Crude Oil Price and Market Analysis
The oil market is consistently
volatile and has large price fluctuations due to macroeconomic and geopolitical
factors. It is also clear that world oil consumption is growing. World oil
demand has grown to 90 million barrels per day. In recent years oil has seen
large swings in price to a maximum of 145 USD per barrel in 2008 and a low 40
USD a barrel in 2009 due the global recession.
However, in 3 to 4 months after reaching these lows, oil rebounded to
reach an average of 100 USD for Brent crude oil during 2010-2012. OPEC and more specifically Saudi Arabia no
longer have the ability to influence the market as they once did, they no
longer have the necessary spare capacity and the recent events of the Arab
Spring have increased the regions need for oil revenues to maintain stability.
Crude oil is fundamentally driven by global supply and demand. Although oil is used as a commodity asset
class in financial markets and can be influenced in the short term by
speculation from traders, especially large hedge funds, oil has the
consistently returns to the fundamentals, the laws of supply and demand.
Examining the fundamentals:
This is a graph produced by the U.S.
Energy Information Administration (EIA) which tracks the change in the supply
and demand for crude oil. This shows
that demand for oil is currently at 89 million barrels per day and supply is at
88.5 million barrels per day. According
to these figures world has no cushion in terms of oil supply, while the world
economy is forecasted to grow by 3.3 percent rate by the IMF. Oil production is barely keeping up with the
demand and is supporting the high price levels currently seen in the market. The supply of oil will need to grow at least
7 percent a year in order to compensate for the declination rate of existing
wells and the predicted 3 percent growth of the global economy. Furthermore a significant proportion of wells
have high costs of production as they come from mature fields. North Sea oil is a prime example of this as
many wells are not profitable with an oil price below 90 USD. This also
provides additional support to market as it creates a price floor that, when
breached will cause high cost wells to be shut down.
The global economy is being sustained, in part,
by the nascent recovery of the U.S. economy.
There are new theories stating that the U.S. economy will become much less
dependent on foreign oil in the coming years due to recent discoveries of shale
oil and gas. In order assess this theory
one must analyze the current status of the U.S. energy balance and evaluate how
much the U.S. actually depends on foreign oil.
According to WTRG Economics the current U.S.
consumption of oil is approximately 19 million barrels per day. U.S. consumption reached a peak in 1979 at
approximately 21 million barrels per day.
Due to rising oil prices and the Iranian revolution the U.S. curtailed
its consumption and brought it down to a low of 14.5 million barrels per day in
1985. In the years since, U.S. consumption of oil has steadily increased to
again reach the high of 21 million barrels of oil per day from 2003 to
2007. In response to the global
recession in 2008, the U.S. decreased
its consumption of oil and it has held steady at around 19 million barrels per day from 2008 to
present. With the U.S economy forecasted
to grow 2.1% by The Economist and
it would be reasonable to expect U.S. consumption to increase. Turing to the supply side, we have the following information by the EIA. U.S.
oil production peaked in 1985 at 9 million barrels per day. Production steadily declined until it reached
an all a low of 4.9 million barrels per day in 2009. Since then there has been an uptick in
production and in 2011 the U.S. produced 5.6 million barrels per day. With new discoveries the EIA projects that
the U.S. will increase production by 700,000 barrels per day during 2012 and
reach 6.8 million barrels per day in 2013.
This means the U.S. will remain a net importer of at least 12 million
barrels per day. Increased U.S.
production will not substantially affect the balance of the global crude oil
supply and demand as its imports will support the market.
One of the largest factors that has contributed
to the increased demand of oil has been the rapid growth of China as it has
developed. China is a new force in the
global economy and even though its growth has decreased to 7 percent a year it
still retains considerable influence. While its growth is no longer in double
digits, its demand for oil will continue to increase with its GDP. While there
is concern about its dependency on exports, research by Credit Suisse has shown
that consumer spending has steadily increased at a 10% rate in recent years.
By examining the long term chart of the price
of oil from 1947 to 2012, produced by WTRG Economics, it shows how major world
events can affect all markets including the oil market and can cause crude oil
to test its support levels. This chart
also reveals that no matter how large the event, the price of oil ultimately
returns to its equilibrium price level determined by the supply and demand of
the physical market. This chart also illustrates
that from 1987 to 2005 the price of oil was kept artificially low due to the
influence of swing producers inside OPEC.
Once OPEC´s spare capacity ceased to exist in 2005, the price of oil returned
to supply and demand fundamentals. Taking
into account inflation what we interpret from this graph is a current support
level of 80 USD a barrel for WTI and 100 USD for Brent.
It is Hispania Petroleum S.A.´s analysis that
in the next 5 years oil prices will average above 100 USD a barrel for Brent. It is also clear that oil prices will
continue to steadily rise in keeping with global demand at the very least to
keep up with inflation.
