March 6, 2012
The latest in a series of reports evaluating the future of the energy markets, especially in the context of the increasingly inevitable Iranian conflict, may just be the best and most comprehensive one (not just because it looks at the commodity from an “Austrian” angle). In 82 pages, Austrian Erste Group has extracted the key aspects and variables for the world oil market and come up with a simple conclusion: “nothing to spare.” To wit: “We see the risks for the oil price heavily skewed to the upside.
At the moment, the market is well supplied, but the smouldering crisis in the Persian Gulf could easily push oil prices to new all-time-highs should it escalate. We believe that new all-time-highs can be reached in H1, at which point we could see demand destruction setting in. We forecast an average oil price (Brent) of USD 123 per barrel between now and March 2013…The latently smouldering Iran crisis seems to be close to escalation. The most recent manoeuvres, ostentatious threats, sanctions, embargoes and the shadow war currently ongoing, have heated up the situation further. It seems we may soon see the last straw that breaks the camel’s back. Even though Iran could probably only maintain a blockade of the Straits of Hormuz only for a very limited period of time, the consequences would still be dramatic. The oil price would definitely set new all-time-highs and could reach levels of up to USD 200.” Enjoy those price dips while you can.
Some more highlights:
Brent oil set a new average all-time-high of USD 111/barrel in 2011. This price also exceeded the 2008 and even the 1979/80 referential values on an inflation-adjusted basis. The main drivers of the oil price last year were the supply side and the unrest in the MENA region. Not even the latent worries about an economic slump in Europe, the US or especially China had much of an impact on the oil price. The increasingly expansive monetary policy of the Federal Reserve, the ECB, the Bank of England, and the Bank of China also came with a stimulatory effect. Given that the Fed will now continue its zero-interest-rate policy at least until the end of 2014, this should support the entire commodity sector, oil and gold in particular. This scenario seems to lay the basis for new all-time-highs.
Last year, we saw mainly upside risks for the oil price, expecting the wave of revolutions to continue rolling across the MENA region more vigorously than it ended up doing. For now the spill-over of the revolution has been prevented by appeasement measures worth billions taken by the various governments. However, the system-immanent problems have only been covered up, not resolved. The initial euphoria of the Arab Spring has meanwhile given way to a sense of sobriety.
The latently smouldering Iran crisis seems to be close to escalation. The most recent manoeuvres, ostentatious threats, sanctions, embargoes and the shadow war currently ongoing, have heated up the situation further. On top of this, the situation in Iran seems tense, with a cut in subsidies and the onset of hyperinflation exacerbating the crisis. It seems that we may soon see the last straw that breaks the camel’s back. We will discuss the political risks and their effects on the oil price in the following pages.
On top of the aforementioned issues, it seems that OPEC currently controls the price more tightly than ever before. In the current environment, prices of USD 90-110 should not (yet) create any form of demand destruction. It seems as if the oil price were to test the precise price level of that critical threshold and then rise a bit higher with every attempt. They say that the cure for high prices is high prices, as a result of which both demand in the OECD countries and supply (unconventional oil, new production methods, etc.) seem to adjust.
A comparison of the oil price forecasts from various oil producers reveals that, in the period of 1999 to 2010 Mexico, Saudi Arabia, and Russia made the most accurate forecasts. All three of them also came closest to the actual price last year, which is why it makes sense to listen to their expectations. For 2012 they predict substantially higher oil prices. Saudi Arabia expects an average WTI price of USD 97, Mexico forecasts USD 116, and Russia USD 120/barrel. Iran has given the highest forecast at USD 137/barrel.
The Austrian School of Economics offers investors a new angle on forecasting asset and commodity prices. In contrast to traditional economists, “Austrians” do not regard the rising demand for oil or other commodities as determining factor for rising prices. Rather, they view the ongoing increase in money supply, which in our partial reserve bank system entails an expansion of credit, as the crucial factor of rising prices. For Austrians, one thing is certain: the more monetary units circulate, the lower their intrinsic value. As a result, the substantial increase in oil prices in the past year has come as no surprise, as for Austrians it is not so much the demand for a good such as oil that determines a price increase, but simply the fact that, especially since 1971, more and more paper and digital money has been circulating globally. The following chart supports this fact impressively. While the average inflation-adjusted oil price had been USD 6.1/barrel within the framework of the Bretton Woods agreement, it embarked on a rapid increase once gold had been discarded as monetary basis. Since the end of the gold standard the price of one barrel of oil has averaged USD 20.6 per barrel.
This article was posted: Tuesday, March 6, 2012 at 10:00 am