Oil is above $63 and is heading back toward $70. This time the rise may be on fundamentals and have little to do with speculation.
China announced that its GDP rose 7.9% in the second quarter. The world’s most populous nation is going to require significantly increased supplies of crude if that growth rate continues. China has locked up supplies outside its borders in places such as Brazil, but much of that production will not come online for several years, leaving the country long on demand that it may not be able to fill if OPEC production and exploration stay low.
OPEC is not prepared for a surge in global demand. Low oil prices have caused most member nations to cut exploration budgets. There is little incentive to make capital investments which may not pay off during 2009. Crude prices will need to hit $70 and stay above that for OPEC nations to begin new drilling again. That $70 number has been mentioned by a number of oil ministers.
The most unstable factor moving oil prices is unrest in Nigeria and Iran. Even a modest interruption in oil supply from those countries could case skittish traders to bid prices up. If there is a political disaster in both countries simultaneously, crude would certainly spike up and stay up until one or both crisis situations is resolved.
Crude has sold down over the last three weeks on news that the recovery in Japan, the EU, US, and UK is not as robust as was hoped. If predictions of GDP recovery toward the end of the year end up to be true, oil prices will be pressured by the assumption that demand in the developed world will be up in 2010.
Douglas A. McIntyre
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