In March we forecasted a significant correction in crude oil to take place in the 4th quarter. That correction has now begun in earnest and it might be worth noting some of the factors that are driving that correction.
The first factor is the simple fact that the global economy and more specifically the emerging giants of India and China cannot afford $150.00 barrel oil on a sustainable basis. Oil prices at that level fuel inflation and force a contraction in consumption. The second factor will be a very real energy independence strategy that will be embraced by the next US administration we believe that strategy will reduce US oil imports by 10% a year over the next ten years. The third factor will be new output primarily driven by Iraq which can be expected to add 2.5MM barrels of new production per day within three years.
The perception of a short and medium term supply shortage has now been erased. It appears that oil’s brief spike served to convince the markets that long-term dependence on fossil fuels is not viable and this has now been priced into oil. Finally the global community “gets” global warming and as such a race for alternative fuels which has already begun can be expected to take on a fevered pitch!