How To Position For The Next Oil Shock
Friday, May 27, 2011
Executive Summary
- Saudi Arabia’s reserve capacity is a myth
- World oil demand is increasingly overwhelming supply
- Why exports matter more than total world production
- What the next oil shock will do to stock, bonds, commodities, precious metals, and real estate
- What you should do to prepare
Part I: Past Peak Oil – Why Time Is Now Short
If you have not yet read Part I, available free to all readers, please click here to read it first.
Part II: How To Position For The Next Oil Shock
Putting It All Together
Let’s review the situation in the KSA:
- Despite assurances of 12.5 mbd of total capacity, the KSA has not yet produced more than 9 mbd on a sustained basis in 2011.
- The IEA is begging the KSA to pump more.
- The KSA has turned to outside companies to help it begin to unlock heavy oil reserves that will take a lot of time, energy, and money to prosecute.
- The KSA has a vastly expanded rig count as they expand drilling operations to produce more oil (odd behavior for a nation with an alleged 3.5 mbd of spare capacity?).
The simplest and therefore most likely explanation for all of this is that the KSA does not actually have 12.5 mbd of total capacity, it is already at peak, and it’s now struggling to maintain even 9 mbd of total output on a limited basis.
Of course, there are other possibilities, but since those will not shake the world to its bones if they happen to be true, the safe course of action here is to go with the ‘KSA is at peak’ story. Sooner or later it will be true, so there’s not a lot of harm in being early to it, while being late could be costly.
Now let’s move onto the last part of this puzzle: demand.
World Demand
While supply is critical to watch, demand is the other side of that coin. As predicted, world oil demand has been marching smartly forward, mainly on the back of increased Asian demand, but also to rising internal demand in many of the most important oil exporters, the KSA among them.
(Source)
In the above chart, we see that in the most recent three quarters, supply has been exceeded by demand (red arrows) and was barely even with it in the most recent quarter (stubby green arrow). In the chart on the right, the IEA has put forth its estimates for oil demand for the final three quarters of 2011. Note the two circled in green, the final quarters of 2011, which will both require record oil production. Where will this come from?
by jminvest 
