Strategic Petroleum, Indeed

Written By Nick Hodge

Posted July 12, 2011

Late last month, the International Energy Agency announced it was releasing 60 million barrels of crude oil into world markets.

Obama graciously pledged 30 million of it from our own Strategic Petroleum Reserve (SPR).

You should find our wanton oil disbursement a bit peculiar, especially since your own government defines the SPR as the “nation’s first line of defense against an interruption in petroleum supplies.” So tapping it inherently implies we’re facing an interruption in petroleum supply.

From its creation after the 1973 OPEC oil embargo up until this summer, the reserve had only been tapped twice: We released 17 million barrels in conjunction with our invasion of Iraq in 1991. We released another 11 million barrels after Hurricane Katrina knocked out 95% of crude production and 88% of natural gas output in the Gulf of Mexico in 2005.

This time — only the third time ever — we released more oil than in the two previous events combined.

What could be so dire that we need to invoke the “nation’s first line of defense against an interruption in petroleum supplies”?

All Tapped Out

Bloomberg ran this headline this morning:

Middle East Oil Rises on Signs Saudis Won’t Offer Extra Supply

But ask anyone who’s not a Big Oil employee or a politician, like Goldman Sachs, and they’ll say the Saudis can’t offer extra supply.

As I told you this weekend, Goldman is adamant about its claim that “Saudi oil production peaked in 2008 at 9.5 million barrels per day and will never reach that level again.”

And it isn’t only Goldman that thinks so.

I’ve told you before about Sadad Al-Husseini, former vice president of the Saudi Arabian Oil Co. (aka Aramco), who said:

Many of the so-called reserves are in fact resources. They’re not delineated, they’re not accessible, they’re not available for production.

Sadad knows the rest of the world is in trouble, too.

Since leaving Aramco, he’s become something of a Peak Oil prophet. Given some of the stuff he’s said in recent interviews, I’m surprised the collective global oil industry doesn’t have a price on his head.

He recently offered up this gem when asked why there is so much denial about the world approaching Peak Oil production:

If you look at published information — for example, British Petroleum’s annual statistical report it very clearly shows that from 2003 forward, oil production has hardly increased. So the information is there. If you look at some of the advertising that Chevron has been putting out for years now, they clearly say we’re half-way through the world’s reserves. The information is there. The facts are there.

Oil prices did not jump four-fold over a three- or four-year period for any reason other than a shortage of supply. Yes, there may have been some recent volatility in 2008, but the price trend started climbing way back in 2002-2003. So, these are realities and the push-back is a sense that somehow the market is not able to deal with these realities, that somehow people can’t cope with these realities.

Speaking of Chevron…

After the market closed yesterday, Chevron announced it expects second quarter earnings to rise over the previous quarter, thanks to higher oil prices.

So it’s all good, right? Higher oil prices, higher profits, happy shareholders. Everybody can rest easy…

Until you look more closely at the details.

Chevron’s U.S. production in the first two months of the quarter (April/May) was down 1.8% from a year ago. Internationally, output decreased 2.4%.

So they produced less oil but made more money because prices are higher.

If that’s not a Peak Oil symptom, I don’t know what is.

It’s the same market dynamic that takes effect when any good is scarce, like those last few tickets to the Super Bowl or an award-winning Broadway play.


Strategic Petroleum, Indeed

And that brings us circuitously back to the strategic petroleum reserve and the 30 million barrels we’re releasing from it. Remember, that’s the most oil we’ve ever released at one time. So there must be a serious and imminent threat to global supply.

A quick look at who bought that oil and how much they paid serves as further evidence.

Yesterday the Department of Energy announced it had signed 28 contracts to sell the crude at prices ranging from $104.97 to $109.26 per barrel.

As I write this, oil is trading for $95, begging the question: Why are the companies buying this SPR crude willing to pay a $15 premium to current prices?

There is only one answer.

They think oil prices are headed much higher.

Here’s who bought some of the oil: Exxon Mobil (NYSE: XOM), Shell (NYSE: RDS-A), BP (NYSE: BP), ConocoPhillips (NYSE: COP), Valero (NYSE: VLO), Tesoro (NYSE: TSO), Murphy Oil (NYSE: MUR), Sunoco (NYSE: SUN), Marathon Oil (NYSE: MRO), Barclays (NYSE: BCS), Hess Energy Trading Co., Trafigura, JPMorgan (NYSE: JPM), Vitoil, Plains Marketing.

As I just showed you via the Chevron example, these companies are not increasing production. Production is declining. So they’re more than willing to pay a small premium for easy supply to keep their refineries and profits flowing.

The banks, on the other hand, have a different motivation…

Since the government doesn’t ban purchasers of SPR crude from storing it (even though that’s contrary to its intent — but we’re talking about the government, so what’s new), banks can buy the crude, sit on it, and sell it later for a higher price.

And that’s clearly what JPMorgan, Hess Energy Trading, Barclays, and Trafigura are going to do.

Higher oil prices are coming, folks. And the only way to prevent them from having ill effects on your bottom line is to put them to use for you — just like those banks are going to do.

Before you go, let me offer one more kernel of wisdom that undeniably proves we’re at a major crossroads for the oil industry.

The last time the SPR was opened back in 2005, the government planned on selling 30 million barrels. It could only sell 11 million barrels because of lackluster demand.

This time, companies were banging down the door to buy easy oil at a premium.

Just as these oil majors and banks are executing their contingency plans for the end of oil (by taking maximum profits from what’s left), you might consider doing the same.

Call it like you see it,

Nick Hodge

Nick Hodge
Editor, Energy and Capital

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