Crude Oil rallied to a new intra-day high of $126.98 today, before pulling back to close the session close to $126/barrel. The trigger for the rally was a International Energy Agency report that the stockpiles of distillates in Europe were down 6.7% in March over the same time year ago. Last week’s EIA’s report had shown a similar reduction in US distillates stockpiles, with a 2.6% year to year decline. Heating oil, a proxy for distillates, rallied to a new high, with the June contract closing at $3.6989; heating oil prices have doubled over the past year and are up 40% year to date.
All the News is Bullish
It is clear that the market has an incredibly bullish tone after Goldman Sachs’ call for a super-spike which could take oil to as high as $200/barrel in the next 6-24 months. The market is focusing only on the good news and ignoring anything bearish.
Today’s rally came in spite of news that IEA had again cuts its forecast for demand for crude-oil (to 1.03 million bpd); the current estimates for growth of oil demand are more than 50% less than the forecast put out in July, 2007 (2.2 million bpd). The IEA expects a further reduction in the forecast as high crude prices, and a slowdown in the developed economies are likely to cut demand further. There is even talk of reduced demand projections in the non-OECD oil importing countries (emerging economies), since the cost of subsidies is sky-rocketing and can no longer be sustained by their respective governments.
Even in oil exporting countries, where gas often sells for less than a $1/gallon, the government is bearing the cost of lost export revenues at prices which are almost an order of magnitude higher. Iran, OPEC’s second largest oil producer, imports 40% of its gasoline.
Iran & Venezuela: Flag Bearers of the $200 Oil
Another factor contributing to the rally was a news report which suggested that Iran was seeking a cut in its crude oil output. This news of impending cuts was later refuted, though the Iranian spokesman did confirm that some discussions had taken place.
Earlier this month, Iran’s oil minister had made statements that disruption in Nigeria and the weak US dollar meant that crude oil could reach $200. Not the one to be left out, Mr.
Chaves of Venezuela had declared that oil would hit $200 if the US attacked Iran.
Both Iran and Venezuela rely on their oil exports to fund their local economy; a fall in oil revenues can have a drastic effect on their ruler’s ability to continue to rule.
Goldman’s Long Term Projection: $75 in 2012?
Lost in the bullish talk of $200 oil was Goldman’s notes about demand destruction. The same report which predicted the super-spike also said that by 2012 the price of crude oil would fall to $75 normalized. Goldman expects the current euphoria to lead to a spike in crude oil prices, which will spur new supply development and also lead to permanent demand destruction.
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