Supply and Demand, Oil Speculators, and You

While a corrupt US Congress cripples US ability to develop domestic petroleum supplies, overseas production is slowly gearing up to take advantage of sky-high prices.

The world's finely balanced market for crude has been creeping into surplus for several weeks. Opec's monthly report says that demand this quarter will average 85.75m bpd. Supply was 86.8m bpd in April. The fresh output from Nigeria, Iraq and Saudi Arabia may push it significantly further into surplus.

The signs are already surfacing in global inventories. Opec says that stocks held by the OECD club of rich countries are above their five-year average, with "comfortable" cover for 53 days' use. US stocks have edged up for the last four months, though they fell last week.

...It is unclear whether hedge funds and investors piling into futures contracts have now become the driving force in a speculative bubble....Lehman's latest report - Is it a Bubble? - says commodity index funds have exploded from $70bn (£36bn) to $235bn since early 2006. This includes $90bn of fresh money. Energy takes the lion's share. Every $100m flow of investment money into oil lifts crude prices by 1.6pc, it said.

"We see many of the ingredients for a classic asset bubble," said Edward Morse, Lehman's oil expert.

This week has seen a dramatic surge in oil contracts dated as far forward as 2016. Futures have moved higher than the spot price, a rare event known as "contango". This can cut both ways: either as a sign of an impending supply crunch years hence; or that the futures market has become unhinged from reality....What we know is that the International Monetary Fund has cut its forecast for world growth for 2008 three times since last autumn to 3.7pc, and the United Nations is predicting just 1.8pc - technically, a global recession. The major oil forecasters have halved their estimates for crude demand growth to 1.2m bpd.

Almost all emerging nations have to slam on the brakes in coming months to curb inflation before it starts spiralling out of control. Inflation has hit 30pc in Ukraine, 22pc in Vietnam, 8.5pc in China, and double digits across most of the Gulf.

The countries that account for the most of the growth in oil demand over the last two years are almost all nearing the limits of easy economic growth. __Telegraph

More interesting commentary at Peak Oil Debunked and R Squared Blog.

The fundamentals of oil pricing put the market price near US $80 a barrel. Bullish oil speculators and easily panicked hedge investors fleeing the dollar have combined with record setting oil demand from emerging nations to push the price of oil into a higher level than can be sustained indefinitely. The US Congress has contributed significantly to the problem by cutting the legs out from under domestic oil production. It is clear that the Congress intends to maintain this stance at least until the November elections, hoping that voters will not be smart enough to blame incumbents in Congress.

Expect this oil price bubble to burst sometime after early November, 2008. But then the next oil price bubble will probably begin before long after that, except it will start from a higher plateau, and reach higher peaks before it bursts in its turn.

We will never run out of oil. But the price of oil will certainly be subject to the influences of panicky investors, corrupt politicians, opportunistic speculators, and the economic booms and busts around the globe.