Here we publish the weekly Oil and Natural Gas market commentary and predictions that we make on the Sunday Energy Week show. This page will be updated nearly every day with new energy market news and data.
The Coming 2012 Oil Spike by energy analyst Alan Lammey
In the midst of all growing tensions between Iran and the West, most investors and traders in the oil futures market are focusing on the geopolitical issues that could send oil prices flying higher.
However, there is another storm brewing in the oil market that a majority of even the most highly versed futures traders and oil pundits are not aware of that could send oil prices soaring even without the underpinning of the geopolitical perspective.
The seeds of this coming storm can be traced back to January 17, 2009, when oil prices had plummeted more than 70% over a roughly seven-month span prior from around $147 a barrel in July 2008 to a five-year low of right around $42.
That's a precipitous fall by any market's standards but if you're a North American oil producer, it's near catastrophic. That's because at $42 a barrel, you can't make money which is particularly the case for some of the giant oil companies who do not hedge their production in the futures markets.
As a result of this titanic fall in oil prices, North American producers simply took their drilling operations off line and stopped production.
In-use drilling rigs fell by more than half when oil prices plummeted. Why did it happen? A few reasons
The first is pure economics.
In places like the Canadian Tar Sands, where the US gets roughly one quarter of its daily oil supply, it wasn't cost effective a few years ago to extract the molasses-like bitumen crude unless oil's trading at $75 a barrel or higher. (As technology advances, companies like Shell say it's more like $50 today)
Further complicating things was the scarcity of credit during those months between 2008 and 2009, which meant many producers could not access the bridge loans and operating capital they needed.
To make matters worse
Falling demand as a result of the sudden massive domestic and international recession had created a substantial glut of oil, which meant even if production were to continue, there was little storage capacity left to hold the oil until normal demand returned.
As a result, drilling in the US fell by more than half by mid-2009. The Canadian Oil Sands, which supplies the US with the lion's share of non-OPEC oil, saw its production fall too simply because at below $75 a barrel, it was a money-losing proposition.
That's important because although most think the bulk of US oil comes from the Middle East, the US gets about half its oil from non-OPEC sources and most of that comes from northern Canada.
So when that North American supply is interrupted in dramatic fashion like it was in 2008/2009 it's bound to have major impact somewhere along the supply line.
That impact is about to be felt soon. But why now when this "production shut down" happened nearly three years ago?
Because here's something else a lot of folks might not realize
You Can't Just "Flip a Switch" on production.
Once drilling and production stops particularly in North America where getting oil out of the ground is more difficult there is on average a ten-week delay for each month of forward drilling time lost.
That means, even if the price situation had improved following a one-year collapse, the system already had a "built-in" 15-month to 30-month delay in new production waiting to hit.
Add to that the refinery process and the time it takes to get finished fuel from the storage facilities to the end use market (gas stations, etc) and you're looking at several months more.
Meanwhile, global demand has been increasing much more quickly than anticipated.
Given many producers didn't begin the process of developing new wells until late 2009, when oil prices recovered to between $70 and $80 a barrel production will probably not start flowing from these sources until well into 2012 at the earliest.
The result is what I call a "production deficit bubble" that's working its way through the system a bubble that should start hitting the North American fuel market very soon.
That could result in three to nine months of very low oil supplies, which in turn will drive oil and gasoline prices dramatically higher, very quickly.
How high are we talking?
Looking at historical supply-to-price models, it would not be out of the question to see an oil futures price spike to test the 2008 highs near $147 a barrel, or possibly even higher -- somewhere in the neighborhood of $150 to $160 per barrel is altogether possible.
Think this cant happen? Well, we've seen this happen before.
In 2003-2004 when oil traded around $30 a barrel and North American producers couldn't make a decent profit. The "production deficit bubble" that came a little more than three years later caused prices to soar to $147 a barrel by mid-2008.
Now its highly possible that the market will see the same scenario play out in the weeks ahead. And this situation is just now beginning to make it on the radar screens of some of the most deep pocketed hedge funds and speculative shops in the world.
Goldman Sachs' energy group recently predicted oil prices will rise notably in 2012, because of strong consumption in developing nations such as China and less-than-expected supply from non-OPEC producers.
JP Morgan Chase recently upped their oil price forecasts for the same reason: "OPEC, as well as other producers, aren't matching rising demand".
Make no mistake about it, if oil prices were to soar upwards of 75% to 100% from $90 to $160 gasoline prices at the pump could soar once again to well over $4 per gallon as early as this spring, with even higher prices kicking in quickly as the summer driving season emerges.
Some will argue that the fragile US economy will simply not support a spike in oil prices back up toward the $140 to $160 area and gasoline prices at $4 per gallon or higher. However, the 2008-09 economy was just as fragile in the midst of the banking/debt crisis, which sparked one of the deepest recessions since the Great Depression. Now just to be clear, Im not suggesting that this rally in oil will be a sustained event. But it is not out of the question that a short-lived spike in oil prices up toward the $140 to $160 a barrel area could indeed occur.
That's bad news for consumers but based on my research, this is a real possibility in the making that will more than likely occur.
If your company is looking for truly the best energy and weather data in the industry, please contact Alan Lammey at 281-658-0395
