[Carlhole]

For the past couple of years, we have all observed how stocks lost momentum or fell as oil made regular gains. And when oil took a few steps backwards, stocks rose.

Then a few months ago, something fundamental seemed to snap into place and the price of oil fell precipitously while the stock market took off to new heights.

Meanwhile, the news out of Iraq has been worsening and the war has grown more and more unpopular. Many thought a climax had occurred after the mid-term election. However, perhaps not yet.

The way that the price of oil and the Dow have been acting would make it appear as though the news out of Iraq is very good! It's as if the Maliki government actually had things under control, that the sectarian militias were cooperating, that the Iraqis were standing up as American forces gradually stood down, that oil revenue-sharing agreements were backed up by real political stability and that America had achieved a permanent presence in the region for its military bases. It's as if Wall Street had finally wrapped up the delicious prospect of feasting upon Iraq's (probably) 200 billion barrel reserves.

Of course, the news we get about conditions in Iraq is exactly opposite the sunny capitalist daydream outlined above although we have heard a little about oil revenue sharing agreements that might be positive for Western oil majors.

But could it be that the Masters of the Universe on Wall Street know something/understand something that the rest of us don't? Why would stocks be racing upwards and the price of oil falling while the news out of Iraq is so monumentally bad? By all lights, it looks like the US has lost this war.

In stock trading, there has always been a fight between 'Fundamentalists,' who look at real-world events that affect a stock, and 'Technical Analysts', who only look at the stock chart because they figure the market has already discounted the fundamentals into the stock price.

Could it be that we just don't know what The Fundamentals are regarding the price of oil and the latest stock market rally?

[Jack]

It's entirely possible that we've missed some fundamental issue. It's also possible that some of the data are distorted, ala Enron and WorldCom.

But I think the answer is simpler. Markets tend to make the majority wrong. When an overwhelming majority are on one side or the other, the market will tend to disappoint that majority. (Yes, that's the contrarian approach). And lots of people have been betting (literally and figuratively) that oil will go up.

As soon as the bullishness is hammered out of the masses, we should start going up again. Of course, in killing the bullish consensus, the markets also cause people to question the very concept of peak oil...assuring that any efforts at mitigation will be deferred.

And people wonder why I'm a doomer.

[FoxV]

I just read a quick blurb (to short to post a link) that Dow was looking up again today because Inflation was as expected and "Strength in the Housing sector". Apparently Housing starts are up for December (everone just loves to wake up to see that Santa has placed a new house under the tree)

So hmm, lets see:
Record levels of Foreclosures
Record high Price to rent ratio
Record vacancy rates of owned units
Record lows in sales

but its all good because new housing construction is up.

oh yeah, this is where I want my money to be.

[firestarter]

Apparently Housing starts are up for December (everone just loves to wake up to see that Santa has placed a new house under the tree)

.

Just what housing needs: more inventory in the pipeline

[FoxV]

Reminds me of the simpson episode (Mad Mad World parody) where they are at the bottom of a hole digging for the treasure (of course with no ladder).

Lenny: So how do we get out of here?
Carl: Lets dig our way out
(fade to black)
Wiggum: No No, dig up stupid

[Ancien_Opus]

A pending recession, which seems to be indicated, would cause demand destruction. There is no real change in the fundamentals. It will be curious to see how low it can go in light of Cantarell.

[toast]

It's a backroom agreement. The Saudis are against any oil production cuts (low oil price) to minimize the forthcoming US recession (hence Dow up). In return the US is committing additional troops to Iraq to protect the minority Sunnis (Saudis buddies) from the Shiites.

[Ancien_Opus]

The Saudi's behavior is very curious. Reminds me of Texas in the 1970's. SA did not (or could not) respond during the Katrina crisis but now promise that they'll reach 12 mbd. The only problem is the new technology and expansive drilling didn't reverse the decline in Texas. Perhaps the great Gahwar field is at that same Hubbert point? The next
12 months shall be very telling.

It's a little difficult to refine promises.

Then PEMEX is in deep production trouble on Cantarell. You don't need tankers to ship oil via pipeline from there. Any replacement for US
imports will be more costly.

[FoxV]

btw, as far as the Dow's behavious goes, I think this article sums it up pretty much

Don't Call it Investing

[DantesPeak]

The Saudi's behavior is very curious. Reminds me of Texas in the 1970's. SA did not (or could not) respond during the Katrina crisis but now promise that they'll reach 12 mbd. The only problem is the new technology and expansive drilling didn't reverse the decline in Texas. Perhaps the great Gahwar field is at that same Hubbert point? The next
12 months shall be very telling.

It's a little difficult to refine promises.

Then PEMEX is in deep production trouble on Cantarell. You don't need tankers to ship oil via pipeline from there. Any replacement for US
imports will be more costly.

I’m not an expert on this, but it appears that what ever kind of low grade oil the Saudis produced 1 year to 1.5 years ago to increase production after Katrina was unwanted. Some commentators stated that it was or near unrefinable. Remember the Saudis comments that no one wanted to buy their heavy crude last Spring?

So their marginal production capabilities have much to be desired. They are working on better/expanded refining and are in the process of essentially reopening some production fields – some of which are low quality. Altogether they can’t produce much more than about 9.1 mbpd consistently of acceptable oil even if they wanted to. Since it appears their February OPEC quota is about 8.3 mbpd, they do have some flexibility, but not much.

[rockdoc123]

They are working on better/expanded refining and are in the process of essentially reopening some production fields – which are mostly of low quality. Altogether they can’t produce much more than about 9.1 mbpd consistently of acceptable oil even if they wanted to. Since it appears their February OPEC quota is about 8.3 mbpd, they do have some flexibility, but not much.

just to be clear almost all of the projects the Saudis have announced they will bring on stream between now and 2010 are either light or superlight crude, with sulphur content ranging from 0% to 2%. The only project with low quality crude is Manifa which I don't think is scheduled until after 2010 but I'd have to check my notes.

An interesting comment from Al Naimi today in talking to the press about the deal for long term sales they have been speaking with the Indians about he noted that as of February 1 Saudis spare capacity would be 3 MMB/d !! I haven't worked that numbers but that does suggest that the Haradh III project which started up in mid-2006 must be doing OK....otherwise it is hard to get to the 3 MMB/d figure.

[DantesPeak]

Sorry that I was mistaken about the type of oil from the projects. I corrected my comments above and did some additional research (see below):

Business Middle East
January 1, 2007

Saudi Arabia: Powering ahead

Saudi Aramco made substantial progress in 2006 with its crash programme of increasing crude oil production capacity to 12.5m barrels/day (b/d) by the end of the decade. The first development in the new series of projects--Abu Hadriyah-Fadhil-Khursaniya--is scheduled to come on stream at about 500,000 b/d by end-2007, to be followed by a 250,000-b/d expansion of the Shaybah field the following year and the 1.2m b/d Khurais field in 2009. Looking further ahead, Aramco has started work on developing the Manifa field, which is expected to be the main source of (heavy) crude for two 400,000-b/d refineries to be operated in partnership with Total of France (in Jubail) and ConocoPhillips (Yanbu).

These new projects are designed to maintain a margin of some 2m b/d of spare capacity, and provide the platform for further expansions in capacity over the next decade.

[sorry no link]

Oil Daily
December 20, 2006

Volume 56; Issue 243

Saudi Aramco pumps up '07 oil and gas drilling budget.
Husari, Ruba

Saudi Aramco has expanded its 2007 development wells drilling budget to almost $4 billion--an increase of 60% on earlier plans to spend $2.4 billion next year, according to industry sources (OD Dec.15,p5).

Aramco plans to complete 489 onshore and offshore development wells in 2007, of which 427 will support crude oil production and the remaining 62 will help gas output.

More than half the crude program will involve producer wells, with the rest involving reservoir injection, water disposal and supply, reserve replacement and evaluation.

Onshore development drilling will focus on the giant Ghawar field, with 134 wells planned for 2007 to support Arab Light crude oil production.

Supporting development plans to raise crude production capacity from 11.3 million barrels per day to 12.5 million b/d by 2009, Aramco will drill 85 wells at the Khurais field in 2007 and a further 50 wells at the Abu Hadriyah, Fadhili, Khursaniyah development. Under these two key projects, the Khursaniyah scheme would produce 500,000 b/d by the end of next year and Khurais 1.2 million b/d by 2009.

Aramco is also planning to increase Arab Heavy crude oil production capacity beyond 2009, through a 900,000 b/d development of the offshore Manifa oil field. This would raise the heavy grade's production capacity from 1.325 million b/d in 2007 to 2.225 million b/d by June 2011. Drilling at Manifa is scheduled to start in October 2008, according to Aramco.

[sorry no link]