Just yesterday I was listening to the chief economist at the Centre for Global Energy Studies explain calmly why the oil price was unlikely to hit $150 a barrel. Today, it has taken a huge jump in that direction, peaking at more than $119.Analysts are scrambling to update their forecasts. Here are some of their more important/interesting thoughts:
Saudi Arabia is key
Petromatrix says that if the Saudis don’t step in and replace what is being lost from Libyan supplies, then the only thing to make up the shortfall will be a price spike that effectively kills demand. As in 2008, this could be catastrophic for the global economy:
There are only two ways to answer any continuous supply shortfall from Libya: more supply from countries that have some spare capacity (Saudi Arabia but with some quality issue) or lower demand. Saudi Arabia had said that they would increase production when a supply disruption starts to develop. The supply disruption is occurring, Saudi Arabia is for now staying silent hence the market has to price the second solver which is lower demand, and lower demand comes through price demand destruction.The price surge of 2008 was quite effective for demand destruction but the process can be quite harmful and long lasting. Forecasts for oil to reach 200 $/bbl are starting to surface and if oil can go ballistic on any further fire in the Middle East, the aftermath will be probably be dramatic for the world economy.
This report hit before the Saudis ended their silence: let’s see if it has the desired effect.
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