Cutbacks today may lead to higher oil tomorrow
Even though some of the cash-rich supermajors are maintaining oil and gas investment, a large portion of the petroleum sector is cutting back on capital spending. The continued low price of oil is curtailing investment in large infrastructure projects that are likely to become very important when oil demand rebounds.
OPEC has implemented multiple production cuts to attempt to push the price of oil back toward $75 per barrel. These measures – significant cutbacks in production and long-term infrastructure projects – may lead to petroleum shortages, and the resultant rapid uptick in the price of crude in the future. Phil Flynn, vice president of Alaron Trading in Chicago, says, “Every bull market in oil is really born in the zenith of a bear market. The cutbacks we see today are going to lead to a spike somewhere in the future. The big question is when it’s going to happen.”
One trend in the current price of oil is downward movement early in the week combined with a late-week rally that coincides with the release of the Department of Energy inventory report. The price volatility is enhanced when the Energy Information Administration report differs from the American Petroleum Institute estimate.
Looking at the next few months analysts are expecting U.S. petroleum reserves to remain steady, possibly with more oil stored offshore. Olivier Jakob of Petromatrix in Switzerland says, “Crude oil stock levels in the U.S. Gulf will soon reach their record high, and yes, at a certain point U.S. stocks will stop building just because there is no more onshore tank space available. But a few more very large crude carriers have been reported to be fixed for floating storage option in the US Gulf; hence the US, despite the OPEC cuts, is far from approaching a supply deficit.”
Sources for this post include the Wall Street Journal and Oil & Gas Journal.
Published Thursday, April 16th, 2009 at 9:15 am and filed under Industry News.