Oil Price May Trade In The $80 - $100 Range

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 the report cited below .  The current imbalance of excess supply cannot go on for long without the price falling to levels not determined by any given downside resistance number.   In that context, I suspect it makes sense that the Saudis would soon start to cut back by perhaps 1 mb/d unless Nigerian supplies are drastically reduced by new MEND attacks on oil supplies.

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.  My sense is that more countries will have applied new EOR methods to old fields than is generally appreciated, given the higher oil prices for the past several years that provide incentives to use EOR methods.   If so, the decline rate could currently be running significantly lower than it was before we experienced several years of much higher oil prices.  Another developing trend is weakness in the U.S. and possibly E.U. economies.  Real U.S. consumer spending reductions are just now starting to be felt and will likely be far more pervasive over the next year.  So I suspect there is currently significant pressure building for lower oil prices from trends toward lower decline rates and lower OECD demand.

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.

Both the increased EOR efforts and the low price of oil should come back to haunt the oil market in a few years.  More EOR now means that the decline rate for old fields will accelerate in later years compared with what it would be without near term EOR efforts.  So if decline rates are actually now down to, say, 2%, because of EOR, they could well jump to over 6% in a few years.  Lower oil prices in 2008 - 2009 will both increase demand and reduce supplies in future years compared with conditions that would pertain if oil had stayed above, say, $120.  New supplies from Canadian oil sands, for example, are already starting to be delayed because of lower oil prices, which will impact supply in a few years.

In short, we may see a range bound oil price for a while followed by sharply higher prices in two to three years, all of which is consistent with the recent mega-projects analysis that I recently posted.

Saudi Arabia Will Probably Cut Oil Supply, Riyadh Banker Says

By Juan Pablo Spinetto and Grant Smith

Sept. 16 (Bloomberg) — Saudi Arabia, the world’s biggest crude oil exporter, will probably reduce supplies before the next OPEC meeting in December after the group pledged to respect output quotas, a Riyadh-based banker said.

The Organization of Petroleum Exporting Countries told its members on Sept. 10 to “strictly” comply with production quotas after oil prices fell 30 percent from a record. Prices have since slid another $10 to $92 a barrel in New York. OPEC next meets in Oran, Algeria, on Dec. 17.

“They will continue to reduce production until the December meeting,” John Sfakianakis, chief economist at Saudi British Bank, said in an interview in London today. The kingdom will likely pump about 9.2 million barrels a day by the next gathering, he said, compared with 9.5 million last month.

Saudi Arabia is “fine if prices stay around $80-$90 in the next few months,” Sfakianakis added. “They will take action if they see continued pressure for prices to fall below $80.”

Saudi Arabia produced 9.5 million barrels a day in August, according to Bloomberg estimates. The country was assigned an official quota of 8.943 million barrels a day in September 2007, which was reaffirmed at OPEC’s Vienna meeting last week.

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