High Oil Price vs. Old Doctrines

Friday, September 03, 2004
The recent frenzy in the oil market is unprecedented in modern history says Norway’s broking house Lorentzen & Stemoco. When prices have risen above US$45/b (Brent) in the past, this has been due to an imminent threat or outbreak of war. But the recent oil price rally has been driven by strong oil demand and not least by the perception that the world oil production reserve base is too small in light of the risk of further disruptions. This latter fear factor has been amplified by the problems in Venezuela, Nigeria and Iraq and the continued risk of terrorist attacks.

For years there has been three main doctrines in the market. The first is that high prices will cause economic growth to stall and thus affect demand negatively. The second is that the general growth in world production combined with the reserve production will always be sufficient to cater for spikes in demand. The third doctrine is that OPEC as the actual manager of the market will always balance the market by providing the required volumes to keep the price within a defined range, that in recent years has been $22-28/b.

All these doctrines have apparently been rendered more or less useless in the face of the massive buying interest that has been hiking up the price at the futures exchanges. The “oil price doctrine” is possibly the most interesting one as there seems to be little or no effect of high prices to read out of the demand data for recent months. In the US, gasoline demand is up during the summer despite record high prices at the pump. This suggests that demand from the rapidly growing SUV fleet is overriding any negative demand development from the rest of the car fleet. With robust demand also from the other sectors (highway diesel) US demand is set for a 0.35m bpd increase (2004).

The same can be found in China where demand is powering ahead with a projected 0.9m bpd growth rate. Many expect Chinese demand to slow next year when it is expected that the government’s efforts to curb economic growth will start to impact on oil demand taking it to a somewhat lower growth rate of 0.5-0.6m bpd next year.

World oil demand is projected to grow by 2.5m bpd this year which is the strongest growth rate seen in modern times. It is perhaps difficult to find strong arguments against a continued positive development in 2005, but history suggests that it is extremely rare to record several years of growth at this kind of pace. The common denominator in this respect is that “something” always seems to happen that causes the rosy outlook to diminish. Oil traders have been helpful in this respect in that their relentless gambling surely is causing inflation to pop up across the US and other major economies.

Heavy investments in exploration and new refineries are detrimental to measuring this factor wherefore mergers and acquisitions in existing oil production have been preferred. But current pricing of publicly quoted companies are generally preventing attractive M&A deals wherefore exploration activity is bound to pick up in the time ahead. The ODS world count of mobile drilling rigs for July shows that the total utilisation rate is now at 84.5%, up from 81.5% in May. Additions to world oil supply resulting from renewed exploration is 3 to 5 years into the future, but money talks and it seems clear that the industry recently has raised its future oil price assessments significantly. The second doctrine will therefore reinstate itself in relation to the market with a two or three year time lag. With the third doctrine; OPEC is reaping the benefits of the general under investment in oil production, which by the way includes their own acreage, but OPEC will, in our opinion, continue as the manager of the oil market for the foreseeable future.

The bottom line is therefore that the three doctrines in effect will remain as useful guidelines, but the concept of time has to be taken into consideration when making further assessments of the oil market. This implies that the oil price will remain high as long as demand is strong and supply tight. Right now it seems safe to predict a tight oil market at least for the rest of the year, but next year might be different. History has nevertheless taught us that it is prudent to be careful wherefore we still recommend sticking to “old” doctrines.

Maritime Today


The Maritime Industry's original and most viewed E-News Service

Maritime Reporter July 2016 Digital Edition
FREE Maritime Reporter Subscription
Latest Maritime News    rss feeds

Energy

Los Angeles Pushes for Valero Terminal Improvements

The Port of Los Angeles has released an Initial Study/Notice of Preparation (IS/NOP) — the first step in the Environmental Impact Report (EIR) process — for a Marine

Canada Seek to contain Oil Spill

Authorities are building a new containment boom to fight an oil spill in a major western Canadian river, officials said on Saturday, after the spill breached a

Ecuador Pays $112 mln Award to Chevron

Ecuador has paid $112 million to energy company Chevron Corp over a four-decade-old contract dispute, even though it remains in disagreement, the head of the central bank has said.

LNG

As Market Sours, LPG Tankers Anchor off Singapore

Record U.S. LPG exports to Asia flip market into a glut. Last year, liquefied petroleum gas (LPG) supplied to Asia was being snapped up by petrochemical makers.

IOC Mulls Buying GSPC's Stake in Mundra Terminal

Indian Oil Corporation (IOC), the country's largest oil company,  is in talks to buy debt-laden Gujarat State Petroleum Corp’s (GSPC) stake in the under-construction Rs.

GAIL, Gazprom Renegotiating LNG Deal

As weak demand in India forces it to stall some contracted supply, GAIL India Ltd (GAIL) is in talks with Russia's Gazprom to delay and renegotiate a 20-year gas

 
 
Maritime Careers / Shipboard Positions Maritime Contracts Maritime Security Maritime Standards Naval Architecture Offshore Oil Pod Propulsion Salvage Shipbuilding / Vessel Construction Sonar
rss | archive | history | articles | privacy | contributors | top maritime news | about us | copyright | maritime magazines
maritime security news | shipbuilding news | maritime industry | shipping news | maritime reporting | workboats news | ship design | maritime business

Time taken: 0.1080 sec (9 req/sec)