Peak Oil is You

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Page added on December 30, 2007

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What the Fundamentals Say About Future Oil Prices

…I would bet that if prices do fall sometime soon, maybe after the peak winter demand season, exporters will cut back fairly quickly to try to keep the price above $80 or so. Further, when prices eventually begin to rise again, perhaps in the Spring or Fall of 2008, exporters will then be slow to raise production, having just experienced lower prices. So I think a possible reduction in the oil price next year would be shallow and would likely be followed by a counter trend leg up that will probably bring the price well above $100.

My thesis is based in part on the hoarding mindset that now dominates the oil market and is hardly ever discussed. Exporters (read OPEC, particularly KSA, UAE, Kuwait, and Venezuela) are now addicted to high and rising oil prices. Their ever increasing cash flows from oil have led to their making huge future capital commitments; they are not willing to see falling oil prices endanger those commitments. They also know that due to tight global supplies relatively minor production cuts are sufficient to raise prices. Finally they now believe that oil in the out years will only get more expensive. Thus near term production cuts will also be rewarded because the oil not sold now can be sold later for more money. In summary, exporters today have their hands on a hair-trigger for raising the oil price and they will not hesitate to pull it if the price falls much below $85. I summarize this series of attitudes on the part of oil exporters as the

Meanwhile global oil production is now at an historically high level but still does not seem to be able to satisfy demand. The Saudis and the Iraqis have both managed to increase production by roughly 500,000 b/d helping to cause the 85 mb/d global production plateau that has existed for nearly two years to be eclipsed during the past few months; production now seems to be running in excess of 87 mb/d as shown in this chart:

Yet the price of oil refuses to sink. Each time oil goes into the high $80s it seems to bounce right back in the face of tight inventories. U.S. crude oil inventories keep sinking

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