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No confusion on where oil price is headed

Henry Groppe

Kevin Van Paassen

Anyone paying attention to the noisy talking heads who populate TV biz panels is bound to come away deeply confused when the subject turns to oil prices.

We keep hearing that demand is essentially flat in the developing world and shrinking everywhere else.

Production isn't moving much in any direction and inventories are piling up like so much Toronto garbage.

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With the global economy deep in the doldrums, $20 (U.S.) crude must surely be just around the corner.

Yet crude prices have actually been on the rise again in recent days, climbing above $68 a barrel yesterday.

The bearish types insist this undoubtedly stems from misplaced faith in economic prospects in the United States and that the hike can't be justified by the commodity's fundamentals.

Others with more conspiratorial leanings, including the Nobel Prize-winning economist Paul Krugman, CNBC commentator Jim Cramer and more than a few policy makers, say the fault lies with financial speculators, who need to be reined in before they cause the fragile economic recovery to come crumbling down on our heads.

Yet at least one prominent energy analyst says the price is headed in the right direction, based on actual supply and demand.

He goes on to say that speculators have precious little to do with the recent runup, and that those insisting oil is wrongly priced are relying on lousy data.

That would be Henry Groppe, 83, who has been tracking the complex world of oil and gas production, consumption and pricing for more than half a century.

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"I feel like I'm from Mars, because I know all the stuff that's put out there has no basis in reality," says Mr. Groppe, who in fact hails from Houston. "Most perceptions of what's actually happened are totally wrong, because there are such errors with the energy statistics."

The reason most numbers are wrong - including those used by the International Energy Agency - is that no one in the industry has any incentive to provide accurate statistics, Mr. Groppe said during a visit to the Toronto offices of fund manager Middlefield Capital Corp., which he serves as an adviser. "So nobody really knows how much oil is being used in the world today."

Mr. Groppe and his associates spent years laboriously developing their own data to paint a reliable picture of oil flows. Relying heavily on oil import figures (which are more accurate than exports, because governments collect taxes on them), among other sources, they know who is shipping what to where and in what quantities.

Their findings: Actual imports have been as much as 1.25 million to two million barrels a day less than was claimed to have been exported in official stats.

Ignoring unreliable weekly inventory numbers and dismissing claims of oil-filled tankers sitting idle in the Caribbean as largely fanciful, he has concluded that much of what has transpired in the past two-and-a-half years "can be traced to specific changes to the supply-demand balance."

During this period, prices soared from an average of $54 to a brief peak of $147.50 a year ago, and then plunged to $34 last December before coming back to the current level. Speculators climbed on the bandwagon, making the peak higher and the valley lower, but they didn't influence the direction, he said.

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If policy makers want to hold anyone responsible, it ought to be the Saudis, who overreacted to fears of a global collapse by slashing production last summer and keeping it down ever since, says Mr. Groppe.

"Since the beginning of this year, we think there's been a significant, steady increase in oil consumption."

So back in January, when Goldman Sachs forecast that oil would keep falling to $25 a barrel, he told clients that his data-mining showed just the opposite. His current forecast: Prices will hit $90 to $95 later this year, until the Saudis restore the missing output.

Speculation could take crude even higher by another $10 or $20 a barrel, and volatility will remain a fixture of the market.

"It will run up to a high enough price level so the Saudis will feel they must act. And I think they will overreact again. I would expect oil to approach $100 later this year and correct back to $50 or $60 the middle part of next year. And then do it again."

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About the Author
Senior Economics Writer and Global Markets Columnist

Brian Milner is a senior economics writer and global markets columnist. In a long career at The Globe and Mail, he has covered diverse business beats, including international trade, the automotive industry, media, debt markets, banking and the business side of sports. More

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