Near-term demand for fuel remains suppressed, but more broadly there is still a belief the economy is in the midst of a steep recovery…..sentiment furthered by the surge in new home sales in March (up 27%). Clearly this was tax credit driven, but for many the idea that individuals are ready to engage the economy (and most importantly the credit markets) has them bullish the current economic cycle. Corporate earnings continue to beat most estimates despite still being below the peaks seen a few years ago, and interest rates overall remain in check and off their highest levels of the last couple months.
Overall energies continue to trend with equities as sentiment shifts from optimism to caution and then back to optimism. We expect the market to remain range-bound near-term as it struggles with its own fundamental weakness and the reluctant climb by equities during this Q1 earning’s season. Tomorrow’s stocks report will be key to oil’s near-term direction, and already the market is looking for another round of builds in the products of 2 mb and 1.5 mb gasoline/ distillate respectively (oil expected to decline slightly) to further cushion already burgeoning inventories. For now the market continues to be in a holding pattern more or less with $80/bbl representing the low-end and $85/bbl indicating the high-end of the trading range.
Equities remain the key to energies ultimate direction, but increasing fundamental pressures continue to bias the complex lower or at least keep any advance in check. Overall we expect the complex to congest further, likely waiting until next week to make another push higher.
What is it…and why we should care?
Peak oil is the point in time when the maximum rate of global supply extraction is reached, after which the rate of production enters terminal decline. This concept is derived from the Hubbert curve, and has been shown to be applicable to the sum of a nation’s domestic production rate, and is similarly applied to the global rate of petroleum production. Peak oil is often confused with oil depletion; peak oil is the point of maximum production while depletion refers to a period of falling reserves and supply.
M. King Hubbert (a geo-physosist from Royal Dutch Shell in the 1950’s) created and first used the models behind peak oil in 1956 to accurately predict that United States oil production would peak between 1965 and 1970. He was “right-on” and his work is now referred to as Hubbert peak theory, and its variants have described with reasonable accuracy the peak and decline of production. According to the Hubbert model, the production rate of a limited resource will follow a bell-shaped curve based on the limits of exploitability and market pressures. In general, the Hubbert curve suggests that production stops rising and then declines. Supply shortfalls will cause increased energy prices, unless demand is mitigated, often by higher prices, conservation and/or alternatives.
Optimistic estimations of peak production forecast the global decline will begin by 2020 or later, and assume major investments in alternatives will occur before a crisis, without requiring major changes in the lifestyle of heavily oil-consuming nations. Pessimistic predictions of future oil production operate on the thesis that either the peak has already occurred, oil production is on the cusp of the peak, or that it will occur shortly.
Whether the optimistic or pessimistic view is taken, one thing is clear; because the future is un-known, and the possibility exits that crude oil production has peaked…and this means there is a price risk in the future. This price risk can be prudently hedge against.
This long term view (regarding “peak oil”) further cements the importance of knowing your energy budget objectives and analyzing how much risk you can “stomach” should an event like “peak oil” go against your desires. One cannot control whether “peak oil” becomes a reality, but one can control the price exposure should production peak, casusing a shortage in supply and thus higher energy prices.