M3

OPEC and Production Cuts: Why Now's the Time to Buy

Oil project analysis 10yrs ago were done the same as they are today, i.e. they're meant to make profits not just break even (with even stricter criterias perhaps because oil didn't seem to be going anywhere back then). If a project got a go, then you can bet they where going to make profits even at USD30. That's how companys like XOM got so rich in the past 2 years. It takes 10-15yrs to get a serious offshore production going and you're right it take billions. So the more stringent you're assumption for future oil prices the safer you are. New projects online within +2/-2 years from now were definately using oil forecasts of USD30-45/bbl, even oil sands. But to be fair 10 years ago oil sands were just a pet project and no one thought them seriously until oil topped USD60, which was only about 3 years ago. Also, for those who have forgotten, oil price (real adjusted for Oct 2008), averaged USD44/bbl from 1980 to present, and guess what? We've come full circle again with oil at ~USD45/bbl. So there's more reason why oil should be below USD60 than at USD200/bbl i.e. because we've been there! Check it out!(www.eia.doe.gov/emeu/s...)

On Dec 04 05:34 AM was wrote:

> You might be right for giving a range of USD 30-45/bbl. But this
> is more likely the break even value not the profitable number. Big
> investments of billions of dollars (canadian oil sands, deep sea
> production, etc.) are made to get profits of comparable volumes.
>
> Any comments??

OPEC and Production Cuts: Why Now's the Time to Buy

Good aricle. But the whole basis for your arguement is that USD60/bbl-USD75/bbl is the price needed to cover the marginal cost of production for the additional 7mbd needed now to keep the world running. Why would you think its USD60-75/bbl and not lower like USD30-45/bbl? Oil fields keep pretty tight-lipped about production costs so the actual marginal costs are anyone's guess. However, its a fact that a lot of the increases in production that is coming online now were based on oil prices forecasts of USD30-45/bbl made 10 years ago. Not alot of people had the vision back then that oil would go this far up (especially when oil was trading at around USD15-20/bbl). USD60-75/bbl might be needed for future projects but those that will be coming online in the next 2 years definately have lower costs. Hence, although prices probably won't go too far down, it might be 2-3 years before they rebound to the USD70's/bbl level.