Kurt Brouwer April 29th, 2008
This is an interesting report that takes a contrarian stance on the future for oil. It’s from domain-b.com, which is India’s biggest online business magazine [emphasis added]:
Oil Bubble Will Soon Burst, Says Lehman Report (Domain-b.com, April 25, 2020)
The oil boom is on its last leg and may last a few months before a clutch of new refineries start operations amid slackening economic growth across the world, consultancy firm and investment bank Lehman Brothers has predicted in a report.
The report said supply is in fact outpacing demand growth even as inventories have been building up for quite some time now. This announcement must surely come as a huge relief for consumers reeling under high oil prices for some time now.
I like the strong position statement in this piece. It challenges the conventional wisdom that oil prices are going to go up much more than they have.
Tellingly, this news comes only two days after Thomas Boone Pickens, an American billionaire who made a fortune in oil speculation, predicted that oil could reach the $150 mark soon. Justifying his stance, he had said that the current global oil supply of 85 mbpd was well short of the requirement of 87 mbpd. “When you have 85 billion to cover 87 billion, the price has to go up,” he said.
”Inventories have been building since the beginning of the year. We have pretty significant projects starting soon in Saudi Arabia, and large off-shore fields in Nigeria,” said Michael Waldron, the US bank’s oil analyst.
Saudi Arabia has started production at its 500,000 barrels per day Khursaniya field while the new 1.2 million barrels per day (mbpd) Khurais field will start next year, the report pointed out.
Saudi Arabia plans to spend $90 billion in oil exploration and production over the next five years, lifting capacity to 12.5 mbpd by the end of 2009 while a clutch of new refineries will add almost eight mbpd of new capacity by 2010, the report pointed out..
Reliance Petroleum’s 600,000 bpd refinery at Jamnagar in India also featured in the report. The facility is to be tested by trial runs in July and expected to be commissioned in September.(See: Reliance plans trial runs at Jamnagar refinery in July)
However, the report makes no mention of the planned capacity addition which will double the amount of oil refined per day, from 0.6 mbpd to 1.2 mbpd. This would effectively catapult it from the estimated third position to the top of the oil refining stakes. This was asserted by H R Meswani, executive director of Reliance Industries Ltd (RIL), back in 2006, when the company was scouting for funds for the project.(See: Reliance Petro may borrow up to $2 billion for refinery expansion)
The build-up in supply comes at a time of cooling world demand. Recession in the US is expected to curb consumption by 300,000 bpd this year.
Americans are changing their driving habits in the face of sky-high prices. I saw a recent report that, as a result, demand for gas has fallen by several percent.
…Lehman also trimmed its forecast for global growth from 1.5 mbpd to 1.1 mbpd, predicting a slide in prices to $83 next year and $70 to $80 in 2010 . This was very much in contrast to the five-fold increase in prices that oil has seen over the last half a decade.
Drilling costs have even started to fall with the levelling of oilfield machinery and maintenance costs. These are all time-honoured signs that the cycle may have topped, it pointed out.
The report blamed the price spike on a $40 billion inflow into commodity index funds this year, much of it from Middle East sovereign wealth funds - the petro-investors may have second thoughts about gaining ”double exposure” to commodity prices.
”Financial flows have been the marginal driver of prices since the onset of the credit crunch. Investors are using oil as a hedge against inflation and a falling dollar,” the report said.
The index effect has lifted prices by $20 to $30 a barrel. This could reverse sharply once the dollar starts to stabilise against the euro, since the euro/dollar exchange has become the proxy watched by oil traders for signals, it said…
Nothing grows to the sky and no price trend — in any market — goes up forever. So, oil prices will stabilize at some point when supply and demand are in balance. That is something that is indisputable. The key question is when will this happen and what will be the catalyst. This piece takes the position that new oil fields and new and expanded refineries mean that supply is going up, while demand falls.
Falling demand certainly will have an impact. Another important factor is the dollar. It does not have to strengthen dramatically against the Euro, but a modest uptick will change the dynamics of speculative trading in commodities such as oil.