So when supply is growing, what should happen to price?

So, if there’s going to be a spare 6.5 to 7 million barrels a day of oil production capacity in the next 3 or 4 years, what should happen to price?

Despite current fears that oil will soon “run out,� global oil production capacity is actually set to increase dramatically over the rest of this decade, according to a new report by Cambridge Energy Research Associates (CERA). As a result, supply could exceed demand by as much as 6 to 7.5 million barrels per day (mbd) later in the decade, a marked contrast to the razor-sharp balance between strong demand growth and tight supply that is currently reflected in high oil prices hovering around $60 a barrel.

There is a bit of a catch, but it has nothing to do with availability of oil, technology to get it or businesses willing to go after it. As expected, it’s government:

“The main risks to our Supply Expansion scenario,� comments Yergin, “are above ground, not below ground – changes in the political and operating climate that could delay expansion.� In CERA’s downside “Delay and Disruption� scenario, the lower boundary in the analysis, capacity increases by 11.5 million barrels between 2004 and 2010.

Meanwhile, oil market irrationality is spreading over to the stock market where we get this quote (after August oil futures fell 79 cents):

“The market is somewhat paralyzed by where oil is going to go, so we’re in a wait-and-see period” that may continue until just before the Fourth of July holiday, said Brian Williamson, vice president of equity trading at The Boston Co. Asset Management.

Found the CERA press release in this post.

More on oil on my site Financial Options including The Secret Way to Play Oil.

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