The Flood of Oil….

What’s with the flood of oil in the markets these days?  Are the markets now a wash with black gold?  What will happen to oil prices?

On June 23^rd the IEA, International Energy Agency, announced that it would release 60 million barrels of oil held in strategic government reserves over the next 30 days.  This equates to approximately two million barrels a day.  The world consumes roughly 90 million barrels per day.

The purpose of the Strategic Petroleum Reserves is to insure that we have enough oil held in storage in the event of an emergency or supply disruption.  The IEA requires its 23 member countries to hold enough oil reserves to last 90 days.  In addition, many of those countries have agreements to share those reserves. 

The news last week caught the oil markets by surprise, pushing the price of crude oil downward almost five percent to $90/barrel.

Initially, this move should help keep a lid on oil prices until the end of the summer.  The extra two million barrels of oil released will help smooth out some of the disruptions especially in Europe caused by the civil war in Libya.  Oil prices near term should remain relatively flat barring any unforeseen political or catastrophic event.  However, in the intermediate or longer-term, this news is extremely bullish for the price of crude oil.

The global oil markets have very little spare capacity to be brought on stream.  Saudi Arabia is the only oil country in OPEC with significant and dependable spare capacity.  There is approximately four million barrels per day of spare capacity that could be brought on line to help control crude prices.  The supply-demand balance is extremely tight when you consider the growth of the emerging markets in this world, especially in China and in India.  The International Energy Agency predicted last Thursday average world oil demand could rise by 1.1 million barrels a day to 95.3 million by 2016.  In other words, despite tepid economic growth estimates in the U.S., which consumes nearly one-quarter of the world’s oil, the IEA is estimating a daily increase of 1.5 million barrels a day each year over the next four years.  The use of less nuclear power by countries like Japan and Germany should also put more pressure on these estimates.

The ramifications of injecting more oil into the system will eventually create more consumption in the economy and increase additional demand on an already tight supply-demand balance.

The release of the Strategic Petroleum Reserves over the next 30 days has more to do with politics than anything else.  It is an attempt in the short-term to control the price of oil in a very fragile domestic economy as the U.S. attempts to dig itself out from the recession.  The price of crude oil, ultimately though, will be dictated by supply and demand metrics.  Look for oil prices as a consequence to rise significantly by the end of 2011.

A Sign of the times

 College degrees no longer guarantee great jobs. In 2009, for example, 2 out of 3 Harvard graduates did not have a job at graduation. What does it all mean? Simply put, students must do more than “just graduate” to stand out in a global economy with millions of college graduates looking for work