If our readers have not guessed thus far, Supply Chain Matters maintains subscriptions to two different mainstream business publications, namely the Wall Street Journal and the Financial Times. We do so not only because both are widely read by supply chain and other business executives, but also because each publication can provide a different lens to a story.
One development that has certainly captured keen interest among procurement and supply chain executives is the current rising cost of oil and its implication to both commodity and service costs. While the WSJ provides coverage of this development from the lens of Wall Street interests, we turned to FT and detailed articles published yesterday and today related to what actions Saudi Arabia officials have now undertaken to respond to this concerning trend, a trend which our readers should be aware.
The Saudi’s are reportedly very concerned that the current trend of rapidly rising energy prices will derail any global economic momentum or cause a repeat of the 2008 price run-up that not only precipitated the previous global recession, but caused transportation costs to skyrocket. The Saudi’s also understand all too well, the cornerstone principles of supply and demand. Increased multi-government sanctions imposed against the government of Iran, scheduled to increase even more in the coming months, have provided concerns about additional global supply reductions or the sudden closing of the Strait of Hormuz, a major shipping lane for crude supply. In the middle of all this lies the financial market speculators who attempt to make money on perceived supply and demand imbalances.
Christine Lagarde, managing director of the International Monetary Fund (IMF) further indicated that that rising energy prices have overtaken Europe’s debt crisis as a concern for the world economy. The same issue is often brought forward by U.S. Republication presidential candidates hoping to unseat President Barack Obama. As of this writing, oil prices are hovering at $124 per barrel.
Today’s FT article reports that Ali Naimi, Saudi Arabia oil minister has publically acknowledged that that current high oil prices are unjustified given the existing numbers of supply and demand. Mr. Naimi views current global supply exceeding demand by 1 million to 2 million barrels per day, a situation that many in our community would view as excess supply. Once more, according to the Saudis, customers are not requesting nor seeking more crude. The summer months are fast approaching and global markets generally require an additional 3 million barrels per day to support seasonal consumption.
To respond to any concerns relative to near and longer-term supply, a separate FT headline article, Saudis deluge US with oil to curb price, reported that Saudi Arabia has recently contracted the largest number of super tankers in years, 11 in all, each capable of hauling 2 million barrels of crude. These tankers will be replenished by the largest increase in Saudi pumping capacity in the last 30 years. According to the FT, over the next few months: “…they will deliver a wall of oil with a single aim: to bring prices down.” The destination of these tankers is the U.S. Gulf coast. Saudi Arabia is also increasing its own supplies of crude within storage tanks located in Rotterdam, Egypt and Okinawa.
These moves are reported to be part of a longer-term Saudi strategy to maintain a very large buffer of spare crude capacity available to support global markets. In the parlance of supplier management, the largest supplier is responding with a significant upside capacity response.
How successful this Saudi response is in driving down the current high prices of crude remains to be seen, but this effort deserves mention and praise. The Saudis have a belief that $100 crude is a reasonable level to support world markets, and with an experienced knowledge of supply and demand principles are about to call the bluff of market speculators. The rest is up to refiners and associated retail markets who will, without any further unexpected supply disruption, find themselves with lots of crude inventory.
In our view, commodity and procurement professionals need to stay informed and up-to-date on this latest development and on the forthcoming dynamics of oil markets. Transportation and distribution teams should be asking their commodity teams for more frequent updates in the coming months, particularly before major 3PL and transportation contracts are renewed.
Market dynamics concerning oil and energy supplies are going to be interesting to say the least.
It would be interesting for readers to share their perceptions as well. Are you planning for higher or lower energy prices for the remainder of 2012?