Oil: A Question Of Supply

It had seemed like the worst was over. After peaking at around US$75/bbl in September, crude oil prices had quietly drifted back into the fifties, and suddenly it seemed as if it were all just a bad dream.

Mind you, a couple of years ago US$50/bbl would have seemed outlandish, but since China’s long term emergence and Katrina’s short term destruction the world has found comfort in believing US$50bbl to be almost cheap. But just when we thought it was safe to go back to the pump…

The longer term rally in the oil price to date has been driven from the demand side and not the supply side. Mind you, the supply side has played its part in that capacity has been caught short, hence as demand outstripped supply the only way for the price to go was up. Economists are less concerned about demand-side rallies in the shorter term than they are about supply-side rallies, as demand will always find a level at which the price is simply too high.

AustralAsian Investment Review