The predominant view of oil markets these days is a nearsighted one.
Oil supply and demand prognostication these days doesn't seem to extend much beyond the current week, much less the next 6 months.
Traders on futures exchanges-the true arbiters of oil price these days, no matter what the general public believes-tend to latch onto yesterday's inventory data or today's violence in the Middle East to drive their trading strategies for the day. Oil prices in early June slumped by several dollars per barrel largely because oil stock levels remained hefty and Middle East tensions (relatively) eased.
Many oil companies plot their capital expenditure budgets because their expectations of oil prices for the rest of the year are influenced by the apparent direction oil prices were headed in the preceding quarter. That trend has grown as companies become increasingly sensitive to the whims of Wall Street, which in turn seems increasingly prone to attention deficit disorder. Those expectations can evaporate-sometimes as a result of their own attendant self-fulfilling prophecy-and budgets are overhauled again. This cycle was especially apparent in gas markets last year, when record low storage spiked prices, which in turn sparked opportunistic drilling, which in turn glutted storage, which in turn depressed prices, etc. You get the idea. The latest capex numbers from SalomonSmithBarney in New York suggest that oil and gas company budgets at midyear are likely to be trimmed by 16% in the US and Canada this year vs. last year. There are a lot of factors contributing to that trend, but certainly recent turnabouts in oil and gas price expectations were key among them.
OPEC constraint
Now we have the Organization of Petroleum Exporting Countries preparing to meet June 26 in Vienna and setting its collective crystal ball on Near Term.
What we find is a group increasingly vocal about resisting pressure to boost oil production in order to head off a supply crunch looming in the second half.
A rollover of the current quotas at the June 26 meeting seems all but certain.
Press reports in mid-June told of an emerging consensus among OPEC nations to retain the group's current quota regime because oil prices are in the target price band of $22-28/bbl for the OPEC basket of crudes. The other factor driving that consensus is the group's growing expectation that the global economy will continue to improve in the second half.
Of course, that latter point begs the question of whether OPEC thinks its supply restraint will help spike prices, which in turn could unravel that economic recovery, which will squeeze oil demand, etc.
Oil demand
For the moment, the chief oil prognosticator of them all, the International Energy Agency, thinks global oil demand will rise in the second half.
Overall, IEA says, world oil demand will be up 420,000 b/d on the year. Not spectacular by the standard of the late 1990s, but far more respectable than last year's resounding thud. That modest rise leads IEA to warn OPEC to relax its restraint on oil production ahead of the seasonal buildup in stocks for the heating season.
Sarah Emerson, managing director of Boston-based Energy Security Analysis Inc., sees a market crunch looming.
"Global crude oil demand has been in a year-long slump," she said. "However, that trend will come to an end as early as June or July, as refinery throughput will begin to register increases over the previous year."
Emerson contends it unlikely that stocks will continue to rise as refinery runs increase.
"When one combines the expected shift towards rising crude demand and falling crude inventories with OPEC's pledge to keep production from rising in the third quarter, it seems likely that the market's perception of fundamental weakness will change," she said. "How far crude oil prices fall between now and then and how fast that perception changes (will) dictate the speed and magnitude of the next rally."
How fast can that happen? Emerson made her comments just before the latest US inventory data showed what analysts called a "smaller-than-expected" increase in stocks. Attention-deficit traders then sent next-month crude futures on the New York Mercantile Exchange rocketing up $1/bbl at closing June 13 from the day before.
Oh yes, and rumors were rampant at presstime of another possible coup simmering in Venezuela.
Can't see another oil price spike this year in that crystal ball?
Try squinting.
(Online June 14, 2002; author's e-mail: [email protected])
