Whither Oil Prices? 22 comments
-
Font Size:
-
Print
- TweetThis
Where are oil prices going? We don’t know. You don’t know. Nobody knows. Short-term events could drive oil higher or lower. The current trend is clearly down, but where it stops is not evident.
What is an investor to do? One reasonable thing to do is nothing, if you don’t have particular oil exposure, or if you have good yield from oil companies with well covered dividends.
When does increasing exposure make sense? That depends on your time horizon and the yield element. If you plan to use a futures-based investment products such as (USO) or (OIL), you need to watch the charts fairly closely. If you you plan to buy large integrated oil companies with solid yields and strong financial conditions, such as Chevron (CVX), or an oil royalty trust such as Canadian Oil Sands (COSWF.PK), now may not be a bad time, although there may be better entry points yet to come.
How low can oil prices go? They probably won’t go below the “total production cost”‘ The problem is that number has an enormous range.
Total Production Cost includes the cost of finding and adding new reserves, plus the cost of lifting the oil, or the equivalent of lifting, for extraction from other materials, such as oil sands.
According to the Department of Energy, Energy Information Agency, “total production costs” per barrel range from just under $10 per barrel in the Middle East to nearly $70 for US offshore oil. Average world total production costs approach $30 per barrel.
Total Production Costs
DOE-EIA says,
In 2006, average production costs (or “lifting” costs, the cost to bring a barrel of oil to the surface) ranged from about $4 per barrel (excluding taxes) in Africa to about $8.30 per barrel in Canada; the average for the U.S. was $6.83/barrel (an increase of 23% over the $5.56/barrel cost in 2005). Besides the direct costs associated with removing the oil from the ground, substantial costs are incurred to explore for and develop oil fields (called “finding” costs), and these also vary substantially by region. Averaged over 2004, 2005 and 2006, finding costs ranged from about $5.26/barrel in the Middle East1 to $63.71/barrel for U.S. offshore. While technological advances in finding and producing oil have made it possible to bring oil to the surface from more and more remote reservoirs at ever increasing depths, such as in the deepwater Gulf of Mexico, the total finding and lifting costs have increased sharply in recent years.
Finding Costs
Lowest Level (less than $30 per barrel): If Saudi Arabia wanted to do so, they could lower the asking price for their current oil production substantially from the current $100+ price, and still make huge per barrel profits while reducing incentives for others to find other oil or to develop alternative energy sources. However, that seems a bit far fetched to us.
Very Low Level ($30 to $70 per barrel): Generally, we would think, world total costs would be a very low price support level. It is doubtful that reserve owners would sell the commodity for less than their replacement costs of about $30.
Low to Moderate Level ($70 to $90 per barrel): Since offshore and deep water oil is a major focus globally for new reserves, the total production costs of offshore oil could be a price bottom for oil. Perhaps more importantly, oil averaged $72 per barrel in 2007, according to DOE-EIA, which wasn’t all that long ago. The world is changing, but demand probably did not double in less than a year to support recent high oil prices of about $145.
Projections: Looking forward, the DOE-EIA projects $119 as an average crude price for 2008 and $124 in 2009. However as recently at June, DOE-EIA was predicting a $100 average price for 2008 and about $93 in 2009, as shown in the chart below.
They don’t know either. The situation is in major flux and does not lend itself to trend projection. However, their earlier projection of a roughly $90 to $100 range for 2008-2009 might be used as another indicator of a support level for oil prices.
Canadian Oil Sands filed their Annual Information Form in March 2008 and reported an average per barrel revenue of $79 in 2007 and projected an average of $92 for 2008 and $82 for 2009 for financial reporting purposes.
Conflict Scenario: War and terror puts everything in a cocked hat, although is it also interesting to see that the Georgian/Russian conflict did not move oil prices up. That was merely a skirmish and prospectively changed control of certain oil assets, but did not curtail energy flow. Serious conflict in oil regions simply changes the game. Price projection: “a big number”.
Long-Term Scenario (UP): Increasing per capita standard of living for an increasing world population, and populations growing faster than proven oil reserves moves the price point up. There is fairly direct correlation between rising living standards and rising energy consumption. Until the world moves to alternatives, the long-term trend for oil is up.
Our Own Projections: Looking simply at long-term trends, we would see something like $70 as a low price for oil in the short-term. The chart below plots the monthly and 12-month average average acquisition cost per barrel for refiners in the US from 1994. It also shows two smooth red lines. The upper line represents a level 1.26% monthly price increase from January 1994. The lower line represents a level 1.26% monthly price increase from September 2001, when arguably the market dynamics for oil changed due to the terror attack on the US.
Conclusion: We’re not oil experts, but we like you must take a view of oil prices because they permeate so much of the investment world, not just the energy sector.
Oil might go to $70, and could even overshoot below that (below offshore total production costs), but probably not.
We would tend to think that with oil below $100, and better yet under $90, a good long-term buying opportunity probably exists for oil assets.
The final good news is that long-term oil price trends will probably bail you out if you enter before a near bottom in the short-term.
Related Articles
|
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication
Seeking Alpha 100 » -
Fastest Climbers
Authors with the largestSee all
increase in followers
in the last 7 days
Fastest Climbers » -
Top Commenters
Top commenters,See all
as ranked by their peers
Top Commenters » -
Top Instabloggers
The 100 most active
Instabloggers.-
1
TraderMark
-
2
Don Dion
-
3
Cliff Wachtel
-
4
Mike Havrilla
-
5
James Quinn
Top Instabloggers » -
1
-
Top StockTalkers
TopSee all
StockTalkers.
Top StockTalkers »
This article has 22 comments:
If these numbers are correct, and the cost of finding oil in deep water is growing at about 10% per year, then the current 2008 cost of finding oil is approaching $76-78, give or take a few dollars (2006 cost was $63.71).
Since looking for oil off the continental US, has not yet been adopted here in the US as an energy policy, and further, given the delay in actual production of perhaps 5-10 years, one can see that for any company to decide to spend billions in off-shore exploration and production now, they must project oil to be at least in the $100 range for the forseeable future.
One can readily see why there might be some reluctance by the oil majors to spend billions, given the authors data and facts presented here. Oil must stay in the $100 range, or Drill, Drill Drill, will not work out profiitably. And if there is no money to be made in Drill, Drill, Drill, who in the right mind will be doing it?
The author is absolutely correct on the premise that no one knows where the price of oil is going, but I prefer to think that it has to stay a little higher than what is commonly projected, or there will be no incentive for anyone to actually Drill, Drill Drill.
Just, IMHO.
IMHO, as the World's biggest oil consumer current oil usage will face even greater Demand Destruction from such an occurance. Granted it will be shortlived, but it is still a possibility.
Speculators who put on the large long positions in crude into June are either gone or short. The short position in natural gas is the largest in many years now. That is bullish for price and gives some clues that you are missing completely. Speculation pushed price to $147 at the maximum long position. Now that position is completely unwound and a huge short position is in place. But the price of crude is still above $100 and natgas is still above 7. That suggests an equilibrium point for crude well above the $105 price we hit Friday and this is one of the quarters of weakest demand.
There is little or no spare capacity in the world oil market so the price is set at the margin, not at some average. The most expensive barrels set the world price. The cost of production is well north of 85 dollars now.
Saudi production dropped 100k bpd last month. Watch what they do, as well as what they say. OPEC meets Tuesday and IKE will be in the Gulf tracking northwest.
So far, Gustav has removed more than 5 million barrels of oil and over 40 billion cubic feet of natgas from production. Ike will keep the rig crews ashore for another week at least. The lost production figures will at least double and will make a significant impact on inventories. It takes 5-10 days to get the wells back on line at full production and they don't all come back to pre-Gustav levels. It's not a zero sum game, some wells don't come all the way back. The production that was lost isn't "made up" until the end of the well life.
Gasoline and distillate inventories are low and the highest demand quarter for petroleum products is approaching.
The price of crude will be over $140 in December.
My guess is that OPEC will NOT want oil lower than $100, which means that oil might overshoot to maybe $90, but not much lower.
OPEC can achieve whatever price it wants by cutting the proper amount of production from global supply.
Jack Yetiv
The $80 to $100 floor level has been a discussion point by Iran recently. For example, the French new service AFP printed this article today:
"Iran wants OPEC output cut to target quotas
3 hours ago
TEHRAN (AFP) — Iran said on Sunday that OPEC members should cut output to the agreed target quotas in the face of falling oil prices, two days before the cartel meets in Vienna, state-run IRNA news agency reported.
"The market does not need more oil and there is no need for excess production given the fall of oil prices," Iran's envoy to the Organisation of Petroleum Exporting Countries, Mohammad Ali Khatibi told IRNA.
"Members should return to the agreed quota and respect it. If a member does not want to go back to the OPEC quota they should have a reason," he added.
"The situation of demand and supply for oil in the world and the global economy indicates a weakening of demand," Khatibi said.
Iran is the second largest exporter in the OPEC, which supplies 40 percent of the world's oil. Crude oil, which hit a record high of 147 dollars on July 11, has lost over 40 dollars in less than two months.
Khatibi said that "reasonable" crude prices could not go lower than 80 dollars a barrel.
"International oil companies say that producing a barrel of crude in some new fields costs 80 dollars so the oil prices cannot be lower than this considering a reasonable profit for production," Khatibi said.
Iran's oil minister Gholam Hossein Nozari on Tuesday called on OPEC to discuss quota-busting in its September 9 meeting and said that 100 dollars a barrel was "a minimum" for oil prices."
collusion,fear of running out etc...seem to dictate the price of oil. I just
started to buy 100 shares of CVX with the intention to buy 100 more every time the price of CVX goes down 5 $. Nice dividend while waiting
because you know that something is going to happen in our world
today,tomorrow,next week....? FEAR is more important for the price of oil than all those numbers written here,
Gives every investor pause to calculate flowing barrel costs, recycle ratios and reserve life for their current holdings. Very Interesting article. Need more like it.
Finding costs are on a downward learning curve.
Petrobras, the leader in deep water drilling and production, calculates with lifting costs of $8/barrel and total costs of a maximum of $30/barrel, once a deep water field is developed. Deep water oil reserves are enormous and will determine the marginal costs of light crude oil production in the next 15 to 20 years
The PBR costs that Karl uses are a minimum base price of 30/barrel, not a maximum and not the total cost. Also, the figures are estimates from a year ago. Time is money. For example steel costs are up 80% this year.
Peter Robertson, vice chairman of Chevron, recently told lawmakers that the cost of new production in the deep water Gulf of Mexico could exceed $95 a barrel.
the TOT and PBR figures you cite sound like pretty good floor numbers on oil prices (excluding any temporary spike down that could, but probably will not occur). the major oil companies will not provide the market with oil below their replacement cost, and those with low costs in OPEC have no current incentive to take it lower. the long-term forces are up.
With that given, why not be buying APC, or other independents like OXY, DVN, XTO, instead of CVX? I don't have a clue when some of these independents might be bought up by the majors, but it looks to me like it is just a matter of time, if the valuations remain close to where they are.
9/11 had almost no impact on the oil markets, unless you want to factor in the reduced demand from reduced air travel for a short period. The Iraq war on the other hand was a big deal, including the way the Saudis since then have either over-produced (way over quota in 2004 in the months leading up to the election, and under-producing in 2006 as a warning to Bush not to go along with the prevailing electoral sentiment to back off the war and get out - - msg delivered when KSA has Cheney get on a plane - - all of a sudden there's to be a "surge").
The EROEI on deepwater is so bad that fields like Jack may never be developed.
Ike to Houston, "We have a problem . . ."
The petrobras cost information is from 2008.
Petrobras knows better than others what the deep water costs will be. They have done a lot of drilling, build the infrastructure and started producing. 30$/bbl are their total cost estimates,once a field is in full production.
Besides light crude oil, there are plenty of unconventional oil alternatives. For example GTL (gas to liquids - proven technology, existing plants. conversion costs per BOE: 15-20 US$. Half of known global natural gas reserves are stranded - not in production actually.
"his" wealth? I understand that he has negotiated to receive 85-90% of the revenues from "his" wells ... so what does he realistically have to gain by later "nationalization"?
Khadaffi still hasn't funded the "repayment of loss" account that was established to compensate victims of his terrorist acts. Is that money to come from his cut of the hoped-for oil wealth?
China has successfully negotiated and corralled southern Sudan's limited oil reserves. Now the US has done likewise in Libiya. Who can truly understand how "superpower" economic hegemony impacts the present and future price of oil? Fear is the driving force and behavior based on fear is often irrational.
The 1.26% may or may not be cute, but it is not made up. That is the rate at which crude increased per month form the beginning of the data period in the 1990's through the end of the data period. the analysis is to extend that growth rate to see where it goes. the high line is simple extrapolation of the historical curve. the low line, I will, grant begins at an arbitrary point, but one that makes sense to us (9/11), using the longer term historical growth rate. there is no right or wrong in extrapolation, only potential interest. it means something to some and not to others. it's just one more piece of information in a larger assemblage of information seeking insight.