The “four” big unknowns for oil

On Monday this week analysts raised their estimates for what the price of North Sea oil will be in 2011 and 2012 from $90/barrel to $105 and $100/barrel.

This follows the recent ‘unrest’ in Egypt, Libya and elsewhere, together with growing tensions over possible future unrest in other nearby oil-producing countries in the region (see chart below).

These prices are still lower, however, than the $115 per barrel that North Sea Oil (‘Brent Crude’) is currently trading at.

That means they expect a return to ‘normality’ later in the year and continuing into next.

The analysts (at Citi) describe the four big “known unknowns” of the Middle East [oil] crisis as:

  • How much supply is at risk?
    They estimate that more than three million barrels per day of supply could be at risk, “but don’t completely discount the risk of more significant volumes being affected”
  • What is the market’s ability to respond to capacity outage?
    Spare capacity is highly dependent on the ability of a few OPEC countries and especially Saudi Arabia to increase their production rapidly.
  • What is the impact on global oil demand?
    Apparently “Energy intensity per unit of GDP” (the amount of oil it takes to produce say £1billion of GDP] is “lower than at any time in history” [shurely shome mishtake, Ed.]. This implies that rises in the oil price will have relatively little impact on economic recovery.
  • What role does the Middle East and North Africa play in the long-term supply of oil?
    Whether regimes change or not, how much oil is under them thar hills? [“Dunes”, Ed.]
    That would imply that medium-term productive capacity is ‘probably’ unaffected. So they can expect a return to [relative] normality  not changing long-term oil price assumptions but consider sensitivity to change in risk profile (page 8).While these are all very valid points, of course, we would add that among the biggest known unknowns is also the extent to which tensions will spill through to Saudi Arabia, and to what degree the authoritarian backlash sweeping the region will spread beyond the Middle East.

As the FT adds, there are fifth and sixth unknowns: “the extent to which tensions will spill through to Saudi Arabia, and to what degree the authoritarian backlash sweeping the region will spread beyond the Middle East.”

To these I would add:

  • the degree to which estimates of oil reserves have been over-stated, plus
  • the degree to which China and India’s growth takes demand past the capacity of OPEC countries to supply and the newly-increased rates, plus
  • the degree to which the financial markets will drive the prices up on speculation, irrespective of physical supply and demand (as happened recently with Sugar, has long been the case with Gold, and was predicted last year to happen with Iron Ore), AND
  • the degree to which oil-producing countries (possibly under new regime control) may decide to hold back oil exports in order to boost their own economies and civil stability.

These are the uncertainties.

What I know for sure is that the price at the pump is now about £1.30 compared with £0.80 when Transition Farnham started two and a half years ago.

We said then that oil prices (and food prices) could be expected to rise significantly.

They have. And I see no reason for them to fall back.

The days of “normal” are gone.

And, courtesy of Citi Private Bank, “here’s a handy chart guide to what’s going on in the Middle East right now”:

Original article at the Financial Times.

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