While crude oil prices in the short term are fixed on the Fed and current oversupply, in the big picture it may be time to party like its 1999.
In 1999 oil prices had just come off a year (1998) where oil prices had dipped as low as $10.35 per barrel and there was doom and gloom across the energy space. Yet in hindsight oil in 1999 was at a historic turning point and a major bottom that changed the energy landscape for over a decade.
There are so many similarities about what is starting to happen in the energy space now it’s almost eerie. In 1999 they were saying many of the things that we are hearing today about oil, but looking back it was dead wrong.
For example, what they were saying about China and their demand for oil was wrong. In 1999 a dour assessment about their oil demand. At the time, the Energy Information Administration said, “Economic developments in Asia over the past 18 months have weakened worldwide oil demand and lowered world oil prices - a trend that is likely to continue for several years.”
This sentiment became ingrained and there was denial by many oil market watchers even as Chinese demand continued to defy expectations. This year, while oil demand in China has softened, their imports are well above a year ago.
In fact, according to Bloomberg, China’s crude imports rose in September from a three-month low, as the world’s second-largest consumer sought bargain barrels for its reserves and their refiners boosted processing. Overseas purchases rose to 27.95 million metric tons last month from 26.59 million in August, according to preliminary data released by the Beijing-based General Administration of Customs on Tuesday. That’s equivalent to 6.83 million barrels a day, up 8.6% from the previous month.
Back in 1999 market watchers and big banks talked about the never ending glut of oil as OPEC overproduced to maintain market share. There was no adherence to quotas in the Cartel because no matter what, one of the countries would start to cheat on those established quotas and the rest would follow.
The Economist wrote an article in 1999 called “Drowning in Oil.” They wrote that what sneered Abdurrahman Salim Atiqi, Kuwait's one-time oil minister, “is the point of producing more oil and selling it for an unguaranteed paper currency?” In 1973, when most people feared that nothing could stop greedy OPEC members from raising oil prices as much as they chose - though not this newspaper, which forecast an oil glut--the producers affected to accept western cash for their black bullion out of charity.
Now the long oil-price odyssey seems at an end. Since its peak in 1980, the price has fallen erratically. It has plunged by half in the past two years alone. In real terms, oil now costs roughly what it did before 1973. Crude is gushing from the ground at the rate of 66 million barrels a day, half as copiously again as in OPEC's prime. The world is awash with the stuff, and it is likely to remain so.
The Energy Information Administration warned in 1999 that non-OPEC oil production was expected to increase more rapidly. Contributing to the growth was a near doubling of production from the former Soviet Union by 2020 (primarily in the Caspian Sea oil fields), new fields in the North Sea, and increases in the offshore regions of West Africa. Mexican oil production would continue to expand, and the rest of Latin America was projected to increase production by more than 50%, particularly in Brazil and Colombia. Lower OPEC production and higher non-OPEC production then would mean that OPEC would not dominate the world oil market until later.