PARIS (ResourceInvestor.com) -- When this column turns away from baiting peak oil nihilists - and it is not hard - we often like to take a look at the market for crude oil. As you know we like to throw in a prediction now and again, our current one being that the WTI price at Cushing in the U.S. will fall to $66.60 at Christmas.
We based that thought on the general motivator behind market economics, the greed and the centralisation of power of trading institutions and the people who make them up. The idea being that, in order to get huge bonuses and the ability to buy your house off you when you lose your shirt, the crude oil market will get shorted to pieces. Volatility brings profits. Profits bring bonuses. Bonuses get your house off you and stick you in the gutter. That is free markets. “The freedom to starve,” as Alfred Sherman founder of the Centre for Policy Study put it.
Of course we based these thoughts on the general idea that nothing very spectacular was going to happen in the crude oil markets between now and Christmas. No attack on Iran. No major hurricanes. No more shut-ins in Nigeria and so on. This idea appears to be coming true.
The closer we get to Christmas the less time there is to fabricate an assault on the Iranian theocracy and their huge oil and gas reserves, sorry, we mean “nuclear weapons programme.” There is more output coming from Nigeria with some Forcados output back on stream and the hurricane season appears to be drawing to a close with only poor Mexican people on the receiving end. And who in the market place cares about them?
So then why is crude oil touching its record highs? Banging hard up against $84 per barrel and not looking like it is going anywhere down, anytime soon. So, let us suppose that - shock horror - the price does not fall in the fourth quarter. What would the reasons be?
Well, firstly production is not increasing but demand is. It sounds a bit obvious but the much vaunted hikes in output from companies such as Exxon [NYSE:XOM], ConocoPhillips [NYSE:COP], BP [NYSE:BP] and the rest have simply not materialised. They assured us that they would be producing extra barrels to sate the world’s ever growing desire for hydrocarbons but due to a series of “mishaps” and “project delays” those extra barrels have never arrived. Meantime a world addicted to oil (and gas) continues to consume even more.
Since 2003 companies and countries have been telling us they would produce more “organically” by finding new deposits, or by using technology, to get more out of existing proven reserves. Outside of the odd success story like Marxist Angola, they have palpably failed to do so.
The free marketers - wrecking the world with their failed political ideology - told us that as oil and gas became more expensive this would trigger a wave of new output. It is the way the market works; we do not need communist rubbish such as “planning.” Gosh no! The market would prevail. But it has not.
The fact is that the oil industry has had plenty of time to bring on new assets and it has failed to create any major supply cushion. Replacing the depletion rate of 84 million barrels per day, a conservative 3.4 million barrels per day annualised at a 4% decline rate, has simply overwhelmed market players - market players who are also highly interested in maintaining scarcity to boost their own profits.
So, the run up to Christmas should be an interesting one. Rather than the market being shorted, as we still maintain, the fall in stockpiles in the U.S. this week could herald another step up as we march towards a peak in production.
Just like when OPEC lost control of the crude market on the upside in 2004 - they can now only influence the floor price - if the greed of the market players is unable to pull the price back down, it will not be because they do not want to try. It will be because they cannot.
