Whats behind the recent surge in crude oil prices?
The OPEC supply increase was too little, too late. The market is in a significant deficit, the first deficit we’ve seen since 2003. Inventory started to drop in October of last year for two reasons. Non-OPEC supply has been extraordinarily disappointing, because those producers are hitting technical difficulties with new equipment and their existing fields are getting less productive. OPEC has the supply but hasn’t brought it online. The second factor is that we’re in the part of the energy cycle where extraction costs are rising and have been since 2001. So how high will prices climb? Our high-risk scenario is in the $90 to $95 a barrel range. I think there’s high probability we’ll get there, rapidly approaching 50%. The later OPEC is in responding to the higher prices, the sharper the deficit and the more critical the drawdown on inventory this winter – and the more volatile the price spikes. They’ll have to respond by first quarter of next year, barring a global collapse in demand.
