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Ag Metal Miner

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Will Oil Demand Growth Be Enough To Tackle Inventories?

Offshore

Two articles in the Financial Times this week give polar opposite views on the direction for oil prices next year.

The first is a report on bets taken by the highly successful hedge fund manager Pierre Andurand on the direction for prices. Andurand is predicting prices will rise above $100 per barrel by 2020 as demand growth exceeds the ability of the U.S. shale industry to meet demand at current prices.

The article quite reasonably points out investment in the oil industry has fallen dramatically as prices have declined, saying on average 40 new developments were approved annually between 2007 and 2013 by the oil majors. That number fell to just 12 last year, as the low oil price left only the most simple and straightforward projects viable.

Furthermore, Andurand believes the U.S. shale industry will find it increasingly difficult to justify new investment if prices remain at current levels — as new fields will become more expensive to develop and maintain, the industry is surviving on the low-hanging fruit at present.

The second article reports on the International Energy Agency (IEA) announcements last week that, despite robust consumption, the current level of cuts is failing to curtail commercial inventories fast enough and still stand at some 3 billion barrels.

Noncompliance from some oil producers exempted from the supply cuts agreement and widespread cheating by others have failed to deliver the level of constraint needed to counter rising U.S. shale output. Related: These Major Oil Buyers Are Quietly Prepping For A Supply Shock

Impacts of Oil Price Fluctuations on Metal Prices

True, oil prices have rallied some 8 percent since July as stockpiles have eased and reports of global demand rising have encouraged the market — but here is why this is relevant for more than just the cost of a tank of gas.

Oil prices are one of the key drivers, along with GDP and the strength of the U.S. dollar, in determining metal prices. A continued weak oil price would help constrain rises in metal prices next year, at a time when stock markets show no sign of falling and the U.S. dollar has remained persistently weak this year. Metal prices are on a rise this month and many consumers fear we are in for a period of sustained price increases through the end of this year.

Let’s hope the IEA’s more pessimistic forecast is closer to the truth than Andurand’s bullish bets.

By AG Metal Miner

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