Jack Yetiv

Megaprojects Predict Decline of Oil Production

Excellent article, but fails to take into account (because it probably cannot) politically-induced manipulation of production, which may change the production curves (and probably the consumption curves) tremendously.

I refer largely (but not exclusively) to OPEC. I think OPEC could serve to smooth the curve even more--until they run out of spare capacity. For example, when Khursaniyah becomes fully operational in the next few months, its production will likely be witheld from the market if oil is at $100 or less. Indeed, when OPEC meets next week, we may well learn of production cuts.

The bottom line is that I strongly believe that politically-induced manipulations of oil production may exert great influence of the above analysis.

In the final analysis though, it seems likely me that oil is unlikely to go south of $100 by a whole lot, and it seems further likely that oil will begin an uptrend over the next few years. I think to guess that oil will be $200 or $500 is to do something we really don't have sufficient data for, but it seems likely oil prices will continue to climb over t5he next few years.

As it was in an article I posted here about 8 months ago, my prediction is for oil to be at $100 to $120 this year and maybe next, with $150 (plus or minus $20) as the new baseline sometime next year or the year after.

Jack Yetiv

Will Global Events Keep Oil Above $100?

I agree completely with the thesis of the article. However, I think you also need to mention that OPEC reduced production will also protect against downside from the $100-110. I posited that hypothesis in my article on SA in january, 2008, when oil was below $100, and it was reaffirmed a few days ago when Venezuela stated it might well recommend a decrease in OPEC production at the meeting next month.

I do agree that oil may approach if not test $100, and nat gas may hit low $7. If they do, I am going to load up the boat (I'm already pretty loaded, though, primarily with PWE and PVX).

Jack

Incorrect Media Speculation About Those Oil Speculators

Great article, Mr. Hamilton. Always appreciate your dispassionate, data-based analysis of the issues.

Frankly, since nobody has actually defined "speculation" it's impossible to determine whether oil prices are largely due to it. Bu thye fact of the matter is that all stocks and commodities are driven by "specualtion" in the braod sense of the world--when I buy a stock, aren't I doing it because I am speculating that it will go up in the future?

How is that different than buying oil because I think it will be higher in the future?

And if I buy an investment property, am I not doing it because I think I will be able to get more for it when I sell it?

Jack

A Case for Retreating From Oil Investments

In summary, I believe that oil will continue to trade between $100 and $120 this year, and that certain oil-related investments are worth holding.

In the past year, I have played oil very simply--by buying and holding shares of three Canadian royalty trusts--HTE last year and PWE/PVX this year. Despite the gyrations in the oil market--and even in the value of these stocks, I am about breakeven on these stocks. But in the past year--which has not been kind to the markets--I have collected about 15% in dividends, which is not a bad return given what has happened in the markets in the last 12 months.

And these generous dividends will continue to be paid unless oil goes under $80 and gas under about $7.50.

To me, these stocks offer a wonderful dividend, which also protects against any major drops in the stock price, while offering substantial upside over the next few years.

Jack

A Case for Retreating From Oil Investments

The author dismisses the thought that Saudi Arabia (SA) will reduce oil production because it is "committed" to producing more. I'm not sure what "committed" means, but I know that one phone call from the King could reduce Saudi production by 1 mbd. I wouldn't be surprised to learn at some future time that some of the 500,000 bpd increased production that SA ramped up in May and July of this year has already been reversed, and if oil breaches $100 (which it might well do in the next month or two), expect OPEC (not just SA) to announce a reduction of up to 1 mbd at their next meeting.

The King and the Saudi oil minister have said on several occasions that Saudi oil should be saved for future generations. $80 oil would provide a powerful incentive to do EXACTLY that--especially since SA knows that if they wait just 2-3 years, the world oil situation will be much tighter and they will be able to get much more for their oil.

The other factor not taken into account by the author is that a significant portion of marginal oil production today is simply not economical at $70 to $80. Will the Brazilian Tupi and Carioca fields be produced if PBR believes all it can get for that oil is $80? I highly doubt it.

Will the Arctic be drilled (assuming it's allowed) for $80 oil? Again, I doubt it. I realize these are longer-term projects that won't produce in the next 2-3 years, but even today, there are a lot of marginal fields being pumped for $120 oil that will be shut down if only $80 can be gotten for that oil.

Finally, it has often been said that "the cure for high prices is high prices," but the same works in reverse--"the cure for low prices is low prices." If oil goes back to $80, and gas back to $2.50, demand reduction will be muted, if not entirely reversed. This will act as a self-correction mechanism.

Final thoughts in the next comment.

Jack

A Case for Retreating From Oil Investments

I have been bullish on oil and gas for more than a year (beginning well before oil crossed $100) and I remain so. Although I have been bullish, I was not calling for oil to hit $150 this year, or, perish the thought, $200.

In an article I published here in early 2008, I said I expected oil to cross $100, cross $110 and test $120, but then spend most of this year between $100 and $120. That remains my prediction. In my predictions, I did miss the irrational rise to almost $150, and perhaps I will be wrong again and oil will go below $100 and stay there for a while.

But I doubt it.

As the author has correctly stated, all the bearish factors he has discussed could have been perceived 45 days ago. Indeed, they could have been perceived 145 days ago. So that is not the reason for the author's change of heart. Instead, his change of heart is due to "listening to the market."

But, AT MOST, the market is telling us that oil was overpriced at $147. It is not telling us that oil is overpriced at $115. Yes, I know that some of the technicians in the crowd believe that oil's recent swoon indicates it's going to $60. But those technicians didn't tell us it was going to go to $147 less than two months ago, so we can all admit that technical analysis of where oil is going to be next week or next month is next to useless.

What I think ALL of us can agree on is that markets OVERSHOOT, both to the upside and to the downside, so market movements don't help me much.

What DOES help is a supply-demand analysis, which the author has done, but I think he has missed some very key factors, which I will discuss in the next post.

Confirmatory Bias and Oil Investing

What oil bears seem to miss repeatedly is that oil is NOT a free market. Even if peak oil is hogwash, there is a group of oil producers that control almost 50% of global production that have agendas that are at least partially driven by factors other than economics. I refer, of course, to OPEC.

Due to OPEC, downside risk for the oil bulls is rather limited, while upside is not so.

PREDICTION:

If oil approaches $105-110 (which I think is quite unlikely), watch Saudi Arabia rescind its recently-announced 200K bpd of extra production that began this month. And if oil goes below $100 (which I consider extremely unlikely), watch Saudi Arabia reverse the full 500K production increase between May's and July's increases.

Jack Yetiv

What Can the Saudis Do to Bring Down Oil Prices?

I think today's announcement from China may help the King in his quest for lower oil prices. But as I have commented previously, I do not believe Saudi Arabia wants two-digit oil prices ever again.

With some demand destruction here and in other OECD countries, some moderation in increase in demand from the developing countries (eg, China announcement today), and an extra half million to a million bpd from Saudi Arabia, that combination may just be enough to keep oil in the low $100's ($110-120), a zone which the consuming countries will be thankful for (compared to projections of $150-200) and which the producing countries will be happy with.

A so-called "soft landing" of sorts.

Jack

Saudi Oil Meeting Scenarios

I think you ascribe to the Saudis some motives they have and some that they do not have, as follows:

1) As I wrote in my article on SA in Feb, when oil was about $100, I believed OPEC would allow oil to go to $120, at which point OPEC would intervene by increasing production. Oil overshot $120 because I believe it took Saudi Arabia by surprise, and it too kSA a few weeks to figure out exactly what to do about it (plus, like many, they probably thought that the move into the $130's would prove unsustainable, which as it turns out, was incorrect).

To start the ball rolling, KSA increased production by 300K bpd about a month ago, with no response in oil price. This weekend, it increased production another 200K bpd, again without much impact (at least no immediate impact).

2) Now, after the 500K bpd has not achieved the goal, Saudi Arabia is calling for the summit. I do NOT believe SA will want to drive oil prices below $110 or maybe even $120. They certainly want to keep the OECD countries out of recession, and they DO want to prevent oil in the $130's and above. But my guess is that KSA will be OK with oil at $110 or even $120.

3) Why does KSA not want oil at $80? Because they make tons more money at $110 to $120 than at $80, while still keeping their customers from making too many changes that will kill demand.

The better question is--Why WOULD KSA want oil at $80? Why would KSA want to squander its resources for $80/bbl when it can get $120?

It wouldn't and the reasons in this article are not convincing as to KSA wanting $80 oil. First, $80 oil is more likely to de-stabilize the Middle East than to the contrary. Iran will not be happy with $80 oil, and is more likely to take aggressive action in the context of $80 oil than $120 (although I do not suggest that Iran will take such aggressive action in either case given the presence of US forces close by). Also, $80 oil will hardly weaken Iran's resolve, financial staus or military capability because at 2.2 mbd of exports, even $80 oil yields more than $1.2 billion in cash per week ($64 billion/year).

I do agree that the key goal of keeping oil out of the $130's and above is to prevent the OECD countries from aggressively developing oil substitutes, but Saudi Arabia probably doesn't need to go to $80 to largely achieve that goal--and even at $80, it won't completely achieve that goal.

My prediction is that KSA will tell the world (1) There is plenty of supply and thus oil should not be where it is, (2) that it has increased production by 500K bpd and will announce another increase of 500K bpd this Sun, and (3) they will also announce that if the extra 1 million bpd does not get oil prices down to a "reasonable" level (which they will not define this Sun), it is prepared to increase exports further (by an undefined amount).

They will also half-heartedly suggest that the OECD countries "conserve"--knowing full-well that the whole purpose of increasing oil production is to DIS-incentivize the consuming countries from conserving.

If I am right, what effect will the summit have? I believe that if KSA can put an extra million barrells of light sweet crude on the market, it will achieve oil levels at the $100-110 range. If oil gets too close to $100, however, I believe you will see the extra production decrease or disappear.

I do not believe KSA wants two-digit oil prices ever again.

Jack

What Can Possibly Explain the Price of Oil?

The factor you have left out is OPEC's sudden epiphany in the past 9 months--and even more so in the past three months--that (1) they will not pump more just to please overconsumers like us, (2) oil is more valuable in the ground and should be left for future generations.

When did we EVER hear that sort of talk from OPEC?

Is it a bubble when a group responsible for 40% of world production of a commodity that is absolutely essential to the world (and for which we do not have ready substitutes) completely changes its plans regarding its production of that commodity?

I don't know where oil will be in 6 months or in a year because I don't know what OPEC's new "set-point" for oil is. But if you tell me what OPEC will do, I will tell you what oil prices will be.

In summary, if OPEC is telling us (as one of its chiefs did on 6-5-08) that it might actually REDUCE production, then $150 oil is not a BUBBLE--but rather, it is a BARGAIN.

Jack

Is There an Oil Crisis Looming?

Frankly, whether Brazil joins OPEC is not that relevant--any more than Russia's not being part of OPEC. Any oil and gas exporting country now knows that $130 oil is not the end of the world, and they will work together to keep oil there.

Jack

Is There an Oil Crisis Looming?

Agree with much of the above. Some slight differences:

1) I don't think global demand increase will be much less than 1.5 mbd, primarily because even if subsidies for personal transportation are decreased, they won't be decreased THAT much (too much unrest), and besides, the other part (ie, not the personal transporation use) of the developing economies will still need a lot of oil inputs.

2) As the above becomes more recognized and accepted--and especially if this November's report on the 400 oil fields confirms decline in the 4-5% range--it will firm up futures pricing for 2009, 2010 and 2011, and beyond, which will also help support short-term pricing.

3) Once our economy begins to recover more briskly in 2009, our decrease in consumption may moderate.

4) THIS IS THE BIG ONE: OPEC's view of oil pricing has been an "aha moment" for the oil producers in the past few years, and especially the last 12 months. OPEC (and even non-OPEC major producers like Russia) have finally realized that they were waaay overproducing a precious commodity. They have clearly adopted a new thought process on this issue, and I would NOT be surprised if they continue in the same vein.

In other words, just like they decided NOT to increase production when oil hit $130+, they may well decide to DECREASE production if oil goes below $120. This very rational behavior would put a floor on oil in the $110 to $120. They might well decrease production on the sly--without announcing it to the world.

Although less rational (because it would spur alternatives more quickly), OPEC might well decide that a new price target (eg, $140 to $150) is better for it than $120. OPEC might well reason that if the rise in oil prices from $120 to $140 were to take a year, it might be acceptably tolerated by the OECD countries without causing too much demand destruction.

In any case, even if there were some demand destruction, total net profit to OPEC of selling 35 mbd at $140 would be far far greater than selling 37 mbd (and I am exaggerating the demand destruction) at $120.

To me, OPEC is the controlling factor, and although OPEC's actions cannot be reliably predicted, there is a rational economic case to be made that OPEC will want $140 oil in 2009.

Jack

Has Oil Production Reached a 'De Facto' Peak?

Excellent article, as always.

I would call it "Economic Peak", as opposed to Hubbert's "Geologic Peak."

I call it Economic Peak because I believe much of the "hoarding" or lacl of production is not due to violence or incompetence but rather due to deliberate decisions by the NOC's to simply not produce more.

Best example is the statement from the Saudi's saying exactly that ("we're going to leave the oil in the ground for future generations.")

I believe even some of the "incompetence" may well be due to a deliberate decision to not sell "cheap" oil today at $130 if $200 can be gotten in 2 or 3 or 4 years from now, eg, Chavez in Venezuela, Libya in old days. As Libya demonstrates, however, these decisions can sometimes be reversed.

Therefore, I believe much of your "De Facto Peak" is due to deliberate economic decisions by sovereign states to forego production now in favor of future [production.

Jack

Are Oil Importers Trying to Manipulate the Market?

In the US, much of our oil goes to personal transportation rather than use by businesses and industry. I'll bet that is not true in the developing nations.

Therefore, a smaller increase in personal use of gas as subsidies decrease may not have that big an impact.

Economies growing at 5-10%/year will need more oil regardless of its price (within reason, of course).

Jack

Crude Oil Prices: Bears Will Soon Win Out

Agree with both of Mr. Kingsdale's comments, but the correction will NOT be severe because OPEC will NOT let oil go south of $100-$110 for any meaningful length of time.

In fact, it may not be much more than $10-15 because if it happens, I would not be surprised if OPEC announces a CUT in production, and just that announcement will stop the correction.

Jack