Oil hits another record high as the outlook gets worse: Kohler

There was some understandable confusion with acronyms this morning as reports sought to attribute the latest rise in the oil price, which rose above $US144 overnight.

Some said it was because of a new report from the IEA (International Energy Agency) that, among other things, predicted that spare OPEC capacity would shrink by 2013 and keep the market tight.

Others said it was because of an EIA (US Energy Information Administration) report last night that US crude oil stocks had fallen by two million barrels last week, or 800,000 barrels more than the figure pencilled in by analysts ahead of the release.

The cause of the price jerk was probably a combination of the reasons put forward by those three vowels. Then again perhaps it was some short covering by hedge funds as the credit markets tighten up again.

The EIA is one of those bodies whose existence helps explain why the US budget is in deficit. It was created in 1977 and is now a large bureaucracy that collects and publishes oil and petroleum data from around the country for the purpose, it seems, of giving commodity futures brokers something to tell traders to prompt them to trade.

Last night’s weekly report showed that US oil stocks fell from 301.8 million barrels to 299.8 million barrels. This is down from 354 million barrels a year ago and from 311.6 million in May, so the US is definitely running lower than usual on crude oil.

But then again, the same report showed that gasoline stocks are up from 208.8 to 210.9 million barrels, apparently because Americans are responding to higher prices by not driving so much.

In the lead up to the 4 July holiday weekend, prices in the US are at around $US4.092 a gallon, according to the American Automobile Association, which, by the way, equals around $1.13 a litre – so petrol is another way in which Australians are being screwed (in addition to housing costs).

The IEA’s ‘Medium-Term Oil Market Report’ cost $US500, which was beyond Business Spectator’s modest budget, but thankfully one of its authors, Lawrence Eagles, put out a press release and made a speech about it – it’s available on the IEA website.

The nub is that the IEA forecasts supply growth from a concentration of new projects during 2008-2010 is expected to see potential spare capacity to rise by four million barrels a day. “However, this expansion slows from 2011 onwards when global demand growth recovers, leading to a narrowing of spare capacity to minimal levels by 2013.”

The IEA says that global average decline in supply is now 5.2% a year, up from 4% last year, and that project delays are now averaging 12 months.

Demand, meanwhile is forecast to grow by 1.6% a year to 2013 – all of it in non-OECD countries like China. Not that anyone really has much clue about this, let’s face it – a month ago it was reported that Chinese oil demand actually fell 3.9% over the past 12 months, which means China is not responsible for this year’s price rise.

To sum up; the oil market last night was either moved by a week’s worth of stats of US oil stocks, or a five-year global capacity forecast, or a bit of both.

At least the EIA stats on US stocks have the advantage of being real, but as the IEA forecasts, there is vast uncertainty about the shape of oil demand and supply curves five years out.

For example the Goldman Sachs analysts who famously predicted a super spike in the price to $US200 a barrel this year, are also predicting that the price will fall back to $US75 a barrel by 2012.

BG Group CEO Frank Chapman told me on the ABC last week that he thinks of a price around the mid-50s is sustainable “if you take away all of the anxiety”.

Meanwhile Marc Faber, publisher of the Gloom, Boom and Doom Report, was quoted on Bloomberg this morning predicting that demand for industrial commodities, including oil, will fall because the financial sector is in disarray and the US economy will continue to slump. Although according to Faber “even $US200 is possible if they go and bomb Iran”.

Actually a Goldman Sachs research note last night probably got the reason for last night’s record oil price most right: “The short side of the market has… to cover in response to deleveraging and decreasing credit terms.”

In other words, banks are asking for their money back again, so hedge funds have had to cover their shorts, and they covered their covering with wise-sounding words from the EIA and the IEA.

This article first appeared on Business Spectator

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