Energy Report: Peak bleak

Phil Flynn

http://www.firstenercastfinancial.co...

May 20, 2009

Peak bleak: Is the world running out of oil? Again? Well if you look at the weekly drops from the API you might think so. But no, oil is rallying back up but not because of peak oil but perhaps due to the sense that the world is not so bleak. The VIX hit the lowest level since September so the passion for risk will soon heat up. And that intensity of risk desire means we should be seeing more economic activity start sizzling up which means we should start seeing oil demand improve. We peaked all right, because we peaked out on being bleak.

That is an important factor for oil because if we feel that the economy will rebound then we better get prepared for a period of rapidly tightening supply. In fact we may have to face that prospect even sooner than you might think. Case in point is last night’s American Petroleum Institute report that was so bullish in had the bull’s mouths watering. The API reported another whopper crude supply drop of 4.47 million barrel in the latest week. On top of that they reported that gas supply in inventory fell by 5.37 million barrels. The big drop in gas supply is due partly because of the fact that a lot of supply is going up on the rack in anticipation of big demand this Memorial Day weekend and the fact that margins though improving are still historically low.

Now I know that there is still a lot of oil in storage and a lot of oil in the global marketplace but I also know that not all of that oil is ending up here. Not for the last couple of weeks anyway. Oil is going to China and Europe and supplies are falling in the US. Short term supplies are still ample but moving in the wrong direction. Oil has reacted to demand and demand has been relatively stronger in other parts of the globe.

And long term the bullish stories continue to attract buyers to the longer end of the curve. OPEC cuts and cut back in investment seem to be suggesting that a rebound in the economy could make our current oil glut look like a quaint anomaly. The Wall Street Journal Is reporting just today that the International Energy Agency is warning in a new report that “Energy investment is "plunging" because of the recession, paving the way for oil-price surges within three years." The IEA says that in recent months, 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. An additional 4.2 million barrels a day in future oil-supply capacity has been delayed by at least 18 months as companies slash spending. The Journal says that the report highlights the growing risk that the crude supply -- though currently abundant because of weak global consumption -- could tighten quickly once the world economy gets back on its feet. The study will be presented to energy ministers from the Group of Eight industrialized nations this weekend in Rome and to G-8 leaders at a July summit. This report is justifying somewhat the large contango in the marketplace. Oil is looking ahead to a time in the not too distant future when supply will tighten dramatically. And it may happen before Obama gets all those new little cars he is pushing.

The Journal says it reviewed the report and it warns that of the most delayed or canceled projects are located in politically stable non-OPEC nations like Canada. Those resources take more years to develop than crude oil found in the members of the Organization of Petroleum Exporting Countries, which is typically easier and cheaper to get out of the ground.

It also says that the rate at which world oil demand recovers remains a critical -- and unknowable -- variable. Several governments in the developed world are advancing energy-efficiency measures, which could temper the rise in oil prices as demand recovers. The IEA estimates oil demand this year will fall by 3%, the sharpest drop in about 30 years, to about 83 million barrels a day. The IEA estimates oil demand this year will fall by 3%, the sharpest drop in about 30 years, to about 83 million barrels a day.

Wow! What a response to yesterday report. It seems a lot of people are sick and tired of all the usually demagoguery from the anti-oil, anti-free market crowd. In fact 99.9 percent of the emails agreed that there are sick of hearing the whining and complaining and the false accusations from those who like to find conspiracies in every grassy knoll. Still I want to hear from the ones who don’t agree! Email me what you think a fair price for oil and gasoline should be! Also we will be talking about this very subject on the Fox Business Network online around 11.50a central time. Also see me on the FBN network at 10.50a and 1p central time. Email me your comment and questions and your requests to open your account at pflynn@alaron.com or call me at 800-935-6487.