Price risks skewed heavily to the upside

On a short-term basis, the U.S. market looks oversold and could bounce later this week, but the thing that has my attention is oil!

OPEC data shows demand for its crude will rise by 2.1 million barrels/day (mmb/d) in the third quarter from the group’s total output in April of 28.8 mmb/d, Naimi said. “Saudi Arabia is committed to supplying the needs of the market regardless of the disagreement,” he said.

The 11 nations with production quotas pumped 26.15 mmb/d in April, according to the IEA. That leaves the group with about 4.5 mmb/d of spare capacity, most of it in Saudi Arabia, to be tapped in an emergency.

The 50-year-old organization met as fighting in Libya shut off most of the output from Africa’s third-largest producer. A rebellion against Libyan leader Muammar Qaddafi has cut shipments from the North African country by almost 90 percent, according to Bloomberg estimates.

The lack of Libyan oil production is concerning. Estimates of current shut in production vary from a low of 500,000 b/d to a high of 1.5 million, from a total production of 1.6 mmb/d. Company withdrawal of expatriate production workers appears to be a major contributing cause of the production decline, not damage to producing fields. Libya is a small producer; however its oil is highly prized in the Mediterranean basin by Italian, French, and other regional buyers, as well as in northwest Europe for use by heavy, sour-based refiners as a blending crude.

To date, OPEC crude production remains around 1.3 mmb/d below where it was before the Libyan crisis broke out. Political and military stalemate there leads me to assume Libyan supply will remain absent from the market for the rest of 2011.

Production from Yemen too is now significantly curtailed by political unrest.

OECD stocks are on a trajectory to descend through the trailing 5 year average.

The good news!!! Iraq's current output is about 2.7 million to 2.8 mmb/d and expected to reach 3 mmb/d by end 2011 and 4 mmb/d by end 2012. Iraq's oil exports in May averaged 2.225 mmb/d.

"Export terminals and pipelines will not be the obstacle," Shahristani, who is responsible for Iraq's energy affairs, told reporters during a visit to southern oilfields and export facilities.
Iraq is rebuilding its oil infrastructure after years of conflict and has signed deals with oil majors to reach a proposed production capacity of 12 mmb/d by 2017. Most analysts see 6-7 mmb/d as more realistic.

I see lots up upside in oil prices, if supply is not brought back on stocks will deplete to worrying levels and that could excessively hamper global growth as oil prices exceed pre-crash levels.

Stock pick of the day: COG