Iraq’s oil auction: No parade for the oil markets
Today's Financial News - Posted June 30, 2009
Iraq was hoping for better results, but is forced to take what it can get as the world’s largest oil producers say the country is still too dangerous to think about cheap oil.
By Andrew Snyder, TodaysFinancialNews.com
Baltimore – (TFN): It is supposed to be a joyous day in Iraq, with American troops exiting the cities they have patrolled for so long and the country’s precious oil on the auction block.
Unfortunately, violence remains high and the gap between crude buyers and sellers is much larger than most had predicted.
After years of violence and destruction, Iraqis were ready to symbolize their potential by selling their oil. The revenues will help the devastated economy rebound and strengthen its role in Mid-East affairs.
But this week’s auctions are not going nearly as smoothly as the country would like.
First a nasty sandstorm delays the auction for a day. When the gavel finally drops, bidders are willing to pay far less than sellers are asking.
Companies like Exxon Mobil (NYSE:XOM), BP (NYSE:BP) and Total (NYSE:TOT) all would like to get a piece of Iraq’s massive oil reserves, but they want fair compensation for their risk and efforts.
Even though Iraq is far safer than it was several years ago, few Americans would be eager to head to the country to set up shop. Violence is high and could surge without notice.
It isn’t Texas after all…
Iraq’s oil ministry, with the help of government pledges to ensure safety, is willing to pay far less for oil production than the producers are willing to accept.
In one field, Exxon was willing to accept about $4 per barrel of crude it pulled from the ground. Iraq was willing to pay just $2. According to sources, the asking price was ten times more than Iraq’s bid.
So far, just one field has been contracted. It is not the joyous news Iraq was ready to celebrate.
As investors, the action is telling us a lot about the crude markets.
First, it tells us the nation’s largest producers are far from desperate to get their hands on new reserves. If they were not sure they would have enough crude to fuel the world’s exit from the current recession, the willingness to negotiate would be higher.
More of the same
More subtlety, the action also tells us that oil producers are not betting crude prices will go lower anytime soon. By sticking to their relatively high asking figures, producers signal they can find higher-margin opportunities elsewhere, specifically places with much lower risk.
While Iraq would love to dump some of its 115 billion barrels of proven reserves on the market, it is not going to happen as quickly or successfully as the government would like.
Until violence and volatility subside, the country will be forced to pay its producers a premium for taking the risk to drill within its borders.
For investors, it means more of the same. There will be no glut of oil hitting the market anytime soon and prices will remain strong, with bullish tendencies.
Don’t change your strategy over today’s action, or lack thereof.
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