Wednesday, May 20, 2009

Why the Oil Spike?

The Poor Explanation (i.e. a current supply issue)

Reuters:

U.S. crude oil futures rose more than $2 per barrel on Wednesday, pushing to a 2009 front-month intraday peak above $62 a barrel as the government reported crude oil and gasoline inventories fell last week.
We've heard this with every release. Inventory build? It was less than expected. Inventory fall? Demand spiked in the short-term. Uh... no. Supply has risen dramatically over the past six months with a SLIGHT fall (can't hardly see it) last week.



The Better Explanation

WSJ:

Energy investment is "plunging" because of the recession, paving the way for oil-price surges within three years, the International Energy Agency warned in a new report.

The Paris-based watchdog for the world's major energy-consuming nations said that in recent months, oil companies and investors have canceled or postponed about $170 billion of investment equivalent to roughly two million barrels a day in future oil supply.

An additional 4.2 million barrels a day in future oil-supply capacity has been delayed by at least 18 months as companies slash spending.

And the Counter-Argument (i.e. the run up has just been speculative)

Individual Global Investor:

Supply stabilizing but demand is still falling. The cross over point in mid 2008 was reached partially because of increased supply but also because U.S. demand consumption, which had peaked in December 2007, began a decline that has yet to cease. Since that period, the world has been in a steady decline as one region after another throughout 2008 peaked in their consumption of energy. Supply has been curtailed, mostly by OPEC output cuts but demand has continued to fall faster.

As reported last week, OPEC supply is no longer falling yet the demand outlook from the International Energy Agency continues to weaken. Oil producers once before tried to hold production constant last November in the face of falling demand and rising inventories. What followed was a sharp drop in crude oil prices from the low $50/bbl range to a recent low of $32/bbl in the final week of the year.

Source: EIA