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Oil Prices: where now?

By David Roffey
Created 21/07/2007 - 03:55

On Webdiary we've gone round the the Peak Oil loop more than a few times over the last few years (eg here [0]). A new point of interest has arisen over this week: for the first time in the last few years the oil futures price [1] has come out of its persistent state of contango [2] as it rose back over USD75.

What does this mean? Well, the short answer is, for the first time in a long while, oil futures dealers are not on balance convinced that the next move in the oil price is necessarily up. Does this mean the price may be going to stabilise at this point? Depends whether you think the oil futures market knows something about what they're betting enormous amounts of your pension fund on. In the real world, there's no evidence that they do - after all, when this last happened the contango persisted, so they were then betting on more up to come -  but the market consensus is nonetheless worth examining.

The slightly longer answer would have to acknowledge that the primary thought in dealer's minds here - most of them are parsimonious with their thoughts, and only hold one at a time, though it may be radically or even diametrically different from the thought they held a few minutes ago - is that the last time the price hit the $75-80 levels (in the middle of last year) it then went down again, so on balance this might be expected to happen again.

But what about the fundamentals? The International Energy Agency's Oil Market Report [3] estimates that oil demand will rise to 88.2Mbd in 2008, and that supply will rise to just meet that increase. We need to remember here that the IEA is a persistent denier of the existence of any peak-oil problem on the horizon, so there is a strong chance that they're being optimistic. Even if they aren't, their forecast suggests at least a year or more of the current situation, in which the tightness of supply over demand means that any real or rumoured interruption to supplies will push the price up further.

As it is, if the crude price persists at the current level, Australian petrol prices will have to rise again - prevailing pump prices [4] are below current terminal gate prices [5], and Singapore ex-refinery prices [6] have upticked over the last few days, so the move up should be on the way right now. [Being right now where I'm paying 97.9 pence for a litre (AS2.34) is even more painful.] Screams about cartels and the poor bloody motorist will have exactly zero impact on this, which is the same impact as exhortatory statements from Costello.

Of course, if the Aussie dollar carries on up to US$1 and above, the impact of iternational prices will continue to be damped as they have been over the last few months - $0.88 represents a potential 10% cut in the AS price from the beginning of the year. Of course, on the other hand, a reversal of this would give a pretty immediate uptick in the pump price of about that amount.

Interesting times.


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