Back to the Oil Spike Future? Will Oil Prices Repeat 2008?

Over on Spend Matters' sister site MetalMiner, Stuart Burns published a two-part series (see Part 1 and Part 2) examining whether oil prices and volatility are headed for a repeat of 2008. In his analysis, Stuart observes two main (and competing) factors driving the price of oil. In his words, "the first and so far the most influential has been the growing fear of supply disruption to crude exiting the Persian Gulf via the straights of Hormuz." He labels this, appropriately, The Iranian Factor. Stuart's analysis is straightforward: "As progressively more bellicose language has come out of Tehran, oil traders have taken the easy option and forward-covered their requirements, driving up the price of seaborne oil as evidenced by the Brent crude price. Additional impetus has been added by the loss of some 300,000 barrels a day from South Sudan, following that region's war of (mostly) words with North Sudan over transit fees."

Yet ultimately, pricing will never just fall on supply concerns. Demand must be a component of the equation. And the current and forecast "drag on demand," as Stuart describes it, comes from three sources. "Firstly, Europe (which is in parts either in recession or facing faltering growth, depending on what figures you look at), secondly, US consumption (that is already seeing the impact of oil prices on consumer demand for gasoline as prices approach $4 per gallon) and thirdly, slowing Asian demand, as China in particular experiences what most expect will be a soft landing, but is already hitting demand for distillates."

Regardless of which side of the two leading components that factor into pricing for oil in the 2012 market that you favor, here at Spend Matters, we take the view that companies with any exposure to oil pricing directly or indirectly (e.g., transportation costs, production costs, plastics/resin, chemicals) should be far better prepared for the potential for volatility including potential price spikes in 2012 than they were in 2008. There is no excuse this time for not taking preemptive steps with a commodity risk management program. Technology and skill sets are now available off-the-shelf for programs tied specifically to broader procurement and supply chain regardless of industry -- CPG, food, diversified manufacturing, automotive, A&D, etc. To hedge or not to hedge may be a fair question. But having the right team and capabilities in place to ask, analyze and then execute any potential decisions that come out of it thoroughly should not.

- Jason Busch

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