FRAMINGHAM, Mass. -- Is the summer rally for crude over and will we retouch the lows? The short answer is no.
Despite Iran grabbing market share and producing 10 million barrels per day (bpd) of oil, and the Saudis holding at 12 million barrels, world demand is improving rapidly. This is led by China at 8 million bpd, the rest of Asia at 32 million bpd, and very strong growth in India and South Korea. Even Japan is picking up.
China’s domestic production is also faltering (as they look longingly toward the South China Sea), and they continue to increase their strategic reserve with a stated goal of 1 billion barrels, or 125 days of usage. China is continuing a major shift from coal as its BTU source and simply does not have enough natural gas, hydro or green energy to replace the hole. When 1.4 billion people who use 80 million BTUs per capita switch, it is important to pay attention. The decrease in coal alone has added 100,000 bpd to Chinese demand, never mind their increasing love of transport fuels.
At the same time Chinese production is faltering because of years of reduced capital spending, Nigeria remains in upheaval. Russian, Mexican and Venezuelan production continues to collapse. Even North American consumption at 22 million bpd is strong.
Overall, world demand will exceed 95 million bpd, making the call on U.S. and Canadian supply in excess of 15 million barrels. The United States therefore needs to produce 11 million bpd given Canada’s 4 million-bpd production.
While we have shut in many wells in the United States and cut back dramatically on exploration and production spending, we have the reserves (34 billion barrels) and capacity to produce 11 million bpd. (We are currently producing 9.5 million bpd.) But the market needs to achieve $70-per-barrel oil to keep the world in equilibrium.
With a growing U.S. economy, stimulating Japan, low interest rates and the threat of terrorism always present, it is simply improbable that West Texas Intermediate will test the $30 lows of a few months ago. Yes, oil has sold off this month, touching $40 in response to fund liquidation (increasing rig count and ample supplies of refined products) but bears are missing the increase in demand. Also, rigs are not immediate production.
While the days of $100-per-barrel oil are over, the days of $30 oil are too. Expect $60- to $80-per-barrel oil by year’s end.
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