$90 Oil In a Weak Economy Is Telling Us Something – Deustche Bank Sees Oil Spikes by 2012 –

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Dec 23, 2010

I’m sure you noticed that oil crossed $90 this week. I’m sure you have also noticed that the economy in the United States and Europe is not exactly booming. I wish I could time travel back to the year 2000 so that I could tell people that 10 years later oil would be $90 per barrel in a weak economy. I would have sounded about as sensible as someone predicting the Dow Jones at 500 or 50,000.

The funny thing is that there were people warning that the world oil market was about to change. One gentleman in particular named Colin Campbell was especially prescient. Here is a link to a presentation that he gave in 2000 with oil in the $20’s and no obvious signs for the mainstream media of the shift that was about to occur:


And here are some specific dates that he provided:

44. Peak dates

In short

· Conventional oil peaks around 2005.

· All hydrocarbons around 2010.

· Gas around 2020.

· Gas liquids peak a little after gas, as extraction rates increase.

· The decline after peak is about 3% a year.

I’m a bit suspicious of anyone giving specific dates on something like this. So I find it a little shocking how accurate it appears Campbell was. Consider what the International Energy Agency said this November. After dismissing the idea of Peak Oil as nonsense for the last decade the IEA said this in its annual report “Crude oil output reaches an undulating plateau of around 68-69 mb/d by 2020, but never regains its all-time peak of 70 mb/d reached in 2006” http://www.financialsense.com/contributors/chris-martenson/it-is-official-the-economy-is-set-to-starve

A couple of years ago the IEA was suggesting that conventional oil production would grow through 2030. Now they have come to the conclusion that it actually peaked 5 years ago. World, I think we have a problem.

Here are the annual average prices of WTI Brent dating back to 1990:











































I think it is pretty obvious something has changed. And although if you watch CNBC you will have experts telling you that there is “No” oil demand and that the reason oil prices are going up is the weakness in the American dollar, QE2 or speculation……the facts tell us otherwise.

World Oil Demand is Hitting Record Highs in 2010

Oil demand globally is forecasted to reach an annual average 86.7 million barrels a day in 2010 -- 100,000 barrels a day higher than in 2007, said Wood Mackenzie. Wood Mackenzie forecasts the demand to increase to 88.1 million bpd in 2011 and about 90 million in 2012.

"This year will see the recovery of all the demand lost during 2008 and 2009, while in 2011 world demand will be two percent above the peak pre-recession level hit in 2007. In 2012 demand will be almost four percent higher than this peak,” said Francis Osborne, analyst, Wood Mackenzie. "Only twice before in the past 30 years has demand grown as much as this, and in recent years, 2010 will be second only to the surge in 2004.”

The report said that the recovery in the global oil demand is mainly led by China where diesel, gasoil and gasoline demand is growing at eight percent annually.


China and India Tensions Over Oil Markets

Yet despite this week's feel-good slogans and ambitious agreements to boost bilateral trade, the wary friendship between India and China is under growing strain as the two energy-starved nations compete for oil markets in Africa, Southeast Asia, Russia and Latin America.

Although their own infrastructure remains relatively inadequate, both are rushing to build roads, schools and community centers throughout countries such as Sudan and Nigeria, hoping to sweeten deals for guaranteed oil supplies.

China has built a massive "friendship center" in Sudan's desert capital, Khartoum, one of the city's largest and most modern facilities. In Nigeria, India has agreed to spend as much as $6 billion on roads, railway lines and power plants in exchange for oil deals.

Competition between India and China as they seek bigger shares of the world's dwindling supply of oil is likely to accelerate the rise in oil prices, economists say. It also has the potential to ignite lingering tension between the two countries going back to China's 1962 invasion of India and exacerbated by hundreds of border incursions since then.


Deustche Bank Sees Oil Spikes in 2012 as Spare Capacity Exhausted

We've argued since early '08 that the oil age is ending owing to the

concentration of remaining reserves into government hands, & an attendant

under-investment cycle. Our focus: no supply growth + demand growth = price

spikes until demand growth = 0. The fact that 2010 demand growth (+2.2mb/d)

will likely be the second fastest for 30 years raises a red flag, especially as we work through OPEC spare capacity - prices will be spiking by 2012 if demand continues to grow at this rate.

* Staring into the crystal ball

What were the main developments over 2010? In this note we run through the

demand and supply side highlights, compared to our view a year ago, and look

forward with a refreshed view. Demand side, we highlight the surprising demand strength of 2010, despite $80/bbl average and rising prices, and focus on the major long term drivers: US cars, Chinese cars, and Middle Eastern demand. The battle is between US efficiency growth and GDP/population-driven emerging market growth. The shift from gasoline to diesel in the mix is a major theme.

* Is supply growth easy to predict because there is none? Not that simple

On the supply side, clearly Macondo was the biggest issue on the bull side

for oil prices, with Iraq the obvious offset. Deepwater Gulf of Mexico will

never resume its previous activity levels. We are confident of Iraqi growth,

but history says we shouldn’t be. Mexico has also surprised with lower declines and an opening to investment. Canada continues to do well. Global NGL growth is a major theme that is extremely hard to pin down – Eagle Ford liquids growth is hard to count.

* Near term outlook – which side of 2mb/d growth in 2010 are you on?

Although our commodities team expects tamer demand growth of 1.5mb/d in

2011, we see major upside risk to this view, starting with cold winter

globally. Recent backwardation and market tightening are bullish; the

fundamental drivers of demand are there: DB expects a weak-ish US$ through

mid-2011 and strong, 3.8% global real GDP growth. We look with interest to sub salt Brazil, Ghana, and Colombia supply growth, offset by North Sea and Mexico. OPEC seems to have moved its price target to $90/bbl at its most recent meeting with no supply raise.

$90 oil in a weak economy is telling us something folks. I hope you are listening. I fully expect that we are going to get peaks and valleys in the price of oil as it moves upwards and to the right over time. My intention is to reduce my exposure as the price goes up and buy again as it drops temporarily. You can follow my investments here: http://valueinvestorcanada.blogspot.com/

It has been an easy 6 months for almost all investors and that is getting me a little nervous. But with $90 oil I feel like most of my portfolio that includes oil producers is quite undervalued.

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