PARIS (ResourceInvestor.com) 15th April 2006 -- If the markets could behave like a rational entity we would already be at $80 oil, no problem. Of course we know markets do not behave rationally, instead they have a kind of menopausal myopia. Fixated on one topic one minute, hysterical about another the next. Thus they have ignored a welter of events that theoretically should have pushed price way over $69.
First, it appears very likely that one insane African leader, Obusanjo of Nigeria, is going after a third term in office. His front companies have not quite looted enough of the country's oil wealth for his manic greed, so another four years should set his family up nicely for the next 150 years or so. That is if he is able to pull it off. The very fact that he is prepared to take this step does not bode well for the oil industry. Nigeria is getting close to a basket case, witness the emails sent by the Delta militias last week saying any Shell teams going back to the attacked platforms "would be executed." The Militia's sent the emails because they were watching events, most likely on CNBC, at the Seventh International Oil Summit in Paris. There a Shell executive said they hoped to resume work in the delta this week. Put it this way, they did not.
Then we have another madman President Idriss Deby of Chad. Unfortunately for the Chadians, who are the 167th richest nation on earth out of 175 measured by the U.N., they found over 1 billion barrels of oil in the south of the country in the Doba region. Deby has brutalised, executed, tortured, massacred and more since he came to power in 1990. Of course as he allows Exxon, Chevron and Petronas into the country to run the $3.7 billion Chad-Cameroon pipeline he is not overthrown. Not even remotely. Instead he was lavished with World Bank loans and secretive deals that pretended to divert some of the revenues to the people. But even that was too much for Deby, he scrapped that to send more money to the army, to basically save his backside. Because he is so hated by his country that half the army have quit and went to live in Darfur, in neighbouring Sudan. It's got to be bad if you up sticks and go and live in an existing war zone. But the army deserters have wasted no time, probably funded by the Sudanese in all likelihood, in coming back and attacking the capital N'Djamena. The Chad pipeline sends 200,000 barrels a day of oil to platforms offshore Cameroon. You do not think they would be onshore do you? Then the oil goes mainly to the U.S. The $3.7 billion was in part funded by your money, where do you think they World Bank get their money from? Exxon aren't going to pay when you will do it for them, why should they? It is the single most expensive foreign investment in all Africa.
So we face some serious meltdown in central and western Africa, then there is Iran. Iran is here for the long term. The problems it will create for the oil industry are not even starting to be priced in yet. You simply cannot do it. The article by Seymour Hersch in the New Yorker may signal some splits within the American administration, but then so did the ones before the invasion of Iraq. Basically, if it takes a Jeb Bush presidency to invade Iran that is what will happen. Iran will be invaded in the next decade and the Middle East will have been taught a valuable lesson like the Nigerians and the Chadians. Do not think you can control your own resources, you cannot.
So with all this in mind the announcement by Saudi Arabia that their "mature fields" are going to decline by 8% a year has been lost in amongst the bullets and spinning centrifuges. They worded it rather vaguely of course. Did they include the mighty Ghawar? It would appear that they must have. They claim some of the declines will be offset by new production, but it is hard to see where. An 8% decline of 9.5 million barrels a day is 760,000 barrels a year lost. Are they really saying they are going to put 760,000 barrels back on the table each year? What about the, admittedly ridiculous, claims last year that they could reach 15 million barrels a day of output? It is baloney.
So you get my drift. $69 is a mental barrier for the markets. After all there are no big storms hitting the U.S. - see the myopia - and everybody's software is taking profits when we get close to $70. But forward contracts are already trading over $71 and when the spot market breaks $70 in the next month or three, expect it to move fast … and up. Look at $74 first, then $77 … and then some. It is all in place; it's all in the pipeline.
