As promised yesterday, the blog looks today at the impact of today’s high prices on oil consumption growth.
As the chart, based on BP data shows, the ‘easy money’ policies of the central banks have only partially mitigated the impact of the oil price rally since 2009. Consumption growth has not fallen to the 0.8%/year level since during the second oil crisis after 1979. But nor has it regained the 1.7%/year level seen during the Boomer-led SuperCycle. Then prices averaged $27/bbl in money of the day, and $41/bbl in $2014.
Overall, the big winners over the period since 2009 have been the traders (including the commodity desks at the investment banks) and oil producers. Consumers have paid the bill.
THE TRADER VIEWPOINT
Oil proved a fantastic money-making opportunity from 2009 onwards. A totally new trading product was developed titled ‘contango crude’. This was crude that was stored in tanks all around the world to take advantage of pension funds’ sudden desire to buy crude on the futures markets.
For a cost of only $1/bbl per month, the early deals made total returns of $30/bbl – sometimes after as little as 3 months. Storage companies also loved the story, and rushed to build more tanks to support it.
But today, the ‘contango trade’ is dead and buried. Brent oil for supply next month closed Friday at $109.66/bbl. The price for delivery in August 2015 was actually lower at $105.86/bbl.
In addition, the investment banks are now busy exiting the business, as their costs of capital are rising. Many have either closed down their commodity trading businesses, or are reducing them in size.
THE PRODUCER VIEWPOINT
Producers have been laughing all the way to the bank. They have kept a very careful eye on the broken Brent pricing mechanism, and have ensured that it has remained steady at around today’s levels. That was not very difficult to achieve in the over-heated conditions of the past 5 years. There are, after all, no laws to stop producers buying in distressed cargoes to avoid disturbing the market.
But whilst the influx of financial players added excess speculative demand, it also encouraged new production – most obviously in the US, but also around the world. It takes time to finance and find new sources of supply. But 5 years has proved more than long enough to create supply gluts in many major markets.
THE CONSUMER VIEWPOINT
High oil prices above $50/bbl have always led to recessions in the past. The impact has been mitigated this time by the easy money policies and giant stimulus programmes. But real incomes, adjusted for inflation, have mostly been falling in the West in recent years, causing higher oil prices to crowd out other more discretionary spending.
Equally, consumers have been looking to use more fuel-efficient vehicles, or to otherwise cut back on energy usage. Again, as with exploration, these developments take some time to impact the market. But they are now having an increasing effect in virtually every major market.
H2 may therefore prove to be the end-game for the post-2008 oil price market rally. What happens next may not be pleasant, as the blog will discuss tomorrow.