FourBrane

OPEC's Cuts Can't Fight Global Recession Headwinds

Friday's drop in oil has to be seen in context: EVERYTHING has been dropping worldwide. Oil paid no attention to OPEC nor is it mechanically responding to supply or assumed demand destruction because the broader context is VALUE destruction. Market-wide, normal valuations (PE, etc) mean almost nothing. None of us are comfortable buying anything at any price (oil, gold, or grain) until we think we might actually have a chance to figure out the game.

Under these conditions, oil may momentarily drop to $30 and diamonds sell for the price of glass. The craziness probably won't end until at least the Japanese carry trade has been totally unwound and probably when most hedge funds are belly up with nothing left to dump.

The market is already pricing as though no one will ever drill for oil again. There are oil service companies selling at PEs below 2 right now. Their market values are below the fully depreciated replacement cost of their equipment...never mind other aspects of their usiness. Tellingly, even these companies can't be snapped up on the cheap because no one can borrow a dime.

It won't last. Without exploration, the price of oil will have to climb as pumping rates slowly decline. Peak oil is real and peak world population is nowhere in site.

Oil vs. the Market: Major Changes Expected This Month

mjaniec: "the recent conflict?" What a relief. I guess the war is over.

Crude Sell-off: Solid Entry Point into U.S. Oil Majors

Pokeyclips2020, the water usage in tar sands extraction is not as high as you presently think. The water is recycled. The CRS Report for Congress (RS34258) dated January 17, 2008 claims that 2-3 barrels of water from the Athabaska River are needed per barrel of bitumen produced, but notes that this is before recycling. Makeup water is only .5 barrel per barrel of bitumen. (To make this clear, the first barrel of bitumen takes 2-3 barrels of water. The process loses about .5 barrel to escaped steam, etc. and thus the second barrel of bitumen needs just .5 barrels of additional "makeup" water.)
Alberta is indeed concerned about pollution problems surrounding the extraction process and are likely to do several things, all of which will increase the production price. First on the list may be a 30% increase in royalties.
I am long oil-related stocks, and momentarily taking a beating, but I look at the next five years and see no way for oil to remain below $150 per barrel. While I think your 300% margin requirement may be a trifle high (new side scanning techniques make drilling dry holes less likely), E&P is still an intensely risky, capital burning business and it will take oil remaining well above $100/bbl for at least a year before we see some serious new development. The oil exploration industry has to feel comfortable that the high price will still be in force 2-3 years from now when their production starts flowing before they will start shoveling money out the door to find and develop new expensive domestic resources. There are still millions of acres under contract in the Gulf of Mexico (GOM) which have not been explored, let alone drilled. Putting more unexplored acres under contract in the Atlantic or Pacific won't result in a single well being drilled until the price per barrel has stayed high for a long time and all of the GOM tracts have been drilled and are producing. The GOM comes first because flowline infrastructure already exists close to every new tract, so it's cheaper to get that oil to market.