Oil: The Price Is Right

A couple of months ago, I made a comment on an article about the price of oil. This was about the time it was coming off of its low, and there was a fair bit of controversy as to whether the move was sustainable, based on fundamentals, or whether it was another case of "speculators" moving the market.

At the time, I suggested that part of the answer might lay in the market "looking forward" to some improvement in the global economy, and another part of the answer was because of the decline in production, via the shutting in of wells, as well as an almost unprecedented adherence to production quotas by OPEC.

In my comments, I mentioned that I thought a price range of something on the order of $60-$70 bbl. would be a sweet spot: a price high enough to return some measure of health to the energy sector, while not high enough to throttle any economic growth that might ensue from the various stimulus plans being implemented.

Now that we're there, the obvious question is "What's next?" This is where it gets tricky. On the one hand, supplies seem to be in relatively good shape, and the Saudis have indicated they aren't too anxious to see another huge run up in prices, in the interests of not adding an additional burden to a still very fragile global economy. On the other hand, a key component in the price of oil is the condition of the dollar. From that perspective, I don't think the future's especially rosy. In addition, the Gulf hurricane season is upon us (always a wild card), as well as geopolitical risk. North Korea's increasingly bellicose behavior doesn't bode well in that regard.

Taking all of the above into account, I wouldn't be surprised to see oil pull back some to something like $50, if none of the "bad stuff" happens, nor would I be stunned to see oil continue as high as $80/bbl, if the dollar continues to tank, Mother Nature doesn't feel like playing nice, or the drums of war get louder.

Disclosure: Long PVX, PWE

Comments

[one eye:]

Opec's blend of oils is priced below WTI, I had heard it to be about $5 last year. If that is still the case, WTI at $75 would meet their minimum target within the new $70-$90 range they are "comfortable with.

At Their $80, Goldman's $85 WTI is reasonable and Next Year's $95 WTI would be the Upper $90 target.

Either way, this price will bring a lot of delayed/shelved projects back into the spotlight and will do Wonders for The Oil sector stocks.

Jun 05 08:52 AM

[one eye:]

Personally, I really think everything hinges on the USD.

The faster it drops, the higher Commodities rise.

Jun 05 08:53 AM

[User 426197:]

I would say this. We better be careful with the rising prices. If the price continues to move upward, it will put the brakes on any hope of economic recovery. We will be right back at square one.

Jun 05 09:26 AM

[Leul:]

A prediction with a 30$ price variance (I wouldn't be surprised to see oil pull back some to something like $50, if none of the "bad stuff" happens, nor would I be stunned to see oil continue as high as $80/bbl)

Hmm.. seems to me the writer is saying that he has no clue

Jun 05 11:11 AM

[oil trader1:]

I agree..what benefit is this article.?


On Jun 05 11:11 AM Leul wrote:

> A prediction with a 30$ price variance (I wouldn't be surprised
> to see oil pull back some to something like $50, if none of the "bad
> stuff" happens, nor would I be stunned to see oil continue as high
> as $80/bbl)
>
> Hmm.. seems to me the writer is saying that he has no clue

Jun 05 11:59 AM

[silverwood:]

Good article I especially like this, Disclosure: Long PVX, PWE. I would like to a recovery in Nat Gas prices to an area where companies like PWE and PVX are comfortly profitable. This would bode well for a restitution of distribution level which is one the reasons to own the Canroys.

Jun 05 12:00 PM

[Old Trader:]

Leul and oil trader 1,

Sorry I wasn't more precise for you, but both of my crystal balls (the one that forcasts the weather, as well as the one that forcasts geopoltical events) are in the shop for normal maintenance.

More seriously, the $50 lower end number is an acknowledgement that from a current supply/demand standpoint, there's no shortage of oil. Additionally, given the run up in price over the last few months, it wouldn't be unreasonable to see a sell-off if for no other reason than profit taking. As to the high end of $80, I came up with that by combining current price momentum, my feeling the dollar will continue to work its way lower, and mixing in the wild cards of the weather and geopolitical risk. Btw, I didn't catch GS's call for $85 oil until a couple of hours after this was written and posted.

If either of you are willing to provide a "tighter" forecast, along with the logic behind your numbers, I'd certainly be happy to see it.

silverwood,

Sorry to say, I'm not looking for NG to follow oil's run anytime soon. The supply situation is arguably even worse for NG than it is for oil. As time goes on, though, the shutting in of wells, and possible increased consumption from utilities as a result of "green measures" (although this administration seems to be much more enamored with "alternatives" such as wind and solar, as opposed to ANY sort of hydrocarbon fuel) may cause an upward drift in NG prices.

Jun 05 05:45 PM

[Alex Filonov:]

The price is always right. Tomorrow it will be different, but it will be right, for tomorrow. Price of oil reflects current supply and demand of oil futures. Nothing more, nothing less.

Jun 06 12:19 AM

[Ferdinand E...:]

The OPEC directorate has made it clear - to me at least - that they feel that they deserve a price of $75/b, and they can definitely get it. In the old days they could also get virtually any price they wanted, but once the 'cheating' started it fell. Now they have more discipline, and the cheaters have less clout, and so - unfortunately - we might see $75/b. Everything considered though, and bringing macroeconomics into the picture, everybody might be better off in the long run if they thought in terms of a price in the mid fifties.

Jun 06 09:36 AM

[Ferdinand E...:]

And by the way, try reading the brilliant article by Dave Cohen in '321 Energy'. Its title: Mr Market is wrong again.

Jun 06 09:45 AM

[Prescient:]

No kidding!!!


On Jun 05 11:11 AM Leul wrote:

> A prediction with a 30$ price variance (I wouldn't be surprised
> to see oil pull back some to something like $50, if none of the "bad
> stuff" happens, nor would I be stunned to see oil continue as high
> as $80/bbl)
>
> Hmm.. seems to me the writer is saying that he has no clue

Jun 06 12:41 PM

[satchv2:]

Just a comment that although we do not have a shortage of oil we do not have a significant over supply.

Having said that an all comments on weak dollar I can not understand why the market thinks the Euro zone or UK is in good shape.

A rough winter in Europe and we will see gas prices driving higher.

On oil supply we all need to understand a lot of"new reserves" are in fields where production cost are very high.

Jun 07 04:00 AM

[beabaggage:]

for some strange reason I feel better about PVX and PWE positions I have now! i am overweight canroys via these, some of the "dog" HTE and ogf.un-to, brompton o/g fund. when pvx sold their us assets to breitburn at the peak of oil price, paid down debt, i thought that was a very good move and have averaged in, pwe is the cadillac. dont like the leverage on HTE or OGF.UN but the divs are good.
collecting divs while all this sorts out is the key. i hope the oil report shows big draw down, gotta figure w school out a LOT of folks went away last week, who knows!

Jun 23 02:24 PM

[Old Trader:]

Between PVX and PWE, I much prefer PVX. PWE seems to have a lot scattered, not terribly attractive production assets they picked up along the way. I think they're going to have to change their focus from acquisition to organic growth for any production increases, which is going to put addition strains on their distribution as their capex rises. I agree with your contention that PVX made a smart move by their sale of US assets at the peak of oil prices. Hopefully, they'll hang on to their midstream assets (NGL production), since conditions are favorable (low NG prices compared to oil).


On Jun 23 02:24 PM beabaggage wrote:

> for some strange reason I feel better about PVX and PWE positions
> I have now! i am overweight canroys via these, some of the "dog"
> HTE and ogf.un-to, brompton o/g fund. when pvx sold their us assets
> to breitburn at the peak of oil price, paid down debt, i thought
> that was a very good move and have averaged in, pwe is the cadillac.
> dont like the leverage on HTE or OGF.UN but the divs are good. <br/>collecting
> divs while all this sorts out is the key. i hope the oil report shows
> big draw down, gotta figure w school out a LOT of folks went away
> last week, who knows!

Jun 25 11:13 AM

[einstein p ...:]

I keep hearing about the significant "over supply" but our own reserves are shrinking. The oil floating in tankers in the Straits can stay there indefinitely until OPEC gets their price or someone decides to blow a couple of tankers out of the water. It may be a light hurricane season, but we are still navigating dangerous waters --- from Nigeria to the Gulf to our own shores. Natural gas and coal are both good plays right now, especially the American Trusts and the Canadian plays. It's a good hedge against the dollar decline that is inevitable as long as we keep the printing presses running and racking up unsustainable debt.


On Jun 07 04:00 AM satchv2 wrote:

> Just a comment that although we do not have a shortage of oil we
> do not have a significant over supply.
>
> Having said that an all comments on weak dollar I can not understand
> why the market thinks the Euro zone or UK is in good shape.
>
> A rough winter in Europe and we will see gas prices driving higher.
>
>
> On oil supply we all need to understand a lot of"new reserves" are
> in fields where production cost are very high.

Jul 05 07:25 PM