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Much Ado About Nothing

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The Saudi Arabia Energy Conference in Jeddah was a dud. There was no new announcement of an additional production hike from Saudi Arabia. The +200,000 bpd increase in July was leaked to the press last week was confirmed at the meeting but it was old news. That will take Saudi output to something in the neighborhood of 9.75 mbpd and was definitely not a fix for oil prices. One attendee said it looks like we are going to see $200 oil.

Prices rose in Sunday night trading to $136.60 simply because there was nothing new that came out of the meeting. Saudi confirmed again that their $90 billion program to increase production to 12.5 mbpd was still on track for completion in 2009. That is good because every barrel of that increase will be needed in 2009 just to stay even with increasing demand from China and India and current depletion rates of about 4 mbpd each year.

Saudi must not have been happy with the response from the delegates because they pulled another card out of their deck at the last minute. The Saudi oil minister said engineers had "discovered" potential additional production capability of another 2.5 million barrels per day that could be brought online over the next several years "IF" the market needed it. Nearly everyone I have read tonight thinks this is just a bluff. Those familiar with the current state of the Saudi fields believe they will have a tough time hitting the 12.5 mbpd target in 2009. The easy oil in Saudi Arabia has been produced. Every barrel they pull out of the ground in the future will be more difficult than the last. Deeper wells, slower flows, horizontal drilling, etc. They will need all the tricks at their disposal to keep the oil flowing.

I mentioned that oil prices were up in early overnight trading but they may not remain up. There was some other news on Sunday that was very positive for oil production. The Nigerian rebels declared a unilateral cease-fire starting at midnight on Tuesday. This was in response to a plea from a group of village elders to end the attacks. I would bet that the plea went something like this. "If you don't end the attacks we are going to turn against you and give you names and locations to the authorities." The MEND attacks have been causing harm to the communities as well as to the oil companies.

The MEND attacks have taken about 40% of the total production of Nigeria offline. Currently there are 944,000 bpd of light crude shut in due to militant attacks and sabotage. Just halting hostilities will not bring the oil back online immediately and could take several months to repair the damage and get the system moving again. They could decide to end their cease-fire at any time so nothing is a sure thing. Once the cease-fire begins it will take several days before the oil companies will start moving to recover that shut in production. This has happened a dozen times in the past and never lasted for very long.

Oil prices post Oil Conference and post cease-fire could continue to be volatile simply because nothing changed on the supply front from OPEC and it will be weeks before any increase is seen from Nigeria. However, the additional 500,000 bpd from Saudi (+300,000 announced May 13th, start June 1st, +200,000 announced June 17th, starts July 1st) would make a difference if it was light crude. If they are going to dump low quality heavy crude on the market it may not impact prices at all.

Monday could be a testing day for the futures community. The August contract becomes the front month on Monday since July ceased trading on Friday. Anyone looking to enter new post meeting positions has a clean slate. Traders are going to want to see where resistance appears and I would expect a support test this week as well.

Jim Brown

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