Checking the Market’s Oil Pressure
By Gus Krafve
March 7th, 2011
Unrest
in the Middle East and North Africa has continued to spread after the fall of
the Tunisian government on January 14th. Thus far, the developed markets around the world have handled
the turmoil relatively well, experiencing selloffs of less than 3%. Conversely, emerging market stock prices
have been underperforming primarily due to commodity inflation and an increase
in the political risk premium. Gas
prices at the pump have also spiked recently as oil is up over 15% since
February 16th.
So, could we potentially experience oil shortages here in the US? Although we import 51% of our oil, it seems very unlikely we would experience any shortages. The majority of our imports come from the Western Hemisphere, primarily Canada, Mexico, and Venezuela. The only country experiencing major supply disruptions at this point is Libya which accounts for only 1.8% of the world oil production, and the US doesn’t import any oil from there. Saudi Arabia and other OPEC nations have said they are willing and capable of producing crude of the same quality to stabilize deliveries. Looking at OPEC oil production and spare capacity, we have concluded that while there is ample excess capacity, Saudi Arabia remains the lynchpin in ensuring there are no supply disruptions. Its future likely determines whether regional instability morphs into a major global crises. OPEC oil production and spare capacity breaks down as follows:
While we don’t anticipate any supply issues to the oil market, higher prices are curbing the discretionary spending of consumers globally. If these prices persist, it certainly threatens the current growth in the economy and the equity markets. Stock markets around the world have gone up significantly in the past six months and many data points show that investor sentiment is overly optimistic. This excessive bullishness, coupled with high oil prices and unrest in the Middle East could be the tipping point for a more serious sell-off in stocks. We haven’t had more than a 5% correction in US stock prices since August of 2010 and are overdue.
