Market Report: A World Awash in Supply

Oil prices got a bid from a rising stock market and concerns over Iran. Now, while some traders and analysts try to hype the Iran story, the truth is the odds of an imminent military conflict with Iran are being greatly exaggerated. And if we do actually get into a conflict, it is unclear as to whether or not it will have a long term impact on oil prices in a world awash in supply.

Many analysts point to the fact that the Iranians have threatened to close the Straits of Hormuz, a major choke point for global supply. The Straits are located between Oman and Iran and connects the Persian Gulf with the Gulf of Oman and the Arabian Sea. According to the Department of Energy, Hormuz is the world's most important oil chokepoint due to its daily oil flow of 16.5-17 million barrels based on 2008 figures. At that time that was roughly 40 percent of all seaborne traded oil (or 20 percent of oil traded worldwide). Currently with OPEC production cuts, it is like to be in the 12 to 13 million barrels a day area.

Many military analysts doubt Iran's ability to shut down the straits for any extended period of time. Even if they did the Department of Energy says that closure of the Strait of Hormuz would require the use of longer alternate routes at increased transportation costs. Some alternate routes would include the 745 miles-long Petroline, also known as the East-West Pipeline, across Saudi Arabia from Abqaiq to the Red Sea. The East-West pipeline has a capacity to move five million barrels per day. The Abqaiq-Yanbu natural gas liquids pipeline, which runs parallel to Petroline to the Red Sea, has a 290,000-barrel per day capacity. Other alternate routes could include the deactivated 1.65 million barrel per day Iraqi Pipeline across Saudi Arabia and the 0.5 million-bbl/d Tapline to Lebanon. Oil could also be pumped north to Ceyhan in Turkey from Iraq. There are two pipelines that can be used and they have a designed capacity of 1.1 million barrels a day and 500,000 barrels per day. Yet right now, due to sabotage, the one pipeline is running only 900,000 barrels per day and the other 300,000.

Now, while a shut down of the Straits of Hormuz would create a deficit in supply and sharply higher prices for a time, the deficit would be easier to replace from other sources than it would have been just a few years ago. With global inventories overflowing and the likelihood that an Iranian shutdown of the straits would be a battle that they would not win, is why the oil market is taking the Iranian threat in stride.

While the United States moves towards green energy sources China seems like it is trying to corner the global oil market. In its latest big move with big cash, as the Financial Times reports, China's state-owned oil company is in talks with Nigeria to buy large stakes in some of the world's richest oil blocks in a deal that would eclipse Beijing's previous efforts to secure crude overseas. The Financial Times says that the attempt would put the Chinese into competition with western oil groups, including Shell, Chevron, Total and ExxonMobil who control and operate the 23 blocks under discussion. Sixteen licenses are up for renewal. CNOOC, one of China's three energy majors, is trying to buy 6bn barrels of oil, equivalent to one in every six barrels of the proven reserves in Nigeria, sub-Saharan Africa's biggest crude producer and a major supplier to the US. Details of the talks were revealed in a letter from the office of Umaru Yar'Adua, Nigeria's president, to Sunrise, CNOOC's representative, a copy of which was obtained by the Financial Times. The overall value of the Chinese offer is not disclosed, although some details suggest a figure of about $30bn. Some oil sector executives said the total on the table was $50bn.


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Kevin | Sep. 30, 2009
The Straits of Hormuz future conflict could be enormous, with million bbl tankers being sunk on a daily basis, thereby not only causing havoc for the insurers, removing transport from the system permanently, but causing enormous pollution which could have a major impact on the Pearl of the Gulf, with all its billions of dollars of expensive real estate right on the waterfront. This would be a problem that could last for decades to come.

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