What's Really Going On With Oil Prices
The Sunday Age
Sunday January 18, 2009
PULLING up to the service station a few days ago I got a fright. Petrol has jumped from $1 to almost $1.20 in a matter of days. I thought the latest oil crisis was over. What's happening?
The price of oil (always quoted in $US per barrel) hit $US145 ($A214) last June - this week it's down about 70 per cent at around $US35.At the pumps that means oil prices, after nearing $2 a litre, fell to less than $1 a litre before Christmas. Last week's retail price jump was, according to the RACV, "inexplicable". But that's not unusual. It's becoming clear that a lot of the action in the oil market is almost impossible to predict.And the extraordinary feature of the oil market is that oil industry insiders seem to have a perfectly rational explanation for the price at any level.For many years the only person I'd listen to on oil was T.Boone Pickens: I just thought an octogenarian Dallas-based oil billionaire with a name like that had to know more than most.Then in September last year Pickens said oil would "never again" fall below $US100 a barrel. He got it completely wrong: since then the Boone Pickens investment fund has lost $US2 billion.In recent years Pickens' arch rival as the oracle of oil has been Arjun Murti of stockbroker Goldman Sachs. He's the guy who said back in 2005 that oil would zoom past $US100, and so it came to pass. Of course when it did come to pass, bathed in the limelight, Murti then said oil could hit $US200.These days Murti says oil will average around $US55 in 2009: that estimate is in the consensus range as most brokers believe a slump in oil consumption will outweigh any other factor affecting the commodity.Johan Hedstrom, an oil analyst at Southern Cross Equities, says that by this time next year oil will almost certainly be higher - but it won't be back above $US100. If currency exchange levels remain unchanged we'd be looking at pump prices maybe in the range of $1.20 to $1.40.That depends, of course, on whether you believe anything oil analysts say any more.Despite the roller coaster in oil prices over the past 12 months we're expected to believe that global oil supply and oil demand is roughly equivalent at around 85 million barrels a day. All assumptions about future oil prices lead from this model ... but the model clearly does not work.On the supply side - the oil producer side - there are huge gaps. First of all Saudi Arabia, the world's biggest supplier of oil, has a unique way with statistics. Nobody really knows how much oil it has left in the huge fields that have underpinned world supply for almost a century. Similar questions arise in relation to big OPEC producers from Iran to Venezuela.Meanwhile, the demand side - the amount of oil the world wants to consume - is impossible to fathom. This is surely proved by last year's "super-spike" in oil prices that was perhaps driven by China, or maybe by hedge funds, or it could have been created by "peak oilers" during a related super-spike in the climate change debate.Although it's impossible to know where oil prices will go with any precision, it seems almost everyone in the industry believes the only direction prices can go is up.Last week, as the market staggered under the ongoing blizzard of bad news and downgrades, one Top 300 company got a profit upgrade - oil refiner Caltex.As it turns out, Caltex has been cutting production as fast as oil prices have been falling, and then in the past few months as the Aussie dollar recovered against the US dollar the company got a boost. After hitting a high of $17 in 2008 before plunging to $6, the stock last week rose to $7.35.And Caltex investors are not the only ones betting oil prices will soon rise. Believe it or not, speculators and oil companies are hiring supertankers, filling them with oil and leaving them to drift around the oceans in expectation that prices will rise.A supertanker can store 2 million barrels - if the price per barrel increases by even 10 per cent in a few months it's worth leaving a tanker at sea. The managing director at the world's largest oil tanker operator, Norway-based Frontline, says the company is experiencing its strongest demand in years.Will the supertanker gamblers make money? I wouldn't bet against them. Keep your tank filled up - and fill up on Tuesdays (it's cheapest).kirbyjourno@hotmail.com
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