384. THE GROWING GLUT
A number of new analyses suggest a growing, long glut:
Oil analyst Philip Verleger claims that OPEC needs to reduce output by at least 7 million barrels a day to balance supply and demand:
Just how daunting is OPEC’s challenge to rein in falling oil prices? Beyond its control, if economist and oil-market analyst Philip Verleger is right.Stocks are definitely rising. The oil market is currently in a "super contango", and crude is piling up not only in monitored storage like Cushing, OK, but in tankers parked at sea:
Mr. Verleger, a former Carter administration official, academic, and energy-industry consultant, says OPEC can forget about tiny production cuts of 1 or 2 million barrels when it meets later this month in Algeria. The cartel needs to wipe out at least 7 million barrels per day of oil production to bring oil markets close to balance, he says, according to Platt’s The Barrel.
And that’s not likely to happen, which spells even more happy times for oil bears, Mr. Verleger says: “Since cuts of such magnitude are out of the question, one should expect prices to come under further downward pressure.”
His thesis? Global demand for oil has cratered much, much more than the spreadsheets used by groups like OPEC and the International Energy Agency. Mr. Verleger says global demand in December dropped to 81.6 million barrels a day, compared with 86.8 million barrels a year ago. That’s dramatically uglier than OPEC’s most recent diagnosis of oil demand, which put fourth-quarter global demand at 86.2 million barrels per day, up from 85.9 million a year ago.Source
Royal Dutch Shell Plc sees so much potential in the strategy that it anchored a supertanker holding as much as $80 million of oil off the U.K. to take advantage of higher prices for future delivery. The ship is one of as many as 16 booked for potential storage instead of transporting crude, said Johnny Plumbe, chief executive officer of London shipbroker ACM Shipping Group Plc.More broadly, a new report from the World Bank called Global Economic Prospects 2009(pdf) declares that "Like earlier commodity booms, this one has come to an end." and states:
The tankers, if full, hold about 26 million barrels worth about $1 billion, more than the 22.9 million barrels sitting in Cushing, Oklahoma, where oil is stored for delivery against Nymex contracts. U.S. crude inventories rose 11 percent this year to 320.4 million barrels, according to the Energy Department.
“All the market operators keep placing oil in storage,” said Francisco Blanch, head of global commodities research at Merrill Lynch & Co. in London. “Even though the contango is steep, it could get steeper.”Source
The strength, breadth (in terms of the number of commodities whose prices have increased), and duration of the current commodity boom have prompted speculation that the global economy is moving into a new era characterized by relative shortage and permanently higher (and even permanently rising) commodity prices. This outcome does not appear likely. Over the next two decades, slower population growth and weaker (though still strong) income growth are projected to cause trend global GDP growth to ease (figure O.3) and, with it, the demand for commodities.According to Andrew Burns, Lead Author of the report:
Over the longer term, the supply shortages that contributed to the sharp rise in commodity prices are expected to ease. Demand for energy, metals, and food should slow due to weaker population growth and an expected reversal in China’s high demand for metals as investment rates there decline.SourceNow that things have settled down, the commodities price spike/collapse of 2008 is looking more and more like a mundane rerun of the commodities price spike/collapse of the late 70s. Except this time we had a whole army of chicken littles, pumped up by the steroid of the internet, to loudly worry and moralize about it 24 hours a day. Six months ago, we were all going to die because we were running out of everything. Now the same stuff is piling up in overflowing tankers, silos and warehouses.
Peak everything. Honestly, how butt stupid did you have to be to buy into that? How likely is it that mankind was running dry of every single natural resource, at exactly the same time? Not too likely, as we've seen. The only thing that was really peaking was financial overextension and hype.
-- by JD