Posted on 01/18/2009 11:05:53 AM PST by kellynla
When oil rocketed past $100 on its way to $147 a barrel last summer, analysts frequently commented that prices "were not supported by the fundamentals."
Now, with oil trading between $35 and $50 in recent weeks, a few questions keep crossing my mind.
Do the current "fundamentals" support $40 oil?
What price do the "fundamentals" support?
In 2009, with the world a different place after an economic meltdown, just what the heck are the modern "fundamentals" of the energy market?
I called John Olson, the co-manager of Houston Energy Partners, for some answers.
Olson told me that the fundamentals of pricing haven't changed. They remain supply and demand, with additional forces provided by Mother Nature, demographics, and global politics and related tensions.
"We're going through a down cycle right now," he said. "Things will sort themselves out in the next few months or quarters."
One thing is clear: Huge price swings bring huge problems. That's when fundamentals fly out the window, replaced by optimism and greed, or pessimism and fear.
"No one in the world could afford paying $147 a barrel for oil last July," he said. "And, in a different respect, no one can afford $38 oil now. Oklahoma can't afford it."
Sky-high crude helped bring on the global recession, while cheap oil hurts the energy industry, Olson noted.
While the average consumer may not tear up over oil companies reporting lower profits, those businesses do need to be able to drill the wells that will produce tomorrow's gasoline and other products.
'Drilling already is being cut back," Olson said. "The situation is that we produce about 86 million barrels a day, but the rate of decline now is about 6 percent. So, that's five million barrels a day we need to replace."
Every year, that decline curve will get steeper, he predicted. And, it will be more costly to reach the newer reserves.
Along with supply issues, a glance at the other fundamentals indicates that sub-$40 oil may not be around too long.
Mother Nature, Olson said, will affect supplies at some point. The global population still is growing. China and other countries continue to add large amounts of infrastructure. And, the recession will end eventually.
"Also, the world remains a dangerous place," Olson said, noting that an incident could restrict output from large producers.
Oil futures traders seem to recognize these fundamentals, he pointed out. Oil on long-term contracts ranges from $63 a barrel for the full-year 2009 to $74 in 2013. Some analysts even have predicted a return to $80 to $90 oil by 2011.
Speculators already are beginning to circle like sharks. In fact, they are out in the water right now, swimming around huge tankers they've leased and filled with cheap crude, waiting for prices to rebound.
"Circumstances have created some of the strangest spending cycles ever," Olson said. "The market is going to be sloppy and messy for a while."
Just watch out for those fins.
ping
I figure I will only need ~500 bbl of crude for my land vehicular transportation out to age 90. I want to buy and hold that now. Any suggestions?
If oil companies were allowed to drill where the largest deposits are (which are the cheapest areas for them to produce, wells capped when producing just fine etc) ,IE within 50 miles of the coast and in other places where it is blocked by the environmentalists.
Plus all the shale and coal put into federal park lands.
You’re thinking just like me. Lock in your lifetime supply of oil. If oil prices go up, you’re covered, if they go down, you’re covered in the sense that you have more free cash due to the lower oil expense.
I like the price now. My plan is to buy a bunch of shares of USO, which is an ETF available just like a stock that tracks the present price of crude. Then, if I want, I will sell my 25 or so barrels each year, as I burn the oil.
Next, we need a way to hedge future road vehicle fuel taxes. If they are now ~$1, there are those who want them at ~$3. It may be worthwhile to prepay the taxes on some of that fuel too.
The bad news is amid all the upheaval and destruction of demand, total consumption is to be down no more than 1% this year, if that.
Out of 84 million barrels a day of global consumption.
< 1% is not the sort of number that extend the lifetime of what’s in the tank. We, globally, are running out and there is no law of the universe that says the alternative is going to arrive before some desperate countries decide that there are ways to destroy demand other than recession.
Nuclear bombs come to mind. They would reduce demand, elsewhere.
Boo hoo for the oil industry. If it comes down to the world versus Exxon, I know who I'm going to support. And if the "oil industry" dies a horrible, lingering death, it will be no more than they deserve.
This brief respite from oil tyranny should be the impetus we need to uncover any sources of energy we can that are not dependent on crude. I don't care if it means burning corn cobs and lawn clippings. We should never again rest our economy or our national security on the whims of amoral oil giants who have reached the point where they are economic superpowers in their own right.
I assume you walk or ride a bicycle.
Otherwise your comments reflect zero content of reality!
That is the damn truth!!
It's the second most plentiful fluid and the erf keps making more from way down below.
That's why it's called rock oil (petro - leum ).
You continue to read my mind. Actually, I was thinking of buying twice as many shares, just for that reason. Some of the Orwellian stuff, like road pricing, is really nasty. It would be great just to have the money pre-allocated and ignore Big Brother telling me where and when to drive.
(sorry for the delay, I had to burn some oil to pick up one of my kids)
He might look at what Exxon does. When oil was well over $100, Exxon was reportedly basing its business decisions on $37 oil. If the project wouldn't work at that price, Exxon was taking a pass.
The article said — “No one in the world could afford paying $147 a barrel for oil last July,” he said. “And, in a different respect, no one can afford $38 oil now. Oklahoma can’t afford it.”
But, Oklahomans have liked the lower pump prices (even if they have gone up in the last week or so...).
Maybe I could interest you in some fuel tax rate default swaps? ;-)
I do both. But I also drive.
Otherwise your comments reflect zero content of reality!
How's that?
No, I live in Minnesota.
Let’s get serious here. The worst possible situation for the oil companies was $147 oil. It was WAY overpriced, so people would adjust and the kickback would be nasty (as in today’s oil prices). Also, companies got vilified along way and nearly had to deal with another “Windfall Profits” tax...and yes, they have been there with high prices and knew exactly what was coming their way as the prices went up again.
If the oil companies had the degree of control over the price, they would have never let the price shoot up. Rather they would have simply increased it something like 10% per year...they would have made plenty of money and pretty much stayed under the radar.
It’s nice to have enemies to blame, but the run-up, and now crash, is simple supply and demand. A lot has changed in the world economy over the past 6 months and the price of oil reflects it.
"But, Oklahomans have liked the lower pump prices (even if they have gone up in the last week or so"
I believe he's referring to people in the oil business...
“thackney” is a lot more knowledgeable than I on this subject but I believe the break even point for American oil production these days is about $40/barrel.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.