One month later however, Iran was begging Saudi Arabia to cut its oil production to shore up sagging prices below $60 per barrel. Most likely, the recent plunge in crude oil from $75 per barrel towards $60 a barrel does represent the evaporation of a $15 per barrel Iranian “war premium.” Oil traders now agree the Bush administration has discarded the military option against Iran, and is resigned to a protracted diplomatic policy, revolving around cosmetic sanctions with little potency.
Iran has sewn up the Chinese and Russian vetoes at the United Nations, leaving US diplomacy at a dead-end. Iran may give China and Russia access to its giant Azadegan oilfield, which contains 26 billion barrels of proven oil reserves, and 6 billion of probable reserves, in return for blocking UN sanctions over its nuclear weapons program. France’s Total Fina (NYSE:TOT) hopes to secure a small stake of about 15% in Azadegan, after French president Chirac spoke out against UN sanctions.
Talks between Iran and China’s Sinopec (NYSE:SNP) in developing the Yadavaran oilfield, are expected to be completed in two months, said deputy Iranian Oil Minister Mohammad Hadi Nejad Hosseinian on Sept 26th. Yadavaran has estimated reserves of about 3 billion barrels and is expected to produce 300,000 bpd, roughly the same volume of crude that China now imports from Iran.
So without the credible threat of a US military attack on Iran, energy prices succumbed to the gravitational pull of hefty US energy stockpiles. Inventories have declined from an 8-year high of 346.7 million barrels in April 2006 to 325 million barrels this week, but are still high enough to weigh on market prices. However, global demand for crude oil is expected to pick up by 3 million bpd this winter, to reach 87 million bpd, and further whittle down existing US inventories.
Still, with heating oil supplies at a seven year high, the OPEC cartel must come up with sizeable production cutbacks, to stabilize the oil market from its latest downward spiral. On Sept 22nd, Saudi oil chief Ali al-Naimi tried to stabilize oil prices at $60 per barrel, with verbal jawboning which sparked a brief bounce to $64 per barrel. “Prices now are rewarding to both producers and consumers and their impact on the global economy is small. The most important gauge for this price is that it does not have a big negative impact on the global economy,” said Naimi.
But the rebound was short-lived, and oil prices were sliding under $60 per barrel a few days later. Then on Oct 3rd, Nigeria and Venezuela withdrew a combined 170,000 bpd from their production, but the cuts represented less than 1% of OPEC-11’s daily supply. Instead of restoring stability, Nigeria and Venezuela only succeeded in communicating to the market that they were worried about a supply glut.
Then on October 4th, Kuwaiti Oil Minister Sheikh Ali al-Jarrah al-Sabah offered to join Nigeria, Iran and Venezuela in cutting its oil output. “Kuwait may voluntarily lower oil output in order to maintain the market’s stability. We are currently in negotiations with fellow OPEC members. The current situation with prices and the big retreat that has taken place is uncomfortable for OPEC nations,” al-Sabah added.
The Kuwaiti oil minister said “$60 per barrel for US light crude is a comfortable price, but $50 /bl is worrying.” On October 8th, following an extra ordinary telephone conference, OPEC formulated a deal to remove 1 million barrels a day of crude from oversupplied markets, as ministers lined up to support the cut. Iran and Algeria publicly backed the reduction, OPEC’s first since December of 2004.
“I think there is more or less consensus for 1 million bpd,” said OPEC President Edmund Daukoru. "The reference point is the official 28 million bpd ceiling.” Algerian Energy and Mines Minister Chakib Khelil said there was consensus to lower output. “This would have a positive impact on the market. What is important is that the market finds the OPEC position credible. That is why it is necessary to have a meeting to make a decision on the cut and to act on it,” Khelil said.
Election Politics and Crude Oil
It is interesting to note, the last time OPEC cut its oil output in a meaningful way in December 2004, was to defend US oil prices from falling under $40 per barrel. Today, OPEC seeks to stabilize crude oil prices at $60 per barrel. Despite the 50% increase in oil prices since October 2004, the Dow Jones Industrials is 20% higher. OPEC knows the world economy can expand at $65 to $75 per barrel, so the cartel doesn’t see any reason why prices should fall too much further.
Do oil prices and election politics go hand in hand? In the last run-up to US elections in 2004, a surge in crude oil prices from $44 per barrel on Sept 16th 2004, to as high as $55.25 on October 26th 2004, had knocked the Dow Jones Industrials 500 points lower to the 9750-level, and according to CNN polling data, President Bush’s 7% lead over John Kerry soon swung into a 3% deficit.
For much of 2004, gyrations in the stock market revolved around polling data. When Kerry pulled ahead of Bush, the stock market turned lower, and vice versa. When the Dow Jones Industrials fell below the psychological 10,000 level to as low as 9750 in October 2004, with only 7-days left before Election Day, the Kerry camp was jubilant, since Wall Street pros were apparently pricing in a Bush defeat.
But fortunately for Bush, the price of crude oil did a 180 degree reversal, and tumbled 10% to $49.50 a barrel in the final week before the elections. The Dow Industrials rebounded above the 10,000-level, viewed by pollsters as Wall Street’s red line between a Bush or Kerry victory. The last minute drop in crude oil, combined with a Dow rally, might have helped Bush to a 51% to 48% popular vote victory.
Republicans trying to hold onto their seats on November 7th are also hoping for a bit of good luck. Will a 70 US-cent per gallon drop in gasoline prices, and Friday’s report of a 4.6% US jobless rate, the lowest in 5-years, do the trick in 2006?
Peak Oil Delayed Awhile Longer
It could be the biggest new domestic oil discovery since Alaska’s Prudhoe Bay a generation ago. Chevron on Sept 6th, estimated a 300-square-mile region where its test well sits could hold between 3 billion and 15 billion barrels of oil and natural gas liquids. The discovery carries particular importance for the industry at a time when Western oil and gas companies are finding fewer opportunities in politically unstable parts of the world, including the Middle East, Africa and Russia. will take many years and tens of billions of dollars to bring the newly tapped oil to market.
Still, it will take many years and tens of billions of dollars to bring the newly tapped oil to market. Furthermore, its located in an area where hurricanes Ivan, Katrina and Rita have attained their maximum strength and inflicted their greatest damage on offshore oil facilities. In the meantime however, the $4 billion Baku-Tbilisi-Ceyhan pipeline from the Caspian Sea to Turkey’s Mediterranean Coast, is soon expected to bring 800,000 bpd new supplies to world markets.
The Energy Sector SPDR (NYSEARCA:XLE) includes ChevronTexaco and Devon Energy, which own 50% and 25% respectively of the Jack #2 well in the Gulf of Mexico. The rankings within XLE are Exxon Mobil (NYSE:XOM) 22%, ChevronTexaco (NYSE:CVX) 15%, Conoco Phillips (NYSE:COP) 8%, and Devon Energy (NYSE:DVN) 3.3%. XLE and crude oil prices were moving in lockstep this past summer, but a divergence began after October 4th, when OPEC agreed in principle, to cut its output by one million bpd.
XLE stabilized near the upper end of its recent 4-week trading range of $51 to $54 per share, while crude oil prices continued to slide towards new lows of $58.15 per barrel. However, natural gas futures climbed by 20% to $6.54 per mil Btu on the Nymex, boosting XLE off its lows, as crude oil sank. Also, with the Dow Jones Industrials trading at all-time highs above 11,800, bargain hunters are looking at beaten down stocks in the energy patch.