Oil Price Predictions and Break-Even Prices 11 comments
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The US Department of Energy “Annual Energy Outlook, 2008″ predicts that oil prices will decline to $58 by 2106, measured in constant 2006 dollars, in their most likely scenario. They predict real prices will rise from 2016 through 2030 to $72 in constant 2006 dollars.
Today’s West Texas Intermediate crude prices are about $93.
The Dept. of Energy is therefore predicting an approximate 38% decline in oil prices over the next 8 years.
Their short term prediction for 2007 back in 2006 was for crude to be around $57 — way off the mark.
An interesting perspective is the $30 break-even price for Saudi Arabia, as reported by the National Bank of Kuwait in mid-2006. The table below shows the break-even oil price for the Gulf Cooperation Council countries, showing an overall break-even price of $38.
Canada’s oil sands are the second largest oil reserves in the world. The largest oil sands syncrude producer is Canadian Oil Sands Trust (COSWF.PK) which reports a current break-even cost of about $33 per barrel.
The table below shows the oil reserves of key countries. Note that the Canadian reserves are overwhelmingly oil sands.
Oil sands have not come into full productive capacity, but their cost is significant. Canadian Oil Sands Trust is a large, if not the largest, player in the oil sands / syncrude market. While their break-even costs are about $33, Kurt Wulf of McDep Associates recently reported that PetroCanada’s (PCZ) new oil sands project will have a break-even cost over $50 per barrel up from $25 per barrel five years earlier.
Given these break-even figures and the willingness of producers to fund projects with $50 break-even costs, we should not expect to see much in the way of long-term supply below about $40 or $50, even in low price scenarios.
The GCC countries have undertaken substantial development of their non-hydrocarbon economies. They depend on profits from oil to fund much of that development. They cannot afford to sell oil near cost and still support their non-oil development programs. Don’t count on sacrifice plays from Saudi Arabia or other OPEC countries. Oil is way up and we think it will stay well above break-even costs for a long time.
There were periods in the past when oil was cheap, but then OPEC was non-existent or weak, and there was no global rise of emerging economies. With China and India alone needing ever more oil to grow their economies, and the possibility of peak oil being here or near, we don’t see any long-term scenario other than high oil prices.
Regardless of your view of whether we have hit “peak oil”, the fact of rising costs of production is clear.
With rising break-even costs and no clear evidence of near-term abatement of geopolitical risks and fears, we find the price predictions by the Department of Energy to be difficult to believe. We hope they are right, but doubt they are right.
This is probably bullish for oil commodity funds such as (USO) and (OIL) and for oil royalty trusts such as BP Prudhoe Bay Royalty Trust (BPT) and Canadian Oil Sands Trust.
On the other hand if the Department of Energy is correct about a slide to $58 per barrel through 2016, oil commodity owners will see significant losses.
We think the Department of Energy is too optimistic about prices coming down. They are energy experts and we are not. Nonetheless, we have to make our bet within our portfolio.
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This article has 11 comments:
SJT is almost entirely Natural Gas. It's amazing how wrong you folks can be. Seeking Alpha? How about Seeking Due Dilligence 101?
And you also recommend deeply flawed USO, one of the worst ways to play oil, as USO got crushed for nearly two years from periods of contango. You probably have no idea, however, what I am talking about.
Good luck. Your readers will need it.
You are quite right that SJT is overwhelmingly a natural gas trust with minimal oil production. We must admit that we make errors sometimes. That was one caused by going from memory about which trusts are gas and which are oil instead of rechecking each fact. We apologize to our readers for that mistake.
We have properly described and classified SJT in previous reports, but slipped up in this article.
To be precise, we did not recommend any particular security, just indicated that certain types of securities would benefit or be hurt by certain oil price outcomes. We could have listed more, but chose to list ones that seem to have more trading volume than some others.
We did not recommend owning oil via USO, but did suggest that over time it will rise or fall with oil prices, backwardation or not.
Contrary to your assertion, we do have an idea of what you are talking about, but we appreciate being told when we make mistakes, although we could do with out the mean spirited approach you chose to point out the error -- but then you may not make mistakes and may not realize how easy it can be for lesser intellects to make an error. It is always easier to be anonymous as you are when casting stones as you are today. Perhaps you should consider coming out from behind your anonymity to contribute articles to share your superior knowledge. I'd enjoy reading it.
In defense of Seeking Alpha, they can't fact check every point in every article, and any complaint you wish to register should be directed at us not them.
Our point remains the same, but we regret mistakenly classifying SJT as an oil royalty trust.
Like i said if breakeven prices are these high, then we in for a really tough time. imagine this, if breakeven prices are that high why will most of these compainies report that huge profit even with their dwindling production growth rate.
The concept of breakeven prices as i understand might have much to do with ur variable cost, which in this sector has to d with ur recoverable reserves so maybe it is not the best practice to judge things based on break even prices in this sector.
Break even prices might have more to do with ur fixed cost, in oil and gas business ur capex
Thanks. We would like to hear more about break-even prices. The prices in the article were published by the Canadian Oil Sands Trust for itself, by Kurt Wulf for PetroCanada (who seems to have gotten the data from PetroCanada) and by Mena Capital, the research arm of the National Bank of Kuwait. We did not make the calculations ourselves and have relied upon those sources. What they include in the calculations was not disclosed, but if those are the perceived break-even points they will impact willingness to produce and deliver.
Thanks again.
You welcome.
Let me sum it up this way even the insiders, by that i mean people making their daily bread from the sector , do not understand the basis for oil trading at this prices!!!! but who am i to comment on this considering the higher an longer it stays here the better for me (i get salary and bonus increase every year and occasionaly i keep my boss on his foot by threatening to leave) although at the back of my mind i definitely know the end of this is not going to be funny.
The cost to drill and produce oil from fields like Ghawar is probably less than a few $ per bbl. Perhaps the cost of new discoveries are running $30 bbl (but that is a small percentage of total production so unlikely to skew the average much higher).
The notion that the average break even cost (as we would normally define break even - ie cost of production = sales) in the ME is remotely close to $30 is beyond silly. They are drilling in the middle of the desert, which is one of the easiest climates in the world to produce oil from. Pipelines run on the surface (or buried in that very difficult to dig sand). Wells are prolific and reservoirs are the best in the world, so minimal workovers needed.
How on earth could massively capex intensive oil sands have remotely similar cost structures as ME oil??? Doesn't anyone have any critical thinking skills here?
Sad. Very sad.
The cost figures are reported by the research arm of a leading MidEast bank. I am reporting their data. Neither you nor I have the ability to accumulate the data they have available. You may be correct that they calculate differently than you would do, or than is done for Canadian oil sands. However, if the ME governments perceive there costs to be as reported, it will impact their willingness to pump at various prices. This report did not suggest that the costs of oil sands and ME oil pumping are equivalent. It reported that there are break-even floor numbers calculated by producers, however calculated, and we reported them. Those numbers impact seller behavior.
Perhaps more attention to the article and less to trying to personal attacks would serve you better in this case.