Upside Surprise

Jim Brown
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A new report from Wood Mackenzie may mean we are farther along the peak oil road than anyone previously thought. This could mean an acceleration of price trends.

A new report from Wood Mackenzie claims global oil demand in 2010 could reach an annual average of 86.7 million barrels per day. That is 100,000 bpd higher than the record set in 2007. Demand in Q3 could surge to 88 mbpd. WoodMac also claims demand will surge to 88.1 mbpd in 2011 and almost 90 mbpd in 2012.

WoodMac is a well known and highly recognized firm. They have nothing to gain by hyping or downplaying future oil production unlike the IEA. They claim the global oil market is quickly diverging from prior norms. The OECD countries (developed nations) have seen demand decline by 3.9 mbpd since early 2008. Meanwhile emerging markets (China, India, Asia) have seen demand increase by 1.6 mbpd over their 2008 levels.

WoodMac claims all the demand lost in the recession has been recovered and 2011 will see a increase of 2% above prior record levels. In 2012 demand will be nearly 4% over the prior 2007 record. Powering this surge in demand is China and India. Their demand for diesel and gasoil is exploding higher.

Consumption of diesel and gasoil in India is growing by +7% per year with gasoline growing by +11%. The Asian market in 2010 will be 3.0 mbpd larger than the North American market. Back in 2008 North America was 1.4 mbpd larger than Asia.

WoodMac said at the start of 2010 they were estimating demand growth of around 2 mbpd. As the year closes it appears that growth was more in the range of 2.5 mbpd and accelerating. It looks like 2010 could be one of the fastest growth years on record and the OECD nations have yet to find any traction. Once they do begin to grow their economies again the demand spike is going to be huge. Only twice in the past 30 years has demand grown this rapidly. The surge will be second only to 2004 in strength.

By 2012 emerging market demand could be 6.5 mbpd higher than in 2008 but OECD nations are expected to still be -5% below pre-recession levels.

There is only one thing wrong with this projection. If demand does increase as strongly as they expect we will see crude prices significantly higher in 2011 and 2012. Significantly high enough that demand destruction and impact to economic growth will return.

We are already seeing $90 oil and OPEC is supposedly sitting on 5.3 mbpd of excess capacity. Anyone who actually believes that would not pay $90 for oil. Their capacity claims are falling on deaf ears. With only a 54% compliance rate on their 4.5 mbpd production cut from Dec-2008 it means more than 2 mbpd of that crude is already on the market. That means claimed excess capacity is actually 2 mbpd less than what they claim and most analysts don't believe those claims anyway.

With oil demand surging an average of 12% inside OPEC countries that means there is less oil to export every year. That 12% is cumulative. OPEC nations did not really see the same recession that impacted the rest of the world because they have all the nearly free energy they can use. Their demand growth only slowed to about a +8% rate in 2008 and then recovered in 2009 and 2010 and shows no signs of slowing. Add in three years of depletion at -6.7% according to IEA surveys and I guarantee you OPEC does not have 5 mbpd of excess capacity. They would be lucky to have 2 mbpd of excess capacity and much of that is in heavy sour crudes that few refiners want.

I believe we are going to see some significant price hikes in 2011 and 2012 the price is going to surge even faster. I believe we could see $125 in 2011, assuming the U.S. and other OECD nations finally start growing again. In 2012 I think we will see a new high for oil.

Have you decided how much longer you are going to keep your SUV? I would bet it is less than two years because gasoline is going to $5 by 2013 and it is NOT going to decline materially from there until the global fuel recession begins. This will be the mother of all recessions and it will be here sooner than you think.

Jim Brown

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