The Oil Price
What to say? The correlation of the oil price with the US dollar (and QE 2 and beyond) continues to astound, but also moves with global equity markets (88% correlation with the S&P, according to Mike Rothman, Cornerstone Analytics). I would argue that the real driver has finally shifted (from the US dollar, etc) back to prospects for the global economy, whose energy demands are still growing, rather than US fundamentals, where some cyclical recovery masks a secular decline in US share of the oil consumption market. In fact, while Brent (North Sea based oil marker) prices have historically lagged the US (WTI) benchmark, the spread has gradually reversed, especially since mid 2008, as, in part, Rest of World energy demands grow faster (now both percentage and absolute) than stagnant US fundamentals. Thus, the apparent resumption of demand growth has shifted the focus of energy investors to the 2011-2013 period, where very weak non-OPEC supply growth, combined with relatively inefficient consumption patterns in the fastest growing markets (China, India, Middle East), will erode the OPEC Excess by 2013. The single most important determinant of global oil prices (although there are many) is OPEC spare capacity.
Since our first issue, in April, the perception of out year, global demand has shifted from robust to slack, to and to increasingly robust again. The consensus is that independent and national oil companies will meaningfully boost spending in 2011, leading to some nonOPEC supply growth by 2014 – but much higher interim prices. We’ll see.
Natural Gas
Ex Post Facto Resource Nationalism Strikes Israel – Following a significant natural gas discovery last year (Tamar, by Noble Energy and Israeli partners), and increasing prospectivity elsewhere (Leviathan), a mid-November study has concluded that Israel should impose a progressive 20-60 percent tax on natural gas profits. This would replace the current 12.5% royalty, which was put in place to encourage exploration of the Israeli offshore. Add the likely claims of neighboring Lebanon, and, at a minimum, the 2013 startup could be at risk. Given the US-based links to the Israeli resource, a negotiated settlement is likely, but may pinch returns on future opportunities.