A front page New York Times report today posted below suggests that minimum oil price thresholds are within view of the current $70+ WTI price.  It said in part, “The drop in prices has already created problems for oil producers. Iran and Venezuela both need oil prices at $95 a barrel to balance their national budgets, Russia needs $70 and Saudi Arabia needs $55 a barrel, according to Deutsche Bank estimates. Algeria’s oil minister, Chakib Khelil, said on Thursday that the “ideal” price for crude oil was $70 to $90 a barrel.”

The report would have been more interesting if it analyzed the marginal cost of production of various high-cost producers.  Some analysts have maintained that certain deep water marginal costs are in the $80+ area.  But it is not clear that the simple fact that various countries need a certain price to satisfy their national budgetary needs will have any impact on the actual supply of oil.   Only an agreement among OPEC countries to restrain production and the adherence to such an agreement would provide a possible short term floor to the oil price.   Such a possibility is doubtful given past tendencies among suppliers to cheat on their quotas.   

In the end, it will probably be up to Saudi Arabia to play the key role in restricting production.   They may do so without a public announcement and may already be doing so.   A recent report by shipping observers said that Middle Eastern oil shipments in September ran about 400 kb/d below the prior month.

Meanwhile, demand is notably weaker according to this Times report which said, “Global oil demand is undeniably slowing down, particularly in developed nations. Japanese oil consumption tumbled by 12 percent in August over the same month a year ago, while in the United States, demand fell by 8 percent in September….The International Energy Agency expects global oil demand to grow by just 400,000 barrels a day this year, to 86.5 million barrels a day. The agency… had been revising downward its predictions all year…”

As I have said and other analysts have also noted, prices tend to overshoot on both the upside and downside.  It may take a much lower price than the current $70+ to cause any significant near term oil to be shut in.   Longer term, “the solution to low prices is low prices,” as the commodity trader say.   Meaning that with low prices supply will be restrained and demand will grow - long term.

I continue to think that a trading range will be established over the next 6 - 18 months.  Maybe it will be $80 - $100 as I suggested a while back.  Or maybe it becomes $70 - $90.   There is little real difference.  But a test of lower lows is highly likely.  One trader today said that $68 will be tested.  I would not be surprised to see a number starting with a “5″ before this is over.   But I would be surprised if such a price lasted for very long.      

Oil Prices Slip Below $70 a Barrel

By JAD MOUAWAD

Published: October 16, 2008

Oil prices dropped below $70 a barrel for the first time in 14 months Thursday, prompting the OPEC cartel to call for an emergency meeting next week to establish some stability in prices that have plummeted recently after rising for months.

David McNew/Getty Images

The instability of prices may discourage long-term projects to develop new sources of oil.

Multimedia

Today’s Business with Jeff Sommer and Jad Mouawad (mp3)

While prices revived slightly early on Friday, oil prices have tumbled by nearly $40 a barrel in just three weeks as indications grow that demand for energy will slow along with weakening economies around the world. As recently as July, oil was trading at a record of $145 a barrel. On Friday, crude oil for November delivery traded at around $73 a barrel on the New York Mercantile Exchange, according to news reports.

The decline in oil prices could provide a form of stimulus to the economy as consumers pay less to fill up their tanks. If oil prices stay at current levels, consumers would have $250 billion more, over a year, to save or spend elsewhere, according to Lawrence Goldstein, an energy economist. Some analysts expect oil prices to keep declining, perhaps to as low as $50 a barrel in coming months.

Americans will probably see lower energy bills this winter, as gasoline and heating oil futures also dropped sharply on Thursday. Gasoline prices now average $3.08 a gallon, down from a summer peak of $4.11 a gallon, according to AAA.

The decline in oil prices came after a government report showed domestic crude oil stockpiles rose more than expected as Americans use less oil, in part because they are driving less. In the last month, domestic oil demand has fallen to its lowest level since June 1999, at 18.6 million barrels a day, according to the Energy Department.

Oil settled down $4.69 a barrel, at $69.85. The drop, along with other promising signs on the inflation front, was among the reasons investors bid stocks higher, with the Dow Jones industrial average closing up 401.35 points at 8,979.26.

Natural gas prices have also tumbled since their summer peak of $13.58 per thousand cubic feet. On Thursday, natural gas futures rose 19 cents, to $6.81, after a report showed that stockpiles rose less than expected.

While consumers may have reason to cheer the falling oil prices after such a sharp run-up, the wild roller coaster of volatility is a nightmare for oil producers and petroleum executives who say they need more stability to plan long-term projects to develop new sources of oil.

If they cannot be confident that they will get a stable return on their investment, they may hold back. That in turn could set the stage for possible shortages of oil and higher prices when global demand picks up again.

The sharp drop-off has forced OPEC’s hand. The cartel said just last week that it would meet in mid-November, after the United States elections. But on Thursday, it rescheduled its emergency session for next Friday, Oct. 24.

The cartel’s producers, which control 40 percent of global exports, could curb their output by about a million barrels a day to try to stem the drop in prices, according to analysts.

It is unclear what price range for oil the cartel wants to establish. But the meeting “sends a clear signal that OPEC is concerned about the speed with which oil prices are slipping away from a preferred price of around $80 a barrel,” said Lawrence Eagles, an oil analyst at JPMorgan.

Iran’s oil minister, Gholamhossein Nozari, told reporters in Tehran on Tuesday, “I think the low price is a real damage to the future of production.”

From its inception, the oil industry has gone through countless cycles, with oil companies cutting investments when prices fell. The price collapse of the 1980s forced companies to slash investments and prompted a wave of large mergers through the industry. But this retrenchment left the world scrambling for oil when demand from Asian and Latin American economies soared.

Concerns that this pattern might be repeated were mentioned frequently during an industry conference in Venice last weekend, where oil executives said they worried that a prolonged recession, tighter credit and lower energy consumption would mean slower growth in energy supplies in coming years.

The credit freeze has already forced some projects to be scaled back, some energy analysts and executives said. “This is a real test,” said Jeroen van der Veer, the chief executive of Royal Dutch Shell, in an interview at the conference. “Some people will be overstretched, and there will be some delays in some projects.”

Over the last decade, growth in oil consumption has outpaced the ability of producers to meet that demand with more production. Many experts have predicted a new squeeze within the next five years that could once again propel oil prices over $100 a barrel.

The drop in prices has already created problems for oil producers. Iran and Venezuela both need oil prices at $95 a barrel to balance their national budgets, Russia needs $70 and Saudi Arabia needs $55 a barrel, according to Deutsche Bank estimates. Algeria’s oil minister, Chakib Khelil, said on Thursday that the “ideal” price for crude oil was $70 to $90 a barrel.

In Russia, which is not part of OPEC, the drop in prices is threatening the country’s ability to increase production. The Russian government has reportedly agreed to allocate $9 billion to its four major producers — Lukoil, Gazprom, Rosneft and TNK-BP — to help them cope with investment needs amid the credit crisis.

In the United States, Chesapeake Energy, a gas producer, has recently indicated it will reduce its capital investments over the next few years in response to falling prices.

Global oil demand is undeniably slowing down, particularly in developed nations. Japanese oil consumption tumbled by 12 percent in August over the same month a year ago, while in the United States, demand fell by 8 percent in September.

Consumption is still growing in developing nations, but at a slower pace than in recent years. The International Energy Agency expects global oil demand to grow by just 400,000 barrels a day this year, to 86.5 million barrels a day. The agency, which had been revising downward its predictions all year, forecast growth of 2 million barrels a day for 2008 when the year started.

The two-day energy meetings last week were held in private in the baroque setting of the island of San Giorgio Maggiore, home to a 10th-century Benedictine monastery. In many conversations with senior executives outside of the conference meetings, they voiced concerns about their industry becoming increasingly vulnerable to a slowing economy.

“We pretty much know where supplies are going to come from in future years, but today the biggest uncertainty is demand,” said Christophe de Margerie, chief executive of Total, the French oil company.

Some executives, though, are still holding out hope that Asian economies may weather the economic storm and help the global economy recover faster. Lower oil prices could also make it harder for some companies to survive on their own, leading to a new wave of mergers and acquisitions.

“This new environment is not all doom and gloom,” said Mr. van der Veer, of Shell. “It can also provide some opportunities. Certain assets may become available.”

Tags: peak oil energy investments

This entry was posted on Friday, October 17th, 2008 at 7:32 pm and is filed under Price of oil, oil demand. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.