US crude has touched $100 a barrel at last – well, just about, anyway – meaning that I have scored the first success in the FT’s predictions for 2008.
It was, of course, a very easy call to make: it was impossible to believe that there would not be some event sufficient to push a volatile oil price up the few extra dollars that it needed. As it has turned out, the assassination of Benazir Bhutto, fresh attacks in Nigeria and a weak Institute for Supply Management survey of US manufacturing have done the trick.
Behind those immediate factors, the underlying factors behind the strong oil price are well-rehearsed. Opec agreed cuts in its production in 2006 and those cuts held for much of last year, helped by the fact that some members such as Iran and Venezuela would have found it hard to increase production even if they had been allowed to. Non-Opec production has been deeply disappointing, partly as a hangover from the years of under-investment at the beginning of the decade, partly because mature areas such as the North Sea have been declining faster than expected, and partly because some oil-rich countries such as Russia have become less hospitable to foreign investment. At the same time, demand for oil in emerging economies, particularly China and the oil producers themselves, has grown strongly.
Yet while that combination of forces sent oil from $60 a year ago to $100 today, it is hard to see it being sustained, at a time when the outlook for the world economy, and in particular the US, is so troubling. China attracts the attention in terms of the oil market, because it is the biggest source of demand growth, but the consumption of China and India together is less than half that of North America. An important question for the oil market as the year wears on will be how far China can avoid the turbulence created by the economic problems of the US. Recession in the world’s biggest oil consumer plus a slowdown in the world’s strongest-growing oil market do not sound like a prescription for high oil prices.
The only way you can realistically remain an oil bull and an economic bear – which is what the markets seem to be right now – is if you take a very negative view of the supply outlook, and the evidence to support such a view remains unconvincing. Today’s Lex column takes a timely pop at peak oil theorists, pointing out that while Marion Hubbert was right about the US, he was way off on his predictions of world output. The latest warnings about Opec’s long-run supply potential, published in Opec’s own review, are sobering, and suggest a future of tighter supplies and higher prices. But in the near term, it looks likely that demand for oil will take a hit – partly, of course, as a consequence of the high price – while supply is rising, and in the months to come we will see a retreat from $100.