Long-term supply worries, and the poor prospects for the dollar have pushed long-term oil supply contract north of $100 a barrel. This is a negative development for airlines and utilities, who buy oil under long term contracts.
Although the Financial Times does not give the whole profile of futures prices, it appears some interim prices are lower, presumably reflecting a belief that economic weakness will lower spot prices for a while. Non-agricultural commodities prices are sensitive to emerging markets demand.
From the Financial Times:
Crude oil futures prices for delivery until 2016 have surged above $100 a barrel as investors bet that oil costs will remain high in the long term even if they weaken in the short because the impact of the US economic slowdown.
Every futures contract until December 2016 finished last week above $100 a barrel for the first time after a strong rally in long-dated futures prices. The Nymex December 2016 future settled on Friday at $103.59 a barrel.
The surge in long-dated prices comes as the International Energy Agency, the western countries’ oil watchdog, meets financial, trading, producing, refining and economic experts on Monday to discuss the roots of the current price rise.
The meeting signals policymakers’ growing concerns about the rise in the oil price from about $50 a barrel in early 2007 to a record high of $111 last week.
Those concerns will be reinforced by the recent surge in forward prices, analysts said. Long-dated oil futures have outperformed spot prices during the past six months. The five-year forward price has risen 45.3 per cent since September, while the spot price has risen by 38.1 per cent.
Harry Tchilinguirian of BNP Paribas said the recent move reflected a shift in sentiment. “Long-dated prices, a proxy for the cost of new oil supply, are still high and volatile and continue to reflect the ingrained supply-side concerns in market sentiment – not just for this year, but beyond,” he said.
Among those concerns, analysts said, is rising inflation, increases in taxation in producing countries and a lack of access to reserves controlled by national oil companies in countries such as Saudi Arabia, Kuwait, Venezuela and Mexico.
Kevin Norrish, of Barclays Capital, which recently increased its 2015 oil price forecast to $135 a barrel, said rising inflation meant the cost of extracting oil from the Canadian tar sands had risen by 300 per cent since 2001 – a steeper increase than that of oil prices over the same period.
Jeffrey Currie of Goldman Sachs warned that the need for further investments was “likely [to] lead to explosive prices in the next couple of years, with oil prices potentially spiking toward $175 a barrel”.
The rise in long-dated prices is making it more difficult for industrial consumers, such as airlines and utilities, to hedge their fuel costs using futures as they can no longer take advantage of much lower forward prices to secure cheaper supplies.
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Color me skeptical (at least somewhat :-)
Firstly, the U.S. is about to enter a profound recession/depression. We’ll likely go the Japan route and lose at least a decade getting back on our feet.
Secondly, sustained prices above $3/gal will lead Americans to consume less, especially in the long term. Already, sales of SUVs are tanking and small cars like the Toyota Yaris are coming up (remember that for our greatly expanded GDP, the U.S. today consumes about the same amount of oil as it did before the 70’s supply shocks; a direct result of the efficiency initiatives undertaken after those price spikes).
Thirdly, while everyone expects China and India will make up the shortfall, China is looking increasingly fragile as well. Much of their growth is export-driven, and the lack of large internal markets means they’ll likely go into recession as soon as the U.S. and other export markets start contracting. Also, their increasing social unrest, high inflation, and inefficient allocation of capital (their banking system makes the U.S. look pristine) means they’re facing an implosion of staggering proportions real soon too.
Of course, I could be wrong. the Peak Oil mavens keep saying we’re actually at peak oil right now, in which case, the decline in demand I’m forecasting may not keep up with the reduction in supply that is predicted as well.
I’m about to put up an article from the hated but I think pretty sound Ambrose-Pritchard that makes a similar case. The consensus is that the Fed can beat deflation, I don’t buy that. It would be better if it could (maybe, I’m not even certain of that since the amount of pump priming we’d have to do would tank the dollar so badly as to create massive instability and much ill will). More on that with the post.
I look forward to your post.
BTW, Yves, when do you sleep?? I’m on the west coast so I’m not burning as much of the midnight oil. Either you’re extraordinarily dedicated to the financial world (and it is more riveting than anything on late-night TV, even the everpresent soft-core porn on cable at this hour :-), or you’re living outside the Eastern timezone…