Will oil prices stabilize around $80?
Most commentators and oil analysts are convinced a further rise in prices is inevitable in the next few years as emerging market consumption grows and supplies increasingly come from more costly and technically challenging sources such as ultra-deepwater.
While there are disagreements about the extent and the timing of price changes, there is a remarkable degree of consensus about the direction: up. But the roller-coaster experience of the last five years should have taught forecasters to be much more cautious about extrapolating trends and assuming the future direction is obvious.
Price forecasts are notoriously unreliable. There are simply too many variables and too much uncertainty about the current state of the market let alone how supply and demand will evolve in future. The crucial role of expectations in price formation adds an element to “reflexivity” which is hard for forecasters to anticipate or model accurately.
Reflexivity is a concept attributed to billionaire financier George Soros, in which perceptions of market direction and market fundamentals influence one another.
Forecasters’ confidence prices can only increase in future seems misplaced. On closer inspection, many of the factors which make price rises seem inevitable are flawed or unpersuasive. At present there are no fundamental reasons oil prices must increase above the current level of around $80 per barrel in real terms (once inflation and exchange rate changes are taken into account). Nor is there any reason to expect a spike in prices similar to 2008.
Prices have remained stable in a relatively narrow range of $65-85 for more than 12 months. While prices are unlikely to stay at this level forever, there is no compelling reason to expect the next move to be higher than lower, or for the current trading range to break down in the short to medium term. Risks to the outlook appear balanced, as they should be if the market is discounting expectations properly.
SHORT-TERM OUTLOOK In its November Oil Market Report (OMR), the International Energy Agency (IEA) attributed the spike in late 2007 and the first half of 2008 to a combination of factors — including strong demand growth; constrained supply; tight spare capacity; and a mismatch between crude oil supply, refining capacity and product specifications; as well as fears about peak oil and growing interest in commodities as an asset class.
Sustainable oil price is $70-90: ESAI
(ESAI, Energy Security Analysis Inc, is a Massachusetts-based energy consultancy. The opinions expressed here are those of ESAI.)
The crisis is over, economies all over the world are recovering, record unemployment is slowly subsiding, and oil demand is growing. The logical question now is where will oil prices go from here? The question is not what the price of oil should be, as discussed at last month’s International Energy Forum. Likewise, it is not what is the equilibrium price.
Equilibrium price is a concept, offered by classical economists, which asserts that there is a price at which supply and demand balance. Price behavior, especially in recent years, has proven that this is an overly simplistic and unworkable concept for the oil market. There is never a point in the global oil market when supply equals demand, and thus there is no such thing as an equilibrium price. The right question is what is the fundamentally sustainable price?
The distinction between equilibrium and sustainability is important.
Equilibrium implies perfection and stability, ideas that are not endemic to the modern global oil market. Sustainability is a created word from the environment community that implies the ability to maintain or endure. Whereas equilibrium suggests certainty, sustainability suggests survival amidst uncertainty.
The difference between a market that is perfect and stable and one that endures has implications for forecasting. In short, it is foolhardy to try to project an equilibrium price, but identifying a fundamentally sustainable price range is a useful endeavor.
So, in answer to the question, what is the fundamentally sustainable price, the answer is not a number. It is a price range within which prices are likely to move for some time based on expected overarching supply/demand fundamentals.
Oil at any price is not sustainable. Neither is coal. The threat that fossil fuels present to the environment is staggering. Not only do they contribute to global warming but the process of extraction and use can cause catastrophic destruction. Let us not forget the Exxon Valdez, Kingston Tennessee fly ash spill and the current BP Gulf disaster.
Anything but oil
– John Kemp is a Reuters columnist. The views expressed are his own —
As OPEC ministers meet in Angola this week, they can congratulate themselves on a brilliant piece of market management.
Quick decision-making and aggressive output cuts over the last 18 months have stabilised prices at their highest level in real terms since the early 1980s. And this despite the deepest recession since World War Two.
The cartel has had plenty of help. Cheap liquidity from central banks has helped finance inventories, while continued enthusiasm from the investment community has encouraged the market to look past weak short term fundamentals and concentrate on the possibility of renewed price increases in future.
Ministers, led by Saudi Arabia’s Ali Naimi, can claim a large share of the credit: delivering timely and reasonably effective output cuts, limiting the stock build, and giving investors a reason to remain bullish.
But the body faces bigger problems as an “anything but oil” agenda swells with developed countries pursuing green agendas and seeking to insulate themselves from volatile markets.
Fears about the availability and environmental costs of combusting refined products have forged an unlikely alliance between the national-security right and environmental left around that agenda. It prioritises the use of other fuels (gas, coal, electricity, nuclear, renewables and biofuels) and new technologies (solar, liquefaction, carbon capture and storage) in preference to oil.
OPEC appears to concur on the danger posed by permanent demand destruction:
According to the Financial Times today, the cartel on Tuesday said high prices and the economic crisis had triggered a shortfall in demand among members of the Organisation for Economic Co-operation and Development, the rich countries’ club.
“The crisis appears to have induced a permanent loss in oil demand in OECD and slower rate of growth in non-OECD, due to policy measures and changes in consumer behaviour,” the cartel’s economists told ministers in a presentation.
NYMEX oil benchmark again in question
– John Kemp is a Reuters columnist. The views expressed are his own –
The record differential between the front-month and more liquid second-month contracts at expiry last week once again raised pointed questions about whether the NYMEX light sweet contract is serving as a good benchmark for the global oil market, or sending misleading signals about the state of supply and demand.
The expiring January 2009 contract ended down $2.35 on Friday at $33.87, while the more liquid February contract actually rose 69 cents to settle at $42.36 – an unprecedented contango from one month to the next of $8.49.
Criticism of the contract is not new, and past calls for reform have been successfully sidelined. But with policymakers taking a keener interest as a result of wild gyrations in oil prices this year, and a continued focus on regulatory changes to improve market functioning in future, there is at least a chance changes will be adopted as part of a wider package of futures market adjustments. AN UNREPRESENTATIVE PRICE
During the surge to $147 per barrel earlier this year, OPEC repeatedly criticized the NYMEX reference price for overstating the real degree of tightness in the physical market and causing prices to overshoot on the upside.
While rallying NYMEX prices seemed to point to an acute physical shortage and need for more oil, Saudi Arabia could not find buyers for the 200,000 barrels per day (bpd) of extra oil promised to U.N. Secretary-General Ban Ki-moon or the 300,000 bpd promised to U.S. President George Bush in June.
Bizarrely, rather than acknowledge there was something wrong with the reference price, some market participants suggested Saudi Arabia should increase the already large discounts for its physical crude to achieve sales in a market that clearly did not need the oil, and was not paying enough contango to make storing it economic (contango is where the futures price is above the spot market).
Major oil companies are masters at gaming the price of oil.
I wonder why you rely on NYMEX numbers.
It’s funny how after the price of oil dropped, several major oil refineries suddenly needed routine maintenance…..there was no issue of maintenance when oil was $140 per barrel.
Please, try to convince me there is no collusion. I’ll bet you $140 that you can’t.
The truth is Mr. Kemp, a relatively small number of traders (maybe 6-10 people) control the price of oil for the entire world. There is no ‘natural’ price of oil, as with other commodities. It is set by those few people.
Stop talking boards. You should know better when it comes to oil.
Your article gives too much attention to public oil trading, and too little to who controls it.
Does anyone want to buy shares in Madoff Securities? 10% return per year. Guaranteed.
In China, OPEC’s nightmare comes true
– John Kemp is a Reuters columnist. The opinions expressed are his own –
China’s decision to link domestic fuel prices indirectly to the international crude oil market, subject to a price cap, while hiking the consumption tax on gasoline and diesel and phasing out a variety of road tolls and other fees shows Saudi Arabia’s worst fears about high prices and demand destruction are starting to come true.
It seems likely to confirm the kingdom’s determination to see prices stabilize around $75 per barrel, well below recent price peaks, and far below the level sought by some other OPEC members, as well as international oil companies and advocates of alternative energy.
China is among the world’s most inefficient users of energy, measured in terms of BTUs consumed per dollar of GDP produced.
Since China’s economy is one of the largest and fastest growing, and heavily reliant on imported crude oil, China has been hit harder than any other country by the recent surge in oil and energy prices.
Rising energy prices have worsened the country’s terms of trade, and threaten the viability of much of the industrial base (including the power-intensive steel and aluminum industries).
The central government has made reductions in energy consumption per unit of output a top priority. Policymakers have used investment controls and other administrative measures to try to limit the expansion of energy-intensive industries aimed at producing primarily for export.
Hei,
I am very interested in Energy Trading ( Crude, Natural gas, etc). Also want to make a career out of this. Please do recommend the course of action i must pursue. I will really appreciate your help.
Thanks
NESSE