Priced To Perfection?

Is oil priced to perfection? Well in the last few weeks you have heard a lot of noise from a lot of places about where oil prices are going, yet if you want a consistent message and want to cut through the noise to look at the big picture, look to the “ Energy Report” if you want to be hedged to perfection.

You have folks telling you that oil is priced to perfection and that the risk from the Iranian sanctions are already priced in. Of course that is brought to you by the same folks that told you that oil would not trade above $40 because of shale oil production. They point to the recent retreat from hedge funds and calling the spike to over $75 a barrel a speculative bubble. They point to recent data that seems to suggest the market is well supplied.

Yet, they fail to take into account that from a refinery run standpoint, demand is seasonally at the bottom and is only going to improve. We still face a situation where global spare production capacity is at a historic all-time low in a world where geopolitical risks to supply are rising. Even OPEC Secretary-General Mohammad Barkindo said global spare oil capacity was shrinking, adding that producers and companies should increase their production capacities and invest more to meet current demand. The International Energy Agency warned that  the decline in Iranian oil exports, which dropped 800,000 bpd since May when the United States announced it was withdrawing from the Iranian nuclear accord that automatically reinstated U.S. sanctions, to September, to accelerate next month. Saudi Arabia has the majority of the world’s global spare capacity, which was estimated at a low 2% in September according to DTN.

They fail to account for OPEC countries that can barely pump their oil quota. Even as Saudi Arabia promises to pump more oil to make up for lost Iranian and Venezuelan supply, they admit that their ability to go much beyond that from a production standpoint. Saying we are priced to perfection I guess is a safe call if you don’t know if the market is going to go up or down.