Crude Oil Reaches $92

Oil briefly broke over $92 this morning.

In real terms, Crude remains below its all-time inflation-adjusted high of $101.70 from April 1980. However, Crude has climbed 47.3% over the past 52 weeks, and since 2001, it is up ~511%, from $18 to $92. (So much for the transitory, self-limiting nature of these price increases).

It's time again to have a quick look at how and why it got here. It doesn't take a genius to identify several obvious factors:

1. Increasing Global Demand:
Booming growth in China and along the Pacific rim is only the beginning of the global story. India, Korea, Russia, Brazil, and Australia are expanding. Even "old Europe" has experienced a spurt in growth. This may be an old story, but it has yet to fully run its course.

2. Falling U.S. Dollar:
The dollar is at 15 year lows versus a basket of currencies. Blame the Federal Reserve for failing to protect the currency, and forcing capital to go where it's treated better.

US DOLLAR INDEX

Fun thought of the day: Imagine if every time Treasury Secretary Hank Paulson said "We have a strong dollar policy" -- and the dollar dropped yet further, his nose grew another inch, Pinocchio-style. I originally was going to suggest a college drinking game where you do a shot each time, but I wouldn't want all those alcohol-related deaths on my conscience.

3. Wars in Iraq, Afghanistan:
Its why I flipped bullish on Crude way back in 2002. The two hot wars in the Middle East have increased tensions, reduced Iraq's oil output, and generally led to higher terror premiums for Crude Oil. Future administrations should take note of this simple formula: Mid-East War = Higher Crude Prices.

4. Supply constraints:
US crude oil stocks unexpectedly fell by 5.3 million barrels last week, and we have a variety of infra-structure issues contributing to this factor. Globally, there is a tight supply of ships, refineries, pipelines, and storage facilities. This contributes to a minimum amount of reserve -- no buffer -- which means Crude Oil Futures fluctuate even more than they might otherwise.

5. Saber-rattling against Iran:
The increased jaw-boning against Tehran in general and the Revolutionary Guard in particular. A variety of analysts have noted that threats of US sanctions against Iran and tension on the Iraqi border had also helped fuel the oil rally.

Although I am not a fan of this White House, I guess I owe them a debt of gratitude: Their tone deaf saber rattling is definitely helping my positions in energy stocks and commodities.

Who ever would have guessed that actions have repercussions?

There are plenty of pixels being spilled on the subject; here's a typical excerpt:

"Oil futures rallied to a new record high on Friday, with worries about U.S. inventories and Middle Eastern tensions combining to send the benchmark energy contract past $92 a barrel. Crude for December delivery rose as high as $92.22 a barrel in electronic trading, a day after the U.S. slapped new economic sanctions on Iran. The gains were also driven by worries about potential conflict between Turkey and the Kurds in the north of Iraq.

At 5:30 a.m. Eastern, crude had settled back a bit. It was up 82 cents to $91.28 a barrel. Oil prices have been lifted by data, released Wednesday, showing a much higher-than-expected decline of 5.3 million barrels in crude supplies. Some believe the $100 a-barrel level is just around the corner.

"An unexpected drop in U.S. stockpiles has added to ongoing concern that supply from the Middle East may be disrupted," said analysts from Saxo Bank in Copenhagen on Friday. Gold futures also rose to a 28-year high on Friday. Commodities across the board are getting a lift from expectations that further U.S. interest rate cuts could come as early as next week, and could fuel inflation."

Hey, at least the core is contained . . . $100 Oil, here we come!

Sources:
Supply fears push oil above $92
BBC, Friday, 26 October 2007, 07:01 GMT 08:01 UK
http://news.bbc.co.uk/1/hi/business/7063250.stm

Crude rallies past $92 to new record
MarketWatchLast Update: 5:50 AM ET Oct 26, 2007
http://tinyurl.com/2w46gd

U.S. slaps new sanctions on Iran
Sue Pleming
Reuters, Fri Oct 26, 2007 6:58am BST
http://uk.reuters.com/article/topNews/idUKN2542594620071026

Crude Hits $92 on Supply Fears
By YEE KAI PIN
October 26, 2007 4:56 a.m.
http://online.wsj.com/article/SB119338625862872747.html

Comments

[blackbody]

1. As global demand increased, so have global supply. The oil sand output alone should have been enough to meet the extra demand. Also let's not forget OPEC have been cutting supply.

2. Falling dollar means rising euro. However OIL have been rising against EURO as well.

3. War in middle east did not in any way disturb OIL output in any significant way for 5 fold increase in OIL price.

4. There is NO evidence of crude supply constraint. Only constraint is refinery capacity which have been artificially constrained due to frequent and unexplained shut downs.

5. IRAN exports crude and imports refined product. Since, according to OPEC, there is abundant supply of CRUDE, not allowing import of refined product by IRAN should in fact increase supply of refined products for the rest of the world.

I find it truly amazing that DEC 2007 crude is trading at $90 while DEC 2015 crude is trading at $78. If OIL is in fact finite commodity and DOLLAR is to keep falling, then 2015 OIL should be trading at premium to 2007 OIL. What am I missing here?

[max petrisek]

High oil prices and pollution plays into the powerful attributes of natural gas. NG attributes as: abundance, lower price, near ideal clean fuel alternative for motor vehicles and residential & industrial uses. There is also a heavier demand for NG as a feeder product for many other products and energies such as hydrogen motor fuel cells. There is a fast evolving use of natural gas * CNG for motor vehicles on a world wide basis This is supported by most governments and the World Bank. The crucial need to reduce air pollution such as in China has been a boom to companies in NG as CHNG, SNEN & PTR to name a few. The increase of industrialization and especially the number of motor vehicles will push the demand for fuels. 92$ oil will accelerate the world wide move to use the most accessible alternative to oil both as to supply and near immediate functionality- that's natural gas. A look at the above companies stock price and volume growth is one testimonial to the above. China is a HUB in these problems as well as opportunities.

[keizer]

The assertion that global demand for oil is "very strong" is just not supported by the data: on average over the past 3 years demand has grown at (a modest) rate close to 1,4%. Mainly because OECD countries have registered six consecutive quarters of negative demand growth. In China and other emerging countries demand for oil derived products is maintained artificially high thanks to prices subsidy. This is clearly not sustainable.

[keizer]

The assertion that global demand for oil is "very strong" is just not supported by the data: on average over the past 3 years demand has grown at (a modest) rate close to 1,4%. Mainly because OECD countries have registered six consecutive quarters of negative demand growth. In China and other emerging countries demand for oil derived products is maintained artificially high thanks to prices subsidy. This is clearly not sustainable.

[wonderer]

How come no one talks about peak oil? What will happen in 2030?

[Georealist]

In fact, increasing oil demand is supported by the data. You can pick your report (IEA..etc etc) and demand is outstripping new supply by 3-4%. OECD (as well as OPEC) production capacity is falling and domestic dedication of supply is eating into export capacity everywhere. Mexico may not be able to send ANY oil to the United States in 3 years.
So what is clearly not sustainable? Our lifestyle???

[keizer]

Global oil demand (source OPEC and IEA web sites)

2005/2004 +1.4%
2006/2005 + 1.16%
2007/2006 +1.6% (and that is assuming according to IEA a whopping +2.8% acceleration of demand in Q4 which considered by many analyst as highly unrealistic)
One of the two pillars of the peak oil theory story that we are being served “ad nauseam” on cable television is that demand for oil is not “under control”. As you can see from the above figures this is hardly the case. Plus demand for oil is FALLING significantly in Europe, Japan and is now flat in the US . It is also a FACT that prices for crude related products in emerging countries have more to do with politics that with the law of market economy (yes prices are subsidized). Demand for oil is peaking my friend.

[Frank Rizzo]

All of you peak oil dead-enders need to read up on the Russian-Ukrainian theory of where oil comes from.

[maximax]

"Globally, there is a tight supply of ships, refineries, pipelines, and storage facilities."

Supply of crude tankers is not tight, unlike the dry bulk sector which is facing shortages and ultra high rates at the moment, larger tankers are in oversupply and will be even more so going forward. Scrapping of older vessels stays low as ship owners are still awash in cash from recent boom times. Storage facilities fall outside my area of expertise but I am wondering if they were only tight during the contango market, as people then preferred to store oil rather than to sell it. Right now we are in backwardation and stocks have been falling, so availability of storage capacity should be fine, and there are many expansion projects, just as with pipelines and refineries, the latter of which may as well be in oversupply by 2012 if all those projects that have been announced become reality as planned - but probably they won't due to shortages of relevant labour and surging construction costs.

Re an above comment about no evidence of supply constraints: There have been upstream shut ins in Nigeria and the North Sea this year, also minor ones due to hurrican threats in the Gulf of Mexico. Also, oil is not oil. Oil sand output is heavy stuff and many refineries cannot take it. Same with oil products, products originally destined for Iran may not suit other countries eg probably those with ultra low sulphur regulations. Don't blindly trust OPEC/IEA etc data&comments. These organisations are not indepedent academic outlets serving the public good. IEA demand forecasts tend to be overbullish, OPEC demand forecasts are the opposite. OPEC export data is not available or is twisted. No outsider exactly knows how much they produce and export, and in what states Middle Eastern oilfields are.