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$100 Oil: Sooner Than You Think
By Dian L. Chu, Economic Forecasts & Opinions
Sentiment in the crude oil market has been quite pessimistic lately after some disappointing economic data fueling fear over the strength of the U.S. recovery, and signs of a possible China slowdown. This is on top of the market distress already exerted by the Europe sovereign debt and banking crisis.
Oil price was down 8% for the week, with the front-month August delivery settled at $72.14 a barrel on the New York Mercantile Exchange.
Crude oil prices have been mostly held back by the temporary oversupply mostly due to the stagnant and declining demand among the developed nations. However, over the coming months, oil price should push higher reflecting the changing global demand/supply pattern resulted from some new development in the sector.
Moratorium Push - Production Loss and Delay
Despite a federal ruling to lift offshore drilling ban, the Obama administration filed an immediate appeal along with a “modified moratorium” in the planning. Many analysts still expect the ban could last well beyond the intended 6-month period.
The moratorium has put 33 deepwater rigs out of work and jeopardized shallow water drilling as well. More project delays and production loss would result from the exodus of these rigs, which undoubtedly will get snapped up by the state run oil companies of China, Brazil and India, just to name a few.
Due to the long time span of offshore oil projects, after resources are redeployed elsewhere due to the Gulf moratorium, it could be more than a year — some analysts say as many as three — before they are available to return to the Gulf’s deepwater projects.
Halliburton (HAL), one of the top three oil serivice providers, estimated a period of 12 to 24 months before returning to 50% of pre-moratorium activity levels.
Analysts’ projections of production loss and delay arising from the moratorium range from Wood Mackenzie’s 155,000 barrels a day, or 2.2% of U.S. liquids supply in 2011 to 100,000-300,000 barrels a day in the U.S., and 800,000-900,000 barrels a day globally by 2015, from the International Energy Agency (IEA)
Meanwhile, Sanford C. Bernstein believes as much as 500,000 barrels a day from 2013 supply may be cut with a one-year worldwide delay in deepwater drilling.
While the moratorium is seen with very little effect near term, and its eventual impact is still unclear, various energy agencies’ forecasts--the U.S. region in particular--may need to be revised with its potentially significant longer-term impact.
Cost Push - Oil Spill Regulation Tightening
The expected regulation tightening from the BP Macondo well disaster in the Gulf will add to oil project costs with global implication.
Offshore drilling costs are already escalating since the Gulf oil spill with the rising environmental, insurance costs and legal risks. Reuters quoted African independent oil and gas company Afren that it had already "experienced a 7-8% increase in costs for a project in Ghana following the safety response of Ghanaian authorities."
Indian state oil company ONGC also indicated insurance premium for its onshore assets, which was decided after the BP accident, rose 88% this fiscal year. ONGC expects overall insurance premiums to rise three times higher after the BP Gulf disaster.
While the head of French oil major--Total SA--warned of tougher rules could push up crude prices $90 a barrel by year end, several analysts also upgraded their oil price targets.
MarketWatch quoted a recent Deutsche Bank analysis that any tightening of regulations could boost deepwater exploration and development costs by about 10%, and add $5 a barrel to future oil contracts.
Barclays Capital told Bloomberg its latest forecasts of $106 oil in 2012, $137 in the long term, and that oil futures for 2018 at under $100 are “undervalued” as BP Plc’s spill in the GoM will raise the costs and lead to drilling restrictions.
Cost Push - Project Costs Bottomed
According to the data released last month by Cambridge Energy Research Associates (IHS CERA), oil and gas upstream project costs are poised to “begin an ascend back to pre-recession levels.” (See Chart)
IHS CERA noted the upward volatility in the underlying sectors that comprise its Upstream Capital Costs Index (UCCI) such as steel, and yard and fabrication. A weaker U.S. dollar and a shortage of skilled labor also played into the rising costs. The index peaked in Q3 2008 after climbing 230% since the base year 2000, and has fallen 13% since the peak.
On the operation side, IHS CERA Upstream Operating Costs Index was up 2% in the 6-month period from Q3 2009 to Q1 2010, pointing to “the upswing in onshore service rates, increased material input prices and escalating manpower costs.”
Since both indexes measure the data before the BP Macondo blowout, the oil spill in the Gulf only adds more uncertainty and impetus to the trend of increasing costs.
Asian Energy Demand Push
Energy consultancy Douglas-Westwood indicated China will be the key driver of global oil demand growth, about half of total. As much as people are worried about a “slowdown” in China, a less than double-digit growth still translates into increasing energy demand. (By the way, Goldman Sachs just “downgraded” the 2010 growth prospect of China to 10.1%.)
Not to make this too lengthy a discussion regarding the Asian energy demand trajectory--particularly from China—and the prospect of peaking “easy” world oil supplies, I will simply refer to the following charts and data from Douglas-Westwood:
Market Push – Risk On Rest of the Year
Last but not least, the following factors suggest fund managers could be looking to put on the inflation trade (risk on)--short the dollar and long commodity and equity--probably through the rest of the year.
- The broad market pull-back last week
- Start of a new quarter and earnings season
- Low intrest rate (near-zero in the U.S.)
- Current high correlation between commodity and equity
- A market-friendly Congress in an election year
In fact, for much of the June month, crude oil had resumed its historical inverse relationship with dollar before the big panic button got triggered. (See Chart)
If we take a look around the globe, the long term higher dollar risk should become evident. European governments have taken on massive austerity measures amid concerns about their credit ratings. Meanwhile, China is also implementing various tightening measures amid concerns over inflation and possible asset bubbles.
On the other hand, the U.S. seems more inclined to keep deficit spending to fight off deflation (a misperception, read here) and to stimulate growth.
A weak dollar will translate into higher commodity prices, including crude oil. A break of the dollar index (DXY) below 80 could single-handedly send crude oil soaring to the range of $85 to $90 a barrel. DXY 52-week low now sits at 74.17.
OPEC “Accustomed to” $100 Oil
Even though many have dismissed OPEC's influence on the world energy market; nevertheless, with roughly 40% share of global oil production, what the cartel will or will not do still matters.
In January of this year, several OPEC members including Kuwait and Libya basically told reporters that OPEC will not act as long as oil prices are under $100.
Right now, the main factor that will determine oil prices in 2010 and 2011 is the pace of global oil demand recovery following the Great Recession.
Based on the factors discussed here, barring a world double-dip recession or depression as warned by some economists, we will likely see crude oil reach $85-$90 a barrel by the end of 2010, and $100 by 2011.
Of course, the ongoing geopolitical tension in the oil producing regions of Middle East and Africa will only hasten the arrival of a triple-digit oil price.
Dian L. Chu, Economic Forecasts & Opinions
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I don't think it's gonna hit 100 or 40. Poor global economy will push it down, regulation and deep water drilling regulation, ect will push prices up but in the end you'll be flat for awhile. Then, when we all shut the fuck up about it, it will move to over 100.
The thing that bothers me about investing in commodities like oil is how hard it is to take a long term position. Short of actually buying an oil tank farm you have two choices: speculate in the commodities market or buy stocks. If you want to take a long term buy and hold approach you certainly don’t want to mess with commodities. If you buy oil company stocks then you introduce market risk in addition to the risk inherent in the commodity, not to mention the reserves of the companies decline every year. Maybe I m missing something here but I just don’t see a good way to invest in oil unless you are a full time trader.
This is weak. If you look at what the global oil market has done over the past year, you'll see that as Asia drove a demand recovery, Opec countries gradually increased production, despite quotas. That is, Opec's collective rate of compliance with its own quotas fell, from more than 80% at the peak of the recession, to less than 60% in May, according to the IEA. So even if Asia continues to drive demand growth, there is still plenty of slack in Opec production, which can and would be utilized in the form of further slippage in the compliance rate, without any formal Opec decision to lift quotas, which is what the ministers you cite were talking about when they said they wouldn't respond before $100.
Besides, I see other trends developing. As Asia's export markets falter - Europe being the biggest - Asian demand growth will slow and proposals to end wasteful subsidies will gain momentum.
Doe no one remember talk about tankers sitting all over the world in quiet out of the way spots filled with oil?
Maybe there is plenty in them there ships to offset the losses so far.
100$ oil and 10$ cup of coffee could possibly be a scenario if QE 2 is pushed dpwn our throats ohn Holmes style.
Whether oil is $20. or $200. doesn't really matter. People will adapt. Life will continue.
We will see sub 60 dollar oil before 100 dollar oil considering they will have to admit this is a depression soon...
Oil will be $67.31/b
Good post. USD made a triple-top, and has rolled over. I say it's going to $82. That means oil rises. The Opeckers want $70 oil floor, it's been holding.
I like COP, 4.5% dividend and only 4% production in Gulf. Majors will be able to absord higher costs, wildcatters will suffer.
BP TO FOLLOW LEHMAN STRATEGY?
LONDON/KUWAIT (Reuters) - Shareholders in British oil company BP balked at reports it would seek urgent investment from a wealthy Middle East or Asian country as clean-up costs for its U.S. oil spill topped $3 billion. Dick Fuld is rumored to be acting as BP's special bankruptcy and capital raising advisor.ONDON/KUWAIT (Reuters) - Shareholders in British oil company BP balked at reports it would seek urgent investment from a wealthy Middle East or Asian country as clean-up costs for its U.S. oil spill topped $3 billion. BP would neither confirm nor deny the rumor, but Dick (the Gorilla) Fuld is rumored to be advising BP on this matter.
Fuld??
First BP accumulates the worst safety and engineering record for a major oil company, then proceeds to drill a three miles down with negative feedback for months on the well's progress, then it punches a hole that results in the likely greatest environmental disaster in history, their CEO gets kicked to the curb, oil continues to toxify the entire gulf coasts AND THEN they hire an assasin like FULD??
Strip this company of all its assets. Then Kill this company. They don't deserve to survive.
That's only assuming that oil prices reflect supply and demand rather than the credit markets and CFTC/ICE regulations. Funny how oil prices tanked when Obama was campaigning about closing the Enron but it rose up again when the markets realized he was full of it.
If it were to hit $100 again in the near future it would kill any nascant recovery.
Jess, this sounds about right to me, too. We saw what $147 oil prices did to demand a couple of years ago, and that was from the starting point of a much stronger economy than what we have now. My guess is that if oil got to $120-ish it would be enough to tip us into another slowdown, causing demand (and prices) to decline again. Lather, rinse, repeat, except that each time, the ball doesn't bounce quite as high as the time before, so that within a few years, maybe $100 oil would be enough to cause problems in the economy, then only $80 on the next cycle, and so on.
That said, $200 oil (or even $2,000 oil) is still possible imo, but it would be in the context of a hyperinflationary currency disaster, and not so much related to the economic cycle.
Some Indian guy from Goldman came out with similar prediction on all TV channels in 15 Aug 2008, tha day They had built huge shorts in oil futures
I wouldn't believe a word that's in those reports
+1
Oil price analysis is never as simple as many of the posters imply. No matter what happens in the world economy in the coming months, the price will not break significantly below $65. That is an extremely tenacious zone of resistance, for all sorts of reasons.
Agreed, oil price analysis is not simple. From the low $30s in Dec/Jan/Feb 2008/09 to $65 was not made until the last week of May 09, and only after the massive stimulus (short USD, long everything priced in USD) kicked in. And then Oil did not make it back above $65 until later July.
At the risk of pointing out the obvious; the stimulus is spent and unemployment (consumer demand) is becoming a still more impressive albatross........EZ, and Tricket just this AM pushing austerity.........CB revises China #s down citing calculation error, China's currency strategy looks more designed to position for a global slowdown (and rising USD)........
There is a long list.........the runnup to the $140s had lots of push from the advent of globalization - now we see globalization has another side - and Bush is gone along with the steady stream of threatening rhetoric that supported higher price over security of supply concerns.
If the shit starts to fly in the Persian Gulf then $100 or higher Oil is likely in the cards withing hours, as the Iranians probably have the ability to shut down shipments through the Strait Of Hormuz, regardless of what gets tossed. That is the risk I see being short oil........along with the deployment of 3 US carrier battlegroupsand 2 Israili submarines armed with nuclear cruise missles.
The other side of that coin is can the US economy or other economies afford the consequences?
Based on what I have been observing, what consequences economies can afford seems alomost a non-issue. Economies seem to do whatever the federal government wants them to do.
This is all academic...isn't it?
It was intended as a question to be asked in the context of endless price discovery and then transfering risk by either buying or selling (currencies, commodities, interest rates, etc.), and very academic when on the right side of the trade.
"The other side of that coin is can the US economy or other economies afford the consequences?"
Nope. Goldmans push of oil to $147 was the tipping point for the economy, an enormous tax on business.
I thought Bob chapman noted that Goldman shorted oil futures in late 2008
who knows what they are doing, this is speculation
What's happening is according to plan
And I must be nuts to say this coz I am usually very 'mainstream'
Great reasoning. Oil's not going below $65 because you say it's not.
That following all seems like a somewhat incredible call to defy the laws of gravity. If I had money with the fund managers you mention I would be freaking out. For starters, without velocity of money there is NO inflation (read monetary base has expanded but money supply/credit has not). And what is to become of demand with US unemployment rising, govt stimulus and unemployment benefits expiring, not to mention the implications of looming austerity measures, at least in the UK and EZ.
Maybe prices rise if the hydrogen money bomb gets dropped - not out of the realm of possibility with mid terms not far away.
Beyond that the upside to oil price looks to be very much correlated to the temperature level of implied threats of a pre-emptive attack against Iran.
(I agree that the price of oil is subsidized at the expense of the environment so when, if ever, that realization sinks in or is allowed to sink in to the collective public concience then price may rise as consumers adjust accordingly - that is wishful thinking, and probably not very realistic on my part).
Market Push – Risk On Rest of the Year
Last but not least, the following factors suggest fund managers could be looking to put on the inflation trade (risk on)--short the dollar and long commodity and equity--probably through the rest of the year.
Last but not least, the following factors suggest fund managers could be looking to put on the inflation trade (risk on)--short the dollar and long commodity and equity--probably through the rest of the year.
That is highly improbable given that fund managers have one of the lowest levels of cash in history AND that massive investor redemptions are imminent secondary to watching a re-run of what happened to their accounts in 2008 -2009 (this will force mass liquidation in these funds and could easily drive the S & P to sub 500 by mid 2011).
OPEC has stated many times, they cannot tolerate oil below $70.00 a barrel.
This is the typical case that separates the "haves" from the "have nots"....
The question becomes ....
What is equal between the "haves" and the "have nots" ?
The size of their stomachs....
Furthermore the average "ability to buy" number is decreasing....not increasing....
..................................
Furthermore....the true "welfare states" produce one item....and must sell it to live....
..................................
And when reliance on this sole product ceases....good riddance ....
Typical oil will be in far fewer products in the future....and perhaps synthetic oil will totally replace tertiary oil.....which could be manufactured in any country at any time....from local products....
CRUDE OIL charts are not currently bullish.
http://stockmarket618.wordpress.com
http://www.zerohedge.com/forum/latest-market-outlook-1
Hurricane Bitches!
http://www.skeetobiteweather.com/picservice.asp?t=m&m=96&a=2
96L must still contend with some upper level shear, but that front is weakening making conditions more favorable. The track has also shifted farther north placing the majority of the Texas coast in the target zone.
From NHC:
THE TROPICAL DISTURBANCE LOCATED OVER THE NORTHWESTERN CARIBBEAN SEAHAS CHANGED LITTLE OVER THE LAST SEVERAL HOURS...AND THERE ARE NO
SIGNS OF A SURFACE CIRCULATION. HOWEVER...ENVIRONMENTAL CONDITIONS
ARE FAVORABLE FOR ADDITIONAL DEVELOPMENT...AND A TROPICAL
DEPRESSION COULD FORM OVER THE NEXT COUPLE OF DAYS AS THIS SYSTEM
MOVES WEST-NORTHWESTWARD OR NORTHWESTWARD AT 10 TO 15 MPH. THERE
IS A MEDIUM CHANCE...50 PERCENT...OF THIS SYSTEM BECOMING A
TROPICAL CYCLONE DURING THE NEXT 48 HOURS. REGARDLESS OF
DEVELOPMENT...LOCALLY HEAVY RAINFALL AND GUSTY WINDS ARE POSSIBLE
OVER THE CAYMAN ISLANDS...THE YUCATAN PENINSULA AND THE
NORTHWESTERN CARIBBEAN SEA OVER THE NEXT COUPLE OF DAYS.
Oil will not go to $40, nor $100, it will trade in the $70-80 rage the rest of the year. It's a number that the FED, G20 Governments, Oil producing nations & Goldman Sacks are happy with, everything else is eyewash.
I think the market goes down before it goes up . A retest of 30-40 is possible to mid-11.
Once that's out the way, the commodity surge may begin across the board.
Nations are cutting. Where's your supply demand change to the upside? You're putting the cart before the horse for the short term and long-term, every man and his dog knows oil will become scarce.
Your views have been done to death on this site. Dig deeper.
Guys, you got it all wrong, and you should listen to what King Abdullah has to say:
http://www.zawya.com/Story.cfm/sidZW20100704000064/Saudi%20King:%20Halt%20To%20Oil%20Exploration%20To%20Save%20Wealth
You need to think deep of the implications of this !!
Interesting link man. Could well be a way to hide their peak and save oil for when it is more expensive in the future. Also to take care of their own internal demand.
I think the author is dreaming.
Redeployment of drilling assets is irrelevant, as whereever they go, they will still be drilling for OIL. All the same market.
And China, yeah, NO epic reduction in demand due to economic collapse coming there, nosiree! THEY can have successful state managed economy, like Obama wants, only it'll actually work for them. Honest!
The recent pause in USD is due to dying euro-debtors acrambling for the currency their debts are denominated in. it is temporary; the longer term trend for the USD is up.
I could go on and on. Author is Fighting the last War. yes, oil could get to $100/barrel . . . IF EVERYthing wasn't pointed in completely the opposite direction.
$40 oil, sooner than you think, unless you still believe in decoupling.
I agree, $40 by....November at the latest, maybe??
and I'll go further than that. We'll see $10 oil before we see $100 IMHO. Money floating around for free and we couldn't even make it past $87.
Liquidity traps and demand destruction, anyone?
The coming double dip recession now plainly obvious in the macro economic data will send oil below $40 before you see $100 again.
Quant,
Yes,and that would be a hell of a time to get in............
My thoughts are similar but there may be increased tax oil/gas too so the prices may be suppressed; maybe carbon tax. I don't think the rest of the world is going to care what happens in the U.S. though as demand is, as I'ver hear before, increasing everywhere else.