An investment in oil at this time is almost a sure bet of future profits. Despite the pundits claim of declining prices because of economic slowdowns and more supplies becoming available in the future their predictions are unlikely to become reality.
The reason for this is simple. Events in the international arena are sabotaging the expansion of supply. Worse yet, fears of possible disruption of available supplies lend speculators in oil to drive up prices even further.
As the world stays focused on events in the Ukraine in relation to Russia events elsewhere continue to conspire in keeping supplies of crude below expected market production.
The price of crude oil has been creeping up as the crisis in Eastern Europe continued to unfold. By Friday of last week the NYMEX contract for American crude had reached $99.46 USD (United States Dollars). All oil is still sold in dollars so it is easy to compare prices between the WTI (West Texas Intermediate) in North America with Brent in Europe.
Oil Gusher United States 1901
Friday’s rise of 56 cents only was a precursor to oil breaching the 100 level earlier today for American oil when it rose an additional 79 cents per barrel. Today in Europe Brent was already selling at $107.41 a barrel after a 49 cents hike. Brent is used to price about 2/3 of the world’s internationally traded oil.
A barrel of oil contains 42 gallons (152 liters). About 19 gallons of gasoline can be produced from a single barrel of oil.
The recent spike may be only temporary but international forces as explained earlier are working toward higher prices.
The economic slowdown in China was supposed to bring a moderation in crude prices. Statistics from China show a 8 month low in manufacturing and factory output in China is declining at the fastest pace in 18 months.
Recent statements by the Chinese government indicate that maintaining the target 7.5% economic growth rate for 2014 may no longer be possible. This is important for traders in crude because China is the world’s second largest economy. It is the world’s second largest consumer of oil as well. Chinese oil reserves are estimated to be 10 billion barrels.
Jingshen Expressway In China
In 2012 China imported 5.3 million BPD (barrels per day). The daily consumption of crude was 9.9 million BPD. Therefore China is importing about 55% of its daily demand of oil.
China has become what the United States used to be as far as dependence on foreign energy supplies. The rapid expansion of its transport sector and energy intensive growth model guarantees strong demand by China even if the economy grows more slowly than in past decades.
Russia is the worlds largest producer of crude in the world. Output rose for the 5th year in a row in 2013 reaching a post Soviet high for the year( highest in 25 years). Oil production ratcheted up 1.3% from the previous year. Output increased from 10.375 million BPD in 2012 to 10.508 million BPD in 2013.
Saudi Arabia is the worlds 2nd largest producer churning out 9.47 million BPD. The United States is the 3rd largest producer with 8.453 (BPD)
Russia exports more than 7 million BPD of crude.
Total world output of oil stands at 84,820,000 BPD. The percentages of world production for the top 3 producers are 13.28%, 12.65% and 9.97% from Russia, Saudi Arabia and the United States respectively. Russian has proven reserves of 60 to 80 billion barrels of oil.
Russian Pipe Lines To Europe
At this point it is unlikely that there will be any attempt to slow down Russian exports directly. However, nations may make attempts to diversify their supply especially nations that feel they are overly reliant on supplies from Russia. This seems to be the case for a number of nations in Eastern Europe.
However, if Russia attempts to seize even more territory from Ukraine regardless if they are more Russian speaking areas to the east and south; Western nations led by the United States may feel compelled to enact sanctions and boycotts of Russian goods. The most valuable exports to the Russian economy are of course, crude and natural gas. The disruption of this flow would cripple the economy of Russia since it is estimated that Russia makes 70% of its $515 billion annual export earnings from oil and to a lesser extent natural gas.
One must point out that the world will pay a price as well if prices for crude increase dramatically. You cannot take such a large percentage of production off the international market and not expect consequences. It is true though that nations like Saudi Arabia could ramp up production to cushion the blow but, it is doubtful they could go much beyond 2 to 3 million BPD in the short term.
It is unlikely that Russia would initiate a cut off in supplies of either crude or natural gas. This would reduce the sale of Russian energy thus hurting the Russian economy and value of their currency. It would also further antagonize the Europeans and only make the day of those counties looking for alternative supplies come that much quicker. Europe currently gets about 25% of its natural gas from Russia.
Another problem is the continuing difficulty of Libya especially in the kind of oil that the nation exports. Libya exports what is known as light sweet crude. This type of oil is prized because it is low in hydrogen sulfide and carbon dioxide. It also contains less than 0.5% sulfur. Refiners prefer sweet crude because the above properties permit elevated yields of high value products including jet fuel,diesel fuel, heating oil and gasoline.
Libyan Offshore Oil Platform
Libyan oil production has yet to recover fully since the 2011 ouster of Moammar Gadhafi and the resulting civil war. Libya has Africa’s largest reserves of crude and ranks 5th in proven reserves world wide with 76.4 billion barrels as of 2010. That same year Libya was exporting 3.1 million (BPD). The proven reserves at that rate would of lasted Libya 77 years alone.
Libya is especially important because of its geographical proximity to Europe and low cost of production. A number of the wells cost as little as a $1 USD per barrel to produce. However, the continuing unrest in the country has led to production that is much below its traditional rate. In 2013 this was 700,000 barrels bringing it down to the 27th ranking in oil production in the world. The situation in Libya seems unlikely to change in the near future.
OPEC Member States
The situation in Iran is of a different set of circumstances but the end result is a reduction of potential sale of oil. As a result of sanctions, Iran has been unable to sell the amount of oil that it would like to. As a member of OPEC (Organization of Petroleum Exporting Countries) Iran holds the world’s 4th largest proven oil reserves and the world’s 2nd largest natural gas reserves. International sanctions have taken a toll on crude production in Iran with the low rate of exports, lack of foreign investment and technology. Iran’s crude oil production fell dramatically in 2012 as Western nations tightened sanctions further. Production dropped to 1.5 million BPD.
Iran went from the 3rd largest exporter of crude in the world to just being in the top ten. Under the sanctions regime Iran has been permitted to sell about a million BPD. There are recent concerns that they are selling much more than that. It is claimed also that they have found ways around the sanctions in recent months with the complicity of countries who wish to purchase the Iranian oil at a discount from world market prices.
The international sanctions are a result of Iran refusing to give up its nuclear program. The Iranians claim it is for peaceful purposes only but that is hard to believe given the vastness of Iranian petrol reserves. This year will bring the issue to a head since they are only months away from acquiring the ability to produce nuclear weapons.
Topographical Map Of Iran
An attack by Western powers seems to be quite unlikely at the moment as these nations particularly the United States government wants to continue to try to negotiate a settlement.
Israel on the other hand has no such wish. The Israeli government believes that the Iranians are just playing for time until the actually have the capability to produce a nuclear bomb. Once they are able to do this they will have additional leverage in negotiation with the nations that are enforcing the sanctions.
Israeli IAI Lavi B 2 Hatzerim
The Israeli government has continually stated that they will not permit Iran to go nuclear since the government of Iran has repeatably stated that it wishes to destroy the nation of Israel. If taken seriously which the Israelis do the very survival of the country is at stake. It is well know that the Prime Minster of Israel has ordered the military to continue preparations for an attack against Iran. If this occurs and war results the price for oil will necessarily skyrocket. Keep in mind that Iran can also because of geography, close the Strait of Hormuz.
U.S. Naval Ship in The Strait of Hormuz
This narrow waterway 21 miles at its choke point is where 17 million barrels of oil passes daily. That is 35% of all seaborne traded oil and 20% of all the oil traded worldwide. Closing the strait even for a short duration of time, would be chaotic to world energy markets and would dramatically effect the economy of the entire world. The waterway could by force be reopened but that would take time and a military intervention by the Western Powers.
Venezuelan Oil
Next is the situation in Venezuela. This nation is the 9th ranking in the world production of oil believed to be over 3 million BPD. The continuing economic and political chaos in the nation is going to effect the ability of the country to continue to keep production targets in place. Oil exports from Venezuela are the 5th largest in the world. They have the largest reserves of heavy crude oil (which is less desirable because it is harder and more expensive to refine) in the world. As of 2010 it was seen to have 99.4 billion barrels of reserves. The largest proven reserves in the Western Hemisphere.
The final country we will take a look at is Iraq. Production of crude at the moment is surging but so is sectarian violence. It is not yet clear that the nation of Iraq will survive as an independent and unified country.
Iraq is once again the world’s fastest growing oil exporter which has kept world oil prices from ratcheting up even higher given the present international situation in the world. Iraq is once again the 2nd largest producer of oil in OPEC.
Iraq has the world’s fifth largest proven reserves of oil.
Oil Tankers at Basra in Iraq
However, violence is escalating partly from the civil war in Syria but also from other areas as well. Iraq is basically three countries bound together in one nation. The Kurds reside in the north, the Sunni are in the center part of the country and the Shiites can be found in the south. It has been difficult for these three groups to cooperate to build a new Iraq since the ouster of Hussein and the withdrawal of American troops.
Production of oil last month reached 2.8 million BPD a 500,000 BPD increase from January. As long as prices for oil remain above $100 USD a barrel the other members of OPEC will not protest these rising production levels but this can easily change. The oil industry can also be brought down very easily if a new civil war erupts or terrorism and violence spreads inside Iraq. It could also be instigated by neighboring Iran. Production levels then could rapidly plummet. Pipelines, refineries, port facilities are all easy to sabotage if there is determination on the part of a radical group or set of individuals.
Given the situation in just the countries listed above indicates there will be an increased likelihood of volatility and wild swings in the price of crude as this is a commodity that is traded world wide. Supply disruptions and fears of such interruptions in supply will see traders of oil bidding up and pricing down through several cycles in the months and year ahead. However, if you are willing to follow these world events carefully, you will be able to profit from them in the oil market enormously. After all oil is a commodity every nation must have in a modern economy.
Great, and thorough article! Simple enough though to generate profitable trading ideas from.
Thanks!