Category Investments

Brain surgeons?

12 October 2004 Angelo Coppola

The oil price continues to set new record highs, with speculators continuously finding new reasons why it would go even higher.

Neels van Schaik at PSG Fund Managers says that one does not need to be a brain surgeon to figure out that an oil price above $50 per barrel is bad for global growth, even though we haven't seen any significant impact on inflation yet.

The speculators are, however, focusing on the news flow that drives energy prices in the short term.

Based on that there are good reasons why the oil price should probably be at current levels, but the question is how many of these factors are sustainable over the long term.

Although production in the Gulf of Mexico is almost 30% below capacity due to Ivan's presence a few days' ago, one has to bear in mind that these cyclones are also seasonal.

Nigerian rebels threatening to sabotage oil infrastructure in Nigeria can surely not be seen as a long-term threat to the oil price.

Maybe I'm naïve, but also living in Africa makes me think the government will either shoot the rebels or do a deal with them.

I agree that Iraqi production may still be a long shot from full capacity, but the world has been getting on without it for months before the recent run-up in the oil prices.

OPEC has made it quite clear during the last few weeks that the market remains adequately supplied. The statistics according to the International Energy Agency indicates that demand is growing at quite a rapid pace, but so is supply.

OPEC has indicated that it can supply another 1 million barrels per day into the market during the next quarter if it is required.

The biggest long-term driver of the oil price remains the China factor, which is currently growing demand at 8.6% year-on-year.

Part of this rapid growth is the building of the country's strategic stock pile.

The market is estimating that China is looking at a strategic oil reserve of 90 days, which means that they will be a looking at accumulating around 600 million barrels of oil.

Lack of refining capacity is often seen as a driver of oil prices. This argument is, however, difficult to buy, seeing that refining capacity has an impact on refining margins and end-product prices rather than the crude price.

Oil has run ahead of the demand-supply fundamentals and the current trend has indeed drawn a lot of speculative attention, which I expect will unwind in due course.

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