Threat of Oil “Permafrost”

By John Richardson

Saudi Arabian oil minister Ali al-Naimi on Tuesday did his best to calm the oil markets by arguing that the kingdom had met all its customers’ requests for crude, and was ready to raise output to full capacity of 12.5m barrels a day.

“My only mission is to convey to you that there is no supply shortage in the market,” he said.

It is the perception of a future shortage, rather than current demand and storage levels that has, in all likelihood, raised prices to their highest levels since H1 2008. And we all know what happened in the second half of that year.

It would, of course, take another Lehman-style event to trigger a repeat of H2 2008.

But as HSBC has warned, even if that doesn’t happen, crude prices could still cause a re-run of last year.

“While confidence has clearly rebounded over the last few months, it is no more than a repeat of developments seen at the beginning of 2011,” wrote the bank, in a report released earlier this month, which we have referred to before.

“As last year progressed, initial optimism gave way to more grounded realism. Rather than a sign of lasting recovery, higher oil prices may simply be a contributor to persistent permafrost.”

Let us hope that Saudi Arabia is successful.

On Sunday, Christine Lagarde, managing director of the International Monetary Fund, warned that oil prices represented the big, new threat to the world now that Greece has receded from the picture.

The danger is that the financial speculators, who have helped drive crude prices to unsustainable levels, will once again cause major damage to the world economy.

If the current price of oil was justified by economic fundamentals, we would see evidence in petrochemicals markets.

There is no such evidence. Producers across several product chains have cut operating rates, and struggle with depressed margins – a reflection of the “demand destruction” being caused by costly crude.

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