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The Looming Spike in Crude Prices

Lots of very crazy stuff going on behind the scenes that’s been keeping me very distracted, and writing to a minimum. Fortunately, Money Morning sent me a very timely essay this morning on crude prices. This one takes aim at the API. While I have a cordial relationship with the API, like Kent Moors who wrote the article below I think their crude production projects are way too optimistic. Of course I say the same thing about projections from the EIA, IEA, and pretty much any organization that predicts that we are going to have a major increase in production from today’s rates. My position for the past 5 years has been that the top is pretty close to 90 million barrels/day, give or take a few million. Some of these organizations are predicting that we will be able to produce over 100 million bpd, and I just don’t see it.

Anyway, as I previously explained topical Money Morning content will be featured here from time to time. As always, normal caveats apply: I am not an investment advisor; these stories are meant to spur discussion.
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Profit From the Looming Spike in Crude Prices That the U.S. Oil Lobby Doesn’t See Coming

By Kent Moors, Ph.D. Contributing Editor Money Morning

John Felmy has been the chief economist of the American Petroleum Institute (API) for years. He’s well respected. And I appreciate his experience. But the two of us disagree more often these days.

We most recently locked horns at Malone University in Canton, Ohio, last week, where we were debating the future of oil. (Actually, when the invitation was made, I was supposed to debate Sarah Palin. But she pulled out to go on the road and pitch a book she didn’t write.)

Nonetheless, something disturbing emerged from the debate.

I still find John a pleasant enough fellow, but the mantra coming from the API, the mouthpiece of the oil industry, is wearing thin. They want us to believe that the oil market is still fine, still humming along, still providing the best energy value. You’ve heard the argument before: Gasoline is cheaper than milk or bottled water.

This time, John tried the latest API version of this sleight of hand: Whatever price you need to pay, oil is still cheap, still plentiful, still the energy of choice.

Sorry folks, the API just doesn’t get it. And what it refuses to get is becoming one of the most important factors investors in the energy sector will need to watch – carefully. This is all about supply and demand. But it’s not the traditional lecture from Econ 101.

This one is going to roll out differently.

Over the next several months, oil will begin losing its balance. As it falls off the wagon, risk will escalate. And that will require greater due diligence by investors. But as the risk increases, so will the number of opportunities. I’ll show you how to profit from them as they surface.

But first, here’s the problem with the API’s approach.

“Suspect” Figures Are Way Off

As John grudgingly admitted in our exchange, the API’s figures are becoming “suspect.” I have a less charitable view. (Unlike John, I don’t work for them.)

The API figures are way off.

They still portray a view of demand (low) and supply (high) that will not continue to square with reality. We have had lower demand for months only because of the financial crisis and the credit crunch. But this has had nothing to do with the oil market as such.

Others are catching on.

The Paris-based International Energy Agency (IEA), for example, has already admitted its supply estimates were too optimistic while its view of demand was too conservative. The IEA revisions have been paralleled in similar moves by the London Centre for Global Energy Studies (CGES), Russia’s Institute for Energy Strategy (IES), and even Washington’s usually impervious Energy Information Administration (EIA).

There’s a reason for this.

Worldwide oil demand, while sluggish, is nonetheless returning more quickly than anticipated. In addition to the usual suspects – China, India, a resurgence in the Far East – OPEC countries are retaining more of their own production to diversify their economies. Russia is facing rising domestic needs at the same time it tries to avoid a significant decline in crude production. Mexico is witnessing a meltdown in its oil sector while its domestic needs also rise. And new major markets are exploding in places like West Africa and South America.

Notice this is not happening in the United States or Europe. These countries are no longer the driving forces in the oil market. The most developed markets are not calling the shots, despite still being over-weighted in the data collected. The IEA finally got that. So did CGES, IES, and even the EIA.

But not the API.

Indeed, the paid spokesperson for the American oil industry continues to see crude oil as the main option. True, it gives lip service these days to alternative and renewable energy. Moreover, given its position as the in-house spokesman for the hydrocarbon sector as a whole, it is also praising the virtues of natural gas as the immediate choice when we transit from crude oil.

Unfortunately, the API still fails to provide an accurate picture. Perhaps in the final analysis, this happens because its clients are the oil producers.

Oil’s (Profitable) Reality

We currently have about 86 million barrels a day in worldwide crude oil demand. That still represents a figure below pre-crisis levels. However, all of the organizations mentioned above (with the exception of the API) are now estimating a rise to around 87.5 million over the next year, with increases accelerating thereafter.

Current global supply, on the other hand, will max out at 91-92 million barrels. That gives us a small cushion – just a few years – before the real fireworks start. Period.

Because new volume coming on line will barely replace declining production from older fields, we have little prospect of avoiding insufficient supply producing a spike in crude oil prices. This is not necessarily a bad development from the investor’s perspective, since a volatile market will provide profit opportunities, especially if the direction in price remains sustainable over any period of time.

The impact on other market sectors, of course, will be less positive.

The key here is to recognize the major benchmarks and triggers, along with early changes in what they tell us. These will not all be moving in the same direction as the unwinding ratchets into high gear. But we will be able to identify when they are changing and, more importantly, how to profit from them.

I’ll be discussing the strategy as it unfolds over the next several months.

I’ll show you, for example, how to spot a real oil-demand rise in the American market before it becomes apparent to everybody else. There are several approaches I will suggest as the market opens up. The best place to start is watching the leading economic indicators.

Actually, six of the 11 stats provided by the Department of Commerce are dependent upon, or reflect, changes in productivity and industrial needs. These are all also energy intensive. That means a rise in energy demand will precede the actual rise in the indicators. This is one of the early triggering mechanisms I use in my analysis and for making my estimates.

I’ll flag them for you as they emerge. And I’ll lay out how they impact the U.S. energy sector and related investments. There are quite different ways of early detection for other global markets, where the demand will be moving in more quickly.

Calls on investment alternatives will be very sensitive to changes in indicators and triggers. That means in energy, we need to stick to the trends. So stay tuned. The recommendations will follow in short order.

Just don’t expect to gain much traction from the API!

[Editor’s Note: Dr. Kent Moors, now a regular contributor to Money Morning, is the executive managing partner of Risk Management Associates International LLP, a full-service global management consulting and executive training firm. He is an internationally recognized expert in global risk management, oil/natural gas policy and finance, cross-border capital flows, emerging market economic and fiscal development, political, financial and market risk assessment, as well as new techniques in energy risk management.

Dr. Moors has been an advisor to the highest levels of the U.S., Russian, Kazakh, Bahamian, Iraqi and Kurdish governments, to the governors of several U.S. states and the premiers of two Canadian provinces, a consultant to private companies, financial institutions and law firms in 25 countries and has appeared more than 1,400 times as a featured television and radio commentator in North America, Europe and Russia. He has appeared on ABC, BBC, Bloomberg TV, CBS, CNN, NBC, Russian RTV, and regularly on Fox Business Network.

Moors next columns will be written from Moscow and London, where he’ll be talking to officials, company executives, traders and bankers. Russia is about to signal a major change in oil and gas development strategy, while recent events in London are signaling a new oil pricing approach.]

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December 4, 2009 - Posted by | American Petroleum Institute, api, investing, investment, Money Morning, oil prices

15 Comments

  1. China

    Comment by rufus | December 5, 2009

  2. Dr. Moors' article is surprisingly content-free – Things are going to change. Maybe he keeps the good stuff for all those goverments for whom he consults?And as a side comment — misogenists seemingly dominate the Left these days, but they are probably a minority of those seeking investment advice. So why piss off the majority of your target audience with a gratuitous swipe at Governor Palin? Doesn't exactly engender confidence in Dr. Moors judgement.

    Comment by Kinuachdrach | December 5, 2009

  3. More scare-mongering. Spreading more fear than light.Right now, we have gluts of oil and natural gas. The natural gas glut is beginning to look epic, due to huge strikes in North America (shale) and gigantic strikes many places else, including the biggest NG well of all time, in New Guinea. OIl seems to be everywhere too, but, as discussed here many times, politics gets in the way. Still, China is going into Iraq and talking boosting output 2-3 mbd, Brazil is going great guns, Africa opening up. Kuwait wants to boost output 2 mbd. We would be flooded in oil were not thug states controlling the bulk of the world's fields–a risk for oil bulls. What if some of these states actually improve? In all, I would say there is no doom scenario that makes sense, and CNG cars, and PHEVs, and BEVs are improving rapidly. It may be in 10 years oil demand is less than today. Then we have the current fact that demand seems to be going nowhere fast. I agree with Kinu, why the Palin bash in the middle of an oil report? And Moor seems to be saying API is wrong, EIA is wrong, IEA is wrong, and CERA too is wrong. Maybe, but after a while, you have to ask with API and CERA are both so deluded. Only Mr. Moor seems to have the real crystal ball.Look, the oil bulls made a mint in the 2007 rally, and they would like to again. The NYMEX can be gamed, has been gamed, and probably will be gamed again. Maybe we will see another oil spike–but each spike seems to engender long-term declines in future demand. OPEC and its financial quislings on Wall Street may they raped the party girl one time too many next time around–she ain't coming back any more.

    Comment by Benny "Boom, No Doom" Cole | December 5, 2009

  4. As I see it, with vast amounts of oil in storage waiting for better prices, a lot of speculative hype (from snake oil merchants like Moors) about the recovering economy is already built into oil prices. Without that, oil would probably be $20/bbl right now. There may be money to be made from oil, but it's a bubble waiting to happen — you're just as likely to get your ass burned. Especially if you believe Moors can tell you "how to spot a real oil-demand rise in the American market before it becomes apparent to everybody else". Reminds me of a quote I read recently about the bubble markets … "we all think we can beat the crowd … we don't seem to realise that we ARE the crowd". Standard Money Morning fare, I'm afraid.

    Comment by PeteS | December 5, 2009

  5. “In all, I would say there is no doom scenario that makes sense, and CNG cars, and PHEVs, and BEVs are improving rapidly.”They are? Going from really really impractical to just just impractical. Many confuse interest with something with actually leaps in technology. There is always a new concept for journalist to write about. Of course, when you are my age the response is 'again'! The good old ICE in a boring old POV just keeps improving too. Second there is not glut. Having an adequate reserve margin is a good thing but it is hard to tell in the middle of a slow economy.I love those who trend without knowing the fundamentals. When the economy is booming, energy is going to grow at at that rate forever. When the economy is slow, energy demand is always going to remain at that way.

    Comment by Kit P | December 5, 2009

  6. Especially if you believe Moors can tell you "how to spot a real oil-demand rise in the American market before it becomes apparent to everybody else".As indicated, normal caveats apply. I think the value of the article is in challenging those future production assumptions. I also believe that they are far too optimistic, and worse they can be dangerous if we begin to count on them.RR

    Comment by Robert Rapier | December 5, 2009

  7. China is impossible to model. Will their growth continue to "explode?" Is it a "Bubble," that's getting ready to Pop?Will they increase their consumption by 1.7 million bbl/day in the "next" 18 months? Were there forces at work of which we have no knowledge?What about Saudi Arabia? Did they really have 3 million bbl/day "spare capacity" in July of 2008 (when oil prices were at $147.00 bbl?) Do they really have 3 – 4 – 5 million bbl/day spare capacity, Now? Really?How much oil is "really" in floating storage? Is it 160 million barrels? Or, 40 million? Both numbers have been published in the last 30 days.How much oil will we need to get back to "growth?" We know Sunoco, and Valero have both announced "refinery closings" in the last couple of months. Exxon said that ethanol will increase 10%/yr for the next twenty years. Of course, RFS2 tells us the same thing.Frank Lutz says the Volt will be a huge hit, and that PHEVs will be 250,000 to 500,000 vehicles/yr in five years. 500,000. The worldwide market is over 50 Million/yr.Good luck with your analysis. I'm playing it safe. I'm building a still.

    Comment by rufus | December 5, 2009

  8. The problem is Rufus, you are going to end up drinking, not driving the results of that still.

    Comment by Benny "Boom, No Doom" Cole | December 5, 2009

  9. 🙂 Only if I'm Lucky.*Hic*

    Comment by rufus | December 5, 2009

  10. A minor pet peeve of mine: I thought that a spike was when something went down, like how a railroad spike points down. Or, in electricity terms, the opposite of a surge.

    Comment by Anonymous | December 5, 2009

  11. An electrical spike does not have to be in a negative or downward direction, it just has to be short in duration.http://en.wikipedia.org/wiki/Voltage_spike

    Comment by Clee | December 6, 2009

  12. Or if you find Merriam-Webster's dictionary to be more definitive, check out definitions 6 and 9 for "Spike". (my emphasis added).http://www.merriam-webster.com/dictionary/spike6 a : a pointed element in a graph or tracing b : an unusually high and sharply defined maximum9: an abrupt sharp increase (as in prices or rates)

    Comment by Clee | December 6, 2009

  13. I've seen one writer (oilfinder on seekingalpha) make a somewhat persuasive case that sufficient supply can be brought on stream by 2020 to bring us over 100mpd. This rests on Saudi expansion to 12, Iraq coming back up to 7, and several other new finds such as Brazil's, as well as a doubling of Canada's tar sands production, and then backing out worst-case scenarios for Mexico, Norway, etc. If I can find the link I'll post it.Couple this with the apparent NG bonanza here in the US, and it's hard for me to see the BTU disparity between oil and NG being sustained. If all else fails the US can implement the Pickens plan gradually to keep demand heading down (it's already down dramatically due to the economy).

    Comment by Doug | December 8, 2009

  14. Content-free is putting it generously. Call it pablum for zombie readers.If Dr. Moors thinks the way he writes, then that is probably the best he can do.Did you actually read that drivel? Well then read it.

    Comment by Anonymous | December 9, 2009

  15. Did you actually read that drivel? Well then read it.I have to be honest; I skimmed it but didn't read it in depth. But I seem to get a rash of complaints every time I post something from Money Morning. I am getting the message loud and clear.RR

    Comment by Robert Rapier | December 9, 2009


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