(After a brief hiatus, mostly tied to ‘Macondo-Fatigue,’ we’re back, with more observations on the broad energy scene. I thought I’d open with a review and update of the initial outlook from the first issue, in March. )
My view of oil supply fundamentals is largely unchanged from Issue 1 – a hole in the global project pipeline, a consequence of runaway prices and service costs during 2006-8, will limit new nonOPEC capacity additions from 2010-2013. There is a risk of some supply headwind from the Macondo accident, which may slow, growth in deepwater development for some time. While nonOPEC output may not be peaking ‘forever,’ it may appear so for a couple years. The ‘upside’ wildcard to supply is the ramp in output from Iraq, as/if rehabilitation projects come onstream ahead of plan, but my assumption is that there will be no material change in Iraqi output before 2012.
The primary thesis for much higher oil prices assumed resumption of demand growth, perhaps in 2010, driving some balance in 2011, and much tighter markets by the end of next year. This, timeline, however, appears too optimistic. US consumption remains anemic, as is most OECD (emerged market) demand, and Chinese consumption, while volatile, seems to have slowed, for now. My view on early 2012 oil prices, once $125, is more like $90 – higher, but not dramatically so. A re-emerging risk to price is not demand, but the move from low $70s to $80 as the US dollar has retreated – a worrisome sign — higher prices with weak consumption. Most recently, diesel consumption, an indicator of US economic (and global trade) activity, has rolled over.
The natural gas outlook may have deteriorated yet more from its glutted status in March. European demand has stabilized, but US supplies continue to grow, and talk – exporting natural gas highlights the shift in attitude from only a few years ago. Legislation to create new demand for gas, including industrial vehicles and ‘gas for (coal) clunkers, is sensible, and under consideration in the sausage machine of Our Nation’s Capital, although moving quite slowly toward reality.
In conclusion, the real driver of energy fundamentals in recent years have progressed through the usual cycle of life – demand drives more investment in supply, while the short term pressures force higher prices that eventually discourage consumption. While some of this lost demand has shifted to renewables, I attribute most to improved efficiency and economic weakness.