Oil Prices: Headlines vs Facts

Oil Prices: Headlines vs Facts

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The price of West Texas Intermediate (WTI) oil topped $106 per barrel last Friday. Brent went over $111 on Monday. And the usual suspects of interpreting these price hikes re-surfaced.

Middle East turmoil is always at the top of the rationalizations. Surely the situation in Egypt must have played a role; the possibility of escalation in Syria, following the chemical attack there, added a further reason.

But during the last decade, when oil escalated from $40 to almost $150 in July 2008, collapsing to $40 shortly thereafter following the credit crunch and economic crises and then climbing back up to $100, this price mark is the new normal. It takes little to deviate up or down. Something simple and innocuous, such as a run on commodity prices can easily do the trick.

Raymond Learsy, writing in the Huffigton Post, with the usual insinuation of conspiracies by Big Oil, brought up a litany of reasons that did not happen, bewildered by the upward trend in prices in their absence.

  • “Egypt did not close the Suez Canal
  • Iran was not threatening passage through the Straits of Hormuz
  • The dollar was not plunging
  • Oil production had not peaked
  • No threatening hurricanes in the Gulf of Mexico were spotted nor forecast in the days ahead
  • Chinese oil imports were continuing at a steady, not at an accelerated pace
  • Commercial oil inventories in the U.S. had not been decimated, and were in fact ample and near their highest levels ever
  • Production of America’s newly developing oil production was not retrenching but was in fact expanding unabated and increasing in North Dakota and West Texas
  • Shipping on the Houston Ship Channel was not threatened by fog (yes, a reason occasionally cited)
  • No sudden shortage of cargo vessels to deliver oil from offshore suppliers (actually a vast oversupply of oil tankers continues)”

And yet the price went up and the trend is likely to continue. And here is my take, remembering that this is a margin business, where one half of one percent of demand can translate into 50% in the price of oil. The culprit is again China which is recovering from its economic downturn.

China, whose petroleum demand is slated to increase at a torrid pace of 13 percent between 2011 and 2014 (to more than 11 million barrels per day, and no chance to increase domestic production) is in the unenviable position of becoming the world’s largest importer. It has surpassed the United States as the number one importer this month. Vulnerability has never been the forte of Chinese foreign policy and behavior. Looking for oil (and gas) at any cost has been a striking characteristic of Chinese policy. Almost $300 billion has been spent by the Chinese oil companies buying oil properties all over the world during the last five years. Expect Chinese energy policy and energy-related investments to dominate the world for at least a decade. Also expect the market sensing this to continue a path skirting the upwards trends of oil prices.

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Comments (2)

  • Dusty Johnson August 28, 2013 at 10:03 am

    Let’s not forget that Hurricanes wipe out oil and gas resources this time of year like clockwork. Just look at the impact of Hurricane Sandy last year and how it devastated Gulf production and you’ll be less than surprised when it happens again next month.

    Reply
  • Naz Ekim August 28, 2013 at 4:47 pm

    The fact is that we need to invest more in alternative fuels and being solely dependent on foreign oil. With the discovery that we’re sitting on huge amounts of NG, why aren’t we tapping into it and building infrastructures to leverage that?

    Reply

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