Oil Will Peak at $150-200 - Barron's Interview 45 comments
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Barron's magazine interviews highly-followed Goldman oil strategist Arjun Murti, who predicted the current oil "super spike" in 2004. He sees the climb peaking somewhere between $150 and $200 -- which could mean $5.75 gasoline.
Murti dismisses the notion that speculation is driving oil prices to record highs. If so, he counters, why aren't we seeing supply growth?
The end of the super spike will come when oil prices reach a level at which it meaningfully reduces long-term demand. U.S. demand has begun to drop, but have people truly changed their behavior, or are they just driving less temporarily? Outside the U.S. (China, Middle East, Asia) demand is still growing.
Murti is bullish on the major oil companies, ExxonMobil (XOM), Chevron (CVX) and particularly ConocoPhillips (COP) due to its lower tax rate and large natural-gas exposure.
He also favors E&P firms, especially those with natural-gas positions. His favorite is Cabot Oil & Gas (COG), followed by Apache (APA).
Pipeline companies stand to benefit from the U.S. need to expand its pipeline infrastructure. Murti likes Oneok (OKE) and El Paso (EP).
He's bearish on refiners, which stand to lose the most from dwindling demand which cut into gasoline margins, and are being squeezed by increasing ethanol production.
Ultimately, Murti doesn't believe $150-200 oil is sustainable.
Our long-term oil forecast looking out 20 years is [for crude] to fall back to $75 a barrel, or some lower number. The questions are: How long do prices stay high? How sharply do they rise? And do people truly change their behavior or are they just temporarily driving less? It's an unknown at this point.
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This article has 45 comments:
Oil is going to $200! But in reality it should only be worth $75.
Wall Street bandwagon analysis.
theinvestingspeculator...
The reserves have peaked and the supply is declining--check production.
China has replaced Japan as #2 consumer.
The Chinese and Indians are increasing their demand.
Per-capita they use a minuscule amount compared to the U.S.
There are a lot more of them!
RightinSanFrancisco.co...
The world needs to permanently change it's habits of wasting huge amounts of oil to a more conservative stance lowering world demand, aided by alternative fuel sources to a level where supply and demand meet. Currently we are in balance but the perception that we won't be in a couple years is the driving force behind this oil rally. Eventually I fully believe we will be in balance but the million dollar question is will it happen soon enough to avoid a supply demand imbalance that sends oil to $200+.
I can't believe were still not drilling more on land and offshore, alternatives need more time to catch up and it will take a couple of years before we see a drop of oil from many of the best prospects we have. Why are we waiting? Maybe we want to force everyone into an electric car in 2010 first.
www.sfgate.com/cgi-bin...
We need a population policy or we will outstrip supply of energy. These newcomers need food, water and energy.
Who will have the balls to mention this. If we do not curtail our numbers we will struggle with energy, food and water. No way to live. We need a balance.
Eventually we will have curtailed demand. I child per family...MAX
Too many people are writing about the run-up in oil as if it has a single solution: we need more alternative energy sources, some say; others demand that we drill more; still others insist that biofuels are the solution. Yes, yes, and yes. WE HAVE TO DO ALL OF THAT AND MORE! The solution to this problem involves many components, some of which will be quite painful. On the demand side, much heavier use of more efficient freight transport (rail instead of trucking and air), getting most people out of cars and airplanes altogether and onto much more efficient rail and bus transit, and replacing the remaining inefficient cars and trucks with less fuel-hungry models. Higher-efficiency heating, cooling, and lighting equipment needs to be phased in sooner rather than later, and many cities and towns in energy-intensive climates need to shrink or be abandoned in favour of more temperate areas with lesser heating and cooling needs. On the supply side, the time to start building more clean electric plants is now. Those reductions in demand will eventually be overtaken by economic and population growth, so supply has to increase. We must figure out how to safely dispose of nuclear waste, or determine that we cannot and that fission is a blind alley. We must determine how much electricity we can generate using solar, wind, and tidal energy, then build out that infrastructure as far as practical. Biofuels are viable, but not all of them; we need to find the best way to make them without shrinking the food supply or expending more oil than we replace. We must increase exploration and drilling, especially for cleaner-burning natural gas, and we must learn how to get the most energy out of our massive coal reserves without choking the air with CO2, sulfur, and soot.
Consider history as well: the 20 years following the 1980 spike top. From 1980 to 1998, the price of oil fell from $37 to $12; both years were highly anomalous. If we suppose that 2008 is also anomalous, that oil puts in a top at $150 this year, and that the same price pattern in 1980-2000 follows, the price would be at or below $75 in only 10 of the next 20 years. The average price in that time would be $87.11, the lowest $47.73 in 2026, and in 2028 we'd be at $109.79. Extend it out another 5 years from there and we'd be well on our way to $650.
So is $75 possible? Sure, but I wouldn't expect it to last very long. Without major investment globally and especially in the US - in efficiency, demand reduction, increased oil and gas supply, and alternatives for electricity generation - and much tighter US monetary policy, the fundamentals will impose a positive tilt on that historical cyclical price chart and push the 20-year average well over $100 with a 2028 target of $200, even if $150 really is the top for this cycle. Then there's China...
Thing is, a year ago, oil was $65 a barrel. When you analyze oil stocks, it's instructive to look at the year-ago price (when oil was falling after a 7-year bull run). In most cases, the market has already priced in a long-term fall back to the $70-90 range. There's plenty of room for the better producers to run here; every day that oil stays above $90 is another day of big-time earnings power that the market has not priced in. After 1980, it was 5 more years before oil fell that far (40%). You would have to be a legitimate oil bear (with 1-year and long-term price targets for oil below $80) to dislike today's prices on producers with the ability to maintain or increase their output. It's hard to like crude at $139 but there's surer money to be made elsewhere.
Although there is tremendous investment underway now, much of the early news is that there isn't going to be a lot of new flow (key word there is flow).
Declining fields are consuming most of the new production, and new production is not "easy" oil.
So while the conditions around investment and consumption are similar to the 1980's, the flow rate on existing and new fields are not. Consequently unless demand drops more than 4% per year, I don't see a let-up in price pressure.
Mike
this grim aspect of growth is broken whenever some really smart persons discover methods to produce superfoods (like bread), refrigeration (tons of the world's food spoils before it can be eaten), storage (tons of food are consumed by pests and rodents), or crop yield improvements (through genetic manipulation, fertilization, pest controls and water or soil improvements).
those discoveries make it possible for the population bubble to expand just when it seems the world has reached its tolerance level and during the next cycle more people survive. of course, that also means that more people die when we reach the upper support level of the next incremental improvement. never-the-less, the incentive for improvements comes from necessity, the mother of all invention. we would still be living in villages, if the process were interrupted. if kings had forced their peasants to stop breeding, progress would have been halted. we have to look at the bigger picture.
someday, we will send people to the stars. when we get tired of being congested, here on earth, we'll develop a way to escape and seed the universe. that is our mandate. grow or die. you can't mourn the ones who die in the process from hunger, disease or war. their existence serves a higher purpose and ultimately, they will be so small in number when you compare them to the countless people who will be able to enjoy other planets because of their sacrifice.
feel free to contribute by buying refrigeration stocks, fertilizer stocks, seed stocks or tech stocks. if you are really very smart, maybe you could work on the next generation of solutions yourself. we have to acknowlege that the "just say no" programs are insufficient. our history suggests that adversity is necessary to prod mankind forward. sometimes, that's a nagging spouse. sometimes, it's the perception that armegeddon is just around the corner.
The massive "Bakken" (Williston basin) oil shale rests on the Montana - North and South Dakota and Canada's border. Even I, a Lithuanian (Europe) investor know these companies. Do your DD.
I think these so called experts should keep their mouth shut. As we can see from Friday because of one report the price of oil went up by more than $10 for no reason I do not believe that there was any supply-demand reason for this increase. As each expert is putting out their estimate the traders are making sure that the price of oil is reaching these targets.
you are right on the money. That is why I went to work for HES APR 07
I am right in the middle of the Bakken play. We were there before everyone found out about it. It is a "happenin' deal!"
There is more vacant, potentially available land in the west and southwest that could be available to produce solar power, both PV and Thermal, than we could use. All we have to do is start the build out and stop trying to make fuel out of Corn. We're wasting our time on the Bush Boondoggle and costing ourselves years of delay at the same time. Let's get to work on cellulose ethanol.
We need to figure out the most efficient and "possible" fuel for each application. We can drive our cars on electricity, unless we're driving cross country. We can heat our homes with electricty and natural gas. We can cook our food with natural gas or electricity. BUT, we probably can't fly from LA to anywhere with electricty or natural gas (well, maybe natural gas, I don't know. I've never heard of trying to run natural gas in a jet engine). We will need Kerosine or ethanol or some other fuel to run jet engines.
We need a lot of electricty to make steel and Aluminum. We also need a lot of metalergical coal to make steel and so we will need a way to capture the CO2 and put it away somewhere or make something out of it. There must be a way that doesn't cost more that we save.
The point is that there is not one solution to all of our energy needs, and oil will certainly be one of them for a long time to come. But the first thing we need is a rational energy plan with the goal of weening ourselves off of foriegn oil. A plan similar to the one JFK proposed back in '61 that got us to the moon. It has to be total dedication to that goal. No more head in the sand, bite the bullet, get everyone involved. If we do this we will become the greatest, richest nation in the world because we will be able to control our own destiny and to sell the technolgy developed to the world.
If we don't we may all descend into anarchy.
You are wrong. What happened in the 80's has nothing to do with the current oil market, with the exception it is the same commodity, oil we are talking about. I went back to college to obtain a petroleum engineering degree during the 80's bust. ANd what is happening now it totally different China and India were insignificant in the demand equation. I agree there is a point where price will cause a drop in demand, but it is not here. It is best to make money on the E&P side and the service side. Don't beleive it? Just sit on the sidelines, watch and learn. Many investment advisors recommend investing in industries you are familiar with, well I have been in oil and gas exploration for 20 years, ups and downs, and now is not the time to be chicken little. Finally after 20 years, I am at the right place, in the right time, and it is time to make hay while the sun is shining.
Pay attention to what GINTARAS said. If you invest in those companies, you will make some money. Stick to best of breed.
Also for those who think Murti is the only one who predicted the price spike, see my 2000 article www.asa3.org/ASA/PSCF/...
Do you think amber will drop in price to that seen in the 1990's? Amber was plentiful, is no longer. Takes mucho years to form. Petrified Tree sap, like oil, there are different grades.
Eliminate West Texas as the oil contract here in the US and oil drops by at least $20 but you would have to eliminate Brent as well. It is THE premium grade.
It increases it, in my eyes. Understand: I am bullish on oil over at least the next 5 years. I am long XOM, BPT, EGY, CVX and TIRTZ.OB (that last one is mainly natural gas). But the world isn't running out of oil -- it's just that the remaining oil is harder to get.
Prices this high are spurring a lot of investment in bringing on new supply. They are also spurring investment in more fuel efficient cars, etc. The reason why I am bullish on oil for at least the next 5 years is that it will take at least that long for these investments to meaningfully increase global supply or decrease global demand. Eventually, they will do both. Most assuredly, they will. Count on it.
When that happens, $75 oil may happen again. But that's years off. So I'm long on oil stocks for the next several years.
People, there are two definitions of peak oil and both are happening.
Definition 1 - Geology - Peak oil in terms of falling global production. We are at a plateau right now and it seems unlikely we'll be able to ramp up like we have in the past.
Definition 2 - Economics - Even if production can achieve some year-over-year gains, demand outpaces production growth which essentially translates to supply being constricted on a year-over-year basis.
Definition 2 is happening right now and definition 1 is a looming reality. Remember- OPEC and all others don't exactly have the most transparent accounting. They self-report their oil reserves which is what determines their production quota.
In our life time, assuming little interference with the energy market, we should never see an oil shortage. Price as a rationing tool will see to that.
al
Also, I would like to point out that Congress overlooked a law that allowed Enron to cheat the public. And that same situation exists now in commodity prices.
There will be more pain ahead for those of you who are ignoring the speculative bubble being created by Goldman, Morgan and others like ICE and NYMEX.
Be the bigger fool if you want. But you should read what Phil Davis and Anthony Schneider have to say about it. Check out their articles on SeekingAlpha. Do your homework. Don't believe what an analyst says.
The EIA says Bakken is 500 billion barrels.
This is a huge difference for two government offices.
Please let me know when, i have to fill up my tank but i will wait for your answer to do so!!!!!
No wonder he is so bullish on Oil?
OPEC has been telling anyone that listens that Oil prices have nothing to do with reality let alone the supply argument.
Why should they raise output?
Maybe its time for the Institutional Investor to go find some other place to create a bubble.........
www.contrarianprofits....
Congress is about to enact a windfall profits tax on the Major Oil Companies to return the money to us, the outraged drivers of America. Do the profits support excessive share prices? I don't think so based on the chart evidence. Are the dividend outstanding? Absolutely not. China is selling most of the retail goods we Americans buy at Walmart. Should they be charged a Windfall Profits tax too? Wait till they start increasing their prices the way OPEC has done, and I might say yes! But certainly not now.
So where is the money going?
Simple, the countries that pump and sell the crude oil. Oil is $137/barrel and it cost our companies that buy and transport it to refineries huge amounts to process into gasoline and distribute in many thousands of service stations.
It is the Arab-Muslim nations that are making a killing. They have a club called OPEC that determines how much each country will sell on the open market. They control the supply through their oil monopoly. When they produce and sell more, the price goes down. The world markets and governments have absolutely no control over OPEC.
Remember the oil shortages in the 1970s? Remember the long lines at gas stations? Remember how high the prices were then? What happened.... We cut the speed limit to 55, drove less, started importing small more efficient cars that took away GM monopoly in this country. As a result of our required conservation and changed habits, we caused a major recession in the oil industry. The price of oil dropped to $10/barrel. Gas got cheap, we continued building more efficient cars and passed laws requiring that cars get higher m/g. Then in 2007, OPEC declared war on the world economies. They could not take us with their military, but they could easily declare economic war of a very effective and efficient nature. They can take over our banks, companies and effectively our future by owning our national debt. The wealth of the Arab kingdoms is unbelievable.
So what does all this mean for our future?
We have huge oil reserves offshore, oil sands in the western states, huge proven reserves in Alaska that our environmentalist wackos refuse to let us drill. The same is true in other countries.
Trees are a renewable resource and I guess you can say that people are as well. The reason for not drilling in 1979 in Anwar was Jimmie Carter. He thought more of a few animals in Alaska than it did of humans, Americans.
If we exterminated 95% of the caribou, they would grow back, but if we are defeated in an economic war waged by OPEC, we become slaves.
So if you agree with this notion, you should share your feelings with those unrealistic folks you know that value trees and animals more than Americans and tell them that we need to immediately begin drilling off shore and every where we can to produce as much oil in the US as possible. We cannot afford to pay the OPEC more than $400 billion a year and allow our balance of payments reach the point that they can control our government. We must defeat the notion of Windfall profits tax and even give additional tax incentives to spur our oil companies to rapidly drill on our own soil as fast as possible.
At the same time we can still go full speed ahead with alternate energy and conservation sources. The problem is America is running out of time. There is much to worry about. Do what you can to change the minds and hearts of those that are standing in the way.
Johnthebear and many others should reconsider their drill-Alaska-to-bits idea. Better idea is to save it for a (really) rainy day.
Start drilling offshore...Complain to your congressman.
Stop Goldman, Morgan Stanley, NYMEX, ICE and others from ripping us off. Again, complain to you congressman. Have the CFTC and the FTC go after the speculators.
Stop buying oil, gasoline, heating oil, turn off the lights when not in use.
Lots of stuff to do.
So DO IT.
On Jun 08 03:03 PM curious cat wrote:
> soilent breed, soilent greed, soilent green. don't sweat it, rbbartho.
> populations reach critical mass in countries and people die, either
> through war, famine, disease or gov't dictates.
>
> this grim aspect of growth is broken whenever some really smart persons
> discover methods to produce superfoods (like bread), refrigeration
> (tons of the world's food spoils before it can be eaten), storage
> (tons of food are consumed by pests and rodents), or crop yield improvements
> (through genetic manipulation, fertilization, pest controls and water
> or soil improvements).
>
> those discoveries make it possible for the population bubble to expand
> just when it seems the world has reached its tolerance level and
> during the next cycle more people survive. of course, that also means
> that more people die when we reach the upper support level of the
> next incremental improvement. never-the-less, the incentive for improvements
> comes from necessity, the mother of all invention. we would still
> be living in villages, if the process were interrupted. if kings
> had forced their peasants to stop breeding, progress would have been
> halted. we have to look at the bigger picture.
>
> someday, we will send people to the stars. when we get tired of being
> congested, here on earth, we'll develop a way to escape and seed
> the universe. that is our mandate. grow or die. you can't mourn the
> ones who die in the process from hunger, disease or war. their existence
> serves a higher purpose and ultimately, they will be so small in
> number when you compare them to the countless people who will be
> able to enjoy other planets because of their sacrifice.
>
> feel free to contribute by buying refrigeration stocks, fertilizer
> stocks, seed stocks or tech stocks. if you are really very smart,
> maybe you could work on the next generation of solutions yourself.
> we have to acknowlege that the "just say no" programs are insufficient.
> our history suggests that adversity is necessary to prod mankind
> forward. sometimes, that's a nagging spouse. sometimes, it's the
> perception that armegeddon is just around the corner.
Get real... Windfall Profits Tax did not work last time and it will not work now. The only thing that will work is working hard to produce what we have and find an alternative to the black stuff!!
Our elected officials need to be held accountable for this mess... We should demand that they use every means possible to let the world know, especially the other producers, that we the largest consumer will not be held hostage by them. Open up the flood gates and start drilling and refining some US oil from any place we have reserves....
Another thing... Why can Hugo Chavez and Castro drill 50 miles off Florida and we can't?
Who is better at making sure we do not create an environmental problem? The US producers that we can control or Chavez/Castro who we have not been able too???????