Oil Super Spike, Part II?

Brian Hicks

Updated May 28, 2009

Just the other day, we reported that If you’re noticing gas prices moving north again, brace yourself because oil could be headed to $70… maybe even $80 near-term.

But we may have been off just a tad.

Here’s what an editor at BarChart.com had to say:

“‘Super Spike Two’ coming to a screen or terminal near you. Is $150 barrel oil going to be cheap in the coming years? Well the kingpin oil minister of the OPEC cartel sure seems to think so.

Saudi Arabia’s oil minister and the most influential member of the OPEC cartel says that he thinks that oil prices could exceed the previous record above $147 a barrel in the next two or three years. The reason is that the current “low” oil price has caused a lack of exploration and capacity expansion. And because of that al Naimi said we will see new record high oil prices within the next two or three years.

In a speech in Italy Naimi said that Saudi Arabia is maintaining its long-term focus rather than being swayed by the volatility of short term conditions. However, if others do not begin to invest similarly in new capacity expansion projects, we could see within two to three years another price spike similar or worse than what we witnessed in 2008.

Of course as smart as Al-Naimi is he has not been the best predictor of long term price moves. Still when the man talks it is obvious that the market listens. And because of the wide contango in futures, a phenomena that means that long term futures are priced higher the shorter term delivery dates, the market may have been expecting this future potential price supply squeeze all along. The market has been paying the market place to store oil for that rainy day. And according to some hard rain is soon to fall.

It is not just al-Naimi that is saying it. In fact he is echoing the same concerns that the International Energy Agency raised last week. The IEA warned in a report that falling energy investment was paving the way for a huge oil price surge within three years. They estimate this that because of the recession oil companies and investors have canceled or postponed about $170 billion of investment, equivalent to roughly two million barrels a day in future oil supply. Add to that an additional 4.2 million barrels a day in future oil-supply capacity that has been delayed by at least 18 months. If you put that together, it is over 6 million barrels of daily oil production that we thought we would see come on line that more than likely will come on when it might be too little, too late.

In the short term the oil market is moving on a delicate balance of concerns over inflation mixed in with a rising tide of economic optimism. Oil seemed to forget all about the geo-political risks brought on by North Korea and instead focused on that surging consumer confidence. The oil market continues to react to any semblance of good economic news partly because of the fears of inflation expectations in the back drop of a recovery but also because an economic recovery and a surge in global oil demand will be hard pressed to be met by supply because of the dramatic and continuing drop in oil investment. Oh sure, I know that supply is ample right now and I am not talking about shortages but the market is doing things for a reason. We may need high oil prices to get the type of investment that will be critical to meet the demand needs of the future. If we don’t. it might not just be the high price of oil that hurts the economic recovery but the inability to secure future supply. 

Now the big question is whether or not all that consumer confidence will show up in the gasoline demand numbers. I am betting that it will.The Energy Information Agency reported that national average retail price of regular gasoline rose 12.6 cents a gallon to $2.435 a gallon in the week ended Monday. Some of that increase was the switch over to the summer time blends of gasoline and of course the higher demand over the holiday. My guess is that the surge reflects a surge in demand as well that may keep prices not far from this Memorial Day peak.”

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