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Stuart Burns

Stuart Burns

Stuart is a writer for MetalMiner who operate the largest metals-related media site in the US according to third party ranking sites. With a preemptive…

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Are High Oil Prices Due to Fundamentals or Speculation (Part 1)

The oil price has been relentlessly rising, widely seen as being driven by a mix of fundamentals such as Asian demand exceeding supply, and fear of supply disruption caused in particular by unrest in the Middle East. Some, such as Ed Morse (shortly to join Citigroup as global head of commodity research), see the price risk to the upside this year and next, listing three main factors in what he terms the new geopolitics of oil in an FT article.

Firstly, while the precarious profile of many oil producing nations is nothing new, exhibiting (as they so often do) young, rapidly growing populations with high levels of unemployment, often a large underprivileged underclass and aging autocratic leadership of dubious legitimacy, what is new is the sudden realization that said populations can do something about the status quo through social unrest. Explosive regime change has been a shock both inside and outside the countries concerned and is set to spread further with uncertain consequences.

Secondly, to counter the above, oil-producing countries are ramping up already generous social programs and subsidies to placate the masses. In Saudi Arabia, the authorities have announced two packages of spending equivalent to $125 billion, about 27 percent of last year’s gross domestic product, directly impacting what Saudi Arabia needs to earn from oil exports. Morse suggests the budgetary break-even price for Saudi Arabia has escalated by 30 percent to $88 per barrel, with similar impacts in other oil producers, according to a recent report from the Institute of International Finance. It is now an imperative for countries like Saudi Arabia to keep oil prices high, meaning they will be less willing to pump oil if prices were ever to drop back below $85-90 per barrel.

Thirdly, oil producers are consuming more and more of their production at home. In the same way as domestic natural gas consumption in some Gulf states has taken precedence over exports of LNG, oil demand is rising rapidly to feed fast-growing and power-hungry populations. One FT article reports that while Brent crude is flirting with $125 per barrel in Tripoli (and elsewhere in the Middle East), gas is $0.55 per gallon, reflecting the ludicrous extremes that many regimes will go to in order to stave off domestic discontent.

Michael Wittner, head of oil research at Société Générale in New York, put the Middle East geopolitical risk premium at around $15-$20 per barrel, suggesting the true price based on fundamentals should be around $100 per barrel.

(Continued in Part 2)

By. Stuart Burns

(www.agmetalminer.com) MetalMiner is the largest metals-related media site in the US according to third party ranking sites. With a preemptive global perspective on the issues, trends, strategies, and trade policies that will impact how you source and/or trade metals and related metals services, MetalMiner provides unique insight, analysis, and tools for buyers, purchasing professionals, and everyone else for whom metals and their related markets matter.


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  • Anonymous on April 13 2011 said:
    The true price today based on fundamentals should be about 90 dollars or less. It is more because of the moronic venture in Libya that upset the market. As for a price of 100 dollars or more, this is very bad news from a macroeconomic point of view. I'm waiting for Part 2 of this article with baited breath, because I once made it clear that if anyone ever shows up in a seminar or conference where I am, and says that the high oil price is due to speculation, he or she will unfortunately have to be made a fool of.

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