartel all summer that more oil was needed but they failed to act. Now OPEC has made a valiant effort by raising their quota from 25.845 million barrels a day to 27.2 million barrels a day which means that OPEC according to their math would be adding 500,000 barrels of oil. That’s not paper barrels but real oil for real men.

Yet because OPEC leaked its intentions early there was no surprise and the market discounted the oil as just replacing oil that was lost during the last two hurricanes. OPEC is proving once again that as a cartel they are very good at getting the price of oil from falling but they are always behind the curve and fail to stop prices from rising. Sometimes it is an issue of not having enough spare production capacity but many times it is because they are quick to cut but slow to raise production.

So then it was onto the weekly supply report from the Department of Energy. Would it give the bulls more reasons to buy! Well, before the stocks report even came out, natural gas bulls were already buying! This time it was because of the weather. A tropical wave that turned into a tropical storm Humberto caused havoc in the Gulf. The Houston shipping channel would close and there was talk that perhaps some oil rigs might be evacuated. Some weather experts fear that this active storm season will continue to cause more havoc and we may have to get prepared for one storm after another.

Then came the weekly inventory report. It was like a bullish dream. Crude supplies plunge 7.1 million barrels more than twice the average estimate. And that was and in all major categories. But even without the bullish report the mood for oil is bullish; decidedly bullish. The psychology after the OPEC announcement and the subsequent rally was a clear sign that the energy markets are poised to move higher.

Crude is convinced that a Fed rate cut is in store for next week and that should help keep the demand for oil much stronger than feared. The market is also showing that funds are getting an appetite for risk once again. Funds that fled from record long positions because they feared the housing slowdown perhaps are jumping back in. Even those without sub prime exposure fled from risk. Now they are coming back, a strong sign of confidence in our economic future.

Yes the backwardation being at near record levels could signal some slowing demand in the future but it also could signal a lessening of refiners worrying about geo-political risk. Let’s face it, with dealt with a lot of talk of the terror premium and war cutting off supply. Take yesterday, there was talk of the US making war plans against Iran and hardly anyone in the oil patch was talking about it.

Even talk about how Russian President Vladimir Putin rearranging the Russian Democracy in his own KGB image had little effect. No one in oil cared yet.

And we had a fire in Prudhoe Bay Alaska and cut production at a BP plant. We have refineries shutting down due to losing power in Texas we have it all. Aned this all means the bears are dancing in the streets.

Venezuelan Oil Output

OPEC Seeks to Bridge Gulf Over Venezuelan Oil Output
by Adam Smallman, Dow Jones Newswires
FWN Financial News 9/13/2007
URL: http://www.rigzone.com/news/article.asp?a_id=50129
VIENNA, Sep 13, 2007

Staff from the Organization of Petroleum Exporting Countries have met with officials from member country Venezuela in a bid to bridge the gulf between the country's stated official oil production level and estimates a third lower by news agencies and institutions, a gap that some say has undermined the credibility of the Latin American nation's oil policies.

Fuad Al-Zayer, who leads OPEC's data services department, said Thursday that he and his colleagues were working closely with Venezuelan officials to narrow the differences to the point where OPEC no longer has to use secondary sources, such as energy information provided by Platts, a unit of McGraw-Hill Co. (MHP), or the Paris-based energy watchdog the International Energy Agency.

Dow Jones Newswires is also a provider of estimated oil output by OPEC member countries.

"We are there to provide them with facilities, to show them how they can coincide with what the secondary sources are saying," al-Zayer said after a press conference on OPEC energy data.

"But there is a gap between the two. We are hoping that they gap will become closer."

Venezuela has longed claimed its oil output is far higher than secondary sources suggest, with the official number around 3.2 million barrels a day, against estimates by Dow Jones Newswires, Platts and the IEA of around 2.4 million barrels a day.

Some analysts attribute the difference to the government of President Hugo Chavez covering up sharp oil production losses experienced in the wake of a clear-out of veteran staff from the state-run Petroleos de Venezuela S.A., or PdVSA, following a crippling strike in December 2002 that lasted two months.

The government subsequently said output levels rebounded to pre-strike levels of around 3.1 million barrels a day.

Some analysts have linked the stated production level to Venezuela's reluctance to lose its influence inside OPEC, which has output targets in place for 10 of its 12 members, including Venezuela.

Al-Zayer said Venezuela's production of heavy, tar-like crude oil may have colored the picture of its actual output.

"We know Venezuelan officials are meeting with Platts and the IEA to show them what's happening," al-Zayer said.

"Some of the problems are that heavy oil is produced in Venezuela and maybe some of the agencies don't count it. So we are trying to iron out this."

However, the International Energy Agency, as an example, clearly breaks out production of Venezuela's Orinoco-derived heavy crude, which it said in Wednesday's monthly oil market report contributed 475,000 barrels a day to Venezuela's output of 2.34 million barrels a day.

OPEC is incorporating secondary-sourced data in its estimates as "that is what the market believes in these days and eventually we hope that we won't do that in the future," Al-Zayer said.

Oil Rises to Record $80.18

Oil Rises to Record $80.18 on Larger-Than-Expected Supply Drop
By Mark Shenk
Sept. 12 (Bloomberg)

Crude oil rose to a record $80.18 a barrel in New York after supplies dropped the most this year.

U.S. oil inventories fell a greater-than-expected 7.01 million barrels to 322.6 million last week, the Energy Department said today. Prices also rose after OPEC said yesterday it would increase production by 500,000 barrels a day, less than is needed to meet a seasonal rise in demand.

``We've shrugged off OPEC's offer of 500,000 barrels,'' said Nauman Barakat, senior vice president of global energy futures at Macquarie Futures USA Inc. in New York. ``There's a tropical storm in the Gulf and inventories posted a huge decline.''

Crude oil for October delivery rose $1.68, or 2.2 percent, to settle at $79.91 a barrel at 2:54 p.m. on the New York Mercantile Exchange, a record close. Futures also touched the highest intraday price since trading began in 1983. The previous record of $78.77 was reached on Aug. 1.

The average cost of oil used by U.S. refiners averaged $37.48 a barrel in March 1981, or $84.73 in today's dollars, according to the Energy Department. Prices rose from 1979 through 1981 after Iran cut oil exports.

Brent crude oil for October settlement rose $1.30, or 1.7 percent, to $77.68 a barrel on the London-based ICE Futures Europe exchange, the highest since Aug. 7, 2006.

A 2.7 million barrel drop in oil supplies was expected, according to the median of responses by 17 analysts surveyed by Bloomberg News before today's report.

``Seven million barrels is an awful lot of oil to lose in one week,'' said Rick Mueller, an analyst with Energy Security Analysis Inc. in Wakefield, Massachusetts. ``There's a feeling that OPEC waited too long to make this move.''

Two Tropical Depressions

Oil also rose after the National Hurricane Center said Tropical Storm Humberto formed off the coast of Texas in the northwestern Gulf of Mexico. Tropical storms or hurricanes spur prices higher because they can threaten offshore production.

Some manufacturers and utilities can switch between oil- based fuels and natural gas depending on costs.

``There's a huge amount of hedge fund money moving into the long side of the crude-oil market,'' said James Ritterbusch, president of Ritterbusch & Associates in Galena, Illinois. ``The global supply balance will be tight as we go into the fourth quarter. There's already a lot of concern about low stocks.''

Oil prices have risen 31 percent this year as hedge funds and other speculators purchased futures because of surging energy demand. Long positions are bets that prices will rise.

OPEC Production

OPEC will target crude production of 27.2 million barrels a day after abandoning its former quotas. The 500,000 barrel-a-day increase will be on top of actual output, according to Kuwait's acting oil minister, Mohammed Abdullah al-Aleem.

``Too much attention was paid to what the Iranians, Venezuelans and Nigerians said before the meeting,'' said Brad Samples, commodity analyst for Summit Energy Services Inc. in Louisville, Kentucky. ``The Saudis and other Gulf producers are the swing producers, the only members with spare capacity, and have the greatest influence. The Saudis had been silent.''

Before the decision, OPEC members including Venezuela, Algeria, Iran and Libya had said the world was adequately supplied with oil. Western officials, including the head of the International Energy Agency and U.S. Energy Secretary Samuel Bodman, lobbied for increased output.

November Maintenance

The United Arab Emirates is expected to cut crude oil production in November by as much as 600,000 barrels a day because of maintenance, reducing output by about one quarter, the IEA said.

``The supply and demand is pretty OK,'' Royal Dutch Shell Plc Chief Executive Officer Jeroen van der Veer said at a briefing with reporters in Calgary today. ``What we do have is a lot of psychology in the price. We have to expect volatility in the oil price due to this psychological component.''

The IEA, an adviser to 26 industrialized nations, said global oil demand will rise 1.4 percent to 85.9 million barrels a day this year, in a monthly report. Consumption will increase 2.1 million barrels a day in 2008.

`Big Question'

``The IEA report is still bullish, even with the downward revisions,'' Mueller said. ``They are still looking for pretty strong gains in demand. It doesn't appear that they are too worried about the subprime crisis hurting demand.''

The agency reduced its demand forecast for this year by 90,000 barrels a day and by 160,000 barrels a day in 2008 from last month's forecast.

``There's still a big question of how the credit crunch will ultimately affect demand,'' said Eugene X. Hodge, a managing director at John Hancock Financial Services Inc. in Boston, who manages a $4.3 billion oil and gas company bond portfolio. ``It's too early to know what will happen.''

Platts: OPEC Output Dips in August

Platts: OPEC Output Dips in August
Platts 9/7/2007
URL: http://www.rigzone.com/news/article.asp?a_id=49966

OPEC crude production fell by 40,000 barrels per day (b/d) in August, to 30.46 million b/d from 30.5 million b/d in July, mainly because of lower exports from Iraq, a Platts survey showed September 7.

The ten members bound by production agreements, however, boosted output by 80,000 b/d, to 26.79 million b/d in August from 26.71 million b/d in July, the survey showed.

OPEC ministers meet in Vienna on September 11 to review the current agreement, which sets target output at 25.8 million b/d. Several ministers have said in the runup to the meeting that they do not see any need for the group to raise this target.

Actual OPEC-10 production has been steadily creeping up over the summer, however, and is now about a million barrels per day above the 25.8 million b/d target.

John Kingston, Global Director of Oil at Platts, said, "OPEC faces a real dilemma at its upcoming meeting. On the one hand, prices have climbed back up toward the $75 level, and the supply/demand balance projects a tight market in coming months, which might encourage OPEC to raise production. But when the organization looks at Friday's U.S. employment figures, and considers the ramifications of the US subprime mess, it will be concerned that a significant slowdown in demand could be around the corner. With that in mind, it is difficult to see a scenario in which it will vote to raise output, given that based on our survey, production is rising slightly regardless."

Apart from a small dip in Iranian production, the only significant decline came from Iraq. Iraqi exports had been boosted in July by the first liftings from Turkish Mediterranean port Ceyhan since January. There were no exports from Ceyhan in August, leaving Iraq to rely solely on its southern terminals. State oil marketer SOMO will sell 5 million barrels from Ceyhan in September, however, having built up stocks at the port.

Iraq, struggling to rebuild its oil industry after years of United Nations sanctions and a US-led war in 2003, does not participate in OPEC output pacts. Angola, which became a member in January this year, has yet to join the quota system.

Table in original article