Oil Is Up Due to Fundamentals, Not Speculation 47 comments
an article to
-
Font Size:
-
Print
- TweetThis
I've been offering reasons for believing that the flow of funds into commodity investing has contributed to the recent oil price highs. Although I believe this speculation has gotten ahead of fundamentals in the last few months, there is no question in my mind that market fundamentals are the main reason for the broader 5-year move up in oil prices. Here I review those fundamental factors.
(click to enlarge)
Data source: EIA.
The developed economies consume a disproportionate share of the world's energy, with North America and Europe accounting for about half of the total oil use in 2006. However, it is the newly industrialized countries and oil producers that account for the recent rapid growth in demand, with Asia and the Middle East accounting for 60% of the increase in petroleum use between 2003 and 2006. North America and Europe contributed only 1/5 of the growth.
(click to enlarge)
Data source: EIA.
Particularly dramatic in this growth has been China, whose petroleum consumption between 1990 and 2006 increased at a 7.2% annual compound rate. It's always amusing to project these impressive exponential growth rates. If that rate of growth were to continue, China would be using 20 million barrels a day by 2020, about as much as the U.S. is today. By 2030, China would be up to 40 mb/d, twice the current U.S. consumption.
Data for 1990-2006 from EIA. Green line is projection of 7.2% compound exponential growth.
Are such projections plausible from the point of view of potential demand? During 2006, China used about 2 barrels of oil per person. For comparison, Mexico used 6.6-- Chinese oil consumption could triple and they'd still be using less per person than Mexico is today. The U.S. used almost 25 barrels per person. According to the data collected for a new research paper by Max Auffhammer and Richard Carson, there were 3.3 passenger vehicles per 100 Chinese residents in 2006, compared with 77 in the United States. Yes, I would say that these astonishing numbers for potential future Chinese oil demand are not at all inconceivable.
(click to enlarge)
Gross new production capacity, in thousand barrels per day, from projects scheduled to begin production in 2008, by individual project name. Source: Wikipedia Oil Megaprojects.
Are such projections plausible from the point of view of potential supply? Not remotely. I do think there are prospects for a significant boost to world petroleum production this year, thanks to a number of big new projects scheduled to begin production.
The Wikipedia database reports 7 mb/d in eventual gross new production capacity eventually expected from projects that are supposed to begin producing during the current calendar year. Before you get too excited about that number, however, several cautions are in order. First, 7 mb/d refers to the eventual peak production, not the amount that can be produced this year.
Second, there is inevitably some slippage and delays. For example, the list includes 250,000 b/d from Thunder Horse, BP's Gulf of Mexico project that was initially hoped to start giving us oil in 2005, but is still undergoing repair work.
Third, the above tabulation refers to gross new capacity, much of which is needed to replace declining production currently being observed in the world's mature producing fields. At any point in time, some of the world's producing fields are well into decline, some are at plateau production, and others are on the way up. It is not clear what average decline rate is appropriate to apply to aggregate global production, but a plausible ballpark number might be 4%. That would mean that in the absence of new projects, global production would decline by 3.4 mb/d each year. To put it another way, a new producing area equivalent to current annual production from Iran (OPEC's second biggest producer) needs to be brought on line every year just to keep global production from falling.
Of the 7mb/d in gross new capacity from the projects tabulated above, projects in Saudi Arabia, Russia, and Mexico account for about a third of this gross increase. Data currently available for the first two months of 2008 show actual production in Saudi Arabia down 350,000 b/d from its average 2005 value, though the latest news suggests that Saudi production may be close to returning to 2005 levels. Mexican production is currently down 400,000 b/d from 2005, and Russian production is down 100,000 b/d from its average level in the second half of 2007.
To summarize, I think we will see some net production gains this year, and expect this to bring some relief for oil prices. But I cannot imagine that the projected path for China above will ever become a reality. Oil prices have to rise to whatever value it takes to prevent that from happening.
So yes, I do believe that speculation has played a role in the oil price increases, particularly what we've observed the last few months. But it's a big mistake to conclude that speculation is the most important part of the longer run trend we've been seeing.
Related Articles
|
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication in the last week
Seeking Alpha 100 » -
Fastest Climbers
Those with the largestSee all
increase in followers
in the last week
Fastest Climbers » -
Top Commenters
Top commenters,
as ranked by their peers-
1
User 353732
-
2
Moon Kil Woong
-
3
doubleguns
-
4
optionsgirl
-
5
Mayascribe
Top Commenters » -
1
-
Top Instabloggers
The 100 most activeSee all
Instabloggers.
Top Instabloggers » -
Top StockTalkers
TopSee all
StockTalkers.
Top StockTalkers »
Inventory is down because refiners anticipate less demand for gasoline, they are ordering less oil. Keeping less inventory is what every business does in lean times.
Every bit of news is mis-reported by the big news media. Goldman Sach and cohorts own the media . From WS Whore to CNBC, they all toe their big advertisers line. We see Goldman come out on Monday call for $150 oil, T Boon Pickens come out Tuesday forcast 150. They even own the Treasury Department. Our congressmen invested their billions in hedge funds also want high oil.
everydayfinance.blogsp...
As far as the Saudis are concerned, they may not be able to up their quota any further and the refiners probably know that. There was a very explicit article on Alpha a while back from an American engineer who was involved in exploring the Saudi oilfields. His statement was (1) We only have the Saudi's word that they have more oil than they used to... There is no outside verification as they do not allow anyone to verify. And (2) he didn't see how they could have any more oil and in fact showed maps of Saudi Arabia showing the flooding of their known oilfields with salt water.
Lastly, our large refiners (Exxon, Chevron etc.. ) have been very busy repurchasing their own shares, rather than heavily investing in new fields, exploration and adding refineries.
Thx jegan ;-)
To all who are outraged and bitter (including ourselves) having to pay such high prices for petrol, the only solution is to find a viable technology that the world can embrace now as an oil substitute. Going back to horseback or bicycles is NOT a viable solution.
Renewable energy for the production of electricity is not the crux at this point; transportation is. Can someone please figure out how to build an anti gravity mechanism, utilizing the earth's gravity for motion in the desired direction...just dreaming.
CrossProfit
You have zero clue how Goldman Sachs truly operates. Even Warren Buffet called the investment banks "evil" within the past week.
Goldman and company most likely sold their long positions and various calls tied to oil today. They will be shorting tomorrow. The Enron loophole will be closed within a week...that's why it "super-spiked" quickly today.
Remember - Goldman was creating AAA-rated subprime CDOs, then soon after, making movements to short subprime assets.
Goldman is a cancer to American capitalism.
www.investingminds.com...
I completely agree with this author except I don't think speculation is having much of an impact at all. I guess people are just looking for someone to blame. I don't know how Harus can say demand is down.
www.marketwatch.com/ne...
www.star-telegram.com/...
hsgac.senate.gov/publi...
www.spiegel.de/interna...
online.wsj.com/article...
Second, I don't find any of these "news" sources credible. Give me specifics on how dabbling in the futures market would affect spot prices. And the fact that congress is holding investigations is meaningless. Those guys need econ 101 also.
Prices are spiking, demand is down...hmmm....sounds like a bubble to me. Yes MONEY is going in, but that is not demand. Money is pouring into hard assets in lieu of stocks and bonds. This causes the price to go up, even though DEMAND has not gone up.
If you really think prices are up on fundamentals, please explain where the "fundamental" increase in demand has been in the last 30 days, or even the last week. Supply has not changed one bit in that time, I promise you, so if you think prices are up on fundamentals, SOMEONE must be buying a crapload of oil.
Finally, I figured out it was all crap the first time I heard them say the price of oil was UP because a refinery was DOWN. That's easily the stupidest thing I've heard on bubblevision.
The euro gained significantly against the greenback, if you were european you pay slightly higher but not that much higher. same goes for AUD ,etc.
I don't however see how demand/currency value could push oil 15% in 1 month. I mean why? and why is gold not $1200/ounce.