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Where Will Oil Go?

Recs

7

January 13, 2008 – Comments (11)

News story is reporting that oil is declining on recession fears.

I have been saying that expect oil to retract, I am not sure where to, but I would think that it sees at least under $70 again, unless of course the US dollar takes another big drop.

Saunafool had a blog about non-OPEC production and how what is coming on stream will increase supply ahead of declines, and that should send the price down.

Add in a recession and you also have a reduced demand.

Oil is about supply and demand.  Those new projects have to pay for themselves and can not easily be shut down without crippling the cash flow of the operating company.

The other thing that has been happening is speculation, which has driven the price up further. 

 

11 Comments – Post Your Own

#1) On January 13, 2008 at 11:10 PM, devoish (99.10) wrote:

Add in higher prices and you also have reduced demand too.

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#2) On January 13, 2008 at 11:32 PM, WCWlooky (22.54) wrote:

Nobody knows where the price is going. It may go down. It may go up. Short term maybe down. Long term probably way up.

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#3) On January 14, 2008 at 12:08 AM, collegeeducated (53.59) wrote:

I think oil and gold and commodities in general are difficult to predict and the situation we have with commodities right now does not make it any easier or any more difficult to predict the next price moves.

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#4) On January 14, 2008 at 12:08 AM, kristm (99.74) wrote:

If the republicans win congress and the White House this fall, as bad as the odds are of that, we're likely to increase domestic production.. That would help general prices and inflation since oil is such a big part of the economy.

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#5) On January 14, 2008 at 12:10 AM, jahbu (89.06) wrote:

If you were sitting on a big pool of oil, would you be selling barrels of it for anything less than $100?

MEXICO CITY, Jan 9 (Reuters) - Mexican state oil monopoly Pemex will stop shipping crude oil to the U.S. West Coast from February due in part to a shortage of infrastructure at Salina Cruz port, the company said on Wednesday.

Pemex was only shipping a tiny 20,000 barrels per day of oil to the U.S. Pacific coast out of its total daily exports of around 1.7 million barrels, but will now focus on exports to the U.S. Gulf coast and smaller shipments to Europe and Asia.

Pemex said the decision was made because of limited storage space at Salina Cruz, on the Pacific coast, and bottlenecks with transporting crude oil there from Dos Bocas on the Gulf of Mexico coast where much the country's oil is produced.

"The volume of crude that will no longer be sent to the U.S. West Coast will be sold in other markets where there are better economic alternatives," Pemex said in a statement.

Earlier on Wednesday a source at Pemex's international trading arm told Reuters the company's oil refinery at Salina Cruz had grown to the point where it needed to use storage tanks formerly used for crude headed for the U.S. West Coast.

"The crude has better opportunities elsewhere," the source said.

Mexico is the world's ninth largest exporter of crude oil by volume.

Around 88 percent of Pemex's oil exports go to the United States, which relies on its southern neighbor as a politically stable oil source second only to Canada.

About 10 percent goes to Europe and 2 percent to Asia. (Reporting by Catherine Bremer; editing by Christian Wiessner and Carol Bishopric)

Note: better economic opportunities elsewhere

Jahbu

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#6) On January 14, 2008 at 3:33 AM, DemonDoug (91.96) wrote:

if oil goes to 60/barrel, i'm probably going to put 75% of my portfolio into my favorite oil stocks.  (Two favorites: MRO and SU).

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#7) On January 14, 2008 at 11:00 AM, saunafool (98.96) wrote:

First, I agree that oil prices will likely cool down from current levels, but oil will never be cheap (<$50/bbl) again. Never!

Recessions do not cause demand to fall--look at global consumption over the past 50 years. Demand only fell one time and that was during the 1976--1983 period. Sure, there was a recession, but there was also the Iranian revolution deliberately withholding product. You can't consume product that never makes it to market.

It was also the only time that the U.S.--the world's largest consumer--actually took substantial steps to reduce demand. Lower speed limits, huge increases to fuel efficiency standards, switching power generation from fuel to natural gas, and so on. The new CAFE standard sets a goal so far into the future, the housing bubble and recession will be long forgotten.

Second, price doesn't affect demand too much. I live in Europe where gasoline is about $7/gallon. People still drive 85 miles an hour everywhere they can get away with it, and when they have the money, they love big cars, just like Americans. The hot new trend in Europe is the "Pick Up"--yes, they discovered American trucks and they love them (if they can afford them).

In America, even at $3.00 per gallon, the price is nowhere near the level needed for actual demand destruction. As a percentage of disposable income, the current prices is still 30% less than the all-time high in 1981. In terms of minutes worked per gallon, it is lower than 1981, and way way lower than it was all the way through the 1950's (back when demand was growing like crazy). Demand destruction won't occur until $5/gallon.

Outside of America, there are tons of developing economies (China, India) and oil producing countries (Saudi Arabia, Venezuela, Iran) where oil prices are subsidized to be artificially low. Plus, about 40% of the rise in oil prices over the past 5 years has just been a devaluation of the dollar, so other countries have not seen the same increase as the U.S.

Finally, global population and especially the population of people with cars continues to grow. In China and India, there are only about 10 cars per 1000 potential drivers. Even in Mexico, there are 280 cars ber 1000 drivers. Demand growth is not slowing down unless the entire economic train flies off the tracks in a catastrophic wreck (I realize it could happen, but let's try to have a bit of hope...)

Therefore, global demand will continue growing at roughly the normal rate of about 1.4% per year. This means that the world needs about 1.2 million barrels per day of new capacity every year. The figures in my blog would just barely cover that for the next 2 years, and as I mentioned in my post, it is quite possible that the numbers are optimistic (this is the same source that said Kuwait would produce 4 million bpd by 2010 and they are still stuck at 2.5 mbpd).

So, short term, oil probably goes down. Long term, up. At $60 a barrel, I'm with DemonDoug with a fist full of dollars on the trading floor. 

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#8) On January 14, 2008 at 8:42 PM, FleaBagger (29.42) wrote:

DemonDoug:

Wouldn't MRO, as a refiner, be more profitable with cheaper oil? So wouldn't that make $100+ a barrel the time to buy, if you believe oil prices are going to go down? I would think $60 a barrel would make MRO too expensive.

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#9) On January 14, 2008 at 9:59 PM, dwot (97.28) wrote:

I think long term the price trend on oil is up, but I think down in the next maybe 1-2 year window.

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#10) On January 15, 2008 at 3:56 AM, saunafool (98.96) wrote:

FleaBagger:

MRO is an integrated oil company--like a mini-ExxonMobil. They do exploration & production, refining, and marketing. They had some good margins on their refining business in the past few years because they focus on heavy, sour crudes, which have been trading at a substantial discount to light, sweet crudes.

Light=low viscosity; heavy = high viscosity

Sweet=low sulfur; sour = high sulfur 

So, basically as long as demand for oil keeps up MRO wins (as do all the other oil companies). Plus, traders are foolish. If oil goes down to $60, all the oil patch stocks will get crushed, even if the lower price doesn't really impact their profits. It will be the fear that the oil boom is over causing many lemmings to sell.

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#11) On January 19, 2008 at 6:16 AM, TheGarcipian (56.60) wrote:

Thanks, saunafool, for reaffirming my belief in continued demand for oil. Yes, we are at the threshold of another recession, in large part due to this fiscally ill-conservative President and his Republican Congress, and (perhaps even moreso) due to Greenspan's continued devaluation of the dollar (but that's a whole other blog that Deborah has addressed, quite well I think). However, that does not mean everyone is going to suddenly cut their demand for gas & oil products domestically. Petro (in all forms) is still very very cheap here in the US, as compared to other parts in the world. I'd push your estimate to $6-$7/gallon before any serious withdrawal effects are registered. And as you pointed out, these are global companies, so the downside risk is not as great as for purely domestic companies, and the share price is likely to be less volatile given the differences in currency rates alone. Still, oil consumption is a seasonal/cyclical thing. We will see demand fluctuate, but to blame it solely on the current recession is, IMO, reactionary. Too many talking heads in the media either don't know what they're talking about, or they just want to sell viewership/readership.

Like you and & DemonDoug, I'm buying large when the Big Boys dip in the coming 6-7 months. I don't think the dip will last more than 9-10 months total, but that's only my guess. Each to his own...

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