Well, at the end of the day, slowing economic activity inevitably reflects – badly – on energy and commodity prices (duhh), especially when the macro correlations (strong dollar-weak commodities, etc) are so fierce. During periods of economic growth, a key component in commodity valuation is the recognition of supply bottlenecks, and a price attached to inventory (or security of supply) above/below ground, beyond the present value of the commodity in use. In recent years, this store of value has also grown to include the ‘hard asset’ (not fiat currency) option. But, when growth, or the cost/financing of inventory and security, is in question, this additional valuation can easily go to zero (or less). The effect of a pretty fearful market has been to trim 15% or so off the global oil benchmarks — compare to the 70% downdraft in 2008-9, and 30% or more from many pure energy equity valuations, although consumption patterns have not yet changed much. Analysts talk about inventories, and the broad recognition is that the 2008-9 glut (oil, products, chemicals, metals) was global, but it’s always harder to see excess inventories through the long and winding supply chain between the well and final consumption — they come out of the woodwork, especially as demand erodes. So it may be too early to identify excesses this time around, but there has been no comment of ‘crude or product on the water,’ which was a headline metric in 2009. Chinese imports and apparent consumption continue to be robust, with signs that the Inflation Fight is winding down. It makes sense to worry about Europe and the looming US Recession, but could it be that China is about to shift from the brakes to the gas?
Is there more downside for the oil price? Of course! The marginal cost of supply is closer to $75 (Canadian oil sands), leaving a $30 risk for the more credible benchmarks (Brent, etc). However, absent greater growth concerns in Ch-India, global demand will probably continue to grow and, with ongoing Middle Eastern (and, now, Russian) concerns, a modest security premium is still in place, even amidst a global slowdown.
In the “while we were watching something else” category, MEES reports that Iran has ‘fired up’ its (and the Middle East’s) first Nuclear fueled Power Plant, around Labor Day, and is delivering power into the grid. The plant is running a little over 5% of the 915 MW design capacity, and is forecast to reach that level by year end. Two more units are scheduled for final assembly/installation for startup by 2013, with about 40% of components manufactured by the Iranians themselves (Russia and Germany splitting the outsourced parts in a 60/40 mix). The country has a plan to generate 20 GW from (roughly 20 units) nuclear power by 2030. For comparison, the US has 150 plants of various sizes, China targets 75 GW by 2020. With roughly 20 nuclear power plants in the queue for Jordan, Kuwait, the UAE, and Egypt, it would seem that projects in the other Gulf States are inevitable (why should Iran have all the nuclear power in the region?).