Monday, May 3, 2010

China And The Deepwater Horizon: Oil’s Inexorable Move To $100

Oil trades up near $87 today, and it is bound to move toward $100 this month. The estimates for the Deepwater Horizon incident now range as high as 100,000 barrels a day if the pressure from crude moving from under the ocean floor breaks off another section of pipe.

Some experts expect the slick to hurt or shut down production from larger refineries along the coast of Mississippi, Alabama, and Louisiana. Bloomberg BusineessWeek reports that the spill could also affect Valero (NYSE: VLE) and Royal Dutch Shell. Each operates large refining operations which sit on the Gulf coast.
The BP spill comes at a time when the US economy has begun to stage a moderate rebound. And, the need for crude imports in China has moved up sharply. The People’s Daily recently reported that “Figures from the General Administration of Customs show imported oil in December hit a record 21.3 million tons, pushing the country’s total oil imports last year to 204 million tons.” China’s GDP will grow at 10% to 11% this year by most estimates. That will only raise the nation’s need for oil produced outside its borders.

At the time when oil demand will hit a peak higher, perhaps than it was before the recession, supply is likely to contract. OPEC shows no sign of increasing production. Nations in the cartel may believe that high oil prices will help them offset a period of low oil prices early last year. As crude dropped below $40, several Middle East countries said that they do not add to their national treasuries unless the price is above $70.

There should not be any hope that other oil-producing nation will fill the hole left by OPEC’s reluctance to raise output. Mexican fields are aging. Russian production could fall as much as 4% this year, Bernstein has estimated.

New and huge fields have been discovered in the seas off of Brazil, Western Africa, and in the Gulf of Mexico. but they are so far beneath the surface that it may take years to get them into production. The Gulf spill will delay indefinitely plans to drill along certain parts of the US coast line.

All of this is to say that just two factors–China and the Deepwater Horizon incident–could push crude prices higher. And, there are other factors in the background which are just as important to crude supply.

Douglas A. McIntyre

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