Bill Totten's Weblog

Monday, February 22, 2010

Bank of America and Barclays

See Looming Oil Crunch

by Ambrose Evans-Pritchard (February 21 2010)

Bank of America and Barclays Capital, two leading oil traders, have told clients to brace for crude above $100 a barrel by next year, before it pushes relentlessly higher over the decade. This is a stark contrast from recessions in the 1980s and 1990s, when it took years to work off excess drilling capacity built in the boom.

"Oil has the potential to flirt with $100 this year. We forecast an average price of $137 by 2015", said Amrita Sen, an oil expert at BarCap. The price has doubled to $78 in the last year.

"The groundwork for the next sustained step up in oil prices is now almost complete. Global spare capacity is likely to be reduced to low levels within a relatively short time. The global economic crisis has postponed, but not cancelled, a crunch which would otherwise be starting to bite now", said Barclays.

Francisco Blanch, from Bank of America Merrill Lynch, said crude may touch $105 next year, with $150 in sight by 2014. "Approximately 1.7 billion consumers in emerging markets with a per capita income of $5,000 to $20,000 are eagerly waiting to buy cars, air-conditioning units, or white goods", he said.

China has overtaken the US as the world's top car market. Mr Blanch expects oil demand to rise by a further 2.8 million barrels per day (bpd) in China and 2.5 million bpd in India by 2015, when two giants will be absorbing the lion's share of Gulf output. Consumption in the West has already peaked and will fall each year as populations shrink and we waste less, but the West no longer sets the price. Global use will increase by 8.8 million bpd to 95 million bpd.

Supply is scarce. Sir Richard Branson warned this month that the world faces 'peak oil' within five years. "Don't let the oil crunch catch us out in the way that the credit crunch did", he said.

Mr Blanch said output from non-OPEC states is falling by 4.9 per cent each year, despite Russia's reserves. Saudi Arabia and the Emirates can plug a quarter of the gap, but global spare capacity must soon drop to wafer-thin levels - leaving us vulnerable to the sort of "super-spike" seen in 2008. The wildcard is whether Iraq can quadruple output to Saudi levels this decade, a target dismissed by most analysts as pie-in-the-sky.

Painfully high prices are needed to unlock fresh supplies as reserves are depleted in the North Sea and the Gulf of Mexico. Deep-water rigs off Brazil are costly and require drilling far below the seabed. Canadian oil sands and US biofuels have break-even costs near $70. While the US, UK, and the Far East are turning to nuclear power, it takes a decade to build reactors. "Peak uranium" lurks in any case.

The oil spike brought the global economy to a shuddering halt in 2008. This time the crunch may hit before the West has fully recovered. Whatever happens, the US, Europe and Japan will soon transfer a chunk of their wealth to the petro-powers. It is a new world order.

Bill Totten


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