Oil
It is worth noticing a few items:
Global oil supply fell to 83.4 mb/d in March to match diminishing demand; this corresponds to IEA 2009 demand forecast, 2.8 md/d less than in 2008 (see chart).- OECD industry stocks rose by 7.5 mb in February to 2,743 mb (7.2% above a year ago) i.e. 61.6 days consumption at the end of February (7.9 days above last year).
- Investors have started to anticipate the the world economy has reached its trough hence anticipating higher demand along the road.
- Oil companies have drastically cut into their exploration and development investments.
- Prices recently have tracked expectations for the global economy, seeking signs of demand recovery. However, pervasively weak market fundamentals could limit further gains until the summer.
- May 12, oil passed the $60/b mark, the first time since mid-November (oil prices were
down awhopping 70% in 2008) to consolidate at $57 today. It is moving towards its 200 day Moving Average (MA) which may check its progression, at least temporarily. - After reaching a low of $37.12/b on Feb 19, prices have strongly rebounded with a gain of over 60%. Whilst bearable for consumers (particularly for the non $ based with the current weakness of the $), further advances would act as an additional tax on consumers.
I however believe that the second half of the year will see oil prices strengthening:
- North Sea, Mexican and the US production is declining.
- Russian production which represents 75-80% of non-OPEC' growth is expected to remain flat or even fall due to the lack of investments.
- Most tar sands production in Canada is marginally profitable (only one project has not been shelved). Remember that oil extracted from tar sands/oil sands represent the largest reserve of oil in the world but is very costly to produce and not environmental friendly.
- Brazil offshore discoveries will not come on stream for a considerable period of time
- Venezuela with Chavez at the helm of the country is finding it difficult to finance its oil industry.
- Mature fields are declining faster than expected.
- According to the IEA, $26 trillion need to be spent by 2030 to meet demand. As of today, there is no way that this amount of money can be found in the coming 20 years.
- Investec calculated that $70-80 minimum is needed to justify the development of new, marginal projects
- OPEC has +/- 5 mb/d of spare capacity
The aggressive investors can however selectively position itself with oil stocks now, which, in addition, are also paying 4-6% dividend yields. Oil stocks underperformed oil and are due to a catch-up. We are in a situation not dissimilar to the early 80's when it was cheaper to buy oil by taking over a competitor than invest in exploration and development; this should therefore lead to strong a M&A activity not dissimilar to the early 80's. I however would personally feel more comfortable when oil is back in the low $50/b.
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