Concerns of oil 'super spike'
September 14, 2007
By Sherilee Bridge
Johannesburg - Supply worries pushed oil to a record high of $80 a barrel this week, adding fuel to Investec fund manager Tim Guinness' predictions that a "supply crunch" could result in oil prices hitting $150 a barrel by 2010.
Crude oil prices leapt on Wednesday after the Organisation of the Petroleum Exporting Countries (Opec), which controls about 40% of the world's oil output, raised its production for the first time in more than two years.
An attempt to sustain global economic growth and allay concerns about falling crude inventories, Opec's move was seen as too little, too late.
Confirmation of the rapid decline in oil inventories came from the US Department of Energy, which on Wednesday reported a 7.1 million barrel drop in oil stocks to 322.6 million barrels, the lowest level in eight months.
The fall was almost triple market expectations.
The Financial Times said on Thursday that in real terms, adjusted for inflation, oil is at its highest price since the early 1980s, but still well below its peak, equivalent to 109 a barrel in today's money, reached in late 1979.
"Crude oil traders warned that prices could soon surge even higher because speculators who had built up large positions that would become profitable above $80 were pushing up the price," the UK's financial daily reported.
The price jump also comes as energy watchdog the International Energy Agency (IEA) warned that the US sub-prime crisis could dampen demand.
In its latest Oil Market Report, released on Wednesday this week, the IEA reduced its global oil product demand forecast to 85.9 million b/d in 2007 (+1.7% over 2006) and 88 million b/d in 2008 (+2.4%).
In the meantime, world oil supply fell by 430,000 b/d to 84.6 million b/d in August and the IEA said project delays and extended field outages presented risks to 2008's supply growth.
"The prospect of $100 dollars a barrel oil is very real - and the downside to the oil price is limited indeed," said Moneyweek in an August article.
Expected to hit $100 a barrel by the start of next year, the oil price seems to be heading towards what Goldman Sachs sector analyst Arjun Murti believes is a super-spike.
In December 2006 he said that his $105 a barrel estimate may even be conservative if the peak oil theory is right and world supplies are running out.
"The belief that the world's oil supply is close to an irreversible drop is no longer on the fringes of the market," he said.
This brings us to Guinness' prediction that the oil price will hit $150 a barrel in three years time.
Agreeing with the IEA that the oil price is likely to rise steadily over the next five years as supplies dwindle, he warned the world was heading for a 'supply crunch' in 2012, when poor output from non-Opec countries clash with strong demand within the cartel's oil producers.
Outlandish as they may seem, these predictions make South African petrochemicals company Sasol's prediction that crude prices would average mid-60 a barrel in 2008 look pale by comparison.
Sasol this week posted record results on the higher Brent crude prices and rand dollar exchange rate. A doubling in the price of oil would certainly be good for business.
The higher prices have already ensured that oil majors have consistently beat analysts expectations. This lead to a re-rating of the sector - and a nice stream of profits for investors.
Somehow it seems hard to believe that just three years ago Deutsche Bank analysts were forecasting a 2010 oil price of $24 a barrel. What were they thinking?
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