Has the Oil Rally Run Its Course?
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Editor’s Note: No market divides analysts as much as oil right now. Are record prices the result of speculators or a fundamental imbalance in demand and supply? Is the bubble about to burst or can oil prices climb further? Dave Gonigam says a lack of supply is behind current trends, implying little change ahead. But Fleet Street Daily’s Ben Traynor has been advising his readers how to protect themselves from a fall in oil prices. Dan Denning says falling demand could mean oil has reached the end of its bull run, at least for now.
No Spike in Oil Price Following IEA “Third Oil Shock” Announcement
By Dan Denning
The International Energy Agency (IEA) gave the oil market a boost when it said supply would remain tight and that the world was in the middle of its third oil shock. Thanks for the newsflash IEA.
“With oil prices hitting 140 U.S. dollars,” said IEA Executive Director Nobuo Tanaka, “we are clearly in the third oil shock, with prices affecting economic growth, truck drivers are going on strike. Airlines are closing down.”
The IEA said high prices would discourage demand for oil in the short-term, but in the medium-term, “demand growth in developing countries and ongoing supply constraints continue to paint a tight market picture.”
The IEA remains in a remarkable state of delusion about the world’s ability to increase oil supply. It projects that global demand will grow from 86.8 million barrels per day this year (with supply of around 88mbpd) to 94.14mpbd in 2013. That’s an increase in global production of 8.5%.
Let’s see. Where will that come from? Well, assuming there is no decline in current production, you could double Iraq’s production, throw in 2mpbd from the Saudis and their spare capacity and new fields, chuck out Chavez and get Venezuela humming again, and bring on-stream a lot of the deep-water projects…and maybe, just maybe you’d get there.
Christophe de Margerie, the CEO of French oil company Total (FP), says 94mpd is an optimistic forecast in ten years, and probably the peak anyway. “We will have to fight against the natural decline of (present) oil fields,” he said “It will not go smoothly.”
You can fight against some things…love handles, injustice, heavy traffic. But if you pick a fight with something like gravity, you’re going to lose every time, and probably injure yourself. The natural decline in the production on an oil field can be “fought” with some methods to enhance recovery. But depletion is depletion. They don’t make Botox for oil fields.
In any event, the IEA announcement did not create a super spike in oil. This leads us to believe oil may be running out of gas, at least in the short-term. Event-driven price increases are almost all played out, barring an Israeli attack on Iran. If that happens, all bets are off. Keep in mind, though, that oil prices actually fell when the first Gulf War began. They did the same in 2003. We’re not saying the same would happen this time, especially if the Iranians tried to clog up the Strait of Hormuz.
But the real reason prices may have topped out is that the world is having a hard time coping with $140 oil. Could it live with $200 oil? Who could afford it? At its current price, oil is killing the airlines and destroying truck drivers. Also, gold seems to be catching up with oil as the most attractive anti-inflation investment alternative.
Source: No Spike in Oil Price Following IEA “Third Oil Shock” Announcement
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Tags: Crude Oil Prices, Dan Denning, FP, peak oil, Saudi Arabia Oil ProductionAbout the Author
Dan Denning is a contributing editor to Diggers & Drillers and a regular columnist for Money Weekly, a Taiwanese financial publication. From 2000 to 2006, Dan was the editor of Strategic Investment of Agora Publishing. His reporting and analysis for The Daily Reckoning is read by more than 500,000 people regularly.