Crude Oil Should Offer Investors Real Opportunity In 2009 22 comments
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by Jason Simpkins
Oil prices have fallen 70% since hitting a record $147.27 a barrel in July, which means in just five months, crude has given up all the price gains it made in the past four years.
After such a wrenching plunge, many analysts believe the outlook for the “black gold” remains bleak – and in the short term it certainly is. In the long run, however, dwindling supplies, resurgent demand, and a lack of investment will cause crude oil to double, triple, or even quintuple in price over the next few years.
In fact, the Paris-based International Energy Agency (IEA) – energy advisor to 28 industrialized nations – says oil will rise to $100 a barrel by 2015, as a result of a major “supply crunch,” and will ultimately soar to $200 a barrel.
But before it does, prices are likely to sink even further, perhaps falling as low as $20 a barrel in the first quarter of the New Year.
Indeed, much of Wall Street expects oil prices to average about $50 a barrel in 2009. Some of the firms and their specific forecasts include:
- Deutsche Bank AG ((DB), which says oil prices will average $47.50 for all of next year.
- Merrill Lynch & Co. Inc. (MER), which predicts that prices will average $50 even.
- Moody’s Investors Service (MCO) also says crude will average $50 a barrel in 2009, but says that average will increase to $55 a barrel for 2010.
- Goldman Sachs Group Inc. (GS) is slightly more bearish, predicting that prices will average $45 for all of next year – after falling as low as $30 in the 2009 first quarter. (It’s worth noting that Goldman – just five months ago – predicted oil prices would hit $200 a barrel in 2009).
But analysts also agree on something else: When the recessionary tide finally recedes, all of the factors that drove oil to its record high last summer will once again be exposed, and crude will again soar to record highs.
"We may see prices drop lower – into the twenties, even – but there’s a better-than-average chance that they’ll be back over $70 a barrel by the end of next year,” says Money Morning Investment Director Keith Fitz-Gerald. “That’s where firms like Goldman and Merrill are getting all of these ‘middle-of-the road,’ $50-a-barrel estimates. And it’s why investors who buy in through the first quarter could enjoy compelling returns at the end of the year."
In the meantime, however, low oil prices are crimping investment in new capacity, a reality that will lead to much higher prices down the road.
Just ask the IEA.
IEA: Rising Demand + Lack of Investment = ‘Supply Crunch’
According to a widely respected energy advisor, global oil demand will slide 0.2%, or 200,000 barrels per day (bpd), this year, falling to an average of 85.8 million bpd. But the IEA also says that oil demand will advance by an annual average of 1.6% between 2006 and 2030.
The bottom line: Regardless of any short-term pullback, daily demand will rise from the current level of 86 million barrels to 106 million barrels in 2030. In other words, daily demand in 2030 will be 23%.
To meet that demand, the agency estimates that the world needs $26.3 trillion in supply-side investments over the next 21 years.
China, India and other developing countries, alone, will need investments of $360 billion a year through 2030, the agency said.
About 7 million bpd of additional capacity needs to be added to the market by 2015. And right now – because of marketplace changes – the financial incentives to make that happen just don’t exist.
Exploration costs have more than quadrupled since 2000, as oil producers have been forced to take on more complex projects, and the costs of both labor and materials have skyrocketed. At the same time, the steep drop in oil prices has put even more pressure on energy companies to curtail their investments rather than increase them.
Earlier this year, for instance, ConocoPhillips (COP) and Saudi Arabia Investment Co. (ARAMCO) were forced to postpone bidding on the construction of a 400,000 bpd export refinery at the Yanbu Industrial City.
"We see and hear about energy investments being delayed … this is a major worry and could lead to a supply crunch and much higher oil prices than we’ve seen before," said Fatih Birol, the IEA’s chief economist.
The IEA predicts that, by 2015, a lack of investment and rising demand will create a "supply crunch" – that will once again send oil prices up into the triple digits.
“There remains a real risk that under-investment will cause an oil supply crunch in that time frame,” the IEA said in an executive summary of its “2008 World Energy Outlook.” “The gap between what is currently being built and what will be needed to keep pace with demand is set to widen sharply after 2010.”
The agency predicts that crude will average more than $100 a barrel from 2008 to 2015 and rise above $200 a barrel by 2030, as demand far outpaces supply.
“While the situation facing the world is critical, it is vital we keep our eye on the medium to long-term target of a sustainable energy future," Nobuo Tanaka, the Paris-based agency’s executive director, told reporters in London. "While market imbalances will feed instability, the era of cheap oil is over."
While it’s probably true that the “era of cheap oil” is in our rearview mirror, a new question has arisen: Just how high do oil prices go?
According to some analysts, the IEA’s target price of $200 a barrel is far too conservative.
$500 Oil?
The lack of exploration and development is certainly a problem. But a much bigger issue is the fact that output from the world’s existing oil fields has sharply declined.
“The future rate of decline in output from producing oilfields as they mature is the single most important determinant of the amount of new capacity that will need to be built globally to meet demand,” the IEA says.
And output from the world’s oilfields is declining faster than previously thought.
In its “2007 World Energy Outlook,” the IEA estimated that output from the world’s existing oilfields was declining by 3.7% a year. But in its latest report, published in November, the IEA revised that estimate to an annual decline of 6.7%. (The November report was based on the first major study of the world’s 800 largest oil fields.)
Unfortunately, the IEA is behind the curve.
For nearly a decade, Matthew R. Simmons has said that the world’s oil production was nearing – or already at – an “inflection point.” While his book "Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy," was scoffed at when it was originally published back in 2005, Simmons is now viewed as perhaps the preeminent expert on the so-called “peak oil” movement.
“Like most people who ignore conventional wisdom, he was scoffed at, ridiculed, and denied," commodities guru Jim Rogers told Fortune magazine. "And now, of course, people are starting to say, ‘Oh, well, I thought of that.’"
Simmons, chairman of the Houston-based investment bank Simmons & Co. International, poured through hundreds of technical documents submitted by Saudi oil geologists to the Society of Petroleum Engineers over the past 50 years.
“I finished reading the last paper on a Sunday afternoon,” Simmons told Fortune, “and I sat back and thought, ‘Holy crap, this is unbelievable. I’ve just discovered the biggest energy illusion ever in the world. We’re in big trouble. I’m going to write a book.’ ”
Much of the alleged Saudi Arabia subterfuge has to do with a complete lack of transparency with respect to the Organization of Petroleum Exporting Countries. After OPEC decided to base its production quotas on reserve figures in the 1980s, several of the cartel’s producers suddenly raised their levels of "proven reserves" by 40% or more.
Back in 1988, for instance, Saudi Arabia raised its proven-reserve figure from 170 billion barrels to about 260 billion barrels. That figure has remained more or less constant since then, despite the fact that billions of barrels of oil have been pumped out of the ground.
"Saudi Arabia has announced for 20 years in a row that they have 260 billion barrels of oil in reserve," Rogers told Money Morning during an exclusive interview in Singapore recently. "It’s astonishing. The figure never goes up and it never goes down. They have produced dozens of millions – billions – of dollars of oil in that period of time.
“Every oil country in the world has declining reserves except Saudi Arabia,” Rogers said. “And I know that every oil company has declining reserves. So unless somebody discovers a lot of oil very quickly in very accessible areas, the surprise is going to be how high the price stays, and how high it goes.”
Simmons thinks oil prices could hit $300 a barrel – and could possibly even surge as high as $500 a barrel – during the next several years.
“Black Gold” Profit Plays
When it comes to investing, the oil sector poses some very clear risks, especially given the murky near-term outlook. However, there are a number of large-cap integrated oil companies that may offer some truly compelling values at current prices.
Exxon Mobil Corp. (XOM) and Chevron Corp. (CVX) are currently trading at multi-year lows, making them exceptionally cheap in both relative and absolute terms. These companies also have strong balance sheets (Exxon is “AAA”- rated and has more cash on its balance sheet than debt), generate strong cash flows, and have traditionally increased their dividends on a regular basis.
Chevron was actually recommended as a “Buy” by Money Morning Contributing Editor Horacio Marquez in his “Buy, Sell or Hold” column earlier this year.
“Chevron is the kind of company that is capable of continuing to post large profits - propelling its share higher from current levels – even if oil-and-gas prices were to drop from current levels over the next three years,” Marquez said. “That’s because Chevron’s business is well cushioned, since refining, marketing and chemicals margins would expand dramatically if market ‘spot’ prices were to decline. Also, the company’s production is poised to expand strongly and Chevron uses some selective hedging that works very well in downside oil markets.”
Offshore drillers, particularly those capable of drilling in the deepest waters, also offer value at current levels. Petroleo Brasileiro (PBR), also known as Petrobras, is particularly appealing, as it recently discovered one of the largest offshore oil fields on earth off the coast of Rio de Janeiro. Known as Carioca, the field could hold 33 billion barrels of oil and gas, making the world’s largest discovery in at least 32 years.
Fitz-Gerald, the Money Morning investment director, suggests investors look at China National Offshore Oil Corporation, or CNOOC Ltd. (CEO). The Hong Kong-based company recently got approval for a $29 billion exploration project in the South China Sea. The company expects to produce 50 million tons of oil equivalent per year from that region during the next 10-20 years. That would equal the production of China’s biggest project, the Daqing Oil Field.
Petrobras and CNOOC are also attractive because, as foreign companies, they will also get a boost from any devaluation in the U.S. dollar.
All of these companies have been hit hard by the combination of commodity-price weakness and credit market turmoil. But these operators do not require peak-cycle commodity prices to generate stellar results and have little or no credit-market exposure.
For a more direct play on oil prices, you might also try an exchange-traded fund (ETF), such as the United States Oil Fund LP (USO), the iPath S&P GSCI Crude Oil Total Return Fund (OIL), or the United States Gasoline Fund LP (UGA).
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This article has 22 comments:
One of the things that we do need to remember is the price of oil does add or subtract reserves....as the prices go higher....more reserves are added.
most proven reserves are 90% likely of recovery....which means there is a lot of oil in the well that is recoverable....but not booked at proven....which means oil reserves can increase with time.
but the problems here....is when we figure out there is a problem with oil....we will have very little time to respond to it.......maybe only a few years before production drastically declines.......as demand will want to keep increasing....and imports does a HUGE nose dive.
The difference in just a couple of years could be 10-20% depending on decline rates of existing fields and demand of exporting nations.
Given a 5% increase of demand of an exporting country and a 10% decline rate.....if they are at the inflection point of peak production....exports will decline by roughly 10% and increasing with each year thereafter since its compounded.
Forget statistics or fortune tellers projections, especially those whose only consistency is being wrong.
Because the market doesn't discount a problem doesn't mean there isn't a problem. What was the market discounting a year ago?
Market pronosticators spend too much time talking and not enough time doing primary research.
but I'm treating it as a long term core hold, irreplaceable in my lifespan and
the engine of growth during the past 100+ years. Alternatives are years from
being cost competitive with oil, though hopefully the r&d continues.
"Cheap" oil will get harder and harder to procure, and thanks to MSM, I don't
think "most" Americans have the discipline to be responsible with precous commodities, we have been spoiled for far to long, myself included.
In mostly all western European countries a bottle of one and half litres of water costs 0.70 Euros. In order to compare both prices you need to buy 106 bottles of water to get 159 litres, equivalent to a barrel of crude oil, so 106 x 0.7 euro = 74.20 euro
Now we have to change euro to dollar so, 74.20 euro x 1.4 = 103.88 dollars.
As you can see, you have to pay 103.88 dollars to get 159 litres of bottled water, but you only need 35 dollars to get a barrel of crude oil.
How long do you think that the price could remain here? 6 month? 1 year? year and half? How lower could it go? $30 pb? $25 pb? $20 pb? Less? Ok, now please tell me, do us, japan, and Europe want to recover the crisis making cars and building houses? do they want to recover the employment? in order to revive the economy they must put money in it, then the people can get employment and buy cars and houses, it means opened factories and banks, it means money in hand, and IT MEANS OIL DAMAND, this is the true reality, Geopolitical conflicts with Iran in Persian gulf and strait of hormuz , problems in Venezuela, in Arabia Saudi, Israel- etc .etc. natural disasters in gulf of Mexico, India, China, all these MEAN OIL DAMAND, but the world must go on and on, so no matter how long it takes, we will see oil at $147 0r $200 or maybe more, who knows!
Best regards
Brazil just completed two bio diesel plants and a third will be on line in several months.
The US is producing 12 billion barrels of ethanol and this will dramatically increase over the next several years. Bio diesel production in the US is poised for tremendous increase.
These events are causing the crude oil producers to lose their ability to set the price of oil.
We do have a fixed amount of oil, the spigot is open and the oil is rushing out. The world is estimated to have 3 trillion barrels of reserves since oil was discovered in the 1800's. Well, it took us over 200 years to use the first trillion barrels and it is suppose to take only 50 years to go through the second trillion and then only 30 years for the last trillion. That is about 80 years of oil remaining.
Given the Chinese history exceeds 3000 years what time frame is 280 years compared to that. The prosperity of the oil years will go down in history as the greatest age since the Roman empire. It is up to us to prepare for the next age. Are we going to stick our heads in the sand or are we going to prepare for it? My guess is we will stick our heads in the sand and live our lives from day to day.
Give me a break! All of these jerks ( I mean "experts" ) base their forecasts on "the economy". Duh! Did they tell you the economy would fall as far as it has? No! These people are paid to make their investors feel good that they are doing a great job. They plot those nice looking graphs based on hind-sight and what do you get? Nothing but hearsay. When a forecaster tells you how much higher (or lower) things are going just run in the opposite direction.
an extended year frame, we might better start hiding some cash and gold under the mattress.Translation = things are really really bad.
We humans need several things to colonize this planet. Cheap energy, pure
water, quality breathing air, abundance of "real" food. I'll also throw in tax write offs, favorable zoning laws, easy "generous" lending terms, and seeking alpha. Without the first three we take the route of Easter Island,Incas,or ancient Troy.
Resources....the stuff of agent legends...not making anymore.
You can make a great living in the market by understanding this fundamental fact.
The article overlooks the huge oil finds in the ocean off Brazil, in North & South Dakota and the oil sands in Canada. Any one of these is a game changer.
The article also overlooks the new techniques of injecting Co2 gas into oil fields to almost double the field's capacity.
The article overlooks the enormous amount of gas recently discovered in New York, Pennsylvania and West Virginia.
The article overlooks the coming massive increase in biofuels such as bioethanol and biodiesel. Brazil just put two large biodiesel plants into production and will add a third in several months. Many more biofuel plants are in planning and construction around the world.
Much oil presently being consumed will be replaced with alternative energy sources such as wind, solar, wave power, co-generation and others. This is just in its infancy today but it is going to explode.
Ninety nine nuclear reactors are under construction or in planning.
The alternatives to oil do not have replace a large portion of the crude oil. The alternatives just have to take away the ability of the oil producers to set the price of oil. This is already occurring.
Article correction, the term is "poring over" not "pouring over".
Much is going to happen and is allready happening in the field of new energy developments. Unfortunatly I cannot find reliable info/knowledge about how it will all shake out. So wait and see for now - fortunes will be made and lost in this huge space.
The point some of us make is at what costs for the alternatives? Those shale's in the Catskills or tar sands in Calgary are great, but at what cost?, deep water rigs at what cost? $30 a barrel? $75? $100? If were that cheap they would be doing it now, look at the cost of Chevy Volt, not cost effective yet.
Our point is "cheap" oil or better put "cheap" energy is dwindling.. ditto for "cheap" purified water and soil and large parts of the seafood industry..We (me and many of us) will look back fondly on how inexpensive it was to fill that gas tank and take a drive into the country.
This recession/depression may mask the issue for a year or two, but
count on a big fear factor down the road..building costs, health care,
plastics, transportation, food production are all dependent... Thanks to "cheap" oil us boomers have had it easy...Electric hybrid cars I think are the future but
speaking for myself it's a heck of a lot more fun to drive an 8 cylinder...
emissions aside.
Our country's "real" growth was built around "cheap" resources...That's why I see major roadblocks for the next generation..the going will be much tougher without oil and water. Hopefully, the next boom in say 10 years is build around alternatives. We had better hope so..the alternative is humbling.
+++++++++Plus currency play.
SU ,ECA, PCZ, CNQ,COSWF & numerous smaller Canadian players, in addition to STA(statoil, Norway) and PBR(Brazil) These oil companies have great resource base within a stable currency environment.
IMO
A more interesting battle is shaping up between the shale boosters and the water barons of the West. Some estimates show production of shale crude will require enormous amounts of water, which the West doesn't have to spare.
Oil may visit $35 or $30 or $25, but it will be a short visit until the delayed reaction to unprofitable prices chokes off enough supply to push it back up again.
We're getting astonishing volatility as prices move much more sharply than moves in supply and demand warrant.
Buy something oil-related at these levels and watch it move as oil returns to $60. Or could that be a short-term $100--then you've got an extraordinary trading moment.
I hate to pour salt in the wounds. I am originally from Alberta Canada and the required return was getting up to $80 dollars a barrel. But it has taken decades to get the technology there. The required return on earlier projects was getting as low $30 - 40 a barrrel.
The problem was....(here's the salt)..... you guys spending Billions and Billions on new projects caused a chronic labor shortage all over the province. Welll over $35 an hour to drive one of the big trucks in the mine. $17 an hour to start as a cashier in a donut shop. Some restaurants were closing after the dinner hour or altogether for a week in the summer because they couldn't get staff.
It was estimated at up to a $Trillion in investment in just 12-15 years.
Don't drill baby, don't drill!!
On Dec 31 04:30 PM scotty1560 wrote:
> Michael 66 , you are correct and I am all for alternatives to.<br/>
>
> The point some of us make is at what costs for the alternatives?
> Those shale's in the Catskills or tar sands in Calgary are great,
> but at what cost?, deep water rigs at what cost? $30 a barrel? $75?
> $100? If were that cheap they would be doing it now, look at the
> cost of Chevy Volt, not cost effective yet.
>
> Our point is "cheap" oil or better put "cheap" energy is dwindling..
> ditto for "cheap" purified water and soil and large parts of the
> seafood industry..We (me and many of us) will look back fondly on
> how inexpensive it was to fill that gas tank and take a drive into
> the country.
>
> This recession/depression may mask the issue for a year or two, but
>
> count on a big fear factor down the road..building costs, health
> care,
> plastics, transportation, food production are all dependent... Thanks
> to "cheap" oil us boomers have had it easy...Electric hybrid cars
> I think are the future but
> speaking for myself it's a heck of a lot more fun to drive an 8 cylinder...
>
> emissions aside.
>
> Our country's "real" growth was built around "cheap" resources...That's
> why I see major roadblocks for the next generation..the going will
> be much tougher without oil and water. Hopefully, the next boom in
> say 10 years is build around alternatives. We had better hope so..the
> alternative is humbling.
>
So now that we have made, "wonderful predictions" , about where oil is going = what in your mind would be the best way to play oil for 2009 and beyond?
Maybe a few links to great ideas would be appreciated???
Thank You
Bighunk
.