Whither now for oil prices?

[room305]

If and when UK/US pull out of IRAQ then production there will likely fall

Production in Iraq has already fallen. From 2.5 million barrels a day to just over 1.5 million. Of which anywhere between 100,000 and 300,000 barrels are stolen and smuggled out of the country. It's hard to imagine production falling much further when the US and UK forces leave.

Given that the extraction technology used in Iraq is extremely outdated, it is estimated that once the Production Sharing Agreements (PSAs) are put in place and western oil companies move in, production could easily hit 3.5 million barrels a day.

That's for existing fields. The US Energy Information Administration (EIA) estimates Iraqi proven oil reserves to be in the region of 112 billion barrels. The second largest proven oil reserves in the world behind Saudi Arabia. However, 90% of the region is still relatively unexplored. The EIA conservatively estimate that exploration could yield another 100 billion barrels.

So it is feasible that within a five to ten year time frame, Iraqi oil production could hit 10 million barrels a day. Potentially offsetting production declines in Mexico and Saudi Arabia.

Even a second Saudi Arabia coming online doesn't change the essential facts. Oil is a limited resource for which it is becoming increasingly difficult to increase supply (otherwise why would oil companies be exploring five miles deep in the Atlantic ocean or on the frozen wastes of Siberia etc.) and for which demand continues to grow.

Eventually, existing oil prices and greater will be justified on a supply/demand basis. However, we are paying high oil prices now for something that will be in short supply in several years. This isn't an item we can store very easily so forward discounting should be relatively minimized. Very few market participants are buying to store and sell later and if they are, why are they bidding on front month contracts?.

I think it is simply sentiment. An Internet bubble-survivor stock I own recently reported a second year of good earnings. It now trades at over $2, up from $1 last year. Back in the heady dotcom bubble days traders paid over $160 a share for the company despite it being deeply in debt with no earnings whatsoever. No doubt many of those traders thought the same thing - the Internet will revolutionize the global supply chain business. Indeed it has. So why aren't those traders flocking back to the company?

The possibility, or even the certainty of, a peak-oil situation manifesting at some point in the next twenty years in no way guarantees that oil will always trade at over $50 a barrel during this period.

 

[Maine]

The possibility, or even the certainty of, a peak-oil situation manifesting at some point in the next twenty years in no way guarantees that oil will always trade at over $50 a barrel during this period.[/quote]

All good points. For one I do not believe anything US EIA says as it has a vested interest in talking up reserves to keep oil prices low for the US consumer or God forbid worry them about buying 4X4s from US car manufacturers.

If US pulls out of Iraq ( oil exports could dry up) then serious destabilisation of Saudi Arabia will begin.

The West politicians focus on today (European gas reliance on Russia, UK has energy crisis, power blackouts in US, Ireland!) while China is playing a 20 year game - they want oil for next 20 years so oil imports in 2025 is an issue for them. By them securing rights to oil for long term means it is simply not available for others - this is what is worrying everyone

Just think of the vast numbers of Indians and Chinese who are leaving largely rural low energy lifestyles for high enerygy urban lifestyles( dishwashers, washing machines, fridges, TVs, videos, sat tv, food packaging, food transport - they will want strawberries all year round too,cars, street lighting).

Oil may indeed fall but long term that will look cheap IMO. Oil majors remain relatively cheap against the general market.

Mostly what people said about the Internet in 2000 has come true less than 10 years later.

 

[room305]

Mostly what people said about the Internet in 2000 has come true less than 10 years later.

Exactly, this is the key point. Dotcom bulls were completely justified in everything they said - increased productivity, reduced costs, globalized niche markets and so forth - you just won't find many people now willing to pay $800 a share to get a piece of Nortel.

It is a point worth remembering when considering that a commodity that is not currently in short supply has enjoyed a three fold increase since 2001.

 

[Savvy]

Exactly, this is the key point. Dotcom bulls were completely justified in everything they said - increased productivity, reduced costs, globalized niche markets and so forth - you just won't find many people now willing to pay $800 a share to get a piece of Nortel.

It is a point worth remembering when considering that a commodity that is not currently in short supply has enjoyed a three fold increase since 2001.

Darn, I knew i should have bought some Nortel shares when the were below $1(back in 2002). I see they are over $25 now

 

[Remix]

There is an enormous amount of excess liquidity currently sloshing round in global financial markets.

(Actually it's not just in financial markets, there was a segment on Bloomberg the other day on the bubble that has emerged in parts of the Art market - driven by hedge fund buying !)

Over one 18-month period recently, the physical market for oil grew by about 5%. Over the same period the futures market in oil grew by over 70%. That's a lot of growth in cash chasing a price.

But I can't see how the Oil price can come down and stay down in isolation from other frothy markets. The liquidity factors that might be keeping the price high may also be propping up the valuations of many other things ranging from Dublin houses to Stock Markets to works of art by Francis Bacon.

Much cheaper petrol? Be careful what you wish for!

 

[z108]

There is an enormous amount of excess liquidity currently sloshing round in global financial markets.

Is this money borrowed at low interest rates ? where is the extra liquidity coming from if it wasnt here before ?

 

[room305]

There is an enormous amount of excess liquidity currently sloshing round in global financial markets.

Indeed there is but as someone far more versed in these matters than I am once opined, "liquidity is the daughter of sentiment". These same arguments were advanced as reasons why the US real estate market would never crash but it did and loans are tougher to come by now even for those willing to buy into a falling market.

Rising asset prices increase margin buying power, favouring those using the most margin and encouraging others to do the same.

However, should asset prices begin to fall, people are forced to liquidate their positions prompting further falls.

 

[Maine]

Note OPEC has learned in the past 5 years is that they were selling oil too cheaply previously - that is the current high price of oil has been absorbed by the global economy without too much difficulty.

In the past 10 years OPECs power has risen dramatically as oil production has become more concentrated at the same time as demand has risen.

A second oil shock is needed to wean us off oil. If Saudi production was to be taken off the market for even a year then G8 would take remaining oil and countries like Ireland may not even get any oil.

Global liquidity in part comes from Middle East petro dollars being invested for long run and necessity to keep interest rates relatively low in the heavily indebted Anglo Saxon world to keep residential property markets up. Low interest rates = high PEs for residential property means equity PEs can rise. If bank will lend to investor in property to get return of 5% then same bank will lend to investor to get same return in stable equity. Hold ? Of course this happened in past 10 years when China emerged as provider of global deflation with other providers like Germany and Japan.

 

[room305]

In the past 10 years OPECs power has risen dramatically as oil production has become more concentrated at the same time as demand has risen.

I agree that OPEC realises now they were selling oil quite cheaply - possibly not realising the full extent of dollar depreciation or increased Western purchasing power. However, to imagine that OPEC's power has risen dramatically is almost laughable. During the 70's price shocks, brought about by OPEC cuts, OPEC brought the Western world to its knees. Now an announcement by OPEC that they plan production cuts barely causes oil prices to rise as commodity traders have learned to ignore their veiled threats. Usually OPEC members expect someone else to do the actually cutting while they continue to sell into higher prices with the result that prices barely rise and production barely falls. In fact, OPEC is scared to announce dramatic cuts because it might highlight how little control they have over their own individual members.

If anything, commodity traders become emboldened and companies less driven to hedge prices when they hear about oil production cuts because it reminds them that crude supply currently trumps crude demand.

 

[BillyNoMates]

"crude supply currently trumps crude demand"
Is this true?

There is an impression that there is never enough of the stuff?

 

[joe sod]

Darn, I knew i should have bought some Nortel shares when the were below $1(back in 2002). I see they are over $25 now

I think nortel had a share consolidation recently where they reduced the number of shares in circulation, where 5 years ago you may have owned 10 shares at $2 now you own one at $25. Im not entirely certain on this but Im pretty sure that something like this occured. I also looked at nortel a few years ago but when i looked at their balance sheet it was very bad with huge debts so i stayed away.

 

[room305]

"crude supply currently trumps crude demand"
Is this true?

Currently yes. I haven't checked the stats in a few weeks but last time I did there was global headroom of about 1.5 million barrels a day.

There is an impression that there is never enough of the stuff?

When you have an entire economic system built upon the prevailance of cheap and abundant energy it is probably fair to say there is never enough of the stuff.

 

[Maine]

Currently yes. I haven't checked the stats in a few weeks but last time I did there was global headroom of about 1.5 million barrels a day.

This shows why oil is high. And we need to analyse where the production comes from - is there a democracy as we know it among them

Add fact that demand is growing and alot of refinery assets are old and prone to breakdown ........and the traders have good reason to gamble

 

[room305]

This shows why oil is high. And we need to analyse where the production comes from - is there a democracy as we know it among them

Here is a good source of such information (compiled from EIA reports):

http://omrpublic.iea.org/World/Wb_all.pdf

Certainly a lot tighter than 1.5 million barrels a day at the moment. Although I think forecasted 2007 demand will be revised down from 85.7 to closer to 83 mbpd in line with GDP revisions in the US.

Add fact that demand is growing and alot of refinery assets are old and prone to breakdown ........and the traders have good reason to gamble

Both demand and supply are growing. It's just a question of which is growing faster. Also I do not see why refinery problems (responsible for current high gasoline prices) necessarily translate to higher oil prices? If the omelette factory in a town burns down, will people automatically pay more for their eggs at the market?

 

[rock3r]

Also I do not see why refinery problems (responsible for current high gasoline prices) necessarily translate to higher oil prices?

maybe you should try filling a car with unrefined oil, then you'll figure out why lack of refineries causes price to rise.

 

[room305]

maybe you should try filling a car with unrefined oil, then you'll figure out why lack of refineries causes price to rise.

Perhaps for the slower inclined among us you could explain why filling my car with crude would serve to illustrate why crude prices soar when there is a lack of refineries? Are you suggesting that when gasoline is not available people actually purchase the raw crude for their vehicles and this puts upward pressure on crude spot prices?

 

[rock3r]

Crude prices rise when people buying oil futures to guarantee next year's oil supply are willing to pay a higher premium for guaranteed supply.

High prices at the petrol pump, though caused by lack of refining capacity, have a strong psychological effect on demand for all forms of petroleum, refined or not. It helps create a perception of scarcity, and that perception becomes reality.

High petrol prices are a good thing, as they spur increased creation of renewables. Since oil got pricey, scientists have developed a solar panel that repays itself far more quickly, and is far cheaper to produce.

As pricy oil causes far more research into renewables, the cost of renewables will decrease.

 

[room305]

High prices at the petrol pump, though caused by lack of refining capacity, have a strong psychological effect on demand for all forms of petroleum, refined or not. It helps create a perception of scarcity, and that perception becomes reality.

Right so it is just sentiment. An illusion of scarcity. Exactly the point I have been making all through this thread.

Although I guess I'm glad I didn't have to fill my tank full of brent just so you could point it out to me.

 

[rock3r]

Well all markets are mostly psychological. The fact is, supply shocks are a real, non-illusory danger and people hedge to insure against that. Hedging puts up the price at all stages of the oil production cycle, from pre-drilling to finished product.

 

[room305]

Hedging puts up the price at all stages of the oil production cycle, from pre-drilling to finished product.

Why?