Oil tsunami

$100 per barrel of oil - this started 2008

Oil tsunami. $100 a barrel of oil - that's how 2008 started. The psychologically important mark has been overcome. A few days later, a new sensation appeared: oil contracts with delivery dates at the end of 2008 reached $ 200 per barrel. How long have triple-digit oil prices come to us? Or is it a typical “bubble”, which, as you know, tends to burst?

Vladimir Milov, President of the Energy Policy Institute

Oil traders like to talk about various current difficulties in the oil market: hurricanes, strikes, the risk of potential conflicts. Popular legends explaining skyrocketing oil prices are increased demand for oil in China and India, and the prospect of running out of oil reserves. All these issues are indeed important and cause concern.

Growth for no reason?

However, behind the current news, one should not forget about the fundamental indicators of the market. Strikes after strikes, and oil production has grown quite steadily in recent years, it still outstrips demand. Iraq has reached the pre-war level of oil production, its production has increased significantly in Brazil, Angola, Kazakhstan, Azerbaijan, Libya. Short-term interruptions in production in individual countries due to armed conflicts, strikes, hurricanes are compensated by the supply of oil to the market from stockpiles, which are sufficient (this was the case, for example, after the oil production infrastructure in the Gulf of Mexico was damaged by Hurricane Katrina) .

At the same time, prices keep rising and rising, and new explanations are offered each time for their growth. For several years, traders have been talking about the fact that free production capacity in OPEC countries (wells that can be put into operation within a month without special costs) has practically disappeared from the market. In many respects this reason explained the rise in oil prices in 2003-2006. However, since the second half of 2006, OPEC's free oil production capacity has increased to 2.5-3 million barrels per day. And the prices are not going down.

Analysts have long argued that they are worried about the likely peak of oil production and the fact that the world has not discovered new major oil fields for a long time. However, production is growing, the peak is not visible, and large deposits have recently begun to be discovered again. In the fall of 2006, Chevron discovered the largest Jack Field field on the deepwater shelf of the Gulf of Mexico with potential oil reserves of up to 15 billion barrels (half of the current US oil reserves), and last fall, the Brazilian Petrobras announced the discovery of a field on the Brazilian shelf with potential reserves of 8 billion barrels. These two fields alone account for 2% of the world's oil reserves. At the same time, new technologies for oil production in hard-to-reach conditions (on the deep-water shelf) are being developed, with oil prices above $40 per barrel, the development of Canadian oil sands (more than 160 billion barrels of oil reserves) becomes profitable. Enough oil. However, prices are not going down.

We were told about the growth in demand in China and India. But demand growth rates in China and India have long been below 2004 levels. There is a risk of a conflict between the US and Iran - on this factor, oil prices heated up throughout 2007. But the US intelligence report published in December 2007, which stated that there were no real prospects for Iran to acquire nuclear weapons, seemed to remove this threat from the agenda. But prices are only going up.

From the point of view of the physical security of the market with oil, things are going better in the world today than, for example, four years ago. In December 2003, free production capacity in the OPEC countries was 1.5 million barrels per day, now it is 2.5 million barrels. The total oil reserves in the countries of the Organization for Economic Cooperation and Development (OECD) in December 2003 were at the level of 2.5 billion barrels, which would be enough for 51 days of oil consumption, now - 2.7 billion barrels (52.6 days). The current oil production at the end of 2007 exceeded its consumption by about 800 thousand barrels per day (86.5 million barrels of production against demand of 85.7 million).

Yet the price of Brent crude in December 2003 was just $29.9 a barrel (a little over $42 in today's dollars), and today it's close to $100. It turns out that there is an excess of oil in the world, free production capacity and stockpiles are higher than four years ago, production is growing, and prices have tripled (2.5 times in terms of the current dollar exchange rate). What's the matter?

bull market

The problem is that the phenomenal rise in prices not only for oil, but also for a wide group of commodities - metals, food, so-called commodities - in recent years has been largely speculative. It was partly justified by objective factors: growth in demand and tension in the production sector. But the main thing was that futures and forward contracts for the supply of commodities during a period of low interest rates in the financial systems of Western countries have become a more profitable means of investing capital than traditional instruments (stocks, bonds). Prices began to be dictated not by the producers of goods, but by exchange resellers of contracts.

After the outbreak of the global credit crisis in the summer of 2007, when stock markets collapsed, and an excess of cheap money remained, Western central banks were afraid to raise interest rates, fearing a slowdown in economic growth, and capital rushed into commodity futures with renewed vigor. Hence the jump in oil to $100 per barrel, with its physical excess and the threat of US strikes against Iran gone.

The mechanics of the speculation process is simple. With the help of highly qualified analysts, investors in commodity futures artificially heat up expectations about commodity prices, constantly highlighting market problems: rising demand, risks of supply disruptions. Traders themselves act as market makers, say, buying March futures at $100 per barrel, but not in order to consume the purchased oil, but expecting to resell the futures contract in February at $110, further heating up the price on talk of strikes, the threat of conflict, a cold winter, and even the assassination of Benazir Bhutto (there were also such explanations, although Pakistan is not an oil producer). It is important to remember that those analysts who constantly tell us about the reasons for the rise in oil prices are economically interested in warming up prices for it - their companies make money on it. On the contrary, you will never hear from them the answer why prices have not fallen, although the war with Iran has not begun.

This is how the usual bull market works, where participants play for an endless increase in quotes. Bull markets usually lead to underestimation of risks and the emergence of "bubbles" that later burst.

Price may drop

Of course, commodity futures markets, including oil, are pure “bubbles”. They will burst when the era of an abundance of cheap money, generated by a long period of low interest rates in the financial systems of Western countries, ends. This can be facilitated by a slowdown in economic growth in the world as a result of the development of the global credit crisis, which will definitely cause a drop in the growth rate of oil demand.

As long as the world continues to have low interest rates and the surplus of money generated by them, the price of oil could rise well above $100 per barrel. But it may fall, and quite sharply - up to 40 - 50 dollars per barrel. Nobody knows for sure. At least those banks that “confidently” declare today that oil will only rise in price have already been forced to fire top managers and write off more than $100 billion in losses as a result of the crisis in the mortgage loan market, which they called “reliable ".