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Oil Price May Trade in the $80 - $100 Range
I think oil will trade in a range of $80 - $100 a barrel in the foreseeable future, probably another year. Why? First supply and demand: Vectors for a lower price include roughly 3 mb/d of reduced demand from the U.S. (about 1 mb/d) and more Saudi supply (about 2 mb/d) vs. a year ago. The rest of the world is about flat with higher demand from China, some other Asian economies and oil exporting economies more than offsetting reduced OECD demand. On the non-Saudi supply side, more supply from Iraq, Angola and Libya is more than offset by lower supply caused by declines in old fields and lower production from Russia, the North Sea, Venezuela and Mexico. So I suspect we are getting about 1 - 2 mb/d of extra supply over demand these days compared with about 1 mb/d extra demand vs. supply a year ago.
In this context it makes perfect sense that the Saudis would now begin paying attention to their need to reduce production as discussed in the report cited below . The current imbalance of excess supply cannot go on for long without the price falling to levels not determined by any given downside resistance number. In that context, I suspect it makes sense that the Saudis would soon start to cut back by perhaps 1 mb/d unless Nigerian supplies are drastically reduced by new MEND attacks on oil supplies.
A significant unknown is the global decline rate. It is generally forecasted to be about 4% - 5% or 3.5 mb/d but nowhere, to my knowledge, is it compiled with comprehensiveness and integrity and made public. The decline rate is actually the natural decline of old fields net of EOR (enhanced oil recovery) efforts that get more oil out of such fields earlier. My sense is that more countries will have applied new EOR methods to old fields than is generally appreciated, given the higher oil prices for the past several years that provide incentives to use EOR methods. If so, the decline rate could currently be running significantly lower than it was before we experienced several years of much higher oil prices. Another developing trend is weakness in the U.S. and possibly E.U. economies. Real U.S. consumer spending reductions are just now starting to be felt and will likely be far more pervasive over the next year. So I suspect there is currently significant pressure building for lower oil prices from trends toward lower decline rates and lower OECD demand.
I suspect oil will hit $80 or even below because the price tends to overshoot in both directions. I doubt the Saudis want oil to trade as low as $80, but the Saudis are still pumping too much, their existing oversupply will take time to wear off; and trend following speculators will tend to keep the price falling beyond the fundamental reasons. Nigerian production has begun to be hurt by a new MEND campaign of attacks but it will take a huge number of successes for MEND to impact Nigerian supplies close to the 1 - 3 million barrels of oil the world may now be in over-supply.
Both the increased EOR efforts and the low price of oil should come back to haunt the oil market in a few years. More EOR now means that the decline rate for old fields will accelerate in later years compared with what it would be without near term EOR efforts. So if decline rates are actually now down to, say, 2%, because of EOR, they could well jump to over 6% in a few years. Lower oil prices in 2008 - 2009 will both increase demand and reduce supplies in future years compared with conditions that would pertain if oil had stayed above, say, $120. New supplies from Canadian oil sands, for example, are already starting to be delayed because of lower oil prices, which will impact supply in a few years.
In short, we may see a range bound oil price for a while followed by sharply higher prices in two to three years, all of which is consistent with the recent mega-projects analysis that I recently posted.
Saudi Arabia Will Probably Cut Oil Supply, Riyadh Banker Says
By Juan Pablo Spinetto and Grant Smith
Sept. 16 (Bloomberg) — Saudi Arabia, the world’s biggest crude oil exporter, will probably reduce supplies before the next OPEC meeting in December after the group pledged to respect output quotas, a Riyadh-based banker said.
The Organization of Petroleum Exporting Countries told its members on Sept. 10 to “strictly” comply with production quotas after oil prices fell 30 percent from a record. Prices have since slid another $10 to $92 a barrel in New York. OPEC next meets in Oran, Algeria, on Dec. 17.
“They will continue to reduce production until the December meeting,” John Sfakianakis, chief economist at Saudi British Bank, said in an interview in London today. The kingdom will likely pump about 9.2 million barrels a day by the next gathering, he said, compared with 9.5 million last month.
Saudi Arabia is “fine if prices stay around $80-$90 in the next few months,” Sfakianakis added. “They will take action if they see continued pressure for prices to fall below $80.”
Saudi Arabia produced 9.5 million barrels a day in August, according to Bloomberg estimates. The country was assigned an official quota of 8.943 million barrels a day in September 2007, which was reaffirmed at OPEC’s Vienna meeting last week.
To contact the reporter on this story: Juan Pablo Spinetto in London at jspinetto [Email address: jspinetto #AT# bloomberg.net - replace #AT# with @ ]Grant Smith in London at gsmith52 [Email address: gsmith52 #AT# bloomberg.net - replace #AT# with @ ]
Tags: peak oil energy investments
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26 responses so far ↓
1 paultaut // Sep 17, 2008 at 1:36 am
I have no problem envisioning your scenario. It doesn’t coincide with mine but thats what makes a market.
Israel won’t allow that Nuc Reactor to be activated. It will not wait for a regime change which includes people willing to talk to terrorists.
I see no Israeli alternative options.
My scenario calls for an Israeli strike before December 08. When Survival is an issue, there is only one assured option.
I use Israeli developed VMware, have been in contact as a Beta tester for a year. There HQ is in Israel and all are on call.
So, as far as my scenario is concerned, I have been adding CanRoys and am about to include TNK to the mix.
2 robert essian // Sep 17, 2008 at 3:29 am
Jim, to be clear;
Hurricanes Gustov and Ike have shut in 1.3 million barrels a day.
Nigerian oil 1.2 million barrels a day.
Barrel of crude is down to $93.00 effectively slowing Canadian oil sands output. Barrels of oil per day ???
My question; Supply appears down 2.5 to 3 million barrels a day (potentially).
Am I missing the boat on these numbers?
I understand that all of these can come back on line but the risk to the market is at any time these type numbers can exist every day.
What a week in financials and banking. Looks to be hyper-inflation to me in the not to distant future. Should bode well for oil don’t you think?
3 paultaut // Sep 17, 2008 at 5:04 am
Hurrah! Don’t forget to read the Li-on battery article, Volt?
4 jkingsdale // Sep 17, 2008 at 6:17 am
Robert: the hurricane impact is transitory. The Nigerian production was reduced over a year ago. New reductions could be important but we’ll have to see. Apparently the govt. troops are becoming more agressive - it’s not clear that either side really wants a full scale civil war.
5 KV // Sep 17, 2008 at 7:20 am
RE & Jim - there is a massive demand destruction going on, I would not be surprised if oil would go below $70.
Wall Street finance companies are unraveling - today is AIG, and the drumbeat is for MS and footsteps are for GS. Oil industry needs financing to explore and build infrastructure and there is no way they can raise money like they used to.
Another point: DOE has been myopic on all alternates except liquified coal and syngas. I know this from DOE sources, and DOE is staff of PhDs is not allowed to look at anything else, because the fossil interests runs that department. It should be named Dept of Oil, Gas and Coal.
6 paultaut // Sep 17, 2008 at 7:42 am
The Hurricane impacts are NOT transitory. It is/has always been cost.
There are many rigs which were never rebuilt after Rita/Katrina or pipes repaired simply because the flow rates had already been declining and the return would have been marginal. Let Nat. Gas double and stay there or higher than maybe the feasibility will be revisited. Ditto for oil.
7 Robert Essian // Sep 17, 2008 at 8:05 am
Thank you Jim…
8 Robert Essian // Sep 17, 2008 at 8:24 am
KV, demand destruction on oil can only go down to the cost of the producers or they’ll stop producing. They won’t drill if it’s not profitable. True?
The variables on costs are different:
Off shore deep water costs would be the bottom assuming that it is the highest costs to produce. Make sense?
KSA cannot supply all the world its needs nor OPEC.
If oil goes below $80.00 a barrel there won’t be any offshore oil rigs working because there won’t be enough profits for the risk.
I wonder how that would effect country’s looking to explore off shore for oil. I image that these countries must know where oil is headed to rationalize the cost.
Anyways I’m adding to my positions @ $90.00-$85.00 and at $80.00. For me there is no where else to go because “oil is real and cash contrived” to quote C.Martenson…
Hope all is well with everyone.
9 Robert Essian // Sep 17, 2008 at 8:34 am
KV, I’m sorry but I wanted to comment on oil and gas financing.
The banks holding the funds for this group of companies are solvent and strong. I imagine it is because they have faced very similar situations before. In addition the industry has made a fortune for a while now and still are so funding legitimate projects seem to be a non-issue.
I know nothing really about this but research I have done indicate this to be true.
However, I concede that you can’t believe anything stated as fact any longer…Peace
10 Isaac // Sep 17, 2008 at 9:25 am
To me it looks like the dual phenomena of dropping oil prices and the global economic downturn sets the stage for a worse energy outlook in years 2011 and beyond. The drop in oil prices, and the loss of easy credit and liquidity will serve to take the wind out of the sails of the development of unconventional fossil fuel projects (ie tar sands, shale gas, etc), and from all sorts of alternative energy projects, whether it is CSP or battery research. Simply, the heat is off and there will be alot less risk taking. And so, as Jim points out, there will likely be a big overshoot on the downside of oil production, which will become evident once the world economy starts the next upturn. Will the USA participate in this economic upturn?- I’m not to sure.
11 paultaut // Sep 17, 2008 at 9:40 am
Exactly my point as far as the West is concerned. Recently(yesterday), a Chinese economist voiced the following opinion: if China ceased all exports to the US, it would only account for 20% of their total output and 2009 GDP could be reduced to the +8-9% area. They do not need us. They are in the process of forming an alliance similar to the EuroZone.
12 paultaut // Sep 17, 2008 at 9:59 am
Today, The Gulf States entered into a Pact to form their own Monetary Union with their own currency.
My, My Miss American Pie, The US appears to be in earnest in destroying the economies of the World. I don’t doubt most of them will eventually divorce themselves from the Dollar.
13 jkingsdale // Sep 17, 2008 at 11:19 am
One comment on marginal costs of oil production: if the oil price falls to the point where e&p’s can’t afford to pay the rig costs of deepwater drilling they will go back to the drillers and renegotiate a lower price for the rig. That’s one reason companies like DO and RIG are slumping even though they have contracts that go out for many years. Such contracts get rewritten if the price of oil goes low enough. They don’t stop drilling the oil unless the price were to drop much lower than $70 - maybe at $40.
And one comment on the dollar: it looks like the start of a big run on the dollar, which will support the price of oil in dollars but not in all currencies.
14 Robert Essian // Sep 17, 2008 at 11:28 am
Thanks Jim…
I have stated before,… how do we blow this thing up…Be careful what you wish for I guess. Wow! This is riveting stuff…Good luck
15 KV // Sep 17, 2008 at 11:43 am
I agree: no deep water, no canadian oil sands.
Further, end of fictional demand from India, China and other emerging market stuff. And, getting the sleeves rolled up to rebuild the country, by producing stuff at home, here, now.
“Need”, “Want”, and “Affordabilty” are all different. If you can’t afford, and can’t borrow from future, you learn to do without or figure out alternate.
Jim’s point on contract revision is valid, provided the driller is able to get labor to take the cut, otherwise, it is shutdown, and even shut-in of the production. The producer also factors whether the project should be shelved until better economics, because who the heck want to produce high risk stuff to merely make a crashing dollar or two? Why not go and build a vicotry garden, and spend time with wife and kids and hell with all the mistresses in faraway places?
As dollar crashes, so does the US economy and with that oil demand.
There are two ways to bring about slavary back: one is by the gun (we tried that in Iraq) and by crippling the economy: this stupid Bush admin is on the second path, they are bailing their friends, and we the future slaves are going to serve their debts as it is all put on our head. Isn’t the crony capitalism wonderful?
16 jkingsdale // Sep 17, 2008 at 12:18 pm
wrt drilling costs: I’m told the drilling contracts are “take or pay” meaning the rig owners have the right to get paid even if the e&p does not want to use the rig to drill. So the reality of that is two-fold. First the e&p will “request” a lower price given a changed world and may get a reduction. More to our point, though, since the e&p has to pay for it anyway, he will certainly not stop using it. Labor costs are an immaterial part of the total.
The other thing, though, is that we may find that the price of oil drops in terms of gold or some basket of currencies but that a run on the dollar may make the price of oil in dollars go higher. That seems to be what is happening today.
17 paultaut // Sep 17, 2008 at 1:04 pm
Lets look at it another way. How much in the way of demand destruction do you actually believe will occur in the US?
Will tires be made of something other than rubber. How about Plastics or Agri, will farmers use horses and plows? What will shippers use to go from train to store or what will be a substitute for heating/cooling sources? I’m not talking 5-10 years from now but in the next 12-36 months.
Old Europe has weaned itself probably as much as they can away from oil. New Europe will find it much easier to revert to the hardships they endured under Soviet Rule.
So where will the demand destruction occur? And how long will it take to occur?
I certainly don’t believe it will occur here unless oil chugs back up to the old levels or higher for it to be meaningful.
Get ready for a big discount cut as the schmucks at the Fed finally realize how badly they gored the Mutual Funds this week.
18 KV // Sep 17, 2008 at 3:45 pm
Demand destruction means tire company stops making them, because they can’t sell them, because people can’t afford the high prices. Oil had gone from $30 to nearly $150, that is five times in less than five years. It is like $400 for four tires, now paying $2,000. May be retreads?
Here is a simple example for gasoline: remember that joy ride that used 2 gallons or more, but now the joy rides are infrequent? See that is demand destruction of 2 gallon of gas.
19 KV // Sep 17, 2008 at 4:00 pm
Jim,
There is a better way to compare. Benchmark to 2003 dollar, when oil was only $30. If today’s dollar is worth half as much, oil would double.
Also, don’t forget as dollar depreciates the breakeven cost of oil sands and deep oil also goes up in depreciated dollars, hence the demand destruction continues but is not easily observable with uncorrected depriciated dollar. Apples to apples and oranges to orange.
What would motivate the rigman to give a discount if he is not getting a break? E&P guys may finish the drilling only to shut-in the well - that I agree.
RE - Insolvancy is only proved when the bank can’t honor the commitments. Just look at Citi, Bank of America, Wachovia, Washington Mutual, Merril, and all those in the recent news. They were all solvent until they were found insolvent.
Debt of E&P companies was near BBB or below, and with the credit crunch, they may be dreaming junk! That drives the cost of capital, which than translates in higher finding cost , and all of a sudden the project becomes negative.
This is the worst contagion we have ever feared. All major investment banks are disappearing…
20 Robert Essian // Sep 17, 2008 at 7:03 pm
What a day…
21 paultaut // Sep 17, 2008 at 9:11 pm
Blame everything on the Current Fed Chief. I certainly do. He Ignored Greenspan’s warnings(Greenspan engineered the hikes which were the Bomb and Trigger). Bernanke pulled the Trigger, booooom. Now instead of Helicopter Ben, we have a new born christian on our hands.
Money is flowing into money markets. To stop that flow, a discount /fed funds rate of 1% is needed. Money Market Managers? Money Market managers and their fees are totally unnecessary if the Funds are automatically invested into 1,2 and 3 month t-bills. Everything else, including Back office can be handled electronically.
Bob, you haven’t seen anything yet. Do you actually believe that AIG was the only player in the CDS debacle. They were the de facto leader and the other major insurers followed in their footsteps. “Whats good for the Goose”
To try to forestall the problem areas due next year…ie Option ARMS, a 1% or lower discount is needed. To allow every other company the courtesy being given AIG, The FASB “Mark to Market” Rule has to be suspended indefinitely. It may roil the rest of the world but a major Financial crisis will be averted. Time to resolve the cross currents, time that AIG is being given can be extended to all.
22 robert essian // Sep 18, 2008 at 2:32 am
Paul, I’m a sports junkie and I haven’t read the sports section with my morning coffee in a month. This is serious stuff and I enjoy every minute of it.
A great time to learn and I thank god Jim Klingsdale and his peers are willing to take their time so we might be better informed. Great stuff.
Loosing money and that hurts but it will come back.
I expect the other shoe to drop by the hour and I haven’t been disapointed.
The purge might just be the start that the voters need to get the power back. It will be an illusion though because the tax payers will be on the hook for a TRILLION dollars and counting.
According to a Yale study I read and it was a tough read for me there is a correlation between the price of oil and inflation. If I read it correctly the price of oil will rise as inflation does. In spite of demand destruction. If true then what happened to the price of oil yesterday would make the Yale article true.
This stuff has so many turns it reads like an active novel only better….It’s real…Everyone…Have a good day
23 KV // Sep 18, 2008 at 7:35 am
Blame belongs to Greenspan, he was the one who thought sub-prime mortgages were OK. Ben and Paulson are dealing with the hand given (Paulson’s words), doing the best they can. By the way, all FED can do is change interest rate and print money. And, they are printing money to bail out their cronies.
The real blame lies with Bush administration, they were so amored with bringing democracy by force that they never really saw the home (USA) crumbling to dust - literally.
24 Robert Essian // Sep 18, 2008 at 1:39 pm
Yep!!!
25 paultaut // Sep 18, 2008 at 3:22 pm
Congress is involved again, and , and and.
They shafted the Bears during triple Witch, Paulson, the fed and Congress deserve each other. They are manipulating the Markets. I would think that Foreigners would want to invest here. If it goes down, we will fix it so it goes up instead.
Correction on The Gulf States Pact, 5 of 6 agreed to it. Oman pulled out. Kuwait already accepts payments based on a basket of currencies. They don’t expect implementation until 2010.
With Israel: Jury elected dovish party. But as a former Mossad agent, who knows.
26 paultaut // Sep 22, 2008 at 4:52 am
Good ol Congressional maneuvering plus International blackmail=$700 Billion before and still $700 Billion after?
Wording changed from Mortgage related to “troubled”; Firms to be bailed out from US to all; Possible additional stimulus package of $50 Billion and aid to the Foreclosed.
All of the “little” extras and the Price Tag remains the same. The only way it remains the same is if the “troubled” assets are bought for Pennies on a dollar rather than 20 cents.
Gold up; dollar down; Oil easily above $100, might stall in $110 t0 $115 but it all now depends on the Perceived costs of the final Package and the unwillingness of Foreigners to continue to shovel good money after bad.
All that has occured is the prevention of a percipitous decline of the entire Banking System. That is still in the wings, but at least it has been slowed.
The consumer has to be encouraged to spend.
How this will be accomplished is anyone’s guess.
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