Satellite Images Reveal Saudis May Be Lying How Much Oil They Have In Storage

A little over a year ago, specialized satellite imaging company Orbital Insight which uses its proprietary imaging and algorithms to track above-ground oil storage, confirmed something we had alleged earlier in the year: that China was vastly under-representing the amount of oil it had stored in its Strategic Petroleum Reserve (with significant implications for prices). As we said last September "according to Orbital Insight, China had not only misrepresented how much oil it has stored, it has done so at a massive scale, with the real number dwarfing even JPM own estimate: the real amount of Chinese oil in storage, according to Orbital, was a whopping 600 million barrels as of May" an amount nearly 3 times greater than the official, at the time, number of 234 million barrels.

The resultant doubt about China"s true purchasing capacity was one of the several factors that led to the subsequent swoon in oil prices which OPEC was unable to overcome until nearly a year later, when the market became increasingly confident that the OPEC strategy of eliminating excess inventory, was working and pushed the price of WTI and Brent to two year highs, above $57 and $63 respectively.

That confidence may not last, however, and the reason may be the same one as last year: Orbital Insights.

As the FT"s David Sheppard writes, "while the oil market’s attention has been gripped this week by the corruption purge in Saudi Arabia and its tensions with Iran, from miles above the earth’s crust one company is highlighting a different kind of intrigue."  He is, of course, referring to Orbital Insight, whose analysis of Saudi crude inventories in recent months has thrown up an "interesting anomaly."

One can call it an "anomaly", but a better explanation of what the company has done is to catch the Saudi kingdom in lying about its inventories. Here is the official narrative:

The kingdom, which has led Opec and Russia in co-ordinated output cuts since January, has for months been reporting to official agencies that its oil held in storage has been falling, which alongside lower production has been one factor that has helped propel Brent crude oil back above $60 a barrel.

There is just one problem: it"s a lie: "Orbital’s analysis of satellite imagery suggests that Saudi Arabia’s above-ground tanks — whose floating roofs allow them to see when oil inventories are rising or falling by measuring shadows cast across the top of the tanks — have seen no real change in the past 18 months."

This, Orbital says, is interesting because before early 2016, movements in above-ground storage closely tracked the trend in Saudi’s official numbers submitted to the Joint Organisations Data Initiative that are crucial for traders and analysts trying to get a grip of the near 100m barrel-a-day oil market.

In other words, the Saudis did not always lie about their inventory - it"s only recently that the nation decided to "pull a China" and misrepresent its true crude inventories... in fact, it only started as OPEC began aggressively jawboning the market to send the price of oil higher in the buildup to the Nov 2016 Vienna production cut agreement. In the process, OPEC"s most important member would do anything to give the fake impression there is more demand, and thus less oil in storage, than there really was.

How much? Here"s the FT"s punchline: "While Saudi Arabia has reported to Jodi that its oil stocks have declined by about 70m barrels since early 2016, the Orbital analysis suggests the above-ground tanks have actually seen inventories rise marginally over the same period."

If confirmed, Orbital"s startling allegation would imply that for much of the past two years, OPEC has been actively engaged in doing what it does best: cheating, not only the market, but also other cartel members, because if Saudi peers found out that Saudi Arabia was quietly warehousing tens of millions of barrels in excess oil to give the false impression of high demand, then everyone else would start doing it. Come to think of it, maybe they are...

Still, as the FT and Orbital point out, there are a few caveats.  For one, Saudi Arabia’s official storage numbers include oil held overseas, in key regional hubs. It also covers line-fill for pipelines and underground tanks that cannot be monitored by eyes in the sky.  These factors may account for why the numbers no longer seem to match up — though they do raise other questions. Orbital says that changes in inventory levels in above-ground domestic storage tanks are normally noticeable normally first as they are easiest to access. Saudi’s Jodi numbers and what Orbital can see through its algorithmic analysis of the satellite imagery had previously tracked each other closely.

“The floating tank data is the part that we think is most indicative of short-term changes in storage,” said James Crawford, chief executive of Orbital Insight. “The big question is why that no longer jives with the government data that shows a pretty big drop."

There may be another explanation and it has to do with keeping higher oil storage levels at home than abroad. As the FT explains, "the most intriguing suggestion for the shift is more strategic: Riyadh’s own concerns about rising tensions with its neighbours."

“[The] reason for no real deep stock draw in [the] kingdom will be mainly security related,” said Cyril Widdershoven, who runs the Verocy consultancy.

 

That suggests, he said, that Saudi Arabia is concerned enough about its deteriorating relationship with Iran, and to a lesser degree Qatar, to keep higher oil stocks at home in case of any disruption.

To be sure, with Crown Prince Mohammed bin Salman saying this week that Iran’s support for Houthi fighters in Yemen, and the provision to them of missiles capable of striking deep into the kingdom, constitutes an act of war, "it is certainly an intriguing theory", one which Shepperd writes that "at times of heightened tension between two of Opec’s biggest producers it is one the market may start tracking closely."

And while there is no definitive explanation for the inventory discrepnacy observed by Orbital, what makes this mystery especially intriguing is how polar opposite the two most likely explanation are in terms of oil prices: either Saudi Arabia is covering up the lack of demand and warehousing excess oil, which will eventually send oil prices sliding, or if the "security-related" explanation is accurate, then Saudi Arabia is indeed preparing for war with Iran, which once the shooting begins will send the price of oil into the stratosphere.

Oil Rig Count Falls By 1 As Analyst Warns Permian Reserves Are Grossly Exaggerated

For only the second time in the last 27 weeks (and 4th in the last 56 weeks), the number of US oil rigs fell last week (down 1 to 764 rigs). There is a growing concern that the rising rig count has now outpaced the lagged response to pricing and is due to rollover further...

Notably the Canadian oil rig count rose by 12 last week.

WTI tumbled to a $45 handle heading into the data after tanker-tracker data suggested OPEC supply was the highest in 2017...

“To really see the market push much higher, we need to see a drumbeat that inventory levels are being pared like the main producers who are cutting production say is happening,” Gene McGillian, market research manager at Tradition Energy in Stamford, Conn., says by phone to Bloomberg. Without that “further gains are going to be kind of tough to come by.”

As a reminder, after rebounding last week, it looks like the Alaskan component of US oil production slowed this week as maintenance work continues in the Alaskan North Slope, but the Lower 48 saw production hit 2 year highs...

And if the government is to be believed that is great news for "Murica...

We are entering a new age of American energy dominance according to Energy Secretary Rick Perry.

President Trump reflected that view in comments he made last week that “…we’ve got underneath us more oil than anybody, and nobody knew it until five years ago.”

Trump was referring to tight oil production and today, that means the Permian basin.

But as OilPrice.com"s Arthur Berman notes, global energy dominance by the United States is somewhere between aspirational and absurd.

So far in 2017, the U.S. has imported more than 9 million barrels of crude oil per day, and net imports have averaged more than 7.3 million barrels per day. How exactly can the world’s biggest importer of oil become the supplier upon which other countries depend?

The recently released BP Statistical Review Of World Energy 2017 places the United States 10th in the global ranking of oil reserve holders between Libya and Nigeria (Figure 1). That’s not bad but it hardly puts the U.S. in the same league as energy-dominant countries like Venezuela, Saudi Arabia, Canada, Iran, Iraq and Russia that have on average 4 times more proved reserves than the U.S.

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Figure 1. The U.S. is the 10th Largest Oil Reserve Holder in the World. Source: BP and Labyrinth Consulting Services, Inc.

Perhaps the President and Secretary Perry have been reading John Mauldin’s recent work of magical realism Shale Oil: Another Layer of US Power. It features a chart which shows that the U.S. is the largest oil reserve holder in the world (Figure 2)

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Figure 2. John Mauldin’s Recoverable Oil Reserves chart. Source: Mauldin Economics and Rystad Energy.

The chart is so wrong that it defies explanation.

Its Rystad Energy source data reveals that Mauldin has misrepresented recoverable resources—all oil regardless of commercial value–as reserves—a specific volume that is commercial at today’s oil prices.

It also seems that Mauldin didn’t show Rystad’s data correctly. Saudi Arabia—and not the U.S.—is the largest holder of recoverable resources according to Rystad (Figure 3).

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Figure 3. Rystad Energy Global Oil Recoverable Resource Estimate. The chart shows Rystad’s 2PCX category: proved reserves plus contingent resources plus risked prospective resources in undiscovered fields. Source: Rystad Energy and Labyrinth Consulting Services, Inc.

Rystad’s P1 proved and P2 proved-plus-probable reserve estimates put the U.S. behind Saudi Arabia, Russia and Iran.

There are many other errors in Mauldin’s transcription of Rystad’s data that can be seen by comparing his chart as my Figure 2 with Rystad’s data in my Figure 3. That’s what happens when energy amateurs masquerade as energy experts.

Assessing the Growth Potential of the Permian Basin

So much for U.S. energy dominance today but what about the growth potential of the Permian basin?

Pioneer Natural Resources CEO Scott Sheffield claims that output may exceed 160 billion barrels of oil. Even credible sources like Wood Mackenzie believe that Permian Wolfcamp growth alone will add 3 million barrels per day by 2024.

The EIA, however, estimated that 2015 Permian tight oil reserves were only 782 million barrels (Table 1). That seems low and is considerably less than the 5 billion and 4.3 billion barrels attributed to the Bakken and Eagle Ford plays, respectively.

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Table 1. EIA 2015 Tight Oil Reserves. Source: EIA U.S. Crude Oil and Natural Gas Proved Reserves, 2014 https://www.eia.gov/naturalgas/crudeoilreserves/

I estimate that there are approximately 3.7 billion barrels of proved Permian tight oil reserves using 2016 10-K SEC filings for leading operators in the plays (Table 2).

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Table 2. Estimated 2016 Permian Basin Tight Oil Play Reserves. Source: Company 10-K Filings, Drilling Info and Labyrinth Consulting Services, Inc.

All the companies in Table 2 differentiated Permian reserves from other company reserves. Those companies accounted for 47% of all tight oil production in 2016. I used that as a scaling factor to estimate the contribution of companies such as Anadarko, Apache, EOG and OXY that did not separate Permian from other company reserves in their 10-K filings.

The estimate is grounded on a reliable base of 1.7 billion barrels from company filings. The assumption that unknown company reserves will follow 2016 production ratios is reasonable but uncertain.

I imagine that an estimate of only 3.7 billion barrels may surprise many who buy into the vision of American energy dominance. Others may accept the estimate but argue that Permian plays have significant growth potential that the Bakken and Eagle Ford do not.

Concho and Pioneer included tables in their 2016 10-Ks that projected future production from proven undeveloped (PUD) reserves. That data indicates that the two leading producers in the Permian tight oil plays anticipate PUD production to peak in 2019 (Figure 4).

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Figure 4. Concho & Pioneer Proved Undeveloped Future Production Expected to Peak in 2019. Source: Company 10-K Filings and Labyrinth Consulting Services, Inc.

Concho’s and Pioneer’s combined peak 2019 PUD production volumes are approximately 25% of their combined 2016 daily production from the Permian basin. That means that the addition of future PUD production may only offset legacy production decline rates.

Anticipated PUD volumes are already included as proved reserves so however we view this data, it does not affect the implied reserves for the Permian basin. 10-K reserve and PUD production forecasts are based on 2016 SEC oil and gas prices. Higher prices would mean higher reserves and PUD production although few now anticipate substantial price changes over the period covered by Concho’s and Pioneer’s estimates.

Tank Theory

Permian tight oil reserves implied by this study are less than accepted estimates for the Bakken and Eagle Ford plays. Permian production, however, has already reached peak Eagle Ford levels and is still increasing (Figure 5).

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Figure 5. Permian Tight Oil Production Has Reached The Eagle Ford Peak & Is Still Increasing. Source: Drilling Info and Labyrinth Consulting Services, Inc.

To many, this implies that Permian production will continue to increase and will eventually eclipse output from the older tight oil plays. That may be true but, without additional reserves from new plays or deeper layers, it may only reflect rate acceleration followed by steep decline once peak production is reached. Concho’s and Pioneer’s future production forecast suggests that peak production may occur sooner than later.

This study represents one scenario that may provide context for the claims and expectations about future production potential for the Permian basin.  Aside from weak growth in the offshore Gulf of Mexico, or some return to growth in the Bakken and Eagle Ford plays, it is the only current basis for the crude oil portion of emerging American energy dominance.

For the U.S. to move into the top tier of oil producing countries, reserves must at least double from accepted estimates by BP, EIA and other credible organizations (Figure 6).

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Figure 6. The U.S. Must Double Reserves To Become an Oil-Dominant Producer Even Doubling or Tripling Permian Reserves Not Nearly Enough. Source: BP, EIA and Labyrinth Consulting Services, Inc.

In some upside scenario in which Permian reserves of 3.7 billion barrels somehow double or triple, that still will not be nearly enough for the U.S. to become energy dominant in oil.

Engineers commonly think of reserves as a tank - you can drain the tank with the best technology at very high rates, and perhaps make some money along the way, but ultimate production is limited by the size of the tank.

I have presented an estimate of tank size using as a basis data from the companies that know most about the plays. If it is even close to correct, American energy dominance should be recognized as just another expression of alternative facts.

* * *

As if more confirmation was needed...the Permian basin has been leading the increase in horizontal oil rig count (+184%)

But, the horizontal oil rig count changes from May 2016 by producers" sources of funding shows that junk bond funded rigs have plateaued!

Gartman: 'Oil Heading Egregiously Lower'; Saudi Oil Reserves Will Be 'Worthless'

Content originally published at iBankCoin.com

Normally, I don"t hone in on a particular talking head, unless of course said talking head is especially egregious. Enter Dennis Gartman, the self-proclaimed "Commodity King."

In the clip below, Dennis ceded to the possibility that oil might bounce a little here -- perhaps as much as $5 -- a mere charitable donation to the fuckheads surviving off oil barrel sales. But over the long run, Gartman proclaimed "oil us heading egregiously lower."

Several years ago, I recall Dennis saying oil was heading down to a nickel -- because MUH fusion energy would replace oil. What in the actual fuck is he talking about?

Now that oil is weak again, this guy is entirely detaching from reality, pretending his car doesn"t run on oil, or his planes, or the fact that oil is used to produce a sundry of goods sold in the grocery store, particularly plastics. Now oil is heading "egregiously lower" and there"s nothing you little trollops could do about it. See, we won the war, said Gartman. The Saudi oil reserves will be "worthless" and our frackers have succeeded in becoming the "swing producer."

In summary, oil will be worthless soon. The hundreds of billions of debt associated with oil is nothing, discarded as a pittance, and the dissolution of oil is a "white swan" to the overall economy.

See it for yourselves.

Utah May Soon Dump Federal Reserve: “Put Trust Back in God and Gold, Rather Than Central Bank”

States fed up with the phony, manipulated central bank currencies are starting to move away from the failing system – and prepare to hedge themselves against the worst case scenarios of monetary collapse.

Though the Federal Reserve clearly dominates the U.S. and global economy, some U.S. states are making moves to reestablish real money, and shift away from the burdensome and oppressive central bank currency.

With the financial system so broadly manipulated by central bank printing – and the experiment over the past eight years of zero interest, unlimited  – many leaders are looking for a safe haven and a guard against the downturn of weak spots of debt-based money printing as the default means of exchange.

Put more simply, Utah may soon lead the way of putting “trust” back in God and gold, rather than in God and the Federal Reserve.

A new law proposed in the House there would allow for a repository of physical gold, and encourage and facilitate official business of the State being conducted with funds backed by or drawn from the value of this stored wealth – a subtle move that is nonetheless revolutionary in scope.

According to the 10th Amendment Center:

A bill introduced in the Utah legislature would build on the state’s Legal Tender Act, creating a foundation for further action to encourage the use of gold and silver as money, and take another step toward breaking the Federal Reserve’s monopoly on money.

Rep. Ken Ivory (R-West Jordan) introduced House Bill 224 (HB224) on Jan. 27. The legislation would add several provisions to state law designed to encourage the use of gold and silver as legal tender. Passage would set the stage for expansion of gold repositories in the state and authorize further study on several sound money policies.

Specifically, HB224 would authorize the investment of public funds in specie legal tender held in a commercial specie repository. Under existing code, “specie legal tender” means gold or silver coin and bullion. “Commercial specie repository” means an institution that holds or receives deposits of specie legal tender that is located within the state. Practically speaking, passage would give the state the option to hold funds in gold and silver instead of Federal Reserve notes.

Things probably wouldn’t change overnight, but it would certainly be noticed by the banking class.

via X22 Report:

Relevant portion on Utah and gold starting around 11:30 minutes

According to the definitions set in place by the founders of this nation, only gold and silver represent real currency.

Article 1 Section 10 of the U.S. Constitution makes clear that only gold and silver are to be used as payment, but it is hardly what takes place in the modern economy:

No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility.

While Texas made a big move in 2015 to set up a gold bullion depository in the state, Utah – historically a very independent and conservative state – is also now attempting to get back on solid footing. As SHTF reported:

As Money Metals Exchange explains, Texas’ move to repatriate gold is a big deal, centered around distrust of Wall Street financial markets and a keen eye on schemes surrounding the physical possession of gold.

When Governor Greg Abbott signed House Bill Number 483 in his own hand on Friday, Texas gave a big gold “finger” to Wall Street and will soon bring $1 billion in gold bars back to the Lone Star State.

[…]  In fact, those with the fiduciary responsibility for managing the Texas gold are feeling less certain than ever.

Many European nations – like Germany – have been repatriating their gold bullion holdings, billions of which have been until recently retained by the NY Fed and other central bank vehicles, while Russia and China, among other world powers, have been accumulating massive amounts of gold at a rate never before seen in history.

Much of it is being soaked up in stealth, and through back channels on the market to downplay the size of the purchases, but close observers are acutely aware of the fact that many states are attempting to build up enough personal collateral to guarantee their relative place if/when the dollar reserve standard is officially dissolved, and a new global exchange takes over.

Of course, individual states in the United States can also make similar moves, and thereby stave off the effects of bankruptcy and potential currency collapse in the foreseeable future.

Would states see a return to prosperity and independence if they used sound money and avoided the debt trap and control instrument of the Fed?

The answer should be obvious, but many would be surprised at how it plays out, if it were allowed to happen.

If states and foreign nations are putting this much stock in gold, given their knowledge of economic events yet to unfold, should you be placing your trust in gold, silver or other precious metals as well?

Keep your eyes on Utah… and if it takes hold there, other states that want more freedom.

Read more:

Texas Signals New Gold Rush: “Governments Have Lost Trust in New York Depositories”

The Ultimate Call: Will Federal Reserve Be Caught Without Gold in ‘Repatriation Rush’?

University of Texas Takes Physical Delivery of $1 BILLION In Gold

Uncertain In 2017? Analysts Expect “Silver and Gold Rally Under Trump”