Jack Yetiv

Whither Oil Prices?

I agree that (1) the marginal cost of production (which is probably $70-$80/barrell) will set the floor, unless (2) OPEC chooses a different setpoint.

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 Long Case for Chevron

For my money, PWE is a much better value in the oil field, for two general reasons. First, I think crack spreads will be pinched for a long time to come because of decreased gasoline consumption and because of consumer/political pressure. Oil is not so subject to the same influence.

Second, the pure oil and gas Canroy's yield far more than CVX or any of the domestic oil majors. PWE, my favorite, yields over 13%, and yet will probably report a payout ratio of under 50% when it reports earnings this Thurs. That 13% dividend is secure unless gas goes below $7 and oil goes under $90.

If anyone thinks either of those is likely, then oil and gas is not a good place to be. On the other hand, if you believe, as I do, that oil will never go under $100 for any meaningful period of time, nor gas under $9 for any meaningful period of time, PWE is a much better deal than CVX.

Jack

Crude Report Stumps Analysts

The other reason for decrease refinery utilization is because refiner's crack spread is too low. What is the sense of running their refineries hard, on;ly to increase supply of gasoline as demand is slackening?

By decreasing refinery utilization (ie, decreasing supply of gasoline made), refiners can boost their profit margins closer to 10% (from about 8%).

Jack Yetiv

In Light of Peak Oil, Financial Diversification Is a Bad Idea

To Mr. Pursley regarding Brazilian finds and how quickly they will come to production:

According to PBR's rather optimistic scenario (as noted in the link you attached), they expect to be pumping 20,000 bpd out of Tupi in 2009 (as the expert quoted in the article said, I also think that is pretty optimistic), 100K bpd by the end of 2010 (more than 2 years from now), and based on all of these finds (Tupi, Carioca, etc), PBR expects to be pumping 4.2 million bpd in 2015, versus 2.3 million now.

In other words, under PBR's own very optimistic schedule, they will produce an extra 1.9 mbpd seven years from now.

Question to you: If you add up depletion rates at Ghawar, Cantarell, and all the other fields in the world over the next 7 years (ie, by 2015), what does that total depletion add up to?

Many people believe global depletion to be running at 5-7%/year, but let's say 3% per year--and don't even compound it.

So, in 7 years, depletion is 20% of our current 85 mbpd--ie, 17 mbpd.

Certainly, PBR will not be the only source of extra oil--maybe the Middle East and Nigeria will settle down and pump fully (although I might note that human history is rather short on, if not entirely bereft of, epochs of global peace and harmony--man is the most contentious animal of all), and maybe the decision not to drill ANWR will be reversed (although I wouldn't hold my breath on that one), but not EVERYTHING will go the way of extra production.

In adddition, mark my words that by 2015, Tupi/Carioca/etc oil will cost at LEAST $100/barrell to produce, putting a floor of probably $130 (assuming a modest netback of $30/barrell) on the price of oil even without taking supply/demand into account.

My point: None of us know what real supply and real demand will be in 2015, but we all know that demand from developing countries will increase significantly, that all fields deplete naturally, that cost of production from the new fields will be far higher than the gushers of old, and that OPEC has made it clear that 2-digit oil prices are a thing of the past.

Thus, I believe that downside risk in the best oil/gas investments is rather limited while upside potential is pretty substantial.

Although I think the author has overstated the case that diversification is unnecessary, I will also say that my rather sizable stock account is 100% invested in a Canroy (PWE) and a solar company (TSL). Of course, my stock account only constitutes a small percentage of my net worth, so I can take the chance to put all of my eggs in the "energy" basket, but that is NOT the approach I would suggest to others less risk-tolerant than I.

I would, however, recommend that people overweight good energy and alternative energy investments in their account.

Jack