This Week in Petroleum 10-17-07
As I watched oil hit $89 earlier today, I just shook my head and said “We have to be very close to the top.” After all, this happened in spite of bearish news that crude inventories increased this week much more than anticipated. This happened despite OPEC boosting crude production. Today, OPEC made another statement saying they won’t rule out putting even more crude on the market. But that’s not the strongest indication to me that we have entered a speculative bubble. When people who have no knowledge of the oil industry start asking me how to buy oil futures, as they have been recently, it is a strong indicator that it may be time to exit.
Will oil run up to $100 this year? I don’t think so, but I wouldn’t have bet we would be where we are now. If you had told me at the beginning of 2007 that on October 17 oil would hit $89 a barrel, I would have thought that 1). We had attacked Iran; 2). OPEC had continued to cut production; 3). A massive hurricane had taken out a lot of oil infrastructure; 4). Terrorists had disrupted a major pipeline; or 5). Global crude inventories were low and falling fast. Yet none of those things have happened.
If we aren’t near a local top, then I will be very surprised. This is not the time of year for strong demand, and as I have said repeatedly I would not be a buyer at $90. If inventories were low and falling, then I might be of a different opinion. OPEC exports in September were up 609,000 bpd over August. Currently, they are in the process of bringing another 500,000 bpd online. But, as I have alluded to several times, they were definitely playing a risky game with the economy: Keep oil prices as high as possible without triggering a recession. Well, it is possible that they waited a little too long to boost production, and now can’t bring it online fast enough to keep prices from skyrocketing (which they have essentially done) and potentially crashing the economy. I said before spring that I thought they would boost production in the summer – as long as crude inventories were falling. Some people thought they didn’t boost production because they couldn’t. I thought they were just trying to figure out how far they could go. They may have found the edge of the cliff. We will find out pretty quickly whether they leaned out a bit too far over the cliff.
So, with that intro, on to this week’s numbers, from the EIA:
U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) rose by 1.8 million barrels compared to the previous week. At 321.9 million barrels, U.S. crude oil inventories are above the upper end of the average range for this time of year. Total motor gasoline inventories increased by 2.8 million barrels last week, and are just at the lower end of the average range. Finished gasoline inventories fell last week while gasoline blending components rose. Distillate fuel inventories increased by 1.0 million barrels, and are at the upper limit of the average range for this time of year.
Now, this week I am going to disagree with something Doug MacIntyre wrote. Doug occasionally stops by and says hi, so maybe he will respond. In This Week In Petroleum, Doug writes:
EIA’s current analysis suggests that supply and demand fundamentals, including readily quantifiable factors such as the level of inventories and spare upstream capacity, and less quantifiable ones such as the effect of heightened geopolitical risks on desired inventory holdings under conditions of tight spare capacity, can provide an explanation of the recent increase in oil prices.
That’s hard for me to swallow. And I know Doug doesn’t want me dragging out some of the old EIA analyses on oil prices. I have some of those at work. Just a few years ago, lots of organizations were forecasting $25 oil for many years to come, based on the supply and demand fundamentals as they saw them.
Indications are that supply is on the way up. Crude inventories are very high in the U.S., and not in terrible shape for the OECD as a whole. Fall turnarounds are under way, so crude demand will be down. The fundamentals haven’t so drastically shifted in the past couple of months to justify this sort of run-up. I could much easier explain why gasoline should be $4 based on the fundamentals. But $90 oil? Not yet.
The data I posted yesterday show that speculators are piling in. How much impact are they having on the price? Hard to say. In a very tight market, it doesn’t take too much speculation to have a disproportionate impact. How does speculation drive up the price? I have seen this question frequently asked. If you are speculating, you are an additional buyer or seller of crude. If the speculators are heavily weighted toward people wanting into the market, then demand is artificially high, so prices are bid up.
Now don’t get me wrong. I am not trying to talk down the price of oil, nor am I whistling past the graveyard. I want to see oil climb to an even higher level. That will stimulate conservation so supplies will last longer (and my kids will have some), and it will stimulate investments into alternatives. But I would prefer not to see it get way ahead of itself in a speculative bubble that could pop and cause investors to push the price down lower than it should be. I would also prefer to see the economy have time to adjust to higher prices.
I do want to see $100 oil. But not until January 2008.