The bullish case for crude oil is back in full force. Once again, concerns over the sufficiency of supplies are outweighing the calculus of reduced demand. Also, the focus on Iran is lending strong support and reinvigorating the geopolitical price premium.
The International Energy Agency released its monthly oil report this morning. News headlines trumpeted the agency’s forecast of reduced demand for the fifth consecutive month. However, the market has jumped all over a forecasted decline in Non-OPEC oil production of 300,000 barrels per day.
While some of you have challenged the arithmetic, here is the latest calculation based on this morning’s estimates: total OPEC and non-OPEC output is forecast at 82.35 million barrels per day versus global demand of 86.77. This translates into a deficit in excess of 5 million barrels per day. I recapitulate that at the end of 2001 these data showed a production surplus of 1 million barrels per day, resulting in crude oil at around $17 per barrel.
Whether or not the deficit actually materializes to this magnitude remains to be seen. It is notable that oil inventories in the OECD countries fell 81 million barrels in April. The trend is not favorable to consumers seeking a break at the pump.
There was also another round raised oil prices forecasts, and Russia’s Gazprom has weighed in with a $250 per barrel price target. Great.
On the flip side, CNBC’s Melissa Francis is reporting that Saudi Arabia output has now risen by 500,000 barrels last month. This appears to be an actual increase over the previous of hike of 300,000 barrels, which was announced just after President Bush’s recent visit to the Kingdom.
This Saudi output rise is a welcome development, as they are clearly now trying to throw the kitchen sink at the rising price of crude, but, if the market shakes off this development, what do they do for an encore, if anything.
The focus on Iran has become abject. While the comments from Israel’s Transportation Minister were highlighted last week, Prime Minister Ohmert was also talking tough, after a meeting with President Bush. We should expect even more rhetoric over the next several days, during President Bush’s tour through Europe, which is expected to have Iran’s nuclear ambitions as its focus.
While there is a glimmer of hope that crude oil’s rise will be stemmed by the dollar’s rebound, the bullish bias in the market remains robust. The latest IEA data and the burgeoning concerns over Iran are too compelling at the moment to stand in the way of the upward momentum and trend.