Prices Reflect More Than Hot Air

Supply – as Well as Fear – is Factor

In 2006, Qatar’s oil minister said about oil prices, “If you can stop the politicians from making negative statements, I am sure you will see almost fifteen dollars disappear from the price.” And that was when oil was about $58 a barrel.

Today, with oil knocking at the door of $100, there is no doubt the “risk premium” also has bloated.

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In 2006, Qatar’s oil minister said about oil prices, “If you can stop the politicians from making negative statements, I am sure you will see almost fifteen dollars disappear from the price.” And that was when oil was about $58 a barrel.

Today, with oil knocking at the door of $100, there is no doubt the “risk premium” also has bloated.

However, as the oil price soared nearly 30 percent in October and November, analysts also noted there are fundamental supply factors – beyond fear – pushing the price. Those factors include:

  • Strong demand.
  • Falling inventories.
  • No production increases from OPEC.

Interestingly, the Energy Information Administration says that while petrol prices have remained relatively cheap, U.S. gasoline demand has been about flat for the last few months, whereas it usually grows by about 1.5 percent each year. Meanwhile, refining margins are being squeezed as top dollar is being paid for the product and the extra costs haven’t been passed on to the consumers – yet.

On the natural gas side, there are supply concerns – especially if winter is particularly harsh.

“The rising demand for gas, coupled with flat production, has tripled prices in the last four years,” said Michael Zenker, an analyst with Cambridge Energy Research Associates. “I would estimate prices would average about $7 through 2008.”

He also said relief should arrive then in the form of liquefied natural gas, imported to alleviate shortages of the increasingly popular fuel.

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