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Bye, Bubble?
The Price of Oil May Be Peaking
Andrew Bary, Barrons
IT’S PERILOUS TO CALL THE TOP IN A BOOMING MARKET, but the price of oil may be peaking in the current range of $130 to $140 a barrel.
… In the next decade, oil indeed may hit $200 a barrel. But prices could fall to $100 a barrel by the end of this year if Saudi Arabia makes good on its pledge to increase production; global demand eases; the Federal Reserve begins lifting short-term interest rates; the dollar rallies, and investors stop pouring money into the oil market. China raised prices on retail gasoline and diesel fuel by 18% Thursday, in a move that is expected to curb demand.
It’s tough to know how much of the surge in crude-oil prices — up 40% just this year — reflects fundamental supply and demand, and how much is due to other factors, including the dollar, commodity speculation and interest from institutional investors. Like some others, we suspect the run-up was fueled by more than economics.
… The supply/demand argument for higher oil prices has some merit. “Name another commodity that has gone up two-and-a-half times in three-and-a-half years and the world hasn’t found a way to make more of it,” says Byron Wien, chief investment strategist at Pequot Capital Management. “The world isn’t finding oil fast enough to replace the 3% to 4% that gets pumped every year.”
Wien’s boss, Art Samberg, who heads the Westport, Conn.-based investment firm, stated in Barron’s midyear Roundtable, published last week, that the commodity bubble “isn’t going to burst. It’s going to continue to expand.” Older oil fields in Mexico and the North Sea are running dry while new sources in places like Kazakhstan and Brazil may prove difficult to bring on stream. In addition, oil increasingly is in the hands of government-run monopolies that may be more interested in maximizing future revenue than boosting current production.
(23 June 2008)
Related from Seeking Alpha:
Oil Bubble Breaking? Barron’s Outlines the Case, But the Argument is Weak
Barron’s Banks on $100 Oil
Why Is Oil So High? Pick a View
Jad Mouawad and Diana B. Henriques, New York Times
People who have spent their careers tracking the ups and downs of the global oil markets say their compasses are spinning. Oil prices rise for reasons they cannot quite fathom, and where prices will be a year from now has become, literally, anybody’s guess.
Those uncertainties have left regulators, oil companies and suppliers uncertain whether increases in supply or declines in demand will affect prices as they have in the past. Some wonder whether the market is broken in some way, creating a bubble of artificially expensive oil.
“This whole industry has absolutely been turned on its head,” said Stephen Schork, who edits an energy newsletter.
… A major factor behind the steady price rise, virtually everyone agrees, is that energy consumption is surging in high-growth countries, and oil supplies are not growing fast enough to keep up. But what confounds many experts is that the price of oil seems to be changing much faster than the world is changing.
… Many economists see a straightforward explanation for rising prices: Global oil supplies remain tight and there is a deep-seated fear that demand will outpace new production growth for years to come. In that climate, they say, the price will rise until it reduces global demand. But demand is still rising, even with oil at $134.62 a barrel.
The high price “doesn’t mean we have a shortage today, but it means there is a serious worry about a shortage three to five years from now,” said Adam E. Sieminski, the chief energy economist at Deutsche Bank.
That view – that market fundamentals are responsible for the price rally – is widely held among energy analysts.
(21 June 2008)
Briefing: OPEC and the soaring cost of oil
The Week Daily
As the price of oil hit an all-time high of $139 a barrel last week, some government officials pointed the finger at OPEC, the international oil cartel. Is OPEC the main culprit?
Is it fair to blame OPEC for the high price of oil?
To a degree. After all, the Organization of Petroleum Exporting Countries-a 13-nation body dominated by Saudi Arabia, Kuwait, and other Middle Eastern countries-was created with the express purpose of influencing prices. In the 1970s, it did in fact hold the world ransom by restricting supply. (See below.) The U.S. and other oil-consuming nations maintain that the cartel is once again driving up prices by limiting production, even though OPEC now controls only 40 percent of the world oil market, down from 70 percent in 1973. The U.S. House of Representatives has even called for the Justice Department to pursue antitrust and price-fixing charges against OPEC.
What does OPEC say in its defense?
OPEC members claim that most of them couldn’t supply more oil even if they wanted to, because they are already pumping at or near capacity. Only Saudi Arabia has substantial surplus capacity; yet when the Saudis, at President Bush’s behest, agreed recently to produce 300,000 extra barrels a day, global oil prices were barely affected. Last week, the Saudis agreed to an additional 200,000-barrel increase. In any case, OPEC insists that it’s not in its own interest to let oil prices rise uncontrollably.
(21 June 2008)
Oil’s Perspective on What’s Behind the Energy Crisis
Jad Mouawad, New York Times
AT a time of record gasoline costs and surging oil prices, oil companies are in an increasingly uncomfortable position. They are blamed by both the public and Congress for the current energy crisis, but complain about being hamstrung in their own search for energy sources.
Before heading to Saudi Arabia for an emergency energy summit this weekend, David J. O’Reilly, the chairman and chief executive of Chevron, spoke about why Congress should allow more access to offshore drilling in the United States and offered his explanation of why oil prices have jumped to record levels in recent months.
… Q. Many people are concerned about the issue of peak oil and the perception that the world is running out of oil has taken hold within investors. How do you respond to these concerns?
A. It is not so much the molecules in the ground that are a concern. The biggest problem is to provide adequate access to permit investment to occur in a timely manner. If you include the United States, this is a matter of access.
(21 June 2008)
Tiger in our tanks
Damien Murphy and Ben Cubby, Sydney Morning Herald
… Sydney petrol prices are riding a surge that last Monday saw the price of US light crude touch a record $139.89 a barrel. Another day, another record petrol price. It has been that way for six weeks. And somewhere, a butterfly beats its wings, the dominoes tumble, and chaos rains on distant landscapes.
… Record oil prices, together with fears about inflation and rising interest rates, have pushed Australian consumer confidence to a 16-year low.
… the oil price is a combination of fundamentals and speculation
… Tourism has already been hit with Qantas dropping poorly performing routes, and other sectors will hurt more.
But here’s the twist. The booming economies of China and India, which are helping to push demand for oil, are also sucking in imports of Australian commodities. This is firing the same Australian economy weighed down by soaring oil costs. Accelerator and brake, pulling in opposite directions.
… As petrol prices go stratospheric, the world is having to take seriously the prospect of running out of oil. Ian Dunlop says diminishing supply will continue to drive price. “The urgency of this is far greater than we’ve been led to believe,” says the convener of the Australian Association for the Study of Peak Oil.
(21 June 2008)
Nice round-up with insights into how the price spike is affecting Australia. -BA
