According to Energy Aspects, the reason for the further jump in prices will be
a drop in new production outside the U.S. shale patch. It’s a little hard to
buy that, however, if one remembers that there is 1.8 million bpd in production
capacity ready to be tapped again once OEPC and Russia taper their production
cuts. That alone should take care of the demand growth that the consultancy
predicts for this year. That is, unless it booms by 2 million bpd, which is the
top of the range forecast by Energy Aspects. But even then, the U.S. and Russia
alone could take care of it: The Russian state majors are itching to expand
production in eastern Siberia.
Of course, the likelihood of OPEC and Russia bringing all that production
online is highly debatable, as the partners in the cut deal seem still
determined to continue with the original plan. Nevertheless, the barrels are
there, so there’s no urgent need for actual new production yet. However, if
global demand grows so much so quickly, does anyone have any doubts that the
new, expanded oil cartel will be flexible enough to make the best of the
So how likely is this demand growth? According to Energy Aspects, there is
currently "no real drag on demand growth." The global economy is in
growth mode, which lends strong support to the price momentum, and the
short-term forecasts for the top consumers of crude oil are all bullish. Yet,
there’s one potential drag: prices.
Here’s what Bloomberg Gadfly’s Julian Lee says
: "Rising prices can have a chilling effect on
demand growth, and benchmark crude prices have risen more than 55 percent since
their rally started in June. End-user retail prices are feeling this."
But that’s not all. While Lee acknowledges that higher prices at the pump will
affect demand in Europe and North America, the effect of more expensive fuels
will be much more palpable in developing nations, which are the main drivers of
global growth, after all. There, Lee notes, governments used the oil price
slump to reduce fuel subsidies, and now that prices have started climbing up
again, the end-user price jump will be much higher. This will inevitably
interfere with economic activity, potentially undermining that growth everyone
is talking about.
And then there’s gas — the bridge fuel, the alternative. Both countries and oil
majors are investing a large percentage of total capex in natural gas
production and infrastructure, with China as the best example. Gas is cheap,
the market is oversupplied and unlikely to swing into a deficit anytime soon,
given the number of large-scale LNG projects in Australia coming online. True
gas-fueled cars are few, and car fuels account for the biggest portion of oil
demand. But higher prices are higher prices. Too high, and people start using
public transport if it’s available.
But let’s forget about prices at the pump and the switch from oil to gas. Let’s
talk about that economic growth that the IMF forecast in its latest World
Economic Outlook and that so many consultancies are also predicting. There are
voices being heard — including from the IMF itself — that the next recession is
not far away.
In fact, according to some, such as Forbes' Michael Lynch, a recession
is pretty close by. Lynch uses an indicator he
calls "more money than brains" to anticipate recessions. Describing
it as "conspicuously ridiculous consumption", he exemplifies it with
the current fad of raw water. He also notes that the U.S. stock market is at
historic highs. It is time for a correction, Lynch says, and he is not the only
one. With a correction in stock markets and a slowdown in the economy of the
world’s largest consumer, what are the chances of Brent hitting $100 a barrel?