lördag 10 september 2011

About the Brent vs WTI price diffrential

PARIS — Libyan oil exports are unlikely to return to their pre-war level before 2013, the new head of the International Energy Agency said on Thursday.

"Our experts think that 2013 or beyond will most probably show the complete full restoration of the Libyan supply to the market, but not before that," Maria van der Hoeven told AFP in an interview.

Libya, a key African oil exporter, produced about 1.6 million barrels per day (bpd) before the rebellion against Moamer Kadhafi broke out in mid-February, and then slowed to a trickle.

Around 85 percent of Libyan oil output was exported to Europe, with the disappearance of its high quality light sweet crude from the market one of the reasons why Brent crude from the North Sea has been trading much higher than oil quoted on US exchanges.

Anyway, I haven't checked up on production data there for a while. The graph above shows the total production of the three main countries involved: the UK, Norway, and a little from Denmark (data from BP).

As you can see, production peaked in 2000 and has tanked since. If we look at the year-on-year growth rates, we get this:You can see the very high decline rates reached in the early 2000s. After 2005, with sustained high oil prices, there was a moderation in the decline rate for a few years (some new fields came on, like Claire and Buzzard). However, 2010 was the worst year yet, with an 8.6% decline rate. There seems small doubt that this region is played out and will decline to very little over the next decade or two. http://earlywarn.blogspot.com/2011/07/update-on-north-sea-oil-production.html

If there is a lesson to be learned here it is: be careful shorting crude oil volumes in 2011Expected UK North Sea crude oil declines increase oil price uncertainty

I have circled the March data in each case. You can see what was going on. The Saudis were slowly increasing their production from last fall through February, presumably in response to growing global demand and rising prices. But then, in March, when Libyan production went into freefall, they put on the brakes and did almost nothing to make up for the shortage.

The burning question is: why? Back in 2006, when their production started to gradually decline from 9.5mbd even as global oil prices were in the worst spike since the 1970s, I was an advocate of the view that the decline was largely involuntary: they'd never produced more than 9.5mbd, they'd underinvested for decades, and some of their big fields were getting very tired (particular northern Ghawar and Abqaiq) and they were starting a big rash of new projects and ramping up their rig counts at the same time.

I see current events differently. The reduction in late 2008 was clearly voluntary to support prices in the face of the great recession. There's no new projects announced, and the rig count hasn't taken off.

So my take is that the failure to increase production to compensate for Libya is deliberate. We can only speculate, but my guess is that, having watched how the west has helped to ease Mubarak and Ben-Ali out of power and is intervening in Libya to the same end, the Saudi regime is in no mood to care about our desire for more oil. Instead, they are very much in the mood to build as large a war chest as possible with which to appease their own population, strengthen their defense measures, etc.

So, instead of Saudi production increasing to compensate for Libya, total world production decreased, and oil prices went up sharply to enforce the necessary conservation on the world's oil consumers.

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