Quick Q and A on Oil Price

Q
Hi Mr. Letourneau. We read your blog regularly. We ( my investment club ) were wondering if you would make some regular comments on the oil price. Maybe some comments on the current low price of oil effects on "near-future" supply, production shut downs, exploration, demand destruction stats, etc. I know you are a geologist, but i'm sure you have some ideas and insight into the overall oil picture. We are very bullish, long-term, on oil. We are "peak oil" believers ( maybe you aren't. tell us why we are wrong ). We would appreciate any comments you may have.

Thanks for you time and your blog comment

John T, Victoria

A
Thank you for your comments. I like your suggestion and will be putting some effort into that arena next week. I'm sure many others are interested as well.

The short term answer is that USA demand is down and it is adversely affecting WTI prices which have decoupled from the global market as storage at Cushing, Oklahoma is near full. We know China just spent $50 billion to tie up oil supplies so the long term is strong.

I'd be interested in your comments... feel free to add them below. Is this is a time/price issue? We know the price is very low but we don't know how long it will take to recover.

Oil Forecast from Bill Newman

Research Capital's Bill Newman's oil price forecast points to supply cuts due to lower investment and natural production declines facing off against a drop in global demand.

As a result of the growing economic crisis, global demand for crude has crumbled. In an attempt to rebalance the market, OPEC has pledged to cut a total of 4.2 million bbl/d from September 2008 production level. Based upon past performance, investors are sceptical that OPEC will adhere to the new the quotas. However, most OPEC members need much higher prices to fully fund government budgets, which could motivate higher compliance. Worldwide, energy companies continue to slash capital spending and are moving into a survival mode.

With world production declines averaging approximately 6.7% per year, a significant investment is needed just to maintain current levels.

However, we don’t expect a significant recovery in the price of oil until demand once again climbs above supply and world inventory levels begin to decline. In fact, prices could fall further on new disappointing economic news or if OPEC members fail to achieve high compliance to production quotas. In the mid to long term, we believe that the current tight capital markets, which have lead to a drop in drilling and the deferral or cancellation of major projects, including Canada’s oil sands plays, will cut supply. This combined with potential of an economic recovery in 2H/09 has set the conditions for a sustained run in oil prices beginning in late 2009.

Given the severity of the global economic slowdown, we are decreasing our 2009 NYMEX WTI crude oil price assumption from US$75/bbl to US$60/bbl, and we have set our 2010 forecast at US$75/bbl.