By John Richardson
YOU should never bet against the capability of oil investors to turn the world completely upside down.
A great example occurred on Wednesday of last week, as Arthur Berman argues in this excellent Oilprice.com article.
He points out that Brent crude surged from $62 a barrel to $65 a barrel on 10 June, despite the US Energy Information Administration announcing on that very same day that the global oil production surplus in May rose to almost 3 million barrels.
“Not to worry, “demand growth is robust,” the oil markets seemed to be saying.
But if you look at the same EIA report, you will find that whilst worldwide oil production declined by 106,000 barrels per day, consumption fell more by 156,000 barrels per day.
It is supposed the job of oil futures markets to anticipate the future – that’s why they are, of course, called futures markets.
Perhaps, therefore, they are good right now at seeing around the corner, and so are accurately anticipating a tightening of markets that many of the rest of us are missing?
No. Last week’s rally to $65 a barrel was just another example of speculators chasing yield in a world of record-low interest rates.
And, anyway, if futures market were so good at their jobs, why did they completely miss the H2 collapse in prices?
On Thursday, Friday and Monday, though, as you all no doubt know, investors took fright, resulting in a decline in oil prices.
But let’s be positive. Perhaps investors finally woke up to reality after reading the 11 June report from the Paris-based International Energy Agency, which showed that the global production surplus for the first quarter of 2015 was the highest in a decade at 1.85 million barrels a day? (See the above chart).
Again, no. They probably just panicked, and/or engineered a little more volatility, which is their meat and drink.
The trouble is that the speculators which have, of late, bought some 500 million barrels of oil futures, are playing a very, very high risk game, and here is why:
- As the Fed prepares to raise interest rate, and as China continues its painful economic reform programme, the oil markets will return to their previous hugely valuable role of genuine price discovery. In other words, they will reflect genuine supply and demand.
- And when that happens, it will become transparent to everyone that supply of energy will be well ahead of demand over the long term because of the secular decline in the global economy.
- The other reason that oil consumption will weaken is growing energy efficiency. The world has turned a corner as the consensus view now is that climate change is man-made, whether you like it or not.
- And here’s another thought: What if the Saudis recognise this, and so are determined to pump as much as possible over the next decade and more? The alternative is for them to cut back production, only to see their oil left in the ground because of greater energy efficiency and the shift to natural gas and renewables.
Returning to the short term, petrochemicals companies must prepare for a major downward correction in oil prices in the second half of this year as investors take flight, which would reveal the real state of supply and demand.
And they must then plan for a world where they will be responsible for generating their own demand as demand will be in short supply – unlike oil.
This long-term planning must also include the possibility of multiple global taxes on using carbon, in whatever form these taxes might take.