Yesterday, the International Energy Agency (IEA) increased its expectations for 2011 global crude oil demand by 200,000 barrels per day to 89.5 million barrels per day. The agency said demand will grow in 2012 to 91.0 million barrels per day. Combined with today’s U.S. Energy Department’s report that domestic crude inventories declined by 3.1 million barrels last week (a million barrels more than analysts were expecting), the price of oil is heading higher today.
Let me point out that the IEA tends to be conservative when it comes to their oil demand forecasts. Over the years they’ve ended up increasing demand forecasts as time passes. So, for them to warn the global markets “that unless OPEC increases oil production by at least 1.5 million barrels a day, world oil demand will surpass available supply during the second half of this year” is something investors should take note of.
In my opinion, the price of oil will flop around in the high $90’s until the market figures out what Washington is going to do about our spending habits and the debt ceiling. Then I believe it could be heading a lot higher. I’m not alone in this opinion.
In May, Goldman Sachs Group (GS) raised its Brent crude oil forecast for 2012 to $140/bbl, up from $120/bbl and it raised its 2011 year-end forecast to $120/bbl from $105/bbl. Goldman’s analysis was based primarily on its opinion that 1.5 million barrels of Libyan oil would remain shut in for at least a year. It looks like they were right about that. Brent closed at over $117/bbl today.
In the report, Goldman said “oil supplies will become critically tight in 2012, largely because production leader Saudi Arabia won’t be able to pump as much extra oil as many people believe.” They went on to say “it is only a matter of time before inventories and OPEC spare capacity become effectively exhausted, requiring higher oil prices to restrain demand.”
The last time demand for oil got within 2 million barrels per day of global production capacity (in early 2008) the price of oil spiked to over $147/bbl. I hope we can avoid the price spikes this time around, but when demand for a critical commodity approaches supply it is a powerful force.
All crude oil is not the same. The conflict in Libya has 1.5 million barrels per day of light sweet crude oil off the market. The Saudi Arabian excess oil supply is heavier and sour (contains more sulphur), so it is not a good replacement. Violence in Yemen, Iraq and other producing nations has another 500,000 barrels per day or more of oil off the market.
China and Japan continue to face electrical power shortages, relying on additional diesel and oil fired generation facilities to meet industrial and consumer energy demand. Pakistan and several Middle East countries are also facing power shortages, using diesel & oil fired generators to produce electricity. Due to increasing domestic demand, Saudi Arabia and other OPEC members are reducing oil volumes available for export.
When I talk to people outside of the energy industry, it is clear they don’t grasp the magnitude of the problem. The world now consumes close to 90 million barrels of oil per day and demand is going even higher, even with the global economy in bad shape. When President Obama announced that he had authorized the sale of 30 million barrels from our Strategic Petroleum Reserves, I wondered if he even realized that was only 8 hours worth of global supply.
Wind, Solar and biofuels are just niche players in the world’s energy supply. They will never be the solution, no matter how much we all want “renewable” energy supplies. The crisis just ahead of us is a shortage of transportation fuels. Obviously, windmills and solar panels don’t produce liquid fuels. Even with 40 percent of our nation’s corn crop dedicated to ethanol feedstock, biofuels will never be more than a single digit percentage of our fuel supply.
What should investors do?
You can sit around and blame high oil prices on the speculators or you can decide to make some investments that hedge your portfolio against higher fuel costs.
As President of the Energy Prospectus Group (www.energyprospectus.com) my focus is on finding undervalued oil & gas firms and bringing them to the attention of our members. Our Sweet 16 Growth Portfolio is heavily weighted to oil, primarily small and mid-cap upstream companies based in the U.S. and Canada.
I’m constantly on the lookout for companies that are poised for significant production and proven reserve growth. They must also have quality management and technical teams capable of carrying out their business plan. A strong balance sheet and access to capital are a must. The companies that have cleared my screening process have consistently delivered market beating results.
I’m bullish on some of the Bakken Shale and Eagle Ford oil producers. Due to weather related delays in North Dakota, growth of Bakken oil production has slowed down a bit but things are drying out up north and production will be accelerating into the fall. I also like several Canadian based companies that are rapidly increasing their production and reserves in Columbia. Investors should be aware that West Texas Intermediate ( WTI ) oil will continue to sell at a deep discount to other crude oil, due to a physical bottleneck in Cushing, Oklahoma (the site where the WTI contracts traded on NYMEX are settled). It is a very good idea to check where a company is selling their oil production before you invest.
I invite you to check our out website, www.energyprospectus.com, for specific recommendations. You can sign up for our FREE newsletter on the top of our home page.
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