The Price of Oil: Weak Demand Trumps Distractions

It’s become apparent that Israel’s land war and Russia’s childish power plays aren’t driving gas prices up. In fact, the price of crude sank 6% to $38.00 a barrel Monday morning.

Demand destruction from the global recession has been able to trump the “saber rattlers” around the world trying to drive up prices. Neither can overcome the fact that U.S. crude inventories are at record highs. Supplies have been on a steady increase since fall and have been piling up in storage containers and ships around the world.

Stock prices of major gas producers have been volatile, but stable since October – when retail gas prices really started moving down. Producers Exxon Mobil (NYSE: XOM), Chevron (NYSE: CVX), BP (NYSE: BP), Royal Dutch Shell (NYSE: RDS.A) and ConocoPhillips (NYSE: COP) have all traded close to the S&P 500 Index (.INX).

The interesting thing is that gas supplies were large and stable during last summer’s price increases. It stands to reason that if the price of crude can be traded away from the demand once, it can happen again.

We predicted the price of crude could reach $20 a barrel late last year. But it wouldn’t be too far-fetched to suppose prices take an alternative tack after hitting a bottom. And a spike could be profitable for gas companies.

Comments

[cyclops:]

What demand destruction?

seekingalpha.com/artic...

Jan 13 08:30 AM

[Andy1234:]

I just want to know how everyone value oil. Its not like you are discounting cash flows for a company.

One might look at the production cost to replace the commodity.....or one might look at the physical labor output a gallon of oil may hold.

By the measure of oil replacement.....I would say the fair value of oil might be $100/barrel as most of the "expensive" oil becomes profitable at $80/barrel....but most oil companies will wait for some margin of safety before kicking those back into gear.

As for terms of the fair value of energy content in relation to manpower. Well....the price could be tens or hundreds of thousands of dollars when you multiply 10/hr * manhours of work.


I would say at $30-40/barrel is pretty underpriced.....and its a good time to be buying.

Jan 13 08:57 AM

[long_on_oil:]

Huge inventories and lower demand plus the government looking into the manipulation in the futures market has driven oil to this level. I read most of the articles pertaining to oil and I have not found a single author that thinks oil is going to stay at these levels.
When oil was selling at over $100 a barrel the head of BP said that BP bases its budgets on $75 oil. In a recent interview a Saudi oil minister referred to a fair price of $75. It looks to me like we may eventually be heading for an oil price that stabilizes around $75 a barrel. That is a price we can all live with.

Jan 13 10:48 AM

[Dr. C.:]

demand destruction?

see www.eia.doe.gov/emeu/i...

the latest global demand number for Q3 2008 is 84.73 mbd

down from the annual average of 85.90 mbd in 2007
a decrease of .77% from the 2007 average

not much demand destruction yet - maybe it all happened in Q4

but it seems that everyday I read about another oil project or expansion being delayed

Jan 13 02:18 PM

[Livingstone:]

There are millions in China and India who are moving to the middle class. Every one of them wants to own and drive a car. Gasoline is still the fuel of choice. Demand for oil will significantly outstrip supply in the next few years because supply is declining and will continue to decline even more rapidly with current low prices because of the deferral of numerous mega projects. The low oil price will sow the seeds of future oil price increases to levels that will make last year's $140/Bbl look like a bargain. Take a look at the presentation by the CEO of Conoco Phillips in September '08 (on their website). Do your homework, look for the right companies (like CVX, BP and COP) and then load up because this ride isn't over.

Jan 15 10:26 PM