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September 25, 2006
Historical recap: Leading into 2003 the price of crude (& open interest) was rising strongly in an anticipation of an Iraq war. Crude quickly corrected as Iraq became a ‘sell the news’ event, and after the initial attack the price of crude did very little for almost a year. In 2004 the demand story for crude came into focus. The demand story, which was/is a fundamental story, gave weight to the ominous supply stories (i.e. peak oil), and this bullish concoction kept crude running steadily higher through 2004 and early 2005. By March 2005 it was widely argued that OPEC was unable to do much to hold prices down. On August 13, 2005 a Reuter’s wire crossed with the startling headline: ‘Bush Raises Option of Using Force Against Iran’. Since August 13, 2005 open interest in crude has almost doubled, in part because the threat of Iran disrupting global oil supplies has risen. It goes without saying that Iran was/is a rumor driven story. Outlook It has only been 3-months since the EIA forecast that China’s oil consumption will triple by 2030 (from 2003 levels). If forecasts like this prove accurate, meeting global demand for crude should prove challenging. Moreover, if Simmons and other ‘peak oil’ enthusiasts are right about Middle East supplies being dramatically overstated, an energy crisis is probably just around the corner. But these ‘forecasts’ do not negate current market realities: Leading into 2006 OPEC was pumping at maximum and Iran tensions were starting to bubble. A plausible scenario as 2006 nears a conclusion is OPEC soon cutting supply and the Iran situation being resolved peacefully. When crude entered 2006 at $61/barrel it was acquiring new bull market participants. At roughly the same price today crude it is losing participants rapidly. With crude stocks up, demand softer than expected, and OPEC forecasting a decline in demand in 2007 (thanks to an increase in non-OPEC supply), the bulls have reverted to hoping for a cold winter. |
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