Dave Cohen: Brace Yourselves For The Next Oil Price Shock

In our United States, which I served in Vietnam as Advisory Team Leader, "bad", and by that I mean not reversible problems are just about to happen: Looking at the oil supply & demand fundamentals, next year looks like an accident waiting to rear their ugly heads. If economic growth in emerging economies remains on track, and that is a "Big If", the next oil price shock will occur in 2012. David Rosenberg recently put the odds of America going into recession in 2012at 99%, but I doubt he had oil in mind when he said that- On the current path, oil is set to hit $150 per barrel next summer. Take an economy in recession, add in oil prices well in excess of $100/barrel, and what do you get? Let's briefly review the fundamentals. Here's the Energy Information Administration's current outlook (STEO, June 7 edition). EIA projects that total world oil consumption will grow by 1.7 million barrels per day in 2011, which is about .3 bbl/d higher than last month's outlook, primarily because of higher forecasts of consumption for electricity generation in China, Japan, and the Middle East. Projected world consumption increases by 1.6 million bbl/d in 2012, unchanged from last month's Outlook. Projected supply from non-OPEC countries increases by an average of .6 million bbl/d in 2011 and .05 million bbl/d in 2012. EIA expects that the market will rely on both a draw-down of inventories and increases in production from both OPEC and non-OPEC countries to meet the projected demand growth. These daunting numbers - 1.7 million barrels per day in 2011, 1.6 million barrels-per-day in 2012, portend a demand shock just like the one the world experienced in 2006-2007. The key phrase is is a draw-down of inventories.