The Case For $80 A Barrel Oil

Forbes ^ | 5/9/2008 | Daniel Fisher

[bruinbirdman]

Oil prices may hang above $100 a barrel for the rest of this year but will fall as low as $80 next year as world demand slackens and Saudi Arabia tries to buy influence with the incoming president by pumping more crude oil, an influential Lehman Brothers analyst said in a report issued today.

Saudi engineers have been working on several big projects that could boost the nation's output by 1.3 million barrels a day--more than the expected increase in global demand next year--but the secretive nation is "likely to keep its political tool, excess production capacity, close to its chest until it has a new U.S. president to win over," Edward Morse writes.

Saudi production is currently a little less than 10 million barrels a day.

The Lehman report contrasts sharply with a Goldman Sachs (nyse: GS - news - people ) prediction earlier this week that crude prices could soar as high as $200 a barrel as non-OPEC producers struggle to maintain output, let alone increase it.

Crude oil hit a record $126 on the NYMEX Friday, almost double the price of a year ago.

Only time will tell who's right, but the analysts at Lehman make a strong case for falling prices as the markets absorb bearish signs such as the Chinese stockpiling oil in advance of the Olympics, and the estimated 28 million barrels Iran is storing in tankers because it can't find a market for the heavy, difficult-to-refine crude.

"If those 28 million barrels were in U.S. crude stocks, the market here would be a lot looser," said James Crandell, an energy markets analyst at Lehman.

A key assumption is that the Saudis will increase production after the election to curry favor with the new president and try to influence policy in the Middle East

[Alright_on_the_LeftCoast]

I’d take Goldman over Lehman any day of the week.

[Proud_USA_Republican]

I would too. Unfortunately, Goldman has a large energy futures trading division and I don’t trust their biased opinions on such matters.

The same way they were selling subprime investment vehicles and at the same time, shorting the subprime market.

[familyop]

"Oil prices may hang above $100 a barrel for the rest of this year but will fall as low as $80 next year..."

So the "recession" scheme is going to be continuing through next year? Alright. That's fine with me. We need new blood in business anyway.

And BTW, freighter fuel won't be going down that soon, and Asian products won't be going down, either. So the dollar will generally go down, until we create more real wealth (by actually making more things ourselves).

[shibumi]

"Saudis will increase production after the election to curry favor with the new president"


I always thought the Indians were best at that.


(That was a bad joke. I'm sari.)

[Amendment10]

We've been fooled twice now by our dependence on foreign oil, the first time being the 1973 oil embargo, so shame on us.

I'm keeping an eye on the following developments in ethanol production.

First, the bad news about ethanol. Ethanol fires are evidently harder to control than gasoline fires.

Ethanol fires hard to control

Hopefully, ways will be developed to make controlling ethanol fires easier.

On the brighter side concerning ethanol, there's now evidence that people might get as much, or more, bang per buck for their gas dollars with gas / ethanol mixtures.

Gas-competitive gas / ethanol mixtures

Also, I was surprised by the introduction of a machine for making home-made ethanol.

EFUEL100

But watch out for fines for violating biofuel regulations.

Fines for violating biofuel regulations

Finally, progress is being made in the development of non-corn ethanol production.

Non-corn ethanol

[dr_lew]

Hang above $100 ? It’s at $126! How much has demand dropped? The whole issue is the nearly vertical (inelastic) demand curve. By rights, that is to say laissez faire economics, the oil suppliers should just keep raising raising raising the price, as long as we’re buying.

[C210N]

Saudis will increase production after the election to curry favor with the new president

That may be so, but if they can do that at will in the future, what influence are they "buying" now with $125 bbl oil... are they trying to influence the US election in a particular direction?

[Virginia Ridgerunner]

I’ve been hearing this line of bull about a gas buble bursting for the past two years and it hasn’t happened yet.

[50sDad]

You gotta love most people's lack of basic economics. If we have a national tax holiday on gas, we save pennies...and demand goes up, so prices go up even more. The simple answer is to >increase supply by drilling and refining our own, which will lower price.

[Will88]

“Oil prices may hang above $100 a barrel for the rest of this year but will fall as low as $80 next year.”

Oil was still around $60.00 a barrel last Fall, and not so long before that $60.00 was a shockingly high price. Now they’re hoping for $80.00 per barrel as an optimistic ‘lower’ price to anticipate.

Lots of acceptance of these high oil prices in barely two years.

[never4get]

I’ve been hearing this line of bull about a gas buble bursting for the past two years and it hasn’t happened yet.

That will never happen. The record profits being made by the oil companies coupled with record dividend distribution to share holders & greater value of the stock by owners(many which are elected government representatives and their families,one of the greatest conflicts one could ever imagine...those elected to regulate the industry having ownership in the industry, go figure) will get in the way of any real drop in barrel prices. Some how, some way they both will work together to ensure those countries producing the oil keep those barrel prices up. Too much money to put into their pockets with these prices so high. The only one who loses is the unfortunate American sucker who has to buy the gas. Hey, we vote these idiots in who represent the oil companies interests over that of the electorate, those who do not allow drilling, refineries being built...I suppose it is really the American publics fault.

[grayhog]

If the Saudi’s were to max their near term ability to produce 1.3 more per day next year (difficult, but possible), that would only meet the global demand growth for next year which the EIA (energy info agency) pegs at 1.2 million barrels per day. That doesn’t get us any more inventory and uses up the spare capacity that everyone has been talking about. If Russia continues to decline (they were down in the first quarter, first time in a decade their production declined), we will see much higher prices.

[RightWhale]

Looking at all possible causes except the True Cause

[thackney]

Don't forget the additional 0.6 million bbl/d in 2008 from Non-OPEC source. All that money that the industry is spending is showing some growth in production.

Short-Term Energy Outlook, Global Petroleum
http://www.eia.doe.gov/emeu/steo/pub/contents.html#Global_Petroleum_Markets

[dr_lew]

Of course, I should have said “horizontal” instead of “vertical” for the demand curve. This represents constant demand, regardless of price. A vertical supply curve would represent a fixed price, regardless of demand.

According to basic economics, i.e. the simple law of supply and demand, the price is determined by the point where the supply and demand curves cross. The presumption is that the supply curve sweeps upward with price, and the demand curve sweeps downward.

Lesson 2 in Supply and Demand points out that market conditions can change, and such changes are represented by shifts in the curves. Clearly the flat demand curve has been drifting upwards, and we dont even need to think of a shift in the supply curve to see that this will push the price upwards. The upward trending supply curve already takes account of the willingness of more suppliers to enter the market at a higher price.

My belief is that demand has risen to the point where we have reached an inflection point in the supply curve. In common parlance, “supply cannot keep up with demand.” Get used to it.

You’re saying suppliers are being held out of the market by government, which is obviously true, but the reply is that the amounts in question are relatively small, which is also true. I think it’s obvious that even with unfettered domestic drilling we would only slightly raise the drooping supply curve at the current levels of demand.

Eventually, the supply curve will shift downward, and the demand curve will be forced to drop with it. This will represent a shift in the habits consumers towards lower consumption and “alternative fuels”.

[HamiltonJay]

Oil prices today have nothing to do with supply or demand.. you want them to drop... raise the amount needed in margin accounts to place a futures order to 50% and you’ll see it drop like a rock.

Speculative bubble folks.. speculative bubble.

[CharacterCounts]

Oil prices may hang above $100 a barrel for the rest of this year

Oil prices may hang above $100 a barrel for until the election is over (fixed)

[CharacterCounts]

Speculative bubble folks.. speculative bubble.

Just like housing a few years ago.

[bruinbirdman]

"By rights, that is to say laissez faire economics, the oil suppliers should just keep raising raising raising the price, as long as we’re buying."

The ChiComs are putting a million more vehicles on the road/month. Per month. At the same time they are subsidizing gasoline prices at about $2.40+/- per gallon.

Countries subsidizing petrol include: Red China, Saudi Arabia, Iran, Mexico, India, Russia, Egypt, Venezuela, Brazil, Malaysia.

"Roughly two-thirds of new oil demand is coming from countries that have subsidized oil markets" and have emerging economies.

yitbos

[bruinbirdman]

"freighter fuel won't be going down that soon"

$124.23 is spot market price. That means immediate posession. This is why these prices are quoted as "North Brent Crude" or (used to be, haven't heard it quoted on the tube lately) "Texas Sweet".

The question arises, what is crude averaging at FOB? In January it was about $82+/-. What are long crude futures (possession required) at as opposed to oil options (contract optional with forfeiture of premium)? I think these are more appropriate prices.

yitbos

[familyop]

Those are good points. I noticed that June delivery contracts are down a little today but won’t have time to scan through numbers until later tonight. Some are hoping that Asian demand will go down significantly now. Others are saying that futures will meet resistance at ~ $115 or possibly top at ~ $130. ...sorry to be so sketchy for now.

[grayhog]

The ability of non-OPEC to show any growth is the $200 barrel question. The world is counting on Russia for big growth this year, yet they were down in Q1. I’m guessing that gets revised down big over the next few months.

It looks extraordinarily difficult, nearly impossible for the world to drill its way out of our current situation. The law of large numbers say that there aren’t enough reserves in place to bring on stream to solve the problem. The only way I see to put the market back in balance is to kill global demand — which means much higher prices that allows us to transition the economy to another fuel source.

[familyop]

I overdid some work time and am a little run down (but fine). Where can we get good numbers for options? We’ll see what happens to prices during the second half of summer. That might give us another clue.

If the scarier prediction happens, I guess that we might even see some surprising price differences between some items next year (inflation for some, deflation for others).