by Charles Lieberman, Advisors Capital Management
April 16, 2012
Oil prices have given a bit of ground recently, as rising inventories suggest that any possible supply disruptions may be more limited in scope than had been feared. The Saudis have increased supply, even as Libya and Iraq increase production, offsetting reduced supplies of Iranian oil and increased stockpiling by China. It is a bit soon to be confident that oil supplies will be adequate should a conflict erupt with Iran, but the evidence is less one-sided now. So, gasoline prices have retreated, reducing the drain on household income.
Higher oil prices deplete consumer spending power, so the recent retreat in oil prices is very welcome, even if it is modest so far. Users, notably the Chinese, have been adding to demand to grow strategic stockpiles, which has helped push up prices. The underlying concern is that a conflict will disrupt supplies coming out of the Persian Gulf, driving prices considerably higher. However, oil production has also increased to meet this demand, notably from Libya and Iraq, as their oil production gradually reverts to normal, and by the Saudis, who are increasing production to counteract the loss of Iranian supply. In March, global supplies increased about 1.2 million barrels per day, a solid advance. Should this stockpiling continue, it would relieve much of the anxiety over the possible loss of Iranian oil.
Europe’s planned oil embargo of Iranian crude is scheduled to begin July 1, but numerous countries have already begun to scale back purchases, if only because financial links are being turned off, so it has become quite difficult for nations to pay for any oil. Iranian oil exports are clearly falling, making the March increase in global inventories all the more impressive. A few more months of additions to global supplies would likely lead to a meaningful decline in prices.
Last year, a rise in oil prices was one of the key factors that helped slow growth, since it serves as a draw against household spendable income. The rise so far this year is fairly modest, yet investors are concerned that a repeat performance is possible. Few would dispute that higher inventories that push down prices would be rather welcome.
