- Oil demand growth will slow in the West, as cars become more fuel-efficient and ageing populations drive less
- Demand growth in the emerging economies will be supported temporarily by real estate lending bubbles
- The USA will allow domestic production to expand onshore, and will see its output soar
- US natural gas prices will tumble back to their historical levels around $4/MMBTU
The Board would probably have nodded its collective head, and thought this outlook was certainly quite credible.
Then suppose you added some extra detail and, for example, suggested that it was most unlikely there would be any supply shortages? Again, the Board would have nodded its head and felt it had done well in asking you for this Study.
Encouraged, you might have added that the US might well see record inventory levels, as supply increased well ahead of demand. You might even have shown an inventory forecast like the chart above, to demonstrate the potential.
It shows the history of US oil inventories since records began in 1982. And there indeed, 5 years later, we see that inventories have reached a record high.
At this point in your presentation, promotion and a large bonus would have seemed certain. But then the Board chairman would have remembered to ask one more question:
“Could you give us your price forecast over this period, please”?
To which you would reply that you were now going to surprise them. And seeing the look on their faces, you would quickly add that prices might not fall back to historical levels below $30/bbl.
A puzzled chairman might then reply:-“I see, you think prices might rise a little whilst the lending bubble took place in emerging countries? You think this might increase their demand on a temporary basis?”
“More than that“, you would reply. “In fact I see them rising to record levels on a an annual basis of $100/bbl or more, and staying there for 3 or more years“.
At this point, the Board would probably start to wonder if you were, in fact, completely mad. The chairman would shake her head in disbelief. How could someone capable of such clear analytical thinking, she would wonder, then get the price issue so wrong. Your potential promotion would disappear into thin air.
By now readers will, of course, have realised that the above is actually the history of the past 5 years. No Board chairman could ever have expected that policymakers would:
- Not only aim to force up prices in financial markets
- Also encourage higher prices by allowing high-frequency traders to dominate financial market trading
- Whilst also allowing the broken Brent marker price to continue to set global levels
The question for today’s Board meeting is therefore clear. “Do you really believe that oil prices can continue to be kept at today’s elevated levels by this combination of forces? Or do you worry that supply and demand may well soon bring us down with a bump?
WEDNESDAY EVENING UPDATE. The US government reported that oil inventories reached a new record last week, at nearly 400 million barrels. Whilst US GDP grew just 0.1% in Q1. One day markets will finally wake up to the fact that all the stimulus in the world cannot produce growth, when fertility rates are falling and life expectancy increasing. When they do, they may well rapidly start to question why oil prices are at record levels along with oil inventories.