Did You Know There's a World Surplus of Crude Oil?:
Did You Know There's a World Surplus of Crude Oil?: David Pauly
Aug. 16 (Bloomberg) -- Maybe the markets are lying. Crude oil keeps trading at $70 a barrel or more, where it's been pretty much since mid-April. U.S. gasoline costs on average about $3 a gallon, enough to make you think about walking. Still, there's a world surplus of crude oil.
Analysts say production of the low-sulfur crude refiners prefer now exceeds global demand by about 1 million barrels a day, equal to about 1.2 percent of consumption.
While basic economics suggest oil prices should be declining, Charles Maxwell, oil analyst at Weeden & Co. in Greenwich, Connecticut, says the surplus has done its work by keeping crude from soaring beyond the record $78.40 it hit last month.
Since last spring, when there was no surplus, he points out that Nigerian output has been reduced by civil unrest, Venezuela and Iran have both cut production and BP Plc has found a leak in its Alaska pipeline. If that had been foreseen, ``you would have predicted $90 oil,'' says Maxwell.
Oil prices per barrel may actually decline into the $60s next spring, when supplies usually become more abundant, if U.S. economic growth continues to abate, Maxwell says.
He says there is anecdotal evidence that industry and individuals are starting to conserve energy. Another reason why crude prices might fall: ``We're running out of bad things that can happen.''
Funds Out?
Earlier this week, Ben Dell, an analyst at Sanford C. Bernstein & Co. in New York, said crude prices were ripe to fall considerably because of the surplus -- and because buying of oil by pension funds and hedge funds may be ending.
These funds have been able to buy crude on the spot market and sell it for future delivery at a higher price. The storage facilities needed to accommodate these trades will fill up in four to six months and they will have to end, Dell said.
Crude oil, at $73.05 a barrel yesterday in New York, would be about $50 a barrel based simply on production costs, the Bernstein analyst said. The rest is due to increased investor interest and concerns about supply disruptions for political or military reasons.
I have a hunch that the price of oil -- which was about $10 a barrel as recently as 1998 and which traded between $20 and $40 in 2002 and 2003 -- may soon drop even more than the experts think possible. Analysts, though, make a good case for relatively high prices staying with us.
Lack of Vision
The emergence of huge economies in China and India, for instance, has increased world demand for oil significantly while capacity to produce oil hasn't kept up.
It became evident in 2000 that oil consumption would increase and the major publicly held oil companies should have doubled their spending for increased production, says Maxwell, who began working in the oil industry in 1957. They didn't. ``You can lay this at their doorstep,'' he says.
Exxon Mobil Corp. has spent tens of billions of dollars buying back its shares, Maxwell says, money that would have reaped additional profit if it had been spent on production capacity.
National oil companies, which control the lion's share of world production, didn't expand capacity either, Maxwell says, because they didn't get enough money from their governments and because they turned away private investment by tough bargaining.
Maxwell predicts the price of crude will be between $55 and $75 for the next two years -- mostly in the $60s -- and people will adjust to the higher level. I'd still like to see $45 oil, but maybe this is the best we can hope for.
(David Pauly is a columnist for Bloomberg News. Opinions expressed are his.)
To contact the writer of this column:
David Pauly in Normandy Beach, New Jersey
dpauly@bloomberg.net
Last Updated: August 16, 2006 00:04 EDT
Aug. 16 (Bloomberg) -- Maybe the markets are lying. Crude oil keeps trading at $70 a barrel or more, where it's been pretty much since mid-April. U.S. gasoline costs on average about $3 a gallon, enough to make you think about walking. Still, there's a world surplus of crude oil.
Analysts say production of the low-sulfur crude refiners prefer now exceeds global demand by about 1 million barrels a day, equal to about 1.2 percent of consumption.
While basic economics suggest oil prices should be declining, Charles Maxwell, oil analyst at Weeden & Co. in Greenwich, Connecticut, says the surplus has done its work by keeping crude from soaring beyond the record $78.40 it hit last month.
Since last spring, when there was no surplus, he points out that Nigerian output has been reduced by civil unrest, Venezuela and Iran have both cut production and BP Plc has found a leak in its Alaska pipeline. If that had been foreseen, ``you would have predicted $90 oil,'' says Maxwell.
Oil prices per barrel may actually decline into the $60s next spring, when supplies usually become more abundant, if U.S. economic growth continues to abate, Maxwell says.
He says there is anecdotal evidence that industry and individuals are starting to conserve energy. Another reason why crude prices might fall: ``We're running out of bad things that can happen.''
Funds Out?
Earlier this week, Ben Dell, an analyst at Sanford C. Bernstein & Co. in New York, said crude prices were ripe to fall considerably because of the surplus -- and because buying of oil by pension funds and hedge funds may be ending.
These funds have been able to buy crude on the spot market and sell it for future delivery at a higher price. The storage facilities needed to accommodate these trades will fill up in four to six months and they will have to end, Dell said.
Crude oil, at $73.05 a barrel yesterday in New York, would be about $50 a barrel based simply on production costs, the Bernstein analyst said. The rest is due to increased investor interest and concerns about supply disruptions for political or military reasons.
I have a hunch that the price of oil -- which was about $10 a barrel as recently as 1998 and which traded between $20 and $40 in 2002 and 2003 -- may soon drop even more than the experts think possible. Analysts, though, make a good case for relatively high prices staying with us.
Lack of Vision
The emergence of huge economies in China and India, for instance, has increased world demand for oil significantly while capacity to produce oil hasn't kept up.
It became evident in 2000 that oil consumption would increase and the major publicly held oil companies should have doubled their spending for increased production, says Maxwell, who began working in the oil industry in 1957. They didn't. ``You can lay this at their doorstep,'' he says.
Exxon Mobil Corp. has spent tens of billions of dollars buying back its shares, Maxwell says, money that would have reaped additional profit if it had been spent on production capacity.
National oil companies, which control the lion's share of world production, didn't expand capacity either, Maxwell says, because they didn't get enough money from their governments and because they turned away private investment by tough bargaining.
Maxwell predicts the price of crude will be between $55 and $75 for the next two years -- mostly in the $60s -- and people will adjust to the higher level. I'd still like to see $45 oil, but maybe this is the best we can hope for.
(David Pauly is a columnist for Bloomberg News. Opinions expressed are his.)
To contact the writer of this column:
David Pauly in Normandy Beach, New Jersey
dpauly@bloomberg.net
Last Updated: August 16, 2006 00:04 EDT
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