Lehman warns that oil boom will deflate
By Ambrose Evans-Pritchard
Last Updated: 12:33am BST 24/04/2008
The roaring oil boom of the last few months may be on its last legs as economic growth slows hard across the world and a clutch new refineries come into operation, Lehman Brothers has warned in a hard-hitting report.
The Bright Artemis, a 146,463-ton Singaporean-registered oil tanker
The build-up in supply is taking place at a time of cooling demand
“Supply is outpacing demand growth,” said Michael Waldron, the US bank’s oil strategist.
“Inventories have been building since the beginning of the year. We have pretty significant projects starting soon in Saudi Arabia, and large off-shore fields in Nigeria,” he said.
The Saudi Khursaniya field has just opened with 500,000 barrels a day (b/d) of production, and the new Khurais field will start next year with a further 1.2m b/d.
The Saudis have pledged to spend $90bn (£45bn) on their oil industry over the next five years, lifting capacity to 12.5m b/d by the end of 2009.
US crude prices retreated yesterday from their all-time high of $119.90 a barrel earlier this week.
The latest spike was driven by fears that the 'Forties Pipeline’ from the North Sea might be closed as a knock-on effect from threatened strike action at Scotland’s Grangemouth oil refinery.
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Lehman Brothers said the price of oil had been pushed to inflated levels by a $40bn inflow into commodity index funds this year, much of it coming from Mid-East sovereign wealth funds.
The petro-investors may have second thoughts about gaining “double exposure” to commodity prices.
“Financial flows have been the marginal driver of prices since the onset of the credit crunch. Investors are using oil as a hedge against inflation and a falling dollar,” said Mr Widmer.
The index effect has lifted prices by $20 to $30 a barrel. This could reverse sharply once the dollar starts to stabilize against the euro, since the euro/dollar exchange has become the proxy watched by oil traders for signals.
A dollar recovery may be on the cards after the G7 powers issued a statement condemning big moves in currencies as a threat to financial and economic stability, choosing the exact wording used before the joint intervention by central banks in September 2000.
A clutch of new refineries will add almost 8m b/d of new capacity by 2010, including a 600,000 b/d plant opening this year in India.
The cost of oil field machinery and rig maintenance has at last levelled after three years of galloping inflation. Drilling costs have even started to fall in the United States, while deep-water rig-rates have stopped rising after jumping fourfold from 2004 to 2007.
These are all time-honoured signs that the cycle may have topped.
Ominously for oil bulls, the underlying value of oil company reserves has slipped slightly over the last two years, failing to “confirm” the huge rise in spot oil prices. The divergence is a warning sign.
It invites arbitrage by hedge funds, who may start to take out “short” positions on crude futures.
The build-up in supply is taking place at a time of cooling world demand. Recession in the US is expected to curb consumption by 300,000 b/d this year.
Lehman has trimmed its forecast for global growth from 1.5m b/d to 1.1m b/d, predicting a slide in prices to $83 next year and $70 to $80 in 2010 – still high by historical standards.
For now, prices remain as tight as a drum. Russian output fell 1pc in the first quarter of this year. Nigeria, Venenezuela, Iraq, and Iran have all suffered setbacks, failing to meet supply targets.
The Saudi government appears to have backed away from its earlier plans to boost capacity to 15m b/d. King Abdullah said he wished to leave some of the country’s untapped reserves in the ground for future generation, rather than exploit it now.
The 'Peak Oil’ theorists may yet win the argument.