SCDigest Editorial Staff

SCDigest Says:

Industry expert Mike Rothman says that the commonly held belief that tremendous demand growth in China and India is driving up prices simply doesn’t withstand analysis of the data, which he says show much lower growth from “Chindia” than most just assume is the fact. What do you say? Send us your comments here

With fuel surcharges consuming an ever larger component of the transportation spend of many companies, the price of oil and diesel fuel which drive those surcharges has become a very important data point.

As oil this week surpassed $80 dollars per barrel, can shippers and carriers expect prices to continue to rise?

Many experts currently think so. Despite recent decisions by OPEC and Saudi Arabia to raise production volumes, market analysts at Goldman Sachs, for example, believe the action is unlikely to have an impact.

"We believe that this will be too little, too late, barring an outright collapse in demand, and now expect inventories to draw to critical levels this winter," the investment firm said in a recent research note.

Goldman Sachs also raised its year-end 2007 price forecast to $85 per barrel, "with a high risk of a spike above $90 per barrel." It also said crude could hit 95 dollars by the end of next year.

Ouch!

But the news is not all dismal.

In an interview late last week in Barron’s, Mike Rothman, an oil industry expert at research firm ISI Group, said prices were headed down – in a big way.

Rothman believes worldwide demand growth has been significantly overestimated, and that production, especially from non-Middle East sources, has been expanding nicely, contrary to fears of the ‘”peak oil” crowd. In fact, he believes Saudi Arabia backed the recent increase in production quotas not to take some “froth” from the market price, as commonly believed, but because it was actually losing market share to these other sources.

He believes oil prices could easily drop to $45-50 a barrel over the reasonably short term, as market realities are better understood.

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Realities Not Reflected in Market Price?

So why is the price still so high now? Rothman believes that it is in large measure because oil prices are no longer really driven in the short term by supply and demand, but rather by the perceptions of big players in the oil futures markets, which didn’t even exist until the early 1980s. These traders can drive up the price of oil even if supply and demand might dictate otherwise.

“I have never seen a gap between the reality and the perception of reality as big as it is right now,” Rothman told Barron’s. He says, for example, that the commonly held belief that tremendous demand growth in China and India is driving up prices simply doesn’t withstand analysis of the data, which he says show much lower growth from “Chindia” than most just assume is the fact.

Rothman’s analysis provides a welcome contrarian view to the prevailing wisdom predicting another cycle of oil price increases, and he has an impressive array of data to back up his belief.

So for which scenario should shippers plan? It’s impossible to say, of course, other than to note Rothman’s view is based almost exclusively on supply-demand data and historical patterns. Others say “It’s different this time.” One thing we do know is that geopolitical events can have a huge impact on perceptions and can also drive prices higher regardless of the fundamentals.

Which view would you take – are oil prices going towards $100, or set for a large fall? How bad is it for logistics cost that oil prices are now driven by traders less than fundamental supply and demand? Let us know your thoughts at the Feedback button below.