Morgan Stanley: Oil Shock’s a comin’

Wow. This isn’t good folks. Pay close attention to what this article is saying: spare production capacity, that which would be used to supply any demand growth, is rapidly disappearing. From 5.9 million barrels per day in 2010 to 2.5 million barrels per day at the end of 2012 – a 60% drop. According to Morgan Stanley, this will be “untenable.”

Naturally, in a “free market” “higher prices will be needed to ration demand.”

This is happening at exactly the same time as OPEC’s pronouncement that they see demand rising by 4.4 million barrels per day by 2014.

Supply and demand are on a collision course.

The report says that oil will reach $95 a barrel by the end of this year – approximately $10 more a barrel than current prices. That’ll mean $3.00 a gallon gas prices at Christmas.

The authors go on to say that oil will rise to $100 in 2011 and $105 in 2012. In my opinion the only way the price stays that low is if it our economy double dips. If it doesn’t, then by the end of 2012, we could see the highest oil prices ever – the oil shock. THAT will put the economy on ice for a long time.

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Oil to Rise as Capacity Drops, Morgan Stanley Says

November 01, 2010,  From Businessweek

By Dinakar Sethuraman

Nov. 1 (Bloomberg) — Crude oil prices will rise as spare production capacity drops to “untenable levels” by the end of 2012, Morgan Stanley said in a research report.

Spare capacity passed its peak this year and may decline to 4.1 million barrels a day by the end of 2011 from 5.9 million barrels today, Hussein Allidina, an analyst at Morgan Stanley, said in the report today. It could drop to 2.5 million barrels a day by end-2012, he said.

“Tighter, impossible levels of spare capacity are seen from 2013 to 2015,” the report said. “With demand relatively inelastic in the short run, we reiterate our view that higher prices will be needed to ration demand.”

The bank maintained its end-2010 forecast of $95 a barrel, its 2011 forecast of $100 and 2012 estimate of $105 a barrel. Oil for December delivery traded at $81.83 on the New York Mercantile Exchange at 2:45 p.m. Singapore time.

Non-OPEC production may decline by 380,000 barrels a day in 2011 to 52.2 million barrels, and by a total of 2.2 million through 2015, according to the report. That means OPEC will need to pump more as global demand increases.

“OPEC will increase production prompted by declining inventories,” Allidina said. “Although OPEC production capacity grows, contingent on an Iraqi production increase of 1.4 million barrels a day, the 1.5 million OPEC crude production increase envisioned through our forecast horizon is not sufficient to offset non-OPEC declines.”

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