Will the Price of Oil Sink Much Lower?

In a sharp reversal from earlier this year, when traders were looking at $147 barrels of oil and pundits claimed it would never go below $100 ever again, the price of crude oil continues to make new lows. Oil hovers around $43.71 per barrel and looks like it could go even lower.

The United States Oil Fund ETF (USO) is also hovering near all-time lows. It’s currently at $34.96, barely above its 52-week low of $33.08 and well below its high of $119.17 set in July.

The price for a barrel of crude has remained relatively stable over the last 25 years, except of the past four years, which have seen prices skyrocketing. It explains why oil giants like Exxon Mobil (XOM) and BP have recorded massive profits lately.

Prices would need to approach $30 to be in line historically. And $20 crude isn’t a far-fetched suggestion, either. But perhaps the biggest impact on oil supplies are the projects that produce oil through drilling.

Crude oil requires a long lead-time from exploration to production - up to 10 years or more.

So the question is, how much future production has been based on increasing oil usage figures? If the projects in the pipeline are planning on increased usage, either cutbacks will need to be made, or the price of crude could sink much lower.

Comments

[long_on_oil:]

No matter what the price of oil is there will people predicting extremes. The reality of the situation is if you are an oil company you will not give your reserves away. If it cost $65 to produce a barrel you will not take $45 for very long. You will shut down production of the high price oil. That is what is happening now. Marginal producers are shutting down production. Remember, how we touted the amount of oil that we will get from the oil sands of Canada. Well, if oil falls much lower you will see that oil production disappear.
We can not forget one important fact. If an oil producer reduces production, they usually keep it shut down until price stabilization makes them feel good about restarting production.
We are digging a deep grave for ourselves with these lower oil prices. Personally I think oil will hit $200 before it hits $20.

2008 Dec 10 09:12 AM

[epeon:]

Pretty much true. If oil doesn't go up, the tar sand projects will end. So will a lot of offshore oil projects. However, I am pretty confident that oil is not staying in the 40s.

2008 Dec 10 11:08 AM

[PatientInve...:]

With Saudi Arabia stating that a big cut is coming on Dec 17, we may see a shift above $50. The latest that I've heard is that the cut will be 5 MBPD

2008 Dec 10 10:16 PM

[fatpitch2:]

Patient:

Can you post source(s) of the 5MBPD cuts rumors?

2008 Dec 11 09:14 AM