Oil Prices Are Not Going to Spike Again Just Yet
The party isn't over -- at least not yet.
For the last year, relatively low oil prices have helped us all cope with the economic collapse. We've paid less for gasoline than we have for years. And businesses have paid less for running their factories, planes and product transportation.
But last week we began hearing the music die down and waiters moving guests out the door. The trigger was crude oil surging through the $80-a-barrel barrier for the first time since September 2008. Goldman Sachs, among others, said the hike is a signal of even higher prices going forward. Goldman predicts an average of $110-a-barrel oil next year.
Here's one big reason why the bulls so predict: Global oil exploration and production have dropped, and when economies rebound there will be a shortage. Hence prices are bound to rise. In the U.S., for instance, exploration is down 27.8% from a year ago, with 309 rigs actively drilling, compared with 428 at this time in 2008, according to the Baker Hughes Rig Count. Abroad, there are 8% fewer rigs drilling than there were a year ago—764, down from 831.
Of course, at some point these fellows will be correct -- global economics will gradually improve, and oil and gasoline prices will rise. But as numerous other analysts tell me, there are numerous reasons to expect oil prices to stay where they are, or even drop, for the next year or two.
When oil prices rocketed past $140 last year, the cause lay mostly with speculative dollars capitalizing on the supply-demand balance: There was virtually no spare production capacity anywhere in the world, so that any supply disruption, such as hurricanes in the Gulf of Mexico and the routine militant attacks in Nigeria, pushed prices up. Taking advantage of the tight market, a wide swath of investors including university endowments, investment funds and small investors piled in to funds holding oil futures, driving the price up.
But the situation is different now. Saudi Arabia has added a huge volume of fresh production capacity since last year. Globally, oil producers can produce 6.7 million more barrels a day than they actually sell, according to the International Energy Agency; Saudi Arabia accounts for 3.8 million barrels, or 56%, of the total.
And why aren't the Saudis and others running their oil rigs at full-capacity? Because there's a huge volume of crude already sloshing around the world. New U.S. government data shows that the U.S. stockpile of oil rose by 800,000 barrels in the latest week, and stored gasoline by 1.6 million barrels. All in all, U.S. crude inventories stand at around 340 million barrels, up 27% from a year ago, reports the U.S. Energy Information Administration. In addition, since mid-September the Strategic Petroleum Reserve has exceeded 725 million barrels, a 27-year record. Together, that's about 118 days of U.S. oil imports.
In fact, there's such a global glut that there's almost no place on land to put all the oil. An estimated 125 million barrels' worth are floating around on tankers scattered over the globe, according to the Organization for Petroleum Exporting Countries. Normally, a negligible amount of oil is being stored offshore in ships.
Much of that oil would have to be drawn down before any big price spike takes place.
The main driver of last week's price runup was the weak dollar -- since March, the dollar has fallen 15% in inflation-adjusted value compared with a basket of currencies of its major trading partners. Traders have sought to cushion the fall in the value of the dollars they are holding by buying futures in traditional safe havens. While oil prices have surged by 71% since March, gold has also soared this year by more than 20%, to more than $1,000 an ounce.
But for the last few days, the dollar has hardened up. And oil prices are back down. Today, they fell to $77.46 a barrel.
Maestro, more music please.
For the last year, relatively low oil prices have helped us all cope with the economic collapse. We've paid less for gasoline than we have for years. And businesses have paid less for running their factories, planes and product transportation.
But last week we began hearing the music die down and waiters moving guests out the door. The trigger was crude oil surging through the $80-a-barrel barrier for the first time since September 2008. Goldman Sachs, among others, said the hike is a signal of even higher prices going forward. Goldman predicts an average of $110-a-barrel oil next year.
Here's one big reason why the bulls so predict: Global oil exploration and production have dropped, and when economies rebound there will be a shortage. Hence prices are bound to rise. In the U.S., for instance, exploration is down 27.8% from a year ago, with 309 rigs actively drilling, compared with 428 at this time in 2008, according to the Baker Hughes Rig Count. Abroad, there are 8% fewer rigs drilling than there were a year ago—764, down from 831.
Of course, at some point these fellows will be correct -- global economics will gradually improve, and oil and gasoline prices will rise. But as numerous other analysts tell me, there are numerous reasons to expect oil prices to stay where they are, or even drop, for the next year or two.
When oil prices rocketed past $140 last year, the cause lay mostly with speculative dollars capitalizing on the supply-demand balance: There was virtually no spare production capacity anywhere in the world, so that any supply disruption, such as hurricanes in the Gulf of Mexico and the routine militant attacks in Nigeria, pushed prices up. Taking advantage of the tight market, a wide swath of investors including university endowments, investment funds and small investors piled in to funds holding oil futures, driving the price up.
But the situation is different now. Saudi Arabia has added a huge volume of fresh production capacity since last year. Globally, oil producers can produce 6.7 million more barrels a day than they actually sell, according to the International Energy Agency; Saudi Arabia accounts for 3.8 million barrels, or 56%, of the total.
And why aren't the Saudis and others running their oil rigs at full-capacity? Because there's a huge volume of crude already sloshing around the world. New U.S. government data shows that the U.S. stockpile of oil rose by 800,000 barrels in the latest week, and stored gasoline by 1.6 million barrels. All in all, U.S. crude inventories stand at around 340 million barrels, up 27% from a year ago, reports the U.S. Energy Information Administration. In addition, since mid-September the Strategic Petroleum Reserve has exceeded 725 million barrels, a 27-year record. Together, that's about 118 days of U.S. oil imports.
In fact, there's such a global glut that there's almost no place on land to put all the oil. An estimated 125 million barrels' worth are floating around on tankers scattered over the globe, according to the Organization for Petroleum Exporting Countries. Normally, a negligible amount of oil is being stored offshore in ships.
Much of that oil would have to be drawn down before any big price spike takes place.
The main driver of last week's price runup was the weak dollar -- since March, the dollar has fallen 15% in inflation-adjusted value compared with a basket of currencies of its major trading partners. Traders have sought to cushion the fall in the value of the dollars they are holding by buying futures in traditional safe havens. While oil prices have surged by 71% since March, gold has also soared this year by more than 20%, to more than $1,000 an ounce.
But for the last few days, the dollar has hardened up. And oil prices are back down. Today, they fell to $77.46 a barrel.
Maestro, more music please.
Labels: goldman sachs, oil prices, super spike
4 Comments:
The US has about five days of commercial crude oil inventories in excess of the minimum operating level of about 270 mb.
But in any case, focusing on US inventory numbers is akin to the old joke about the drunk looking for his keys below a streetlight late at night, because the light was better there, even though he had lost his keys down the street. Weak US--and overall OECD--demand is a not a new story, but most of the growth in consumption in recent years has been in non-OECD countries.
The fact remains that current oil prices have doubled since hitting a post-2008 monthly low of $39 in February, and the current price of oil is higher than all average annual prices prior to 2008. I think that we are in the process of transitioning from voluntary + involuntary reductions in net oil exports this year to mostly involuntary reductions in net oil exports next year.
Hey Jeff. Going by your stated metric -- the volume above what's needed to keep pipelines and refineries in working order -- the U.S. has about 23 days of inventory on land (http://tonto.eia.doe.gov/dnav/pet/pet_sum_sndw_a_EPC0_VSD_days_w.htm).
In addition, there are the 14 days of supply offshore. Plus the Strategic Reserve, which Obama may be much less reluctant to wielding than did his predecessor.
(On this point, is there a standard minimum operating volume for oil? I don't find that metric at EIA or elsewhere, apart from your September 2007 piece on The Oil Drum. Separately, I wonder whether such a figure might be affected by the drop in capacity utilization in oil refineries in the two years since from 90% to 81% as some refineries have stopped working altogether.).
What explains the spike to $147 and the plunge to $32? Both clearly were overshoots; $147 was unreasonably high, and $32 unreasonably low. As you suggest, the highest average oil price when you exclude 2008 was $72 a barrel the previous year. So we are within a reasonable range of that historically high average.
Yet there is a key difference between then and now -- that is oilfield finding risk and costs. Both are much, much higher. So that arguably the "right" price all things being equal may have shifted up.
Whatever the case, I myself agree with those who see the big story in Asia -- if oil demand does not take off at the expected trajectory in China over the next decade or so, those inventories could be sloshing around for some time.
Thanks for the comment.
IMO, commercial crude oil inventories between about 300 and 350 mb, i.e., between about two days and five days of supply in excess of MOL, are basically just noise.
Clearly, we had a decline in demand, but the EIA is putting the overall annual decline in worldwide demand at only about 2% in 2008 versus 2007.
Our best case is that the (2005) top five net oil exporters post-2005 cumulative net oil exports will be more than 50% depleted in 2013--four years from now. I think that this is the primary factor driving oil prices.
Closer to home, our three closest sources (and three of our four largest sources) of imported oil--Canada, Mexico & Venezuela--have shown a 20% drop in net oil exports, just from 2004 to 2008.
Let's leave aside the peak oil stuff for now (clearly you much discount the Saudis). The U.S. imports 9 mbd. If we accept your IMO number, you get about 200 mb in excess. So 23 days of U.S. supply if you count the stuff on ships. Are you talking about global demand?
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