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saunafool (< 20)

Will the Oil Boom End Soon?



July 08, 2008 – Comments (5) | RELATED TICKERS: USO , XOM , RIG

First, a hat tip to FoolYap over on the Peak Oil Party discussion board for directing me to this article.

About half way down the article, take a look at the table showing net exports. That tells the whole story about why oil prices have increased so much over the past 3 years. The most important data point is that the #1 exporter in the world, Saudi Arabia, is showing substantial declines in their export capability. In 2005, their average daily exports were 9095 Mbpd; in 2007, their average daily exports had fallen by MORE THAN A MILLION BARRELS PER DAY to 7923 Mbpd.

So, for people hoping for a crash in oil prices aka 1986, here is what the author of the article has to say... 

Critically, Saudi Arabia appears now unable to perform the role of market stabiliser that it played from the 1980's until the 2000's on the basis of its known ability to pump up to 20% extra volume at short notice. Depletion of Saudi Arabia's giant oil fields appears to have taken away its ability to help the world in this way, though the Saudis will not directly admit they no longer have this power.

It seems likely that since 2007 OPEC has lost effective cartel power because few of its members have the ability to pump more oil. This means the cartel as a whole can do practically nothing to bring down prices even though key members like Saudi Arabia have much of their wealth tied up in Western economies and are clearly concerned about damage to their own interests if oil prices go any higher – thus the Saudi conference held on the 22nd of June 2008.

There might be a short-term drop in oil prices, but it will never be below $50/barrel again. Not until we don't need it anymore.

5 Comments – Post Your Own

#1) On July 08, 2008 at 11:33 AM, wolfhounds (40.01) wrote:

T. Boone Pickens, commenting this morning about current oil prices on CNBC, said that oil will be $150 by year end. So far, my investments following his advice have done eceptionally well. Thanks for this market correction, or should I say trader stampede.

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#2) On July 08, 2008 at 3:32 PM, Tastylunch (28.72) wrote:

Never below 50 per barrel isn't exactly a bold prediction .

I agree  though I don't  think the Oil boom will be over for the foreseeable future, there may be technical or dollar related pullbacks, but the general long term uptrend will remain.


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#3) On July 08, 2008 at 3:54 PM, saunafool (< 20) wrote:

You say never below 50 isn't very bold, but oil was $50 a barrel in January 2007. Furthermore, only a couple years ago, the Department of Energy and CERA were predicting longer term pricing on the order of $28/bbl.

I fully expect oil prices to fall below $100 in the coming months, and hopefully back into the $80/bbl range which seems more sustainable for the global economy, but with global exports falling, all bets are off. All I can say is not below $50. No way. 

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#4) On July 08, 2008 at 5:58 PM, Tastylunch (28.72) wrote:

I fully expect oil prices to fall below $100 in the coming months, and hopefully back into the $80/bbl range which seems more sustainable for the global economy,

Really? based off what? Just curious

I would think a pretty massive reduction in demand and a significant rise in the USD would have to happen simutaneously for that....the DOE unfortunately pretty much only uses historical data for future predictions, I don't think that applies here. Also from what I understand from old classmates of mine who worked there, there is tremendous political pressure for the DOE to forecast friendly numbers....I have never put much stock  in what they say Re:oil. Their models don't account for modern global economy.

Certainly a global recession could and will dampen demand I could see it flrting with a 100, but I don't think it will go down to the point that Oil falls by over 50%. I think if it does you are talking global depression not recession in that case.A depression is certainly not out of the question, but I think it's unlikely given how slow it would be developing...

I'm in the T boone Pickens camp. I think a slight increase by he end of the year from here is more likely, but you never know what could happen RE: discoveries, politics...

Well I'll be sure to give you credit if you end up being right.

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#5) On July 09, 2008 at 3:22 AM, saunafool (< 20) wrote:

My guess (I won't even call it a prediction) is based on what I see as the normal volatility of oil prices over the past few years. Prices went up to almost $80/bbl after Katrina, only to fall to $50/bbl a few months later, back up to $80, back down to $50 the year after. I'm only suggesting that the price retrace much of the gain from the past 6 months.

What will cause it? Probably some temporary demand destruction after the Olympics. China has been allowing product prices to rise, American demand is falling for the first time in 25 years, and so, I wouldn't be surprised by a few weeks of rising inventories.

That said, any confrontation involving Iran, Russia, or another oil producing country could send the price to $200 in a heartbeat.

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