Oil Supply Shortages

Posted by Bull Bear Trader | 5/22/2008 07:46:00 AM | | 0 comments »

As recently reported in a WSJ article, the International Energy Agency IEA is apparently preparing a downward revision of its oil-supply forecast. An analysis of the top 400 oil fields is expected to show that future supplies of crude oil will be tighter than previously thought. As seen in the WSJ chart below (source: IEA World Energy Outlook, 2007), a November 2007 analysis found that there needs to be 12.5 million barrels of oil added each day to keep the supply-demand balance in order out to 2015. Over the last 6 month the situation has probably stayed the same, at best, even with higher crude oil and gasoline prices.

While the IEA has predicted over the years a steady increase in supply to keep up with rising demand, even assuming the increases would continue out until 2030, there is now worry that the world will have a difficult time over the next two decades supplying a level of demand much above 100 million barrels a day. Demand is currently at about 87 million barrels, with supply about 85 million barrels. As of now, the lack of supply is being made up by some reduced demand (from higher prices), as well as pulling from inventories, but inventories will eventually be drawn-down too much and will be unable to make up the difference.

Many note that the data is always somewhat suspect. The IEA is funded by the oil consuming countries and is sometimes thought to be used as a way to encourage the countries flush in oil to supply more, thereby driving the price down for consumers. Furthermore, given that the major oil producing countries are secretive as to the real level of reserves left and available for production, it is also difficult to get an exact reading on the supply number.

Nonetheless, the hand-writing is on the wall, causing many firms on Wall Street to begin raising estimates for the price of crude (Goldman predicting $200 a barrel next year) as more data suggests that supply will not be able to keep up with demand. It looks like the volatility and movement in crude oil prices will continue until they reach a level where real demand destruction begins.