Oil Prices Search for a Bottom

A front page New York Times report Thursday 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.

Comments

[CLH:]

I would say the opposite is true. Low prices cause more oil to be pumped in order for the oil states to keep up their loan needs. I was looking for $50 low but I now think $30. I expect $50 to last many years as it bounds back from the low. Forget $100 which was a bubble.

You are right that what the oil producers need has nothing to do with what they will get. OPEC is a poor excuse for a monopoly. Also more and more countrys will start to use alternative energy.

2008 Oct 19 10:15 PM

[Paul Killinger:]

A look around the world tells us that no one is seriously substituting other available forms of energy for oil yet. We persist in this folly at our peril!

2008 Oct 20 08:15 AM

[Joshua Lacey:]

Paulk8756. I couldn't agree with you more. It is pure insanity that we continue to be a slave to OPEC when we have so much technology available to us to get ourself off fossil fuels. The price we pay for oil effects every aspect of our economy and for this past year it has nearly destroyed our economy. Have you read The Manhattan Project of 2009 by Jeff Wilson ? It is based totally on your comment.

2008 Oct 20 10:15 AM

[Timothy Stolz:]

Jim....your parting comment mentioned that you would not be surprised to see the price of oil "starting with a 5 before this is over" and then a further comment that you would not expect that price level to last very long.
Do you see that "5" as a starting figure for the price of a barrel of oil in our near future or further down the road? How long would you guess that price would last?
Thanks.

2008 Oct 20 01:34 PM