ON THE CONTRARY
WHILE some see uncertainty in the future direction of oil, (see feature, left) I take a bullish view. The recent crude oil review prepared by analysts at Morgan Stanley points to a very slowly improving supply outlook. Their analysts are forecasting a growth in supply by 1.1m barrels per day, on average, in the years between 2011 and 2016, and at 1 per cent, that’s below trend growth estimates. That is the barest minimum needed to sufficiently meet growing oil demand and assumes a global economic environment of low to modest growth. In other words, there is barely enough crude oil coming onstream even given the current global economic situation.
That may also be an overestimate. The increase of 1.1m barrels per day that Morgan Stanley is forecasting presumes what its analysts call “flawless execution.” That could be achievable in a perfect world, perhaps, but in this one? Even its analysts believe that there is a razor-thin margin for error, and historical evidence suggests that it will be tested.
Supply disruptions and outages are common, and could pose a major problem during periods of tightened spare capacity. Consider the suppliers; several of the oil-producing countries have recently had production problems of one sort or another. In Nigeria and Yemen it was infrastructure-related, while in Angola it was a technical glitch. In Canada, it was a fire; in the US and Australia, it was adverse weather that resulted in plant closures. Libya is in the news, but the list goes on and on. Flawless execution? Not likely.
And while downbeat economic sentiment abounds, what if the current global economic situation was about to explode? A reacceleration in oil demand would place significant stresses on the already challenged supplies.
But this is exactly where the global economic situation is headed, if analysts are reading their tea leaves right. The US, the UK, Brazil and more than likely China are all about to loosen their monetary policy.
Although the effect of looser policies around the world could take time to drill down into underlying demand, it is clear that this time, looser policy conditions are here to stay. And not only that, but skirting this near to a double-dip scenario – which is very close to materialising, thanks to premature tightening by policy makers – practically ensures that the next wave of tightening will be slow and cautious. That, in turn, should pave the way to a longer oil price rally.
How much of a rally? If we consider effective money printing, interest rate cuts and the thin thread of margin capacity then it is possible that the $100 per barrel threshold might be in reach once again. Will we see the peaks of 2008? That depends on producers’ willingness to increase and invest in more capacity; but oil prices are destined to shine.