The petroleum complex rides again and surges with the momentum of that wild bull. Can it be possible that despite the fact that we are swimming in supply that perhaps the market is worried about tight supplies in the near future? How much of the energy market's recent rally is about the inflationary aspects of Fed policy and the Obama budget and how much is it about the fear that low prices are causing a drop in production that we will pay for later.
Every bull market is born in the zenith of the bear and is it possible that the worry about production and investment destruction has over taken the reality of current demand destruction. And the worry is valid considering we have ongoing cut backs by OPEC, strikes in Brazil, plunging rig counts, falling government investment - is the energy complex just a supply crunch waiting to happen? The International Energy Agency’s Dr Fatih Birol defiantly thinks so and is raising those very concerns. Dr. Birol is warning that the global economic downturn which has substantially weakened demand for energy has also slowed government investment in traditional forms of energy. If the economy picks up sharply he says that we will be surprised by how quickly we will go through oil supply. He says that governments around the world have cancelled projects that would originally have required two million barrels of oil per day. This has driven price levels of energy sources down, and in turn, disincentives governments and companies from further investments in the sector. Also, most projects require access to very substantial amounts of credit, which many companies cannot get in this climate.
Those fears were echoed in a new report by Cambridge Energy Research that says the slowdown in investment in oil and gas production could cut nearly eight million barrels a day of future oil supply growth, setting the stage for another big crude price surge in years to come. CERA cut has an estimate for world oil production capacity of 109 million barrels a day by 2014 from the current 94.5 million barrels a day but now is concerned that 7.6 million barrels a day, or slightly more than half of that increase, is at risk due to project deferrals or cancellations.
Of course all of that is true over the long term but in the short term it will take some time to work off the current massive over supply. It is possible that the market is trying to ration current supply with high prices anticipating a tighter situation in the future. Of course that is assuming that the desperate measures to save the global economy don’t create unforeseen ramifications months and years down the road. The many bulls that have been stunned by the veracity of the recent rally seem to fail to grasp the impact that the Fed’s quantitative easing has had on price. This perhaps is the most bullish fundamental you can get. The easing is the perfect concoction of stimulation and inflation that is so bullish for commodities it makes your mouth water. Buy today and damn the consequences for the future at least until the stagflation ruins the taste. Until then, or a reversal of Fed policy, commodities are going to be inflated.
Yet you cannot underestimate how bullish Obama’s budget is to the price of oil. His attack on the US oil and gas industry will take more money out of the pocket of the average American than they will get in a tax rebate. Gosh wait, it looks like the rebate - even for the middle class! - will get killed. Oh well. Is this still change we can believe in?
Oh sure in the short term the market is reacting to the historic moves by the Fed and the most inflationary anti-business budget ever created in the United States of America. This is the type of budget that penalizes success, hard work and ingenuity that has characterized the US oil and gas industry and replaces it with research and development. While we wait for the wind farms and the clean coal plants and smart grid to be built the poor can go broke paying for energy. Just a little more change were forced to believe in - is this still America? What country are we in.