Thursday, April 28, 2005

Pounding the table.

I suggested earlier signing up for the Guinness Atkinson Energy Brief if you're interested in investing in energy, and I'm going to suggest it again, in case you haven't.

If not, the April one is here.


On the other hand no careful observer could fail to see that just now OPEC appears to be overproducing by 1m b/d and I continue to caution that a period of short-term weakness is still quite likely.

Indeed, when I reflect on the latest OPEC10 increase to 27.5m b/d and Saudi adding further that it was turning the taps on, I find myself puzzled at the continuing strength of the oil price. Particularly as I think it underlined that for political reasons Saudi Arabia really does want a price below $50. So what is going to happen next? I think oil will hit $45 in the next 2 months. How likely ? 60/40.

Turning to a slightly longer time horizon, we are increasingly confident that the US and China along with the rest of emerging Asia and the Middle East and the FSU are going to continue to provide robust demand growth. We accept it will likely fall back from the 2004 level which was exceptional but we note that very recently Chinese authorities have been warning of the rapid worsening in power shortages which will support oil imports to run back-up generators. In the medium term, growth in car ownership is going to be hard to stop and with that will come high rates of oil consumption growth for 10 ? 20 years. We also see an emerging consensus that the global economy can cope with oil prices at much higher levels than previously thought.

We also believe the impending difficulty of growing non-OPEC supply is considerable.

Therefore over the medium to long term OPEC can, and likely will, pursue policies which mean oil will trade considerably above the old $22-28 target range, probably over $40 WTI now and we would not be remotely surprised to see a new target range within a few years of $50 -60 which is where the price in real terms averaged for 12 years 1974 -85.

Looking at the big picture, I remain ever more convinced that the medium term outlook is for a decisive break with the $25 oil of the 1986- 2000 period and a shift back to the $55+ world of 1975 ? 1985. Meanwhile, the odds on a sizeable dip are reducing as OPEC starts taking the necessary action and Russian production growth slows.

Additionally, there are already people who have framed their lives around cheap gas who are hurting. (See Seattle Post-Intelligencer: High gas prices really sting low-wage workers.)

If you're reading this, and you know people making decisions now that will not work longer term with more expensive energy, I believe you ought to try to explain the implications of cheap oil getting scarce. They may not listen right away, but you will have raised their awareness.

And if we're wrong..

Well, a little extra fuel for the grandkids..