Commodities
Energy Watch
A lesson from long-dated oil: A steadily rising price forecast
The market is once again searching for a new equilibrium as
it did in 2004. In a structural re-pricing, the status quo is
neither stable nor spiking prices but rather upward trending
prices until a new equilibrium is reached. To balance trend
global GDP growth of 3.8% against trend supply growth of
1.0%, prices need to rise on average 14% from here in 2H08.
Long-dated oil prices are driving the market again
The current oil market is experiencing a structural re-pricing much like it
did in 2004-2005. After remaining stable for more than two years, the longdated
oil price (five-year forward) is once again driving the oil market. And
like 2004-2005, as the rise in long-dated prices drags spot prices to everhigher
levels, speculators, a weakening US dollar, and “risk premiums” of
all kinds have once again been looked to in order to explain a market that
seemingly defies fundamentals.
The "revenge of the old political economy" constrains supply
This time we cannot simply make the argument that long-dated prices will
rise until they reach a point that motivates large scale investment in nonconventional
resources, as over the past four years the industry has hit
significant constraints on scalability of these technologies. This is due to
“the revenge of the old political economy” (resource protectionism) which
imposes significant policy constraints on the free flow of capital, labor and
technology that are substantially limiting supply growth. These constraints
have ultimately slowed long-term trend oil supply growth to 1.0% pa while
at the same time trend global GDP growth has accelerated to 3.8% pa.
Long-dated oil prices need to rise at a rate which will force trend
demand growth inline with trend supply growth
Given this imbalance, long-term oil prices will need to continue to rise to
bring trend oil demand growth inline with trend supply growth. Strikingly,
the rate of increase in long-dated oil prices today is nearly the same as it
was in 2004, roughly 55% pa, which using historical relationships is the
rate of increase required to achieve long-term balance in the market given
the current supply and GDP trends. Our analysis suggests that long-dated
prices will drive spot prices on average 14% above current levels, leading
us to raise our average 2H08 WTI price forecast to $141/bbl from $107/bbl.