We refresh our Peak Oil Market work; spare capacity gone by 2012?
We've argued since early '08 that the oil age is ending owing to the concentration of remaining reserves into government hands, & an attendant under-investment cycle. Our focus: no supply growth + demand growth = price spikes until demand growth = 0. In this note we review 2010 vs our late 2009 thesis and focus on key changes. The fact that 2010 demand growth (+2.2mb/d) will likely be the second fastest for 30 years raises a red flag, especially as we work through OPEC spare capacity - prices will be spiking by 2012 if demand continues to grow at this rate.

Staring into the crystal ball
What were the main developments over 2010? In this note we run through the demand and supply side highlights, compared to our view a year ago, and look forward with a refreshed view. Demand side, we highlight the surprising demand strength of 2010, despite $80/bbl average and rising prices, and focus on the major long term drivers: US cars, Chinese cars, and Middle Eastern demand. The battle is between US efficiency growth and GDP/population-driven emerging market growth. The shift from gasoline to diesel in the mix is a major theme.

Is supply growth easy to predict because there is none? Not that simple
On the supply side, clearly Macondo was the biggest issue on the bull side for oil prices, with Iraq the obvious offset. Deepwater Gulf of Mexico will never resume its previous activity levels. We are confident of Iraqi growth, but history says we shouldn't be. Mexico has also surprised with lower declines and an opening to investment. Canada continues to do well. Global NGL growth is a major theme that is extremely hard to pin down - Eagle Ford liquids growth is hard to count.

Near term outlook - which side of 2mb/d growth in 2010 are you on?
Although our commodities team expects tamer demand growth of 1.5mb/d in 2011, we see major upside risk to this view, starting with cold winter globally. Recent backwardation and market tightening are bullish; the fundamental drivers of demand are there: DB expects a weak-ish US$ through mid-2011 and strong, 3.8% global real GDP growth. We look with interest to sub salt Brazil, Ghana, and Colombia supply growth, offset by North Sea and Mexico. OPEC seems to have moved its price target to $90/bbl at its most recent meeting with no supply raise.

Eoin Treacy's view Oil continues to extend the breakout from a more than year long range. (Also see David's comments above.) This is helping to spur interest in energy related shares and a number of those mentioned in this report were covered in Comment of the Day on December 6th.

On December 6th I concentrated on US oil companies but at least two Canadian producers are also worthy of mention. Canadian Natural Resources ranged below C$40 for a year and broke upwards earlier this month. A sustained move below that level would now be required to question medium-term upside potential.

Suncor Energy has been ranging between C$30 and C$40 for 18 months and has sustained a progression of higher reaction lows since June as it rallies towards the upper side. These would need to be taken out, with a sustained move below C$34, to question potential for continued upside with a view to a successful breakout.