ExxonMobil suggests $60-$70/bbl oil

POMO May11.pngThe CEO of ExxonMobil, Rex Tillerson, has provided powerful support for the blog’s long-held view that oil prices are well out of line with fundamentals. He told the US Senate that:

“If you said: ‘If I had access to the next marketable barrel, what would it cost?’, its going to be somewhere in the $60 to $70 range“.

Ironically, of course, the reason for today’s high prices is the US government, in the shape of the Federal Reserve’s $600bn QE2 programme. As the above chart from the excellent Petromatrix consultancy shows, there is a very close correlation between:

• The major increase in the Fed’s POMO (Permanent Open Market Operations) activity – blue line, left hand scale
• The rise of speculative open interest in WTI futures – yellow line, right hand scale

As QE2 is coming to an end, this support is now waning. It is probably no coincidence, therefore, that crude oil prices seem now to have peaked.

What happens next is, of course, the key question. But the blog is a great believer in the fundamentals. It also has great respect for ExxonMobil’s judgement. $60/bbl crude therefore looks like a reasonable next step, unless geo-politics or the Fed intervene again.

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. He also serves as a Global Expert for the World Economic Forum. The aim of this blog is to share ideas about the influences that may shape the chemical industry and the global economy over the next 12 – 18 months. It looks behind today’s headlines, to understand what may happen next in critical areas such as oil prices, China and Emerging Markets, currencies, autos, housing, economic growth and the environment. 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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