As we are now seeing an ‘echo’ of the huge spike in oil prices that in my view precipitated a US recession as much as the implosion of the credit markets, it’s worth revisiting the 2008 bubble in energy prices. emstrongThe historic oil price shock of 2005-8 was triggered not by a supply interruption like that of the 1970’s but simply by stagnating supply in the face of soaring demand, reducing the daily supply cushion to uncomfortably low levels at 1-1.5m b/d (now up to 5m plus) and magnifying the potential impact of any threatened supply disruption/strong/em , be it from Nigerian militants or a Gulf Hurricane. The impact on prices was exacerbated by a speculative mania that gripped the poorly regulated and opaque energy markets from late 2007, creating a parabolic blow-off move to the $147 high last July. Crucial to this whole destabilizing episode was the role of Saudi, which was no longer willing to act to regulate prices (production actually fell in 2007) whether through policy (and Crown Prince Abdullah spoke in April 2008 of ‘leaving it in the ground for our children’) or the much rumoured degradation of their key Ghawar field.br /br /On the demand side, Chinese consumption had been growing at 7% pa for two decades, and was 870k barrels higher in 2007 than 2005 (imports of 3.6m b/d), while over the same period of strong economic growth, daily consumption fell 122k in the US, 346k in Europe and 318k in Japan in response to soaring prices. World GDP grew 4.9% between 2003-7, against 2.9% annually in the 1990’s, pushing the equilibrium price for oil sharply higher in the context of stagnant supply and that ‘fundamental’ price was probably just sub $100. On July 17th last year, I wrote: em’As US energy demand is now slumping (both natural gas and gasoline), Asian demand growth has peaked, and 800k b/d of additional Saudi supply is coming on stream, I’m expecting $100 to be tested by the Autumn…any re-regulation moves to limit index fund buying by the CFTC will speed the slump in energy prices.’/em Ultimately, demand elasticity proved higher than the bulls expected, and US consumption began to collapse even before the financial crisis last Autumn; strongemenergy as a share of US total consumer spending had risen from sub 5% to 7.5% in three years, effectively a tax increase on already stagnating incomes./em/strong Changing fundamentals alone cannot explain the move in crude oil from $92 in December 2007 via $147 in July 2008 and then to $40 by December, although the key driver was undoubtedly the flatlining production at 85m b/d that resulted from two decades of underinvestment. emThe question is whether now, with well over 100m barrels of oil held overshore by speculators betting on the steep contango structure evident until recent weeks, crude has run way ahead of fundamentals./embr /emspan style=”font-family:trebuchet ms;color:#3366ff;”strongThis article continues at /strong/spana href=”http://www.deadcatsbouncing.com/”span style=”font-family:trebuchet ms;color:#990000;”strongwww.deadcatsbouncing.com/strong/span/a/emdiv class=”blogger-post-footer”img width=’1′ height=’1′ src=’//blogger.googleusercontent.com/tracker/1897020887579135393-4685536860108668431?l=deadcatsbouncing.blogspot.com’//divdiv class=”feedflare”
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Last 5 posts by Sean Maher

• Who was Smuggling $134bn in US Bonds into Switzerland? - June 12th, 2009
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• Bond Market Rediscovers Inflation... - May 22nd, 2009