Wednesday, June 02, 2004

It looked like Black Bart (played by >$40 barrel of oil) was going to win the day as NYMEX light crude prices hit $42.45/barrel on Wednesday. But then the Lone Ranger (played by Saudi Arabia) and Tonto (played the United Arab Emirates) rode into town to drive out Black Bart and save the community, pledging 1 million extra barrels a day between the two, and New York crude prices dropped sharply to close at $39.96/barrel -- down 5.9%.

Overall OPEC is promising to raise production quotas by 2.5 million barrels/day. It's nice that Saudi Arabia and UAE are offering to up their antes, because according to the US Department of Energy (see Table 3a), they're the only OPEC countries not pumping at maximum capacity. The extra 400,000 barrels/day promised by the UAE puts them at maximum production; the extra 600,000 barrels/day from Saudi Arabia only dents its surplus capacity of 1.7-2.2 million/barrels day.

OPEC is promising to raise its production ceiling 2.5 million barrels/day to 26 million, but this is deceptive. Per the Department of Energy, OPEC is already exceeding its quotas by 2.3 million barrels/day, so upping the quota is almost wholly an act of ratifying the status quo rather than really increasing production. At most, OPEC proposes returning to levels seen in March 2004 when production was at 26 million barrels/day. Back then, before the reheating of the Iraq War, NYMEX prices fluctuated mostly in the $35-$37/barrel range.

Again per the DOE (see Table 3), world oil demand in 2004:III is expected to be 81.1 million barrels/day. But here's the kicker: total world oil supply is also estimated to be 81.1 million barrels/day. In this scenario, OPEC's crude production is 27.5 million. If the real-world production is only 26 million, then, Houston, we have a problem. Even the "fundamentals" say oil prices will be rising over the summer -- at least above the current "fundamental" price of around $32-$35/barrel. Put a little terrorist froth on top and a Chinese economy that can't slow down, and you've got a recipe for a long, hot summer.

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