Oil to stay north of US$60
Column - After a brief period of slack last winter, oil prices are once again reflecting the tightness that prevails in oil markets in light of a weak supply response in the face of strong demand globally. A truer picture of oil markets has emerged in recent months, one that suggests oil markets are not as well supplied as previously thought, OPEC supply cuts notwithstanding. In only a few short months, demand has proved stronger than predicted and oil supply that was expected to materialize has not. The end of the bull market in oil was hastily pronounced by wishful value managers and a doubting public last winter when oil prices traded around US$50 per barrel in the midst of a US economic slowdown. Yet, neither warm winter weather nor a US housing recession provided sufficient or lasting respite to counteract what is shaping up as a weak supply response to higher oil prices.
Despite the intensity of capital expenditure directed toward new supply in recent years, the result is appearing less than promising. A variety of factors are conspiring to limit oil production over the near term and perhaps beyond. Capacity erosion or depletion, cost inflation in equipment and services and lack of access to resources in several countries are the most important factors. Declining rates are most profound in non-OPEC oil-producing countries. Net additions so far this year are anemic, a total of 640,000 barrels per day. Also current OPEC production appears to be too low to meet "the call on OPEC," which is the difference between projected demand and projected non-OPEC supply. It's not one thing but a variety of factors that are conspiring to potentially send oil prices even higher in the near term. Demand has been revised higher this year by 420,000 bpd and last year's numbers were also ratcheted up by 250,000 bpd. Revisions are attributed to non-OECD countries where demand has been compounding at nearly 4.5% per annum since 2003, far stronger than previously thought. Production outages in Nigeria and declines in Iraq are surprises that tip the balance to tightness over the next few months. Conflicts in both these countries suggest that resumption to full capacity is unlikely in the near future and current weakness could prevail. Even if we leave speculation about depletion to peak oil theorists, the balance for oil markets appears exceptionally tight in the near term only a few short months after oil prices were in a free fall. Perhaps the world should get used to $60 oil.
(National Post 070709)
Blah blah blah. Demand is climbing faster than expected and supply additions are pathetic. Sound familiar. I feel like a skipping record on this topic. I've been talking about this for months. All the numbers publically released are bogus (or, at least, intensely filtered -- much like inflation numbers) and only meant to satiate the concerns of the stock market investors. The reality is far different from the fantasy that is being spun by the talking heads.