Royal Caribbean's (RCL) already depressed share price has been heavily hit recently by an earnings miss, an uninformed downgrade and the bashing by short sellers. Yet the fundamentals make it a compelling buy for long term investors.

As a regular reader of IEA's reports, I can say that its demand forecasts are often off the mark, long term even more than short term. Quite often, the agency forecasts significant demand growth for oil products, sometimes creating stress in the markets, and then, over time, quietly scales those forecasts back.

• The IEA has several times downsized its global oil demand growth forecast for 2008. Its current forecast for demand growth for 2008 is lower than its supply growth forecast. Spare capacity will be three times higher by the end of 2008 than in 2005. Being usually behind the curve, it is likely that the IEA will continue to cut its demand growth forecasts for 2008. JP Morgan already estimates that global crude demand will decline in 2008.
• In the new report, the IEA says that "soaring demand for distillate fuels -- such as diesel, jet fuel and kerosene -- and a lack of sufficient refining capacity has played a key role in lifting crude oil price". That is not very logical. A lack of refining capacity suggests an expansion of refining margins. But those margins are under pressure. Refineries have problems passing trough crude oil price increases. It is also not logical to deduct an upward pressure on crude oil prices from a lack of refining capacities. The latter would suggest that crude oil supply is accumulating in front of refineries, which, without speculation, should put downward pressure on its prices. From what refineries are saying, there seems to be enough capacity to process any kind of crude.
• The IEA has reduced its demand growth forecast for the next 5 years from an average of 2.1Mb/d to 1.5Mb/d. That is quite a significant change. But it's not obvious that crude demand will increase by 1.5MB/d in each of the coming five years, mostly based on growing transportation demand in emerging markets. Those markets are not immune against price increases, especially if subsidies are gradually removed, as seems to be the case. Price-demand elasticity in such markets is higher than in OECD countries. We have seen multi-year periods in the past in which global oil demand was flat after an oil price spike, because of changes in consumer behavior, despite significant economic growth in those periods. If, for example, demand growth in the next 5 years is 1Mb/d instead of 1.5Mb/d, spare capacity will remain at comfortable levels after 2010, even with the IEA’s reduced supply growth projections.
• Following the IEA, there will be no real supply-demand problem in the next years. Spare capacity will increase in the next two years to 4.3 Mb/d. That is quite comfortable. It is supposed to decrease in the following three years. But, what really happens after 2010 is uncertain. One should for example not underestimate the ability of the Chinese government to realize its plans to significantly increase the (currently low) efficiency of energy use, manage traffic growth and diversify to alternatives like CTL. One should not underestimate the capabilities of the US to make itself less dependent from oil imports and reduce oil consumption with the implementation of a serious energy policy concerning supply and demand. The technical constraints in realizing current and new crude oil supply projects can diminish significantly in coming years, once technical capacities have been adjusted. We have seen that in past investment cycles. Moreover, the IEA doesn’t take into account the impressive potential of electric cars.
• The IEA doesn't correctly take into account speculative demand. It only admits that speculation can have a day-to-day impact on price moves. The facts presented by Masters and others in the US Senate hearings are essentially ignored. If, in the magnitude of 150B$ has been "invested" in oil via futures, indexes and other instruments over the past three years – up from close to zero before, that has had more than a day-to-day impact on prices. Such additional demand has lifted cash prices via all kind of arbitrage activities without immediately appearing in official (and only partially known) inventory data. The IEA has, by the way, only an incomplete view about what is going on in global oil inventories, as the agency has acknowledged. Following the Senate testimony of professor Greenberger, financial speculation currently accounts for 80% to 90% of trading volumes. Those who try to prove the contrary avoid looking at the unregulated markets, where the action takes place, and qualify the related activities of investment houses like Goldman Sachs as "commercial". The conclusion, that speculative demand and not consumer demand determines prices and price trends, is obvious.

If the price of oil is currently rising based on what might happen in 2013 or thereafter, the situation can only be characterized as a wild speculation.