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Crude Oil Price
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Four Macro Factors
1) US Dollar Weakness; Oil denominated in Dollars
2) Oil as Inflation Hedge
3) Demand for ALL Commodities (Real Assets Excluding Real Estate)
4) Oil is Single-Source Fuel for Transportation; Undiversified
Dollar Weakness and Oil Price
Dollar Weakness and Oil Price
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Oil Supply Demand Inflection Point
2-2.4 MMBPD of spare supply capacity, 3% of total
All in Saudi Arabia OPEC not meeting until September Short-term marginal cost of supply is very
large ($110-$120/bbl) “Rut of Upward Momentum”
Short Term Disruptions
Fog on the Houston Ship Channel; GOM hurricanes
Weekly oil and gasoline inventory changes Conflict involving oil assets anywhere
Forties pipeline shutdown due to Scottish refinery strike
Nigerian bombings and strike Attack on Japanese oil tanker
Longer Term Supply
Estimates 3.4 to 6 trillion bbls; used 1 trillion Total geologic estimates don’t matter; political &
economic limits frame availability Practical peak or plateau; 65% of reserves owned
by NOCs IOCs have “full access” to 7% NOCs
revenue-rich; resources as patrimony; different development incentives some starved of capital by govt (Venezuela, Nigeria, Iran)
January 2008 Oil Production
January 2008 Oil Production, Source: Oil and Gas Journal
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US Crude Oil Imports
Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08
Canada 1,950 1,960 1,889 1,919 1,784 1,944
Saudi Arabia 1,468 1,441 1,370 1,530 1,675 1,479
Mexico 1,381 1,293 1,322 1,484 1,234 1,198
Nigeria 1,184 1,137 1,184 1,245 1,210 1,163
Venezuela 1,138 1,146 1,221 1,227 1,246 1,135
Angola 400 578 342 408 439 566
Iraq 520 603 490 508 378 543
Algeria 572 503 213 184 348 366
Ecuador 240 234 222 154 195 247
Kuwait 139 143 150 154 158 239
Colombia 152 165 164 197 113 171
Brazil 250 213 172 78 171 169
US Crude Oil Imports, Largest Sources
01,0002,0003,0004,0005,0006,0007,0008,0009,000
10,000
Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08
Impediments
Oil Reserves, Political Limits, 2004 Est.
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BBOE 263 133 115 77 72 35
Saudi Iran Iraq Venezuela Russia Nigeria
Reserves(less available or costly)
Projects coming on this year w/total peaks 3 MMBPD
Saudi Arabia not above 12.5 MMBPD - Al-Naimi Russia—changing terms, (New Cold War),
production plateau Mexico (Constitution), Cantarell declining from 2.0 to
1.3 MMBPD Venezuela (political), declining Iraq (War) Nigeria (MEND, tax regime)
Other Reserves(less available or costly) cont.
40 billion barrels in US off limits (political) US Alaska Prudhoe declining Some Brazil (hostile geology) Canadian tar sands, $65/bbl Ultra Deepwater GOM Arctic seabed (hostile geology) Lack of good field data for Saudi Arabia,
Russia
Reserves (more available)
US-Bakken Shale Some Brazil Saudi Arabia Khurais Iraqi discussions with IOCs Kashagan USGC (Jack field; Lower Tertiary play)
Drilling and Transport Costs
All drilling costs much higher (Rig shortage for deepwater GOM like Jack field)
Credit crunch has limited access to capital Transport more expensive:
Russia 2007 cutoff through Belarus Ethanol (US, Brazil Esso news) Oil sands to USGC Alaskan gas to US; KEY to Alaska oil field
development; TransCanada only licensee
Refining
Oil without refining is a swimming pool without water Supply of refining capacity is 2nd-level effect most
miss US refining at capacity; no new refineries
NIMBY, long payback, regulatory step function changes Debottlenecking secret Port Arthur Motiva (Shell-Aramco), 275 to 600 KBPD Change in crude quality Increasing imports of gasoline, other petroleum
products
Demand
Forecast reduced, 86.6 MMBPD Level of effect from US economic weakness *Price signals in US are key Increasing fuel efficiency (rolling stock
turnover) Story is China, India, Middle East *No price signals, Middle East and Asia Western consumption a target
Increasing Asian Car Demand
Asian Demand Potential
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US (2005)
Japan (2006)
China (2005)
India (2003)
China at US levels
India at US levels
Number of Cars
Alternatives
Ethanol: hero to zero Food prices up 83%; law of unintended
consequences BP’s prescience Ethanol mandate Higher CAFÉ standards Biofuels not from foodstocks (no drinkable jet
fuel) Hybrids & Electric
Factors That Could Bring Down Oil Prices (Short Term)
Change in Fed monetary direction (stop rate drop) Move of speculative/investment funds away from
commodities Corn-derived ethanol Price signals are powerful; invisible hand (millions)
US conservation, consumer and industrial Transport substitutes: videoconferencing, carpooling, mass
transit
Factors That Could Bring Down Oil Prices (Long Term)
Short-term factors plus capital investment Drop levy on imported ethanol Non-food biofuels Other non-petroleum transport fuel and cars
that can use it US fleet meeting higher CAFÉ standards Meaningful number of hybrids and electric Other countries reduce subsidies
Oil Price Predictions
$50-$80 If dollar strengthens to level of euro, $70/bbl Rubin’s estimate of $120/bbl Traders betting own money; NYMEX
collected wisdom
NYMEX Forward Price Curve
NYMEX Crude Oil Futures, 4-29-08
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$/BBL
$/BBL 115.6 114.7 114.0 113.4 112.8 112.2 111.6 107.5 106.0 105.5
Jun- Jul- Aug- Sep- Oct- Nov- Dec- Dec- Dec- Dec-