Monday, May 26, 2008

Oil's Dangerous Situation

“We are not very happy with this increase in oil prices," said OPEC chief Abdala El-Badri yesterday. "Volatility has nothing to do with the fundamentals. It has nothing to do with world demand… The price was at $130 and today is at $135, so it's really a crazy market.”
El-Badri, if you think about it, is rightfully nervous. While dollar weakness contributes to $135 oil, the last ten bucks have been driven mostly by supply-and-demand speculation. As the man who almost entirely embodies the supply side of the oil trade, El-Badri shouldn’t be happy that the world is collectively announcing that supply might fail to meet demand. For example:
The outlook for global oil supply “is a dangerous situation,” warned Fatih Birol, chief economist to the International Energy Agency. Birol and his crew just finished a study of about 400 oil fields across the world, and he announced yesterday that the IEA will lower its oil supply forecast in its next annual report. As far as we know, that’s never happened before.
"We are entering a new world energy order,” Birol continued. “The prices are very high, and demand did not respond in the last few years as much as one would have expected. The growth in terms of production was not great. We did not see enough investment… The oil investments required [to meet future demand] may be much, much higher than what people assume.”

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