The IEA is out with a report warning that the financial crisis and the resulting lack of oil investment could actually result in an oil spike in the coming years as the global economy recovers. They said:
“Cutbacks in investment in energy infrastructure will only affect capacity with a lag, often amounting to several years. So, in the near term at least, weaker demand is likely to result in an increase in spare or reserve production capacity. There is a real danger that sustained lower investment in supply in the coming months and years, could lead to a shortage of capacity and another spike in energy prices in several years time, when the economy is on the road to recovery. The faster the recovery, the more likely that such a scenario will happen.”
I continue to believe that most of the recent rise in oil prices is due to money printing (primarily China’s stimulus plan) and seasonality. While the IEA’s report is likely true, oil traders don’t have a tendency to look much past next week or next month when trading. This could pose a serious threat to oil prices and the equity markets as the July 4th holiday rolls around and the seasonality trade ends. It’s beginning to look like we could see a repeat of last year when oil prices ran up on fundamentals that simply didn’t correlate to the current fundamental situation.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.