Immediately prior to the IEA reserves raid announcement on 23rd June, Brent was trading at $110. Today it is back to $109 suggesting that the promise of 18 hours additional expensive supply at some point in the future has done little to impact the big picture - what a surprise!

The blue line shows a 1 year running average. In the past when the oil price has been >$100 for a year it has led to recession. Are we on another collision course with destiny this Fall? The IEA action does at least signal awareness among OECD governments of the risks posed by high oil prices to the economy. But the markets are focussed on Greece today. With little prospect of meaningfully boosting global production, the IEA and OECD governments need to focus much more on energy efficiency and conservation - and in America that means smaller cars:-(

Brent was $114 when the SPR release was announced. There are hints that rumours of the announcement were leaked leading to significant sell-off the previous week.

The price now seems to have bottomed out and is once again testing $110 , as the European markets are rebounding on the assumption that Greek debt default has once more been delayed, and they are salivating at the national asset fire sale to come. The optimism may yet be miss-placed.

Greek default is now being priced into the market, but when it comes it will almost certainly lead to reduced economic activity and oil demand in Europe. However, it seems for now that the rest of the world is more than ready to buy up all available oil at rising prices,

The SPR release is a flash in the pan. It has not turned the economic weather. I cannot imagine the experiment will be repeated. If it is, it will be a clear act of desperation.

So 10 more rigs is going to create a bonanza of oil production? Am I reading this graphic correctly? Even if each well avg. is 5k per day and it takes 2 months per well. I don't see a huge growth of production in any type of useful window.

Be careful with Baker Hughes rig counts as they have a very narrow definition of an "active" rig:

"To be counted as active a rig must be on location and be drilling or 'turning to the right'. A rig is considered active from the moment the well is "spudded" until it reaches target depth or "TD". Rigs that are in transit from one location to another, rigging up or being used in non-drilling activities such as workovers, completions or production testing, are NOT counted as active."

Not only has it to be drilling, it must also be doing that for a minimum of 15 days in the counting month. This can produce anomalies, for example, Unocal/Chevron Thailand drilled wells so quickly that their rigs were "active" for less than 15 days per month and therefore were not counted even though they were using Hughes Christensen drill bits.

Euan,
"Note that demand for petroleum products has fallen by >1mmbpd in the US alone so far this year."
Looking at your graph of US petroleum products supplied, it didn't seem to indicate a reduction of more than a couple hundred thousand bpd, or am I missing something ?
Thanks.

As previously discussed, we see a clear inflection point in Global Net Exports (GNE, i.e.Top 33 Net Oil Exporters) in 2005.

Following are what we show for GNE for 2002 to 2010 (oil exporters with net oil exports of 100,000 bpd or more in 2005, which account for 99% plus of global net oil exports):

Note that GNE increased at about 5%/year from 2002 to 2005:

2002: 39.1 mbpd
2003: 41.6
2004: 44.8
2005: 45.5

At the 2002 to 2005 rate of increase, GNE would have been at about 59 mbpd in 2010, but let's look at what actually happened:

2006: 45.5 mbpd

2007: 44.6
2008: 44.5
2009: 42.3
2010: 42.6

(BP + Minor EIA data, total petroleum liquids)

I suspect that this inflection point was quite a shock to oil importing countries, especially developed oil importing countries. The gap between what the import market was "expecting" at the 2002 to 2005 rate of increase and what we actually saw was about 16 mbpd in 2010.

The difference between GNE and Chindia’s imports is what I define as Available Net Oil Exports (ANE), i.e., GNE not consumed by Chindia. As you can see, ANE fell from 40.4 mbpd in 2005 to 35.1 mbpd in 2010:

GNE - Chindia's Net Oil Imports = ANE

2002: 39.1 - 3.5 = 35.6 mbpd
2003: 41.6 - 4.0 = 37.6

2004: 44.8 - 5.1 = 39.7

2005: 45.5 - 5.1 = 40.4

2006: 45.5 - 5.5 = 40.0

2007: 44.6 - 6.1 = 38.5

2008: 44.5 - 6.4 = 38.1

2009: 42.3 - 6.9 = 35.4
2010: 42.6 – 7.5 = 35.1

(BP + Minor EIA data, total petroleum liquids)

Note that ANE in 2010, 35.1 mbpd, were below ANE in 2002, 35.6 mbpd. In other words, the supply of global net oil exports that were available to oil importers other than China & India in 2010 was below the supply of net oil exports available to oil importers other than China & India in 2002--and of course it was well below what was available in 2005.

A plausible estimate is that ANE will be down to between 27 to 30 mbpd by 2015.

Obviously, this analysis does not support the popular misconception that generally rising oil price are solely due to “Speculation.” It also goes along way toward explaining the IEA’s decision to release emergency oil supplies.

While US crude inventories are fine, the WSJ reported that European commercial crude oil inventories are at five year lows, and I think that the IEA was quite concerned about supply versus demand problems in the fourth quarter (at current oil prices).

The problem that the developed countries are facing of course is that given a continued decline in ANE, after the release of emergency crude oil supplies, then what? Do they keep depleting emergency crude supplies?

Incidentally, one of the little quirks of "Net Export Math" is that the rate of increase in net oil exports tends to exceed the rate of increase in production on the way up, but given a production decline, the rate of decline in net oil exports tends to exceed the rate of decline in production. For example, production by the Top 33 net oil exporting countries increased at 4.6%/year from 2002 to 2005, but their net oil exports increased at 5.1%/year over the same time frame.

From 2005 to 2010, the Top 33 showed a very slight production decline, going from production of 62.2 mbpd in 2005 to 61.9 mbpd in 2010, but their net exports fell at 1.3%/year. Their consumption to production (C/P) ratio increased from 27% in 2005 to 31% in 2010. At this rate of increase in the C/P ratio, the top 33 would collectively approach zero net oil exports some time around 2050. However, based on multiple case histories, and assuming about 45 years of post-2005 net oil exports, the top 33 probably will have shipped about half of their post-2005 CNE (Cumulative Net Exports) by the end of 2020.

Spare capacity? Why they have so many untapped fields like Dammam.

Saudi Aramco looks at restarting its first ever oilfield
Reuters / May 24, 2011

ALKHOBAR: Saudi Aramco will study drilling again at its long mothballed, first oilfield, industry sources said.

Dammam, now known as the “Prosperity Well,” is where the top crude exporter has made its first discovery in 1938.

Saudi Aramco’s chief executive Khalid Al-Falih has said the Number 7 well there produced 32 million barrels of oil before it was shut. The kingdom’s oldest field, Ghawar, has pumped more than 65 billion barrels since 1951.

“The well remains capable of producing even today, and the Dammam Field as a whole still accounts for half-a billion barrels of our proven reserves,” Al-Falih said.

Saudi Aramco had recoverable oil and condensate reserves of 260.1 billion barrels in 2009.

“There is a plan to drill trial wells, to try to assess the feasibility of the extended reach target,” one source said.

“It is challenging to drill an extended reach well.” ...

"Demand for petroleum products in the USA showed weak growth in the period July 2009 to Dec 2010, peaking in that month. Since then, throughout 2011, demand for petroleum products has been in decline with signs of lower highs and lower lows on the chart. The 52 week MA has turned down. Is this a leading indicator of recession?"

Not leading. It is at most a coincident indicator, more likely a lagging one.

How would it be leading if employment and consuption are concurrent, and industrial production is lagging? Those are the main factors affecting oil demand.

Is Rig Count data trustworthy? The more I see of these various oil production statistics in disagreement, the more I realize we may be looking at a new kind of accounting fraud in our system.

Relying on any one accounting effort may be susceptible to book cooking, which is what we saw with Enron and others most recently. Now we see people cannot count bbls of oil, and of course KSA is so secretive.

Why trust these rig counts?

Of course, we won't even talk about the quality of the oil--the available net energy per bbl (Joules per bbl net) and so forth. Those types of accounting would show the real story for recent oil production efforts.

Interesting post, it's certainly intriguing that the rig count is increasing for Saudi Arabia whereas their spare capacity is near record high. It would have been interesting to link the change in drilling activities with planned oil megaprojects (I think Baker Hughes distinguish offshore and onshore rigs also). Shrinking net exports combined with falling oil prices and promises to boost state welfare programs may be the best way to push them to produce more if they can.

Looking at Canada and the US as a model, total meters drilled jumped sharply after peaking. Just a quick look at the rig history back to 1975 shows the rig count was 120-200 over that period. Rig counts have now moved up closer to 300. I wish we had data from the 60's & early 70's so we could see the rig rates when the mid east production was growing rapidly.

The US has about 1800 rigs running, and has almost always had at least 1000 rigs running back to 1949 according to BH. So that is substantially more. It may reflect the smaller resevoir sizes, but also the private nature of US mineral extraction. Anyone who can pull together the capital can take a shot at drilling a well.

It is hard to know from rig counts what is happening to these producers.

So the critical question still remains unanswered. How much spare capacity does SKAQ have at the moment?

From a North American perspective, it's always striking how *few* rigs operate in the Middle
East. We have about as many rigs running in the state of Colorado as they do in these four nations combined. There are about 2x as many rigs in North Dakota's Bakken field as in these four nations combined. In the past ten years, these OPEC nations have produced more than 40 billion barrels, by rough calculation, without ever needing more than 100 rigs to do it. It's astonishing, when you think about it that way.

Is the United States release of it's oil reserves really a big deal. Will these really have any economic impact, or is it just political propaganda?