Oil May Trade in the $80 to $100 Range for a While

Source:

...A significant unknown is the global decline rate. It is generally forecasted to be about 4% - 5% or 3.5 mb/d but nowhere, to my knowledge, is it compiled with comprehensiveness and integrity and made public. The decline rate is actually the natural decline of old fields net of EOR (enhanced oil recovery) efforts that get more oil out of such fields earlier...

I think oil will trade in a range of $80 - $100 a barrel in the foreseeable future, probably another year. Why? First supply and demand: Vectors for a lower price include roughly 3 mb/d of reduced demand from the U.S. (about 1 mb/d) and more Saudi supply (about 2 mb/d) vs. a year ago. The rest of the world is about flat with higher demand from China, some other Asian economies and oil exporting economies more than offsetting reduced OECD demand. On the non-Saudi supply side, more supply from Iraq, Angola and Libya is more than offset by lower supply caused by declines in old fields and lower production from Russia, the North Sea, Venezuela and Mexico. So I suspect we are getting about 1 - 2 mb/d of extra supply over demand these days compared with about 1 mb/d extra demand vs. supply a year ago.

In this context it makes perfect sense that the Saudis would now begin paying attention to their need to reduce production as discussed in this report...

A significant unknown is the global decline rate. It is generally forecasted to be about 4% - 5% or 3.5 mb/d but nowhere, to my knowledge, is it compiled with comprehensiveness and integrity and made public. The decline rate is actually the natural decline of old fields net of EOR (enhanced oil recovery) efforts that get more oil out of such fields earlier...

I suspect oil will hit $80 or even below because the price tends to overshoot in both directions. I doubt the Saudis want oil to trade as low as $80, but the Saudis are still pumping too much, their existing oversupply will take time to wear off; and trend following speculators will tend to keep the price falling beyond the fundamental reasons. Nigerian production has begun to be hurt by a new MEND campaign of attacks but it will take a huge number of successes for MEND to impact Nigerian supplies close to the 1 - 3 million barrels of oil the world may now be in over-supply...

In short, we may see a range bound oil price for a while followed by sharply higher prices in two to three years...

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