|
We need Oil in increasing quantities, but because it is a ‘dirty product’ to handle, no-one wants to build refineries any more. Having said that, there is a lot of exploration going on in many parts of the globe, in the hope that the big discoveries of oil reserves will be somewhere other than the world’s troubled hot spots.
We of course have plenty of gas, and it so happens that most of it is in the more economically and politically stable parts of the world. Nonetheless, it is not as appealing as oil.
The dilemma is that oil needs to stay in excess of US$60 a barrel to make it sufficiently attractive to explorers and refinery investors. OPEC has said that it will cut production if it falls below this critical level.
So the price of oil is buffeted by many winds – OPEC production, the Middle East geo-political risks, perception of growth in USA and India and last but not least, inventories of USA stocks. As I listen to oil future traders talk the market up one day and down the next, I ask myself why should inventories be so critical and why can’t they count over there to eliminate that side of the uncertainty equation.
At US$60 oil will not stunt world growth, but the prospect of a US$80/85 a barrel as postulated in the chart below, will make the going pretty tough and could be enough to even turn the current economic boom into a recession.
Chart 1 – Oil (Light Crude) Weekly Line Chart
click chart for more detail
The chart above suggests the current pullback may not yet be complete, but either way no matter how one looks at an oil chart, the big direction is up albeit with volatility along the way.
Tom Scollon
Chief Analyst
|