Oil Price Should Move Higher After Labor Day

Dan Steffens  |

Despite the economic slowdown in the United States, global consumption of oil keeps going up.

On August 10 the U.S. Energy Information Administration (EIA) revised its 2011 and 2012 global oil demand forecasts.

  • 2011 demand for oil will increase 1.6% to 88.2 million barrels per day
  • 2012 demand will increase another 1.8% to 89.8 million barrels per day
  • According to the EIA, by mid-2012 the world will be consuming over 90 million barrels of oil per day.  That is very close to what most experts believe is the world’s current production capacity.

“Production Capacity” is defined as the amount of oil the world’s fields can produce at maximum output without damaging the reservoirs.

On August 12, Barrons ran an article discussing a new Deutsche Bank report about startling reductions in oil output by 20 oil majors during the 2nd quarter of 2011.   Keep in mind that we had very high oil prices during the quarter, so these companies had all the incentive in the world to produce as much oil as they could get to market.  These companies are all investing massive amounts of capital, yet they cannot keep their oil production levels flat.

The increase in demand is not being offset by new discoveries, and the supply-demand equation is becoming ever more constrained. The Barrons’ report concluded “Even in a low growth environment, we are set for firmer oil prices, and ultimately periods of further volatility after oil prices push well beyond $100/bbl again”.

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Barrons is not alone.  Raymond James, in their August 15 “Energy Stat of the Week” report, said they see no increase in oil production outside of OPEC this year.  Their report hinted that Saudi Arabia is having trouble reaching their target of 10 million bbls per day. All other OPEC nations are now producing at capacity, except for Libya that will be offline for quite sometime. When the world notices that Saudi production has peaked out, the price of oil will firm up.

On August 17 the International Energy Agency’s Oil Market Report revealed a rather stunning forecast.

The IEA, based in Paris, thinks demand for oil will be quite a bit higher than the U.S. based EIA report referenced above.  The IEA says that total global consumption of oil was 88.0 million barrels per day in the 2nd quarter and they are now forecasting demand of 90.7 million barrels per day in the 4th quarter of this year.  Where is this extra 2.7 million barrels per day coming from?

  • The IEA’s full year demand forecast for 2012 is now 91.1 million bbls per day.  That is 1.3 million bbls per day higher than what the U.S. based EIA is forecasting for next year.

On the supply side of the equation, the IEA reported that the world produced 88.7 million barrels per day in July (up 1.3 MMBOPD from July, 2010) but it appears that every country in the world, including Saudi Arabia, is producing just about all the oil they can.

In my opinion, the world’s producers are going to be challenged to reach 90 MMBOPD in 2012, much less the 91.1 MMBOPD of oil demand expected by IEA.

Most of the oil & gas stocks we are tracking over at Energy Prospectus Group (www.energyprospectus.com) are now trading at a discount to my calculation of their break-up value.  Bargain hunters should be focused on adding high quality mid-caps with growing reserves in the U.S. and Canada, many of which you can find in our Sweet 16 Growth Portfolio.

Patterson-UTI Energy (PTEN) and Mitcham Industries (MIND) are two service companies that value investors should take a look at.  Both companies are on-track for strong 3rd quarter results and potentially record earnings this year.

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