Oil's Changing Prices

By Dian Vujovich

Every time I go to the gas station the cost per gallon of gas has changed. Sometimes up. Sometimes down. Rarely the same. With summer on its way, I’m expecting it to go up again. It always seems to.

To help me make sense out of oil and gas prices, I phoned Tim Guinness, portfolio manager of the Guinness Atkinson Global Energy Fund (GAGEX). Tim is co-owner of the investment company bearing his name and has spent the last 10 specializing in the fields of oil, gas and global energy.

What follows is some of my interview with him conducted on March 19:

Dian: Can you help me understand what’s happened to the price of oil lately?

Tim: I can tell you exactly what’s happening. One is obviously what’s happening to supply- as in the growth in the supply of oil outside of OPEC. And by that I mean in North America, Alaska, Canada, off shore of the US and in places like the North Sea, Amman, Mexico and Brazil. The short point is supply outside of OPEC is simply not growing. Even the IEA (International Energy Agency), who publish a monthly oil report, have revised their projections; instead of showing it (supply) growing at one-half a million barrels a day they’ve now said, “Ok, we’ve agreed it’s going to be flat.”

Also, Russian supply is actually now declining and lots of countries have gone past peak production.

The next thing is demand. Everybody is aware that demand has been destroyed by this recession. What people are now recognizing is that the effect of the worldwide recession is to a large extent being offset by the very sharp unwinding of the price of oil. But in fact, the oil price was having a big effect on dampening demand in 2007 and in 2008 when it got up to $150 a barrel. What people didn’t know was how big a recession it was going to be with regard to oil prices.

So, what ‘s happening to demand is that it’s going to be flat or may decline by about 5 percent, not the 10 percent we feared.

With demand down and OPEC cutting production, the result is that the world oil market is now tightening. And it’s tightening sufficiently so that people like us are taking the view that oil inventories around the world will be worked off maybe late May, maybe mid- July,

You can’t be exact as to when, but the result is that the physical oil market is moving from a very sloppy oversupply to actually a tightening up and constrained market. And that’s what is causing the price changes that got as low as $40 a barrel and have gone up through $50 as you saw today. (March 19, 2009)

Dian: Is there enough oil in the world or are we running out of it?

Tim: No, we’re not running out tomorrow. Are we running out in the next 50 years? Yes. So those are two different things.

There’s much more to this interview with Tim about the price of oil, China’s huge demand for it, comments on coal and even suggested reading. Read it all at: http://www.allaboutfunds.com .