Coming sooner than you think - $100 oil
July 19, 2007
With the way the analytic crowd is kicking around triple-digit oil prices, you'd think central bankers would be pulling out their hair and soaring prices would be capping demand.
But it isn't necessarily so. What we're finding out, courtesy of Jeff Rubin, is that demand for crude is a lot less price elastic than we were led to believe.
Not in the developed economies of the Americas and Europe, mind you, where gasoline taxes and subsidies for bio-fuels have cut crude oil consumption for two years running. But in the developing countries like China and even oil-producing regions like Russia and the Middle East, where demand this year is expected to grow by four times the rate in our backyard.
And all this comes with supply hard pressed to keep up.
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"The arrival of $100 (U.S.) a barrel oil is likely to come earlier than first predicted back in 2005, when we pegged the end of the decade as the likely period," said Mr. Rubin, CIBC World Markets' chief economist and strategist. His charts suggest U.S. prices should set a new record high of $80 a barrel this year on tighter markets, climbing to an average of $90 in 2008, and then crossing the unthinkable barrier towards the end of next year.
He's not alone. On Tuesday, Goldman Sachs warned that the price of crude oil could top $90 a barrel this autumn and hit $95 by the end of the year, if the oil cartel keeps oil production capped at current levels.
The cartel's latest oil market report contends that world oil demand in 2008 will grow moderately while supply from rival producers will expand, reducing the need for crude from the exporter group.
Oil prices yesterday put on another spurt after a surprise drop in U.S. gasoline inventories last week, sending the slippery commodity higher by $1.03 a barrel to $75.05 on the New York Mercantile Exchange, a 47 per cent jump from a January low of $51.13.
"The significant gasoline draw instead of an expected gain, coupled with the drop in imports, is a dramatic story," said Tim Evans, an energy analyst at Citigroup Global Markets Inc. in New York.
Also contributing to taking crude to 11-month highs has been speculative long positions taken by hedge funds in recent months. Jennings Capital analyst Greg Chornoboy notes that the August crude contract expired on the InterContinental Exchange (ICE) on Tuesday at $77.33 a barrel, just falling short of the all-time high of $78.65 set last August. "With yesterday's bullish [U.S.] inventory report, speculative money may just have found new strength in challenging the record," he said.
RBC Dominion Securities, in its latest U.S. equity outlook, takes an "overweight" view of the energy sector, calling it "one of the most promising long-term themes buoyed by the rapid industrialization of emerging economies." Its favourite groups are drillers, integrated oils, and refiners and marketers, citing attractive valuations, return on equity and profit momentum. And its "stocks of interest" are Pride International Inc., ConocoPhillips Co. and Tesoro Corp.
All of which rings sweet for investors long oil stocks this year. The heavily weighted TSX energy index has quietly climbed some 22 per cent in 2007, free from the consolidation mania going on in mining. But Mr. Rubin predicted that runaway oil prices are "going to trigger the huge kinds of M&A deals that we've already seen in the base metals sector."