Gigem77

Whither Oil Prices?

TOTAL Ceo de Margerie said last week (June 2008) that to replace reserves now will cost a minimum of $80 per barrel.

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.

Whither Oil Prices?

The data you use from DOE and the finding costs chart stop at 2006. That data is very much out of date. For example, the cost of deepwater drilling rigs has risen by more than 100k per day since the end of '06. Similar price increases have hit steel tubing and other supplies needed to drill.

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.

The Market's View on Oil

What is the EPS range for your list? What PE did the market assign when oil was 85 in January and what was the PE when oil was 147? How does that range compare with today's price of 112? If the PE range is tight, and it is, then how does that affect your theory?

DVN is primarily a natural gas producer with expanding production. They have a forward PE of barely 6 today. When crude was 147 and natgas was nearly 14, their forward PE was about 7.5. You use a trailing PE of 10. That's not much difference.

A better hypothesis is that the market does not like energy shares and always assigns very low multiples. That's why many of the big energy companies are buying back their own shares.

Analysts estimate that DVN will make 12 dollars per share this year and 14 in '09. Assign any double digit PE you like and you get a price higher than the current one.