Energy Panic Trigger, The $200 Oil Peak
$200 crude oil is on its way, according to Sean Brodrick in his latest report entitled Energy Panic, referred to in Money and Markets, after he saw how the Jeddah Summit failed to halt the advance in the price of crude oil.
Brodrick who is part of the Weiss Research team reckons that higher energy prices are on their way and that even the mighty OPEC producer nations cannot halt the price rise of this key commodity.
Indeed his report he refers to $20 natural gas in the not too distant future, so we seem to be facing higher heating costs and higher gasoline costs.
You can now subscribe to the free Commodity Universe Ezine below, and get the latest articles on the commodity sector . Just your first name and email. It's as easy as 1-2-3! Brodrick points to key Energy Panic triggers which explain why the world is facing this monumental challenge of our times.
He refers to the almost daily occurrences of supply bottlenecks across the globe, with numerous US airline route cancellations, lorry drivers striking and even gasoline (petrol) riots across the world.
His chilling verdict is that crude oil, natural gas and gasoline prices are heading in one direction only.
So what are the global factors or triggers which will lead to this Energy Panic, according to Sean Brodrick?
It seems the emerging markets have developed an insatiable demand for crude oil, and in fact, according to Brodrick, that demand is now greater than from the US.
So 2008 is likely to see the BRIC (Brazil, Russia, India, China) economies and the Middle Eastern states in particular will consume over 20.6 million barrels per day (more than the US).
Just consider that China may see automobile sales increasing by 1 million vehicles annually up to 2015.
In 1997, China bought 1.6 m cars while in 2007 that figure had surged to 5.5 m including cars and minivans. All these vehicles will need gasoline and so crude demand will remain strong.
The Saudi Sour Crude Problem
There is very little spare crude production capacity left in OPEC and most of what is available is in Saudi Arabia, which is the second largest supplier of oil to the USA. While the Saudis have pledged to increase production capacity by 2009, most of this will be the heavy sour crude oil grades, which will not help the gasoline market in the developed world.
Gasoline needs the WTI light sweet grade of oil and there is less of this available.
Recently the premiums for light over heavy sour crude oil have soared, another sign of the tight supply of the more desired light sweet grade.
So the Saudi’s cannot do much, yet they have no incentive really, as they make big profits from the present high crude price.
The Spectre of La Nina
Brodrick raises the spectre of meteorological influences with the advent of hurricane season to the Gulf of Mexico, where around 20% of natural gas and 30% of crude oil is produced in the US. And the Louisiana Offshore Oil Port (LOOP), supplying over 12% of US oil, would be vulnerable to abnormal and serious weather conditions.
If the La Nina effect is strong it could induce more powerful hurricanes and this area could suffer from protracted storm activity.
Few will need to be reminded of the impact of Hurricanes Katrina and Rita.
Higher Oil Prices, Higher Imports
Interestingly, the Brodrick letter touches on the positive correlation between higher crude oil prices and higher US imports of crude.
He cites the example of oil at $23 per barrel in 1990 and in 2008 at $140, a 500% increase, while imports over the same period have climbed 70%. A classic example of inelastic demand, perhaps?
The report highlights two major oil exporters who are seeing significant declines in their crude oil output.
Firstly, Mexico which is the third largest oil importer to the US with 1.2 million barrels per day (mbpd) has seen a big fall in production at its major Cantarell field. Output is down to a nine year low of 2.8 mbpd. On present trends Brodrick suggests Mexico will have become a net oil importer by 2016. And the other major exporter he considers to be facing difficulty is Venezuela , an OPEC member, and a major importer of oil into the US.
The Advent of Peak Oil
This refers to the scenario where world crude oil production has peaked and it matters not how many more wells are drilled, global output will be on a downwards path.
Some advocates of this theory believe we have arrived at Peak oil or are very close to this position.
With this state of affairs production falls yet demand and prices keep rising, and the report notes that the top five world oil exporters have seen a fall in their exports as a percentage of their total output. So whatever the prevailing price quoted for NYMEX WTI crude futures in New York or for ICE Brent in London, the world is at or near its capacity limits.
It is amazing when you consider that about 50% of world oil production comes from less than 120 large fields, many of which are over 50 years old. Brodrick reckons that roughly only about 35% of remaining world oil reserves can be exploited, and at a higher cost. Natural Gas Heading For A Peak Too
It also seems that we may see another cause for energy panic with Peak Natural ,and the report suggests this commodity may soon be touching $20. You only have to see how, for example, both the US and UK are building large Liquified Natural Gas (LNG) terminals to secure long term supplies as their own output is flat or declining. But many other economies want this LNG too, so the price will be driven upwards over time.
So with all these factors pressing on the world economy along with other high commodity prices, it is not surprising that there is a measure of energy panic when talk is of $200 crude oil.
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