High Prices Cure High Prices

March 3, 2009 06:00 PM

Linda Smith, Top Producer Executive Editor
Demand has been rationed not just for ag commodities, but for energy as well. The $100/barrel decline from the record high of $147 last July to early February is the most precipitous fall in recent history, reports Federal Reserve Bank of Dallas economists Mine Yucel and Jackson Thies.
"Just a few short months from the zenith of all the bullish hype, oil is struggling to stay in the $30/barrel range. Instead of oil supplies running out, we are facing the largest oil glut in years,” says Phil Flynn, vice president, energy and general market analyst with Alaron Futures and Options. "Supplies are at a 16-year high and at Cushing, Okla., where the world benchmark price is set, they are at an all-time high.”
In fact, we're almost out of space to store it, he adds. "Because land storage cannot be found, they are now storing oil on ships. Right now, just floating around in the ocean somewhere, there are oil supertankers filled with about 80 million barrels of crude—oil that in many cases is having a hard time finding a port to unload. This is the most oil in floating storage in at least 20 years.”
Global oil demand, which was supposed to grow unabated, has stalled, Flynn says. World oil consumption will fall 1 million barrels, to 84.7 million/day, which is the largest drop in global demand in 27 years, according to the International Energy Agency.
The US Department of Energy sees an even greater drop—1.2 million barrels/day in 2009. This will be the first time since 1982-83 that consumption has dropped for two consecutive years, the Dallas Fed economists point out.
The seeds of the next boom are being planted right now, Flynn declares. "In response to lower prices, "OPEC is cutting production by more than 4 million barrels/day and may cut more as it tries to lower supply. It is also postponing 35 out of 150 oil and gas production projects. These delays mean that OPEC will not hit its target to increase capacity by 5 million barrels/day by 2012.”
The fact that nearby futures are more than $21/barrel below prices for December 2010 indicates "the futures market is predicting that the excess production capacity today will be trimmed and future demand will rebound, resulting in higher prices,” according to the Dallas Fed economists.
Before we pick a bottom, we need to see a reduction in supply and the world economy has to turn around, Flynn says.
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You can e-mail Linda Smith at lsmith@farmjournal.com.

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