“it's at $110, now edging $117, omg! someone just said $220! its getting higher…getting higher…aaah!” I had a general idea on why the oil prices were going up…but can someone really visualize a globe with oil prices at 220!!!. The guys at Nomura who sent a "Oil Market Update" on 23rd Feb 2011 think its quite a possibility. I was keen to learn about the method en route to this bet. Before that, let me confess, I badly needed to get my head around some basics of this oil business, because trust me, in the coming weeks, coffee table conversations would all revolve around this topic.So I went to the Texan and said “What’s the meaning of oil at 110?” He said “That’s the cost of door delivery at Cushing, Oklahoma (USA) for 158.9 liters (one barrel) of light crude oil or delivering the same quantity of Brent (Oil) at a place called Sullom Voe in Scotland, you Stupid”. I wasn’t done yet “Ok, so if there are millions of barrels of oil being transported…who the heck is this company which makes all these empty barrels?”. Clearly Mr. Tex was amazed at my ignorance “They stopped sending oil in barrels when oil tankers were invented, Stupid”. I have one more question for an encore “errr… am assuming oil tankers are cheaper to transport oil than transporting them in barrels in a cargo ship, which is why they stopped oil barrels, right!” The guy was shocked “You are so..so stupid Anup, didn’t you even know that way back in the 20th century, in Russia when they were still using oil barrels, half the cost of petroleum production went to manufacturing of these leaky unreliable barrels. I’m also guessing Anup, you don’t know that, the average cost of oil transportation via an oil tanker is only 2-3 cents per gallon…” (Oh! I can delete this paragraph of my conversations with Mr. T, because you guys knew all of this; apologies.)
Coming to Nomura’s research. This is what they had to say on Oil at $220 :
“In order to estimate the possible impact MENA crisis has on oil supply and prices, we analyse the past crises that have rocked the region. There have been a few events that drove oil prices higher, most of which are during the period in which OPEC controlled oil prices. For example, during the 1973 Arab-Israel war, OPEC increased oil prices by US$6.5/bbl or 128%, while in 1979-1981 the Iran revolution followed by the Iran-Iraq war saw oil prices move up by about 77%. In fact the only major event that is comparable is the Gulf War in 1990-91 as it is the only event in the Middle East which seems close to the ongoing crisis during the free-market pricing era. Before the Gulf War, OPEC spare capacity stood at 5.9mmbbl/d. During the war, OPEC production capacity was severely reduced (OPEC spare capacity came down to less than 2.0mmbbl/d) and oil prices jumped 130% in a period of two and a half months”
Gulp…ok, so there is precedence and with Gaddafi still hanging around in Libya...(maybe i should just go back to farming olives). What category of an economic havoc does a jump even half the size of what is mentioned above happen in an already weakened European Union or United States! Wait read on ..there’s more
"If Libya and Algeria go offline, one can see a 3.1mmbbl/d of reduction in production…., we could see a spike in oil prices in case supply is actually disrupted, given the uncertainty that it would bring. Based on the Gulf war, coupled with the fact that demand is much higher now, we estimate oil could fetch well above USD 220/bbl, should libya and Algeria stop production."
After reading till now, am assuming everyone’s on their seat edges and waiting for the climax (reading becomes faster…) Is this the reason for oil to touch $220. Is there anything more…let's keep reading
"Currently, OPEC spare capacity stands at 5.2mmbbl/d with 3.5mmbbl/d of that coming from Saudi Arabia. As a result, we believe that there is enough spare capacity available in the OPEC to ward off any near-term supply disruptions owing to the crisis as it stands currently. If the situation in the region were to worsen in a way that it encompasses other oil producing countries as well in the future, the oil supply-demand balance could change very rapidly. In particular, if the crisis were to spread to Saudi Arabia, , there can be real threat to global oil production, the impact of which is impossible to ascertain on prices….Overall, we do not rule out the possibility of oil prices touching record highs in excess of US$220/bbl in the near term, should the MENA crisis continue to spread over the coming weeks "
Phew...So there are two caveats in this whole $220 story by Nomura:)
1) There’s spare capacity in the United States of Saudi Arabia, which could be tapped on request
2) This scenario is only possible with Saudi Arabia also joining the party with Libya and Algeria (Fat chance of KSA slipping into any chaos)
Ok guys, go back to your boring lives now, there’s nothing called Crude at $220 anytime soon. For those interested in this sensational report by Nomura , you can download the Nomura Research out here via Scribd.
