Oil hits $34/bbl

Oil rig right.jpg

The blog’s oil price forecasts have had a stellar record this year. Last month, with its $70/bbl forecast having been realised, the blog continued to worry about downside risk:

“If refiners are forced to cut runs for December, then it would be hard for OPEC to cut its own production quickly enough to compensate. In that case, a $20 – $30/bbl range for crude, albeit temporarily, would not be impossible.”

Since then, refiners have indeed been cutting runs very hard. Equally, OPEC’s secretary-general has confirmed that the cartel’s November cuts have only achieved c60% compliance. As a result, the January WTI contract hit $33.87/bbl last week.

The expected temporary nature of the fall has led to massive forward purchases, causing June prices to be $10/bbl higher than today’s. In turn, this offers guaranteed profits for those able to find storage. 50 million barrels have so far been added to stocks as a result. And official OECD stocks have risen by 5 days, to 57 days.

This supply overhang will make it hard for prices to rally quickly from today’s depressed levels. Yet an eventual supply crunch is growing ever more likely. Today’s prices are a long way from the $75/bbl that is needed to make most proposed new investment viable.

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. The aim of this blog is to share ideas about the influences that may shape the chemical industry over the next 12 – 18 months. It will try to look behind today’s headlines, to understand what may happen next in important issues such oil prices, economic growth and the environment. We may also have some fun, investigating a few of the more offbeat events that take place from time to time. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.

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2 Responses to Oil hits $34/bbl

  1. Adriel Michaud 22 December, 2008 at 8:32 pm #

    Paul, your blog always seems to be on the mark. That’s pretty incredible when you consider how uncertain the rest of the economy and so called “experts” are.

  2. Paul Hodges 26 December, 2008 at 10:34 am #

    Many thanks for the comment.

    My comment was based on future investment costs, not on today’s production costs or already commited investment. I entirely agree that actual production costs in most parts of the world in 2009 will be less than $25/bbl.

    But every year, as I noted last month when commenting on the IEA report, 6.4% of oil reserves come to the end of their life (http://www.icis.com/blogs/chemicals-and-the-economy/2008/11/iea-says-worlds-energy-system.html ). These reserves have to be replaced. And the cost of this does not just include daily pumping costs, but the cost of finding the oil, and putting all the infrastructure into place – drillining, pipelines, ports etc -over the 5 – 10 years that are typically required to bring major new sources of oil to market.

    Current estimates for bring new sources of oil from Canadian tar sands, for example, suggest an investment cost of at least $75/bbl will be required to access these. This is also a typical cost for other major potential sources of oil, which are mostly in hard to access and diifficult regions.

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