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This month’s publication, Road Map to the Next Repricing of Oil, explains that the next upward price move, starting about two years from now, will share some similarities with the last repricing on the supply side. However, the conditions on the demand side will be very different. Oil will actually be in a subordinate role this time around to growth in the power grid. As energy transition continues, global GDP will be driven, in the years 2015-2020, by coal, natural gas, renewables and the total set of inputs to global power supply. Oil therefore, instead of being a driver for global growth, will be a beneficiary of global growth. Combine this with the inelasticity of oil demand in the Non-OECD, and oil will reprice rather easily during the next global economic expansion:
A number of familiar factors which led to the last repricing are already in play, as we start down the path to the next repricing. The shifting of demand from stagnant OECD economies to growing Non-OECD economies; the recent peaking of spare capacity in OPEC, which comes in the aftermath of OPEC finally increasing production above 32 mbpd; the likelihood that any further supply increases, of note, need oil at $125 or more to give surety to oil companies to invest; the unstoppable rise of oil extraction costs for all oil—not just unconventional oil—which raises the overall margin of safety for development; and finally the price insensitivity which characterizes oil demand in the developing world.
The September issue also includes the next round of changes to the Model Portfolio:
As it stands, the TerraJoule.us Model Portfolio remains in its accumulation phase. We have approximately three more entry points before energy equities, primarily Oil and Gas equities, head into their seasonal low in November/December. It may also be helpful that the recent machinations over a missile strike in Syria will likely cause a nasty hangover in the price of oil, as such geopolitical events reliably cause a mini-spike—followed by a mini-crash. By Q4 of 2013, the price of oil will likely be back below $100 a barrel.
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