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Four Days and Counting

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It is only four days until the Sept 9th OPEC meeting where they will discuss changing the current production quotas. With oil prices flirting with the $100 level there is sure to be some hostility between the members. Venezuela and Iran have already expressed their desire to have production quotas cut to support the price of oil. Since neither country can currently produce at their quota rate it would not impact them to have the quotas cut.

OPEC pumped an average of 32.575 million barrels per day in August according to a survey of oil companies, producers and analysts. This was 200,000 bpd below the July levels. July output estimates were revised down by 50,000 bpd. Production by the 12 members with existing quotas, everyone except Iraq, declined 50,000 bpd to 30.265 mbpd. This was the first decline in production since April. OPEC members with quotas produced about 592,000 bpd more than their quotas in August. Most of that was Saudi Arabia. Iraq production fell -150,000 bpd to average 2.31 mbpd in August. That was the lowest since January. Saudi cut output in August by 100,000 bpd to average 9.5 mbpd and just off the three year high set in July.

Iran raised its output by 100,000 bpd to an average of 4.08 mbpd. Venezuela and the UAE were the only other OPEC nations to increase output in August.

At the OPEC meeting next week the cartel is expected to not change output at least on an official basis. According to 29 or 32 energy analysts surveyed by Bloomberg they will ignore pleas from Iran and Venezuela to cut production. Analysts expect those pumping above their quotas to be pressured to cut back silently to avoid rebuilding global inventories. That would cut 500,000 bpd without any official change. They want to keep the margins of supply tight but not announce a production cut that would send prices soaring again. OPEC is a cartel and what they say in public is not always what they do in private. Most analysts expect them to support prices at $100 even if it is an unofficial slowdown in production. They believe $100 would not be enough to slow the global economy and just low enough to slow global efforts to replace crude as a transportation fuel. The next meeting is Dec-17th in Algeria.

Saudi Arabia announced it has started producing from the Khursaniyah field. This is a field that is expected to produce up to 500,000 bpd eventually. It was initially scheduled to start production in December. Saudi would not say how much production has been started only that it is operational and producing.

Brazil was invited to join OPEC after its large pre salt offshore find. Brazil's president Luiz Inacio Lula da Silva said the country declined on Sept 2nd. The Brazilian Oil Minister Edison Lobao said OPEC members believe Brazil will be one of the largest producers worldwide at some point in the future. Lobao said Brazil was investing in its refining capacity in order to be an exporter of fuel rather than an exporter of oil. That is a very wise move by Brazil. Fuel in the form of gasoline and diesel is a global commodity that any country can use while crude oil is only valuable if you have the refining capacity. Very few countries have excess refining capacity.

In the weekly oil inventory report on Thursday oil inventories fell by -1.4 million barrels. That is a drop in the proverbial bucket compared to how much they are going to fall over the next three weeks. The shutdown in the gulf, the halt in the flow of imports and the three hurricanes disrupting the trade routes for tankers is going to put a serious crimp in existing inventory levels. Also, the surge in gasoline usage to move two million people out of harms way and then back again should produce a sharp drop in gasoline inventories.

Hurricane Hanna has finally begun tracking up the East Coast and will prove no threat to the gulf oil patch. Hurricane Ike, currently a category 4 storm is headed for Cuba and is projected to turn north from Cuba to hit Florida head on by next Tuesday. That track would also miss the oil patch but forecasters are wary that it might miss that turn north and blow into the gulf and the alternate track is the oil patch and New Orleans once again. We should know better by Sunday evening.

Jim Brown

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