Friday, April 20, 2012

Peak oil is nowhere to be found on the WTI futures curve

As predicted back in February the crude oil rally has stalled. WTI reached $110 in late February, which so far has been the high for the year.
MarketWatch: And despite ongoing Middle East threats to global supplies and a complicated background comprised of market manipulation talk, government oversight proposals and pipeline changes and expansions, many analysts don’t believe prices are where they should be — simply because there’s too much oil in the market.
Spot crude is of course higher than it was 3 months ago, driven primarily by the Iran fears.
MarketWatch:“The economic price for (West Texas Intermediate) oil is in the $80-$85 range,” said Mickey Cargile, managing partner at Cargile Investments, basing his estimate on where he sees supplies locally and in Cushing, Okla., the delivery hub for Nymex oil.

“Our range valuation suggests a 15%-20% risk premium priced for potential supply disruption from Iran,” he said.
Europe and Asia have been hoarding supply in the last few months, according to Phil Flynn, a vice president at PFGBest. “The market and countries were basically pricing in and expecting war” with Iran.
Interestingly enough that "economic price" prediction is roughly where the long-term WTI futures are in fact trading. The chart below shows how the WTI crude futures curve has moved in the last three months. As Iran fears drove up the front end, the back of the curve came down materially.

WTI futures curve - now (orange) and 3 months ago (blue)

Part of the driving force behind this subdued view on prices is the reassessment of growth in emerging markets. A component of this reassessment is China shifting to domestic demand and reduced infrastructure investment. But the supply side of this dynamic is also changing.
Forbes: But just when we thought the global hydrocarbon map was complete, another serious player has cropped up, and it comes in the form of East Africa. This is the new African oil rush, and the race to secure regional riches between East and West is on.
The market has now priced in declining oil prices at least through 2020. If "peak oil" dynamics are still at play, they are nowhere to be found on this futures curve.

Update: Please note the following
1. This is not a forecast. The chart is showing what the market is currently pricing in - a big difference.
2. Three months ago the market was indeed implying price increases starting in late 2016. It no longer does.
3. Ignoring what is priced into the market is a mistake many economists make. Not paying attention to "wisdom of crowds" could be costly.
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