Something Tells Me We Will See the Sequel In the Not Too Distant Future

Link here to the New York Times: Libya's new government unable to curb militias as chaos grows.

TRIPOLI, Libya — As the militiamen saw it, they had the best of intentions. They assaulted another militia at a seaside base here this week to rescue a woman who had been abducted. When the guns fell silent, briefly, the scene that unfolded felt as chaotic as Libya’s revolution these days — a government whose authority extends no further than its offices, militias whose swagger comes from guns far too plentiful and residents whose patience fades with every volley of gunfire that cracks at night.

The country that witnessed the Arab world’s most sweeping revolution is foundering. So is its capital, where a semblance of normality has returned after the chaotic days of the fall of Tripoli last August. But no one would consider a city ordinary where militiamen tortured to death an urbane former diplomat two weeks ago, where hundreds of refugees deemed loyal to Col. Muammar el-Qaddafi waited hopelessly in a camp and where a government official acknowledged that “freedom is a problem.” Much about the scene on Wednesday was lamentable, perhaps because the discord was so commonplace.

Headline Writers At It Again

Here's the headline: "Oil Could Drop to $87 In the Near-Term"

Read the article at the link and decide for yourself if that's the take-home message.

This was the concluding paragraph in the article:

The current retreat [in the price of oil] is an aberration in the fundamentals of demand and supply. The price chart shows the constraints of this policy. A return to the usual demand and supply relationships restores the price activity to its previous behavior and this points the way to a resumption of the uptrend. [Note: on the day this article appeared, WTI oil was up $2.00 from $91 to $93, or thereabouts.]

Elsewhere in the article, the writer says:

The downside target is the long-term support level near $87/barrel. If this fall was triggered by changes in the fundamentals of demand and supply then the chart would also suggest a further downside target near $77/barrel. This is a low probability target simply because the new supply of oil is limited by the size of the stockpiles and the political will power of the IEA member nations.

This is very different from OPEC intervention in the market where their virtually ‘unlimited’ supply allows for the almost infinite increase in production to meet the demand and supply balance. IEA increases in supply are limited by the very nature of the stockpile. This suggests string support around $87/barrel with the development of a consolidation pattern.

I agree with everything in the article (in a general way) except the statement (written as fact) that OPEC has an "unlimited supply [that allows] for the almost infinite increase in production to meet the demand and supply balance." But in the aggregate, a nice analysis. 

But even so, the writer of the linked article and I probably agree on OPEC supply as generally defined and understood, but my definition is a practical one; the writer's definition is no doubt a "theoretical" one.

It Never Quits: Yet Another Story That Confirms That Saudi Unable to Make Up Shortfall

Update

June 28, 2011: I honestly can't remember if I posted my thoughts on why the IEA wanted oil released from global strategic petroleum reserves. I talked in broad terms (Saudis can't make up shortfall) but I don't remember how specific I got. 

Having said that, here's the reason: European refineries running perilously short of light oil, and Saudi couldn't make up the loss from Libya.

For comparison: some weeks ago the Williams County commissioners stopped all county road traffic "effective immediately." That "ban" lasted less than four days, and came to an abrupt end when the Tesoro refinery in Bismarck said it was making plans to shut down operations because it was running perilously close to running out of oil. Another phone call from the state government and Williams County commissioners called off the ban, saying that road repairs over the weekend were sufficient enough to return to "normal operations." Sure. 

Shutting down a refinery is not a simple process, and starting one back up is even less easy. There is no question in my mind that European refineries, particularly in France and Italy, were perilously close to having to shut down.

One can opine in generalities (supply not meeting demand) but one needs to get to the specific tipping point that resulted in the decision. The tipping point in this case: at least one refinery was getting ready to shut down just before the Europeans started taking their August vacations. Read the Minyanville article linked above. It is right on target.

The IEA wanted the US to support the decision even though it made no sense for the US to do so. Unless the strategic petroleum reserves outside the US were inadequate. Hmmm. Scary.

Original Post

Link here.

U.S. Treasury Secretary Timothy Geithner defended the decision by industrialized nations to release emergency oil reserves into global energy markets, saying on Friday that it was not a political move.

"It's really as simple as this: there's a war in Libya, costs between one and two million barrels a day in lost output, I think 140 million barrels off the market so far," he said in response to a question at Dartmouth College, where he spoke on a panel.

"Reserves exist to help mitigate those kinds of disruptions and we helped to organize a coordinated global international response to help ease some of that pressure," he added. [Of course, so would increased drilling, but that's another story, and an inconvenient truth for an administration that detests the oil industry.]

 Assuming you take him at his words, Saudi was not able to make up the shortfall from the Libyan "event" as they said they could. Remember, it was in March that the Libyan "event" began, and immediately Saudi said they could make up any shortfall.

I don't recall any news story that said Saudi was actually doing anything in March/April time frame, except stories that heavy Saudi oil was not what the Italian refineries wanted.

Then in May/June time frame OPEC met again, and disagreed about production. Saudi said they would increase production about one million bbls/day.

We have never gotten a straight story on how much Libyan oil was taken off the market; it was anywhere from 500,000 bbls/day to 1.5 million bbls (some said as much as 2 million which was laughable).

April - May - June is about 90 days. Geithner said 140 million bbls were lost due to Libyan "event."

140/90 = 1.55 million bbls/day.

I personally think that's high. I'm getting the feeling that even had there been no Libyan "event" the shortfall would have been about 500,000 bbls this summer for the European refineries had OPEC not increased production.

The Mideast

Update

March 18, 2011: When I wrote the original note below, I implied that despots and dictators in the Mideast learned a lot when they saw what happened to Mubarak in Egypt and how Libyan strongman Kadafi handled a similar situation. Now, others are reporting the same thing.

Kadafi has ruled this country for four decades using tools also at the disposal of other Arab leaders. He shrouded his dirty deeds in nationalist ideology. He tactically doled out the country's oil money. He kept tabs on his enemies here and abroad.

But in the end, it was Kadafi's willingness to use brute force and the tools of his police state that has helped him so far avoid the fate of neighboring autocrats in Tunisia and Egypt who were swallowed up by popular revolutions.

Regimes in Bahrain, Saudi Arabia, Yemen, and Syria appear to have taken note, confronting their uprisings with a hard wall of state-sponsored violence.

If the people rise up against Saudi royalty, I wonder if President Obama will side with the rebels? If not, it's interesting how he picks which countries should become democratic. Apparently those with minimal / no oil such as Libya and Egypt get freedom. Those with oil, won't. 

Original Post

I can't comment on the situation in Tunisia, except to say it is a constitutional republic.

No one has any idea how "this" will end in the Mideast, but there are already lessons to be learned, and observations.

It is interesting to note that the countries with the most Western-oriented (with one exception: Morocco), liberal thinking, well-educated were the first to be engulfed in conflict.

Tunisia first, and as I've said, I don't know it well enough to comment further except to say that is is a constitutional republic.

Then, Egypt, perhaps the longest ally of the west, working closely with the west to hammer out peace treaties with Israel, was the second. It's young people may be the best educated among the Mideast countries, and they are probably the most traveled, particularly to London. Their government, outside of Israel, of course, was the most progressive among the countries with Sunni- or Shia-dominated populations.

Then Libya. Of course, there is a madman in control, but his 38-year-old son was well-educated and well-traveled. The expectation was that he would succeed his father with plans to bring Libya closer to the western world.

The westernised 38-year-old, who studied at the London School of Economics and enjoys close friendships with senior British politicians and financiers, has become the focal point of the conflict now threatening to rip Libya apart.
Whereas Gaddafi senior has always been seen in the west as a dictator – albeit one brought back into the fold – Saif, a trained architect who established a medical charity and was considered his father's heir apparent, held out the promise of a new dawn.
As far back as 2002, Saif told an interviewer that Libya needed democracy. "It's policy number one for us. First thing democracy, second thing democracy, third thing democracy," Saif said, using a rhetorical technique he was to repeat last week to far more sinister effect.

Another link here regarding the son's ties to London.

Bahrain was next; and that appears to be settled. Sort of. For now.

Saudi Arabia and Iran have both stomped on initial efforts of protesters.

Obviously, Iraq is a special case, but had Saddam still been in charge, I doubt there would have been any long-lasting or successful uprising.

My hunch: the leaders (despots as some would call them) in the more hard-line countries like Saudi Arabia and Iran are learning a lesson: they need to improve things for their folks but democracy is not something they are going to be interested in any time soon, now that they have seen where it leads.

For Those Who Thought This Would Be Over In A Week -- Libya

Updates

September 11, 2012: US ambassador to Libya killed. The administration has changed the story so many times; not linked. This link is fascinating: 

When terrorists attacked the U.S. consulate in Benghazi, Libya, on Sept. 11 of this year and killed the U.S. ambassador and three other Americans, there were no U.S. Marines deployed in Libya to defend U.S. diplomats, diplomatic facilities and classified information and equipment. However, says the State Department, a Marine Security Detachment was deployed on that day to carry out those duties at the U.S. Embassy in Bridgetown, Barbados. 

September 4, 2011: Is it over yet? Kadafi still on the run. 

August 14, 2011: Timeline for those who thought this would be over in a week. 

August 6, 2011: I remember getting a comment when the "Libyan thing" first broke out that "this would be over in a week and Kadafi was toast." The war continues, the rebels fight among themselves, and now today it is reported that Kadafi takes a key town back from the rebels and launches a new offensive. 

July 28, 2011: For those who thought the Libya "war" would be over "in a week," there are now confirmed reports that the rebel leader has been assassinated. There are rumors that there are internal "rifts" among the rebels. 

July 4, 2011: Libyan rebel leader -- ok, ok, ok -- Kadafi can stay in Libya. "As long as he resigns and remains under supervision." Let's see -- this all started in March, 2011 -- haven't heard from those who said this would be over in a week. 

April 16, 2011: The reason the US got involved in Libya, we were told, was to avert a humanitarian crisis. It looks like the results have just been the opposite: Kadafi is now using heavy weapons on civilians. Had the US not intervened when it did, the rebel uprising would have been shut down. One can argue whether there would have been a humanitarian disaster at that point, and at Kadafi's hands, but there is no question that things have turned out much worse than expected. When US air strikes began, "anonymous" wrote to say what many thought: "this would be over in a week and Kadafi was toast."  Kadafi may still be toast, but it certainly is not over in a week, and the humanitarian toll will be much greater than had we just stayed out. And some say the war is costing the US $2 billion/day.

April 7, 2011: NATO now fears a protracted, "never-ending" civil war. 

April 4, 2011: US pulls back its air force; then extends the air war for two days; then pulls it back again. Now Kadafi says he is staying but open for change. "Free" elections to determine if Libyans want him or someone else. Whoever thought this would be over in a week and Kadafi would be toast -- well, it's been since the end of February, and now it's April. And Kadafi looks to be calling the shots. There is talk his son will take over. 

March 17, 2011: Day 31. Kadafi surrounds last rebel outpost: there will be no mercy. UN scheduled to vote later on military action against Kadafi. President Obama preparing to leave to party in Rio.

March 14, 2011: The fourth week? And Libyan forces now have the upper hand. The US government won't take unilateral action. Europe, NATO, and UN still talking. Philosophically they want Kadafi out of there; practically, they want cheaper and accessible sweet oil. The discussion will be interesting to follow. Ya wanna bet which wins out: philosophy or reality? Mubarak was thrown under the bus in less than 72 hours by America; four weeks into the Libya thing, "we're" still looking for a bus.

March 7, 2011: well, the Libyan thing continues. What is this? The third week? So much for the thought that this would be over in a week (a reader, not me). Oil is up another $2 overnight, about $106 now.

March 3, 2011: so much for a quick end to the Libyan issue. Even analysts expect the loss of oil production from Libya to be lengthy. Who knows, it might be over tomorrow, but the situation suggests otherwise.

As a result of the standoff, the analyst predicted that, “An extended period of conflict—with commensurately lengthy disruption to oil supply—is looking even more likely than before.” 

March 2, 2011, morning: price of oil "surges" another buck; over $100/bbl; conflicting reports regarding who is in control of oil fields

March 1, 2011, evening: Gadhafi forces retake towns near Libyan capital.

U.S. Defense Secretary Robert Gates said he ordered two ships into the Mediterranean, including the amphibious assault ship USS Kearsarge, and he is sending 400 Marines to the vessel to replace some troops that left recently for Afghanistan. [Just the other day, SecDef Gates said, “In my opinion, any future defense secretary who advises the president to again send a big American land army into Asia or into the Middle East or Africa should ‘have his  head examined.'"]

March 1, 2011, evening: WTI oil futures continue to rise, now solidly over $100.  

March 1, 2011, morning: Oil price spikes $2.00, retraces; solidly over $99 as Mideast continues to smolder, and in some cases burn.

Oil prices climbed Tuesday as Iran clamped down on anti-government protesters and unrest in the Middle East threatened to keep energy prices high for months to come.

Benchmark West Texas Intermediate for April delivery gained $1.80 at $98.76 per barrel at midday on the New York Mercantile Exchange. In London, Brent crude gained $1.92 at $113.72 per barrel on the ICE Futures exchange.

February 28, 2011: "Oil Rises Toward $98 as Traders Eye Libyan Exports." And so it goes, nine days into the Libyan issue.

Original Post

For those who thought this would be over in a week, and for those who thought Saudi could step up to the plate and diffuse fears, the oil futures suggest otherwise.

To the best of my knowledge, futures start posting at 6:00 p.m. CST.

At 7:00 p.m. in Chicago and 8:00 p.m. in New York City, Sunday night, February 27, 2011, oil futures are up $1.90 to $99.78.

It's been my "feeling" that futures seldom correlate with the opening the following day, and seem to correlate even less as the trading goes on.

But at least on Sunday night, about a week after "the Libyan thing" began, there is still a bit of anxiety in the markets.

Saudi: Talk Vs Action

Lead story on CNBC at the top of the hour: 7:00 a.m. CST.

"Is Saudi all talk or can they really replace the oil loss due to events in Libya?"

The $147 question.

So far Saudi is only talking about increasing supplies.

Questions:

1. Does Saudi have the reserves? Short term Saudi has been decreasing production due to slowdown in global economy, so they have ability to quickly bring production back up to historical highs. However, long term, there are discussions on whether Saudi's reserves are as robust as they say they are.

2. Does Saudi have the right kind of oil? Libya's oil is sweet oil, like the Bakken oil. Refiners in Italy taking Libya's oil were "geared" for sweet oil. It is not as simple as flipping a switch to take Saudi oil, which is sour. Saudi is apparently talking about options: a) diverting sour crude to Asia and allowing other sources to divert sweet oil from Asia to Europe; b) see if European refiners can handle more Saudi sour.  Some can argue that by the time they sort this out, the Libyan crisis will have reached some sort of equilibrium (as price of gasoline goes up, demand goes down).

3. Does Saudi want to increase oil production? Long term Saudi has talked about need to "save" their resources for future generations. Short term, they enjoy the high price of oil, but realize that high prices can affect the global economy. Saudi is as invested in the world economy as the US, China, and Europe. Most interesting is this: it is no secret that Saudi is unhappy how Washington (as in DC) treated Mubarek (as in "throwing him under the bus" after 30 years of friendship). Some are suggesting that the Saudis are not eager to help the US. At the end of the day, these folks are capitalists and they will do what's best for themselves and their country.

4. Has Saudi seen this movie before? Yes, Saudi has seen the prequel and many sequels, and they know there will be more sequels.They will think about this carefully before rushing into anything.

For another perspective, click here.