After years of peak oil scare stories, could the world soon be drowning in oil?
OPEC has just cut its oil demand forecast for OPEC-produced oil, citing a slow-down in the global economy as the supportive effects of government stimulus wear off and increased non-OPEC oil supply. The organisation noted that, “the impact of the slowing economic recovery on oil demand is already evident as growth in oil consumption is slowing down and has even turned negative in some parts of the world,” according to Fox Business,
Their latest move highlights the twin drivers of any potential oil glut scenario:
- The stagnation of demand growth from major developed economies such as the U.S. and Europe
- The growth of non-OPEC oil supply.
Already, the U.S. is sitting on more oil than it has in decades:
Despite the Iraq War and the resulting production disruptions, despite the moratorium on drilling in the Gulf, despite turmoil in Nigeria and ongoing cross-border transshipment quarrels in Central Asia and the multiple, repeated declarations that “peak oil” has arrived and supplies will inevitably dwindle, the United States has more petroleum on hand today than it has had since at least the beginning of the first Gulf War.
At the same time, consumers have finally responded to higher gas prices and, perhaps, concern over the environmental impacts of burning fossil fuels. Miles driven by U.S. motorists have fallen over the last couple of years for the first time since such statistics have been collected, indicating that the American love affair with the automobile could be waning. And gasoline demand in China, the world’s largest automotive market, may not skyrocket after all, as the government ramps up its drive to replace internal combustion engines with electric vehicles.
Global demand forecasts are coming down as well:
“In the last 18 months we’ve seen this big trend emerge,” says David Kirsch, research director at PFC Energy in Washington, D.C. “We spent five to 10 years in a supply-constrained market, characterised by the growth of the BRIC countries [Brazil, Russia, India and China] and concerns over the security of supplies.”
Now, Kirsch remarks, because of the financial crisis and the time it will take to pare down the debt of the major OECD nations, demand growth over the next decade is likely to be lower than previously forecast.
Oil itself seems to have been stuck in a trading range over the last year as shown by the chart from Finviz below, so far either undecided or oblivious to the potential for a glut.
Problem is, in the end, forecasting oil demand has been a fool’s errand historically, so the oil glut theorists have as much visibility as yesterday’s peak oil proponents.
Adam Brandt, a professor at Stanford’s Department of Energy Resources Engineering, released a study last month examining the various models that have been used to predict the future of world oil supplies. “Data do not support assertions that any one model type is most useful for forecasting future oil production,” Brandt concludes. “In fact, evidence suggests that existing models have fared poorly in predicting global oil production.”
We’ve republished a telling chart from a previous post below, showing just how wrong oil forecasts can be. Previously, they were too bearish, so perhaps they’ve now become too bullish?
Whatever happens, should a substantial oversupply of oil appear (relative to where oil is now), then expect a sharp and sudden drop in the price of black gold. Why? Because its price activity has become highly correlated with financial speculators’ activity. Which means, if speculators flee en masse, look out below. (Personally, we happen to be bearish on oil for the remainder of 2010, while still bullish on the long-term however)