The Bull Argument for Oil

I have been looking at various consensus S&P EPS projections for 2010. Depending on which analyst it is, EPS is going up from $45-55 in CY09 to $60-$70 in CY10. Almost everyone assumes oil prices will be $70-$80 next year, up from $50 this year.

The bull argument for oil is - credit crunch has made new supplies difficult. So when global growth resumes, coupled with the natural field decline each year, the excess oil inventory and supply will be taken care of soon. And, it is a good inflation hedge.

What was unusual between 2003-2007 was that not only did global growth happen, but it lasted for a long time. For the oil bulls to be correct, not only should global growth occur, but it should continue for some period of time. If growth would instead turn out to be erratic, which is what I think is more likely, productivity improvements and climate change pressures might ensure that the time taken to work off the excess inventory and supplies is more than just a couple of years. Oil companies and national governments are still doing capex - it is down but not to 0.

Disclosure: No position

Comments

[Prudent Man...:]

The crude story seems to be long-term bullish due to the emerging markets, But, the domestic oil companies, with the current Administration and Congress, would be looking at an "excess profits" tax. That must be factored into any of analysis.

Apr 19 03:25 PM

[Ferdinand E...:]

I think that I can go along with the argument in this article, at least at the present time, but a lot of things could change.

Apr 20 12:03 PM

[Alan von Al...:]

Massive glut in gas, at least 5 million b/d liquids shut in, big inventory of crude and refined products. I don't think it matters what the price may be, $50-$70, there's no incentive to invest in new production until and unless the macroeconomic picture changes. At $50 we buy a little more, at $70 we buy a little less, but the total demand stays the same unless there's real economic growth. Oil producers know it. They can't raise capital or borrow from banks, and profits are weak or nonexistent. Most of the NOCs are being squeezed by 'taxes' and unprofitable home pricing (Venezuela and Iran in particular). Rig count in the US has been cut in half.

Apr 20 12:28 PM

[Alan von Al...:]

"Near term, we don't see any supportive factors for the oil market," said Harry Tchilinguirian, oil analyst at BNP Paribas in London. "We have not yet turned the corner on the economy, oil demand is very weak and inventories are high." [Guardian UK a few minutes ago]

Apr 20 01:55 PM

[Wyatt Nevada:]

The fundamentals clearly indicate a rise in oil prices over the long term. Every U.S. citizen uses 2.87 gallons of oil per day. (21 million bbls day x 42 gals divided 307 million people) while China uses .25 gallons (1-quart) of oil per person per day. ( 7.8 million bbls day x 42 gals divided by 1.33 billion people) India uses only 1/10th of a gallon of oil per day / per person using only 2.72 million barrels of oil per day with a population of more than 1.2 billion.

Last year there were more new cars sold in China then there were in the U.S. India has a backlog of more than 10,000,000 people waiting for the new "Nano" car that was just released.

Both China and India have a rapidly expanding middle class that will use more energy each and every year for the foreseeable future.

Short term fundamentals may keep oil lower in the near term but long term, watch out, $147 barrel may come sooner than you think.

Apr 20 04:40 PM

[Alan von Al...:]

When we consider future demand in India and China, it's a mixed picture. China is doing very well from a domestic production standpoint onshore and offshore. They also have good prospects for further development domestically and prepaid import deals in Brazil, Sudan, etc. India on the other hand is a basket case. I doubt whether India can expand economically and, even if they could eke out some real growth, they have an infrastructure problem (impassibly crowded streets). India has some offshore potential, but it's bureaucratically bound and there's a shortage of affordable drilling platforms.

What's at issue is world demand and world supply. Japan is a pivot on the demand side, and Russia on the supply side.

Apr 20 09:27 PM

[mac.barron:]

Looking ahead to 2010: is there any question that production and refining has scaled back due to the economy? Is there any doubt that it will take time to get production to ramp-up as the emerging markets start to need more energy? Connecting the dts it is pretty easy to see a bull market down the road for oil.

Apr 21 12:56 AM

[lebur:]

The oil price long-term must be connected to demand AND supply. Supply equals current global production capacity plus excess inventories. Over a period of weeks, IF production capacity is close to its then-current upper limit, and if inventories must be replenished to stay even with demand, then the oil price will be very sensitive to fluctuations in demand. As time passes, production from the lower-cost fields that presently supply a very substantial portion of the oil being consumed will diminish cumulatively by a large amount, on the order of 6%/year +/-1%-2%. A time will be reached when even if demand no longer reaches its 2007-2008 level, much more expensive oil will come on line as the oil price rises, Exactly when all these factors combine to push oil to or above $100 remains to be seen. But that it WILL happen in a foreseeable future seems a foregone conclusion.Eventually, it goes without saying, new modalities of energy production and use, especially for cars, trucks, planes and ships will have to replace disappearing liquid hydrocarbons.

Apr 24 11:37 PM