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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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.