Skip to comments.What are the fundamentals of the crude oil market?
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.
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!
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.
I recieve oil money and so do a lot of folks like me ...Strangely Big Oil is comprised of a whole lot of little people.You have bought into something that does not exist
You said — “I believe he’s referring to people in the oil business...”
Yeah, I’m sure that’s what was being referred to. But, my interests may not be their interests... :-)
And then you said — 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.
I think I’ve been reading that it might have to go down to $20 a barrel before it “finds the bottom” and then works back up again.
I'd guess that the BE point for producers is all over the place. The question of interest to me is what is the price point for domestic producers to grow domestic output at, say 10%, per year?
Would it then be cheaper to invade Mexico or Venezuela to get off Arab Oil.?
And it's not just oil. The last refinery was built in this country 30 years ago.
They've been trying to build one in Yuma for about a dozen years but think about it, 30 freaking years. It amazes me supply hasn't been a problem. 30 years!
So when there's a cold snap and a big increase in heating oil demand and the price of gas goes up people are surprised?
Sigh, I guess that won't happen once the government takes over that market and sends all the capitalists to reeducation camps.
Looks like it would be best to buy an oil well.
“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.”
What the heck are you talking about. Except for those that are part of a cartel, oil giants have very little power. They are the playthings of governments and the market.
Interesting...I’ve been to a bunch of web sites regarding USO and none of them have noted what’s stated here...rather they stated that the ETFs simply track the current price, but, yes, they do trade futures. So I’m not sure...but I’m going in anyway.
“Oklahoma can’t afford it.” I having been spending a fair bit of time at Market Watch, reading oil related articles. Here are some facts and opinions that I have encountered:
1) Cushing, OK, a major oil depot has nearly filled its capacity. A lot of oil is being stored on oil tankers, and the world appears to be running out of storage space. Everyone is waiting for oil/gasoline sales to move back up so they can sell at a higher price than now. The contracts for “futures” in the next few months are higher than the futures for next month. This is called “contango”, not to be confused with the Argentinian dance of a similar name.
2) A lot of sentiment there was expressed regarding not resuming big spending on gasoline. I decided to take a straw poll of people planning to continue to conserve, and those planning to return to “the good old days”. The vote was 35 conserve, 8 use more. I wonder if that would match the FR sentiment.
3) While OPEC may holler about cutting back, they can’t just turn off the wells, as it is too expensive to get them started again. There or at FR it was mentioned that both Russian and Iran may have a stake in encouraging the Gaza war to increase the price of oil, so they probably won’t intervene effectively to stop it.
4) Sentiment is mixed as to whether oil will drop into the 20’s, vs. moving up to the 60’s and 70’s. Sentiment is pretty strong that it was the speculators that drove the price up into the 100+ area, and this is not likely to happen again in the near future (until amnesia sets in again, my comment).
“It amazes me that suppy has not been a problem.”
Market Watch comments also indicate that refineries are only producing at 82.5% of capacity, because they want to prop up the price of gasoline. It probably would be a good idea to have some more refineries built well away from hurricane and tornado territory, just in case. Another MW topic concerned the Bakken oil production area in our own west. One story said this area has reserves from 200 to 500 billion barrels, more than Saudi Arabia. The only problem is that only 3 or 4 billion are recoverable at current technology and pricing. People who push the high figure are trying to sell hype. Who knows?
Yes on #1. I’m just a few miles east of there (in Tulsa). And from the news I’ve read, it’s about ready to overflow... :-)
On #2, I’ve cut way back. I know I’m doing a lot less on gasoline consumption than ever before. Of course, it’s not summer yet... :-)
On #3, I can understand that and it’s most likely true. However, how about slowing down the output on many different wells, instead of shutting them down. Wouldn’t that drastically lower output?
On #4, well, even if gasoline is “up” it seems that oil is “down”. So, we’ll see which one of the two “breaks”...
LOL! You must be joking! The Big Five oil companies control gross revenues far greater than most COUNTRIES on this planet. They can buy and sell governments! Not even an economy as powerful as America's is immune to energy manipulations.
There is NO legitimate reason whatsoever that the world's economic health should be held hostage to these godless cartels. Their product is an abomination that should have been obsolete after World War II demonstrated the fragility of the supply line. Instead, we go through these ridiculous cycles of fabricated shortage/fabricated oversupply and we grumble about it but no sooner start to do something and the price drops ... just like it has recently.
Price be damned! Now is the time to drive a final stake into the withered hearts of these economic ghouls by developing ANY and EVERY other source of energy we can: ethanol, biofuels, shale, coal, nuclear, wind, solar, flatulent methane, I don't care. Every day that we depend on oil for our lifeblood, we trade our liberty for ease. This country is made of better stuff.
Who do you consider the the "Big Five"?
Do you understand that for several months, the stocks of gasoline have been growing in the US? The production and imports continue to be more than the demand.
1. Exxon Mobil
2. Royal Dutch Shell
5. Conoco Phillips
“The Big Five oil companies control gross revenues far greater than most COUNTRIES on this planet”
No, they don’t “control” their revenues. That is, they don’t control future revenues. They have to earn them.
“Price be damned!”
That about sums up your “economic” analysis.
“Their product is an abomination that should have been obsolete after World War II demonstrated the fragility of the supply line”
A war involving hundreds of nations and millions of people probably demonstrates the fragility of the supply lines for plenty of resources.
Now start factoring in the crude owned and controlled by foreign (and hostile) governments, and it is clear that the oil industry represents an enemy that can very likely accomplish what no other enemy ever did: defeat us.
The inevitable fallback of the oil company apologist: the ad hominem attack.
Your point is?
WWII showed us that wars can be won or lost not on the strength of one's army, but on the might of a nation's industry. AND the ability to deliver that materiel to where it is needed.
Patton's tanks ran out of gas as he was pushing toward the Rhine in 1944. Hitler suffered chronic shortages of fuel, which hampered his efforts to prosecute the war on every front. When the Allies looked for strategic targets to bomb, the Ploesti oil fields were at the top of the list.
We should have learned our lesson then, and said "Never again." Never again will this country be put at risk because we lack adequate fuel. And if we can't get that fuel from oil, which apparently we can't -- at least in sufficient quantities to control the prices to any reasonable extent -- then we need to get it somewhere else. ANYWHERE else.
If I remember correctly an article I saw last year in “The Economist”, uk, said that the “seven sisters” oil companies now control a much smaller percentage of oil resources than they once did. I am only guessing from memory, by I think the figure was less than 20%. The biggest players are now the countries: Saudi Arabia, Russia, Venezuela, Mexico, Nigeria, etc. The tools that can be used to influence countries are rather different than those possible with corporations.
I hope that clears things up.
Your vehicle runs on oil? Mine runs on gasoline.
“The inevitable fallback of the oil company apologist: the ad hominem attack.”
I clearly attacked your analysis, not your self.
1 Saudi Aramco
7 Libya NOC
12 Exxon Mobil
15 Qatar Petroleum
21 Royal Dutch/Shell
Understanding Todays Crude Oil and Product Markets
Think again. Maybe they'll have a 'special' camp for the folks in the oil patch. Liberals are rare as lizard fur coats out here.
Yes, this means the ExxonMobil is equavilent to that economic powerhouse of the World, Bulgaria. It edged out the world renowed economic master of Lithuania.
A rather meaningless number. How many individuals around the world are stock holders are in ExxonMobil? I would guess it may exceed the population of these countries as well.
At the same time, ExxonMobil paid over $105 Billion in Taxes. Where do the taxes paid ranked compare as countries GDP? Moves quite a bit farther up the list.
As I said, that figure is true for Exxon Mobil ALONE. Combine it with the other “Big Five” and the economic clout these megaliths swing is on par with an industrialized nation. Add in the state-owned oil powerhouses and it is arguable that the oil industry commands economic power in excess of most nations on earth.