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 That data is very much out of date.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.

Support for Crude at $111?

Use ten year data for oil, not 20. We will never see the same market that existed 20 years ago. 10 years ago China was a net exporter of oil, now they are the #2 importer, consuming 8 million barrels per day. World spare capacity was nearly 10 million barrels per day. Now it's less than 2.

Short term the stocks aren't waiting for your signal. DVN hit a low in the mid 80's and is 103. EOG has already moved from 94 to 106.

Carpe Diem

Support for Crude at $111?

Use ten year data for oil, not 20. We will never see the same market that existed 20 years ago. 10 years ago China was a net exporter of oil, now they are the #2 importer, consuming 8 million barrels per day. World spare capacity was nearly 10 million barrels per day. Now it's less than 2.

Short term the stocks aren't waiting for your signal. DVN hit a low in the mid 80's and is 103. EOG has already moved from 94 to 106.

Carpe Diem

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.

Too Soon to Re-enter Oil Stocks?

Thanks for the chart.

Demand for energy is not destroyed, it is subdued or supressed. As prices fall, demand comes back. The EIA data show that over the past 4 weeks demand for gasoline rose week over week. Equilibrium, minus a bunch of speculators, is going to be re-established north of 100 and possibly 110 in oil. Once that becomes apparent the market will take off the discount currently applied to that list of stocks.

Options Trader: Friday Outlook

So copper and oil need to fall, the dollar needs to recover over 75 and housing needs to bottom. Well, that reminds me of an old joke about a couple of cowboys crossing West Texas. One says, "all this country needs is some water and a few good men". The other responds, "that's all hell needs".

Chinese oil imports just hit 8 million barrels per day. That year over year growth more than compensated for the drop in U.S. consumption. tinyurl.com/5wlpof

Growth in population and in the middle classes of China and India will keep upward pressure on commodity prices.

Bernanke cannot adopt the policies of Volcker without killing the banking system that he is trying to save. Ergo, the dollar is toast.

The fact that a failed former fed chairman can still move the stock market is an indication of how speculative and fragile it has become.

We pulled out of the recession of the 80's with massive new innovations in computers and communications. What's the basis for optimism this time? That's where I want to invest.

The 'Peak Oil' Myth: New Oil Is Plentiful

This is from the same guy who said in April that it was time to buy the S&P 500. Hmmmm..

Peak oil means production has reached zenith, not that we are running out. So get the definition right, please. Otherwise it's just another "straw man" argument.

It's great to list all of the new projects. That gives people some ideas about investment possibilites. But how about including the concepts of demand, decline and depletion? The world is burning 30 billion barrels per year. Demand has proven to be very inelastic as price approaches $150 per barrel. Existing fields are being depleted and their rates of production are declining. Are we finding 30 billion barrels per year? How fast are the new fields being brought to production and at what cost?

SavingAlpha keeps publishing shallow, cheerleader type pieces that demonstrate a poor grasp of the subject. Try the oil drum or one of the Investor Village boards (brys, cwei) for some depth. www.theoildrum.com/