Oil, like gold, is flowing ever-more eastwards to India and China...
FOR MANY YEARS it was believed that the oil price had a direct impact on the Gold Price, writes Julian Phillips of the GoldForecaster.com.
Then the 'credit crunch' arrived, after the oil price had hit $145 per barrel and more, before tumbling to $35 a barrel. Since then the oil price has been treated as irrelevant to the Gold Price. But we at Gold Forecaster believe it only had an indirect influence on the Gold Price in the first place.
Oil's major role, as a price indicator, was to give us a feel of the state of the global economy. After all, economies still run on oil. Nothing on that front has changed, so oil remains a good measure of the state of the world economy. But since 2007 a great deal has changed in the global economy and the oil market. These changes are structural and long-term. But they have to be seen in perspective for their impact on the future oil price and indirectly the Gold Price.
The major structural change has been the expansion of the client base of the oil market and so the potential for huge demand growth. While oil supply is growing, we do not believe that in a growing world economy there will be enough supply to satisfy demand.
Khurais is an oilfield that has come on stream now in Saudi Arabia. It is capable of pumping 1.2 million barrels a day – more than the entire production of Texas. Saudi Arabia's output is well over the amount that the world wants at the moment. After raising its capacity to 12.5 million barrels a day, Saudi Arabia is now pumping about 8.5 million barrels a day, its lowest level since the early 1990s.
But the recession hit US demand in particular, which had to slash oil consumption by 10% from its 2005-7 peaks. And a few months ago, Aramco sold its storage facilities in the Caribbean, a signal that it was abandoning the East Coast market, dropping from the lead oil supplier to the US to letting Canada, Mexico and Venezuela run ahead of them.
Not that the Saudis are giving up on the States. They are expanding refinery capacity in Port Arthur, Texas, alongside Royal Dutch Shell to 600,000 barrels a day to make it the largest US refinery. But they are also adjusting the shape of their customer preference to make room for Asia.
For instance, the Saudis have also ended the "US discount", where Aramco sold oil to American refiners for about $1 a barrel less than to Asia. Saudi exports to the United States fell to 989,000 barrels a day, the lowest level in 22 years, from 1.5 million barrels a day the previous year.
This has produced a dramatic swing in the global oil flow. As a result, Saudi Arabia exported more oil to China than to the United States last year. China is the growth market for petroleum. Saudi officials have recognized that changes are taking place in the United States turning them from the present top oil buyer to a future when they will be less important.
Saudi sales to China surged above a million barrels a day last year, nearly doubling from the previous year. We believe that China's oil demand is set to grow much more than that each year for at least the next two years. Saudi Arabia now accounts for a quarter of Chinese oil imports. Saudi Aramco recently inaugurated a huge refinery in the Fujian province, in the southeast coast of China, which is projected to receive 200,000 barrels a day of Saudi crude, and is looking at a second project in the northeast city of Qingdao. It is also planning to build two refineries in Saudi Arabia, that are primarily destined to ship products to Asia.
India is also courting Saudi attention. After a visit in March to Riyadh by India's prime minister, Saudi Arabia outlined a goal to double its exports to India from 25% to 50% of the market. Its exports to India had already grown sevenfold from 2000 to 2008.
The United States, on the other hand, consumed 18.5 million barrels a day in 2009. That amounts to 22 barrels of oil a year for each American, compared with 2.4 barrels for each Chinese. To get some perspective on this growth, look at Chinese growth in oil demand growing roughly in line with their car markets.
Much of Chinese industry also relies on oil, but their car market alone grew 46% in December year-on-year. Compare populations: 300 million US vs. 1.4 billion in China. Understandably, the Saudis now see their relationship with China as very long term and a strong foundation for more control over prices and supply in the oil market.
Chinese oil consumption reached 8.5 million barrels a day last year, compared with 4.8 million in 2000. Should Chinese growth persist at the current pace we foresee they will take up at least 2 to 3 million barrels of the 4 million barrels a day, spare capacity of Saudi Arabia. This brings the next oil crisis into view in around 2013, provided there is no growth in Europe and the USA. in oil demand. Most believe there will be growth there, meaning we should hit crisis level in around 2012 or earlier.
We have all taken for granted that Saudi Arabia could not afford to ignore its US guarantee of security (particularly the house of Saud). This was based on the fear that Russia in particular would fill the void the US would leave. More realistically, we assumed that they just could not do with the US pressuring them if they turned away from the States.
But is there such a real threat to the stability of Saudi Arabia? The Russian danger has diminished considerably (as has its influence over Iran, its near neighbor) and in the light of the tight relationship between the Middle Eastern States and the disappearance of any threat from Iraq, just what dangers would Saudi Arabia face if it sent say, more than half its supplies to China? The States is headed to a lower level of importance in the eyes of Saudi Arabia, but would remain a critically important supplier to the States. Saudi Arabia certainly would not abandon its US allies, but would control its oil markets with considerably less influence from the States.
So with the issue of Saudi Arabia's security, less important, so the declining importance of the US to Saudi Arabia brings important ramifications. We refer in particular to the global oil price continuing to be quoted in the US Dollar. It will be but a short while before it will be very much to their benefit to have an oil price in a basket of currencies. The change in the size of Asian clients should make any such transition far easier than it was two years ago and will make it easier by the day!
So the talk of a Persian Gulf currency based on a basket of currencies may well have substance. Watch this space!
Now take all these changes and what do we have with reference to the gold market and its price? In oil terms the US is in economic decline, China is on the rise (as is India and the rest of Asia). The East Buy Gold and will do so believing still that it is the money of last resort.
The coming massive oil crisis is just over the horizon. Markets won't wait until they arrive they discount the changes well ahead of them. The picture of a swing in wealth and power to the east, from the west is shown by the changing shape of oil demand and supply. Add to that the crises that always attend such power swings and oil market changes are pointing to the time when gold will hit peak demand and Gold Price rise to unseen levels. Then the oil price will influence the Gold Price as a joint measure of the state of the global monetary scene.
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