After months of hysteria about rising oil and gas prices, this week brought some seemingly welcome news for Americans seeking relief at the pump.
First, the International Energy Agency (IEA) declared the "cycle of repeatedly tightening fundamentals...has been broken," citing rising global supply of over 1 million barrels per day in the first quarter.
Second, China reported first-quarter GDP of 8.1%, its slowest in three years and below expectations. A slowdown in the world's second-largest importer of energy would put downward pressure on crude prices.
Third, Saudi oil minister Ali al-Naimi said the kingdom is "not happy about" persistently higher oil prices and is "determined to see a lower price and is working towards that goal." Naimi reiterated the kingdom's pledge to use its spare capacity to bring down prices, if necessary, and said there are no supply shortages in the global market, Reuters reports.
These developments occurred ahead of this weekend's talks between Iran, the United States, France, Russia, China, Britain and Germany, from which the world is hoping for a diplomatic (vs. military) solution to Iran's nuclear ambitions.
As if on cue, this week has brought a series of stories -- in The Wall Street Journal, CNN, MSNBC and other major outlets -- about prospects for a near-term peak in energy prices.
But don't believe the hype about lower prices, says Jan Stuart, head of energy research at Credit Suisse, who sees "the balance of risks to the oil price as being firmly to the upside."
While West Texas Crude is down 5.6% from their February highs, there is "a real risk these oil prices will go right back up again," Stuart says. "The speculative froth, if there is any, may be coming off. The hysteria may be dissipating. But underlying supply and demand firmly shows things are tightening and should be getting tighter not looser going forward."
Fundamental Risk to Oil Prices
Plainly speaking, the IEA is either wrong or "using the wrong data" in its forecasts, according to Stuart, a former IEA analyst.
On the demand front, Stuart sees approximately 750,000 barrel per day more than the IEA, believing the agency is underestimating demand from both emerging markets and mature economies like the U.S. and Japan.
Critically, U.S. consumers have shown an ability to absorb gasoline prices near $4 per gallon, which Stuart attributes to an improving employment picture and rising personal income, which is up 3.6% on a year-over-year basis. "People are better able to afford to pay a little more for gas," he says.
On the supply front, while the IEA sees non-OPEC production with room to grow about 700,000 barrels per day, Credit Suisse sees only 200,000 barrels of additional capacity.
As for OPEC, "the Saudis no longer have it in their power to flood the market," Stuart says. Brent crude -- the international benchmark -- has only come down $5 from its 2012 peak despite 6-weeks of Saudi pronouncements about raising exports and "jabbering" from the U.S. and Europe about releasing strategic reserves, he notes.
Beyond the fundamentals of supply and demand, Stuart is not very optimistic about prospects for "peace and stability" breaking out in the Middle East.
Judging by recent history and the rhetoric on both sides, "it would come as surprise" if Iran were serious about "negotiating away its nuclear options" and the U.S. was serious about "embracing relations with Tehran," he says.
In addition, Stuart sees risks of supply disruptions in "numerous countries," including Iraq, Libya, Nigeria, Algeria, Venezuela and Russia, as we discuss in the accompanying video.
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- International Energy Agency