I had some time to think about a very basic issue. You need to get your information straight before you bet a lot of money on anything. At least, I need to do that.
To me, analysis of the fundamental data is the cornerstone of successful speculation. Our goal is to decipher the balance of demand and supply and find out whether a particular commodity will become scarce or whether there will be ample supply of it. Basically, scarcity will push up prices, ample supply will lower prices.
First, we should become aware of what is possible and what is impossible. We will never have all data available for analysis. If all the data is freely and openly available, it will be too late to invest in order to profit from that data.
Therefore, our decisions have to be based on uncertainty. There is a danger, though: you may overanalyze your market and pass the moment to invest your money profitably. Or you invest before you thoroughly analyzed your market.
As time passes, there is a window of opportunity to invest. If you miss it, you will either suffer losses (you entered too fast with too little knowledge) or you will miss the chance to make profits (entering after all the data is available).
Using Intelligence Techniques
So we don’t have all the information we need. Worse, some information is dead wrong. Let me give you an example: I wrote a paper on the proliferation of weapons of mass destruction in Arabic countries, and I had to deal with a lot of contradictory information. Continue reading
The University of Applied Sciences Bremen, Department of Applied Business Languages and International Management, invited me to give a speech about the oil market. As an alumnus, I was delighted to do this.
This is a short description of my presentation.
Demand, especially from China, has risen over the past 20 years. Peak Oil, the geological restriction that limits our abilities to increase global crude oil production, curbs supply. Hence, we are in a seller´s market. Peak Oil pushed Big Oil into costlier production areas, e.g. Canadian tar sands and deepwater offshore. This pushed up the floor price for crude oil.
Furthermore, this allows OPEC, especially Saudi Arabia, to control the oil price via controlling OPEC´s crude oil production. Saudi Arabia wants a minimum oil price of $100 per barrel. If the price falls below this floor, the Saudis will simply curb production.
In addition, I showed another scenario based on the research of Matthew Simmons. If Saudi Arabia doesn´t have any more reserve production capacity and crude oil demand still rises, even the Saudis can´t control the market any more. Oil prices will spike until demand is curbed.
This is the pdf file: Stefan Schaller on Peak Oil
Saudi Arabia´s crude oil production is at a 30-year high.
Aramco wants to restart production at its oldest field.
Saudi Arabia struggles to increase its export capacity.
It ends where it began: in Dammam. SOCAL (Standard Oil of California) drilled well number seven in Dammam in 1938. They hit oil and propelled Saudi Arabia into the oil game. Some 30 years ago, the Saudis mothballed Dammam. But Dammam is back on the agenda – Aramco wants to bring the kingdom´s oldest oilfield back into production.
As I wrote in “Don´t toil – trade oil”, the Saudis rely upon old oilfields. Decline has already started to lower the kingdom´s production capacity. Aramco, the state-owned oil company, used every available oilfield technology in order to fight decline in its old fields. Furthermore, they reopened production at problematic fields they had once mothballed.
As Libya descended into civil war, the Saudis increased their crude oil production. Global demand continued to grow. While Libya has almost restored its prewar production capacity, the Saudis didn’t scale back production. They currently produce at a 30-year high of 10.0 mb/d. Only the Saudis have spare capacity left, but it may be less than the 12.5 mb/d they advertise publicly.
We get the big picture by collecting the news we get from the kingdom: Continue reading
The oil market is like a poker table. Hedge funds, investment banks, Big Oil, dictators, sheikhs, speculators and western politicians – everyone tries to get the other players’ money.
Ali al-Naimi, Saudi oil minister, told journalists that current oil prices are too high. He took measures to bring the prices down. Saudi production is currently at 10 mb/d, the Saudis will ship 22 VLCC (Very Large Crude Carriers) to the US. The usual number of these shipments to the US is one ship every two months. So the FT described this as “a wall of oil” moving towards the US Gulf coast.
So we know what the Saudis are up to.
President Obama is under pressure from the Republicans as prices for gas are surging in the US. The Republicans blame him for that.
Japan has shut down almost its entire nuclear capacity after the Fukushima incident and is currently burning oil and gas to generate enough electricity. Power producer Tepco recently raised its prices by 17 percent.
France and the UK are also suffering, the UK from its austerity and France from a lack of competitiveness and the Eurozone crisis.
The Strait of Hormuz is the most important tanker transport route for global crude oil exports. Iran’s atomic program may trigger further sanctions and even military action from either Israel or the US. The Iranians won’t try to close the Strait of Hormuz as retaliation for EU sanctions because this would hurt Iran´s economy.
The importance of the Strait of Hormuz for global oil trade
Oil production from the Gulf countries equals roughly 29 percent of global crude oil production. Just to get a feeling for the market: When Libya´s oil production declined, which was just two percent of global production, the price of Brent increased by $20.
The pundits expect oil prices beyond $150 (some even suggest $200) if the Strait of Hormuz is closed. This is of course a serious issue for all oil speculators as what happens there can have an enormous impact; and certainly, the political situation has further deteriorated. A confrontation seems to be more likely now Continue reading
Saudi Arabia dictates the new minimum oil price: $100 per barrel
Saudi Arabia now needs a minimum oil price of $100 to cover its government spending. If the oil price falls below $100, the Saudis will lower their overall oil production in order to push up prices.
In my book “Don´t toil – trade oil”, I introduced the concept of a floor price for crude oil. A floor price is a minimum price for the commodity. I distinguished between a technical floor price and an economic floor price. The technical floor price is the cost of producing the oil, e.g. about $45 for a barrel of crude from deepwater production.
The economic floor price is the minimum oil price Saudi Arabia needs to cover its spending. If the oil price falls below this price, the Saudis will shut down some wells in order to push up the price of oil. As the second biggest oil producer (Russia is still number one) and the only oil producer with some spare capacity, the Saudis can lower their production by 1mb/d or even more if necessary.
Why no one needs to pay attention to its decisions any more
OPEC members ignore the cartel´s decisions.
OPEC is deeply divided while any decision has to be unanimous.
Only Saudi Arabia has spare capacity left to move the market.
The last two OPEC meetings in June and December 2011 showed that the cartel no longer playsan active role in shaping the world.
At the first meeting in June, Saudi Arabia wanted to raise production quotas in order to boost oil production. The goal was to lower global oil prices. Even as OPEC members set production quotas and a price band between $70 and $80 back in 2008, member states simply ignored the allocated production quota and produced as much as possible. Saudi Arabia was just the exception, retaining some spare capacity. Prices had risen to $117, far away from OPEC´s target price.
So everyone expected OPEC to raise production quotas in order to adjust its policy to reality.
The meeting ended without any agreement. Saudi Arabia, Kuwait and the UAE wanted to increase production, the rest of the cartel didn´t. So the hawks (Iran, Venezuela) defeated the doves (e.g. Saudi Arabia). The Saudis decided to ignore OPEC altogether and increased their crude oil production to keep the market supplied.
The December meeting was different. Continue reading
New book out
And it’s called “Don’t toil – trade Oil: How to make double digit profits with the new oil price formula”. Catchy, I know, but I want people to actually read it.
If you’re interested in the fundamental analysis of world oil reserves, Peak Oil theory and how to leverage this knowledge into a lot of money, you should probably read it, too.
Or just click on the link below and go buy it rightaway.