Oil Price Factors
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L. A. Starks, author 13 DAYS: THE
PYTHAGORAS CONSPIRACY
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$/BBL
Crude Oil Price
Crude Oil Price
120.00
100.00
80.00
60.00
40.00
20.00
0.00
WTI
RAC
Four Macro Factors
1) US Dollar Weakness; Oil denominated in
Dollars
2) Oil as Inflation Hedge
3) Demand for ALL Commodities (Real
Assets Excluding Real Estate)
4) Oil is Single-Source Fuel for
Transportation; Undiversified
Dollar Weakness and Oil Price
120.00
1.000
100.00
0.800
80.00
0.600
60.00
0.400
40.00
0.200
20.00
0.000
0.00
Month
$/BBL
1.200
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Ap - 07
M r- 0
ay 7
Ju -07
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Ju -0 7
Au l-07
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p- 7
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ct
No - 07
De v-0
c- 7
Ja 0 7
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8
EU/$ Exchange Rate
Dollar Weakness and Oil Price
EU/$
WTI
Oil Supply Demand Inflection
Point





2-2.4 MMBPD of spare supply capacity, 3%
of total
All in Saudi Arabia
OPEC not meeting until September
Short-term marginal cost of supply is very
large ($110-$120/bbl)
“Rut of Upward Momentum”
Short Term Disruptions



Fog on the Houston Ship Channel; GOM
hurricanes
Weekly oil and gasoline inventory changes
Conflict involving oil assets anywhere



Forties pipeline shutdown due to Scottish refinery
strike
Nigerian bombings and strike
Attack on Japanese oil tanker
Longer Term Supply





Estimates 3.4 to 6 trillion bbls; used 1 trillion
Total geologic estimates don’t matter; political &
economic limits frame availability
Practical peak or plateau; 65% of reserves owned
by NOCs
IOCs have “full access” to 7%
NOCs




revenue-rich;
resources as patrimony;
different development incentives
some starved of capital by govt (Venezuela, Nigeria, Iran)
January 2008 Oil Production
January 2008 Oil Production,
Source: Oil and Gas Journal
10,000
8,000
6,000
4,000
2,000
R
ud uss
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ra
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a
U
S
Ira
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A
Ku E
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Ve a
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Ir
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0
Sa
Thousand BPD
12,000
US Crude Oil Imports
US Crude Oil Imports, Largest Sources
10,000
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
Aug-07
Sep-07
Oct-07
Nov-07
Dec-07
Jan-08
Aug-07
Sep-07
Oct-07
Nov-07
Dec-07
Jan-08
Canada
1,950
1,960
1,889
1,919
1,784
1,944
Saudi Arabia
1,468
1,441
1,370
1,530
1,675
1,479
Mexico
1,381
1,293
1,322
1,484
1,234
1,198
Nigeria
1,184
1,137
1,184
1,245
1,210
1,163
Venezuela
1,138
1,146
1,221
1,227
1,246
1,135
Angola
400
578
342
408
439
566
Iraq
520
603
490
508
378
543
Algeria
572
503
213
184
348
366
Ecuador
240
234
222
154
195
247
Kuwait
139
143
150
154
158
239
Colombia
152
165
164
197
113
171
Brazil
250
213
172
78
171
169
Impediments
Oil Reserves, Political Limits, 2004 Est.
300
250
200
150
100
50
0
BBOE
Saudi
Iran
Iraq
Venezuela
Russia
Nigeria
263
133
115
77
72
35
BBOE
Reserves
(less available or costly)







Projects coming on this year w/total peaks 3
MMBPD
Saudi Arabia not above 12.5 MMBPD - Al-Naimi
Russia—changing terms, (New Cold War),
production plateau
Mexico (Constitution), Cantarell declining from 2.0 to
1.3 MMBPD
Venezuela (political), declining
Iraq (War)
Nigeria (MEND, tax regime)
Other Reserves
(less available or costly) cont.







40 billion barrels in US off limits (political)
US Alaska Prudhoe declining
Some Brazil (hostile geology)
Canadian tar sands, $65/bbl
Ultra Deepwater GOM
Arctic seabed (hostile geology)
Lack of good field data for Saudi Arabia,
Russia
Reserves (more available)






US-Bakken Shale
Some Brazil
Saudi Arabia Khurais
Iraqi discussions with IOCs
Kashagan
USGC (Jack field; Lower Tertiary play)
Drilling and Transport Costs



All drilling costs much higher (Rig shortage
for deepwater GOM like Jack field)
Credit crunch has limited access to capital
Transport more expensive:




Russia 2007 cutoff through Belarus
Ethanol (US, Brazil Esso news)
Oil sands to USGC
Alaskan gas to US; KEY to Alaska oil field
development; TransCanada only licensee
Refining



Oil without refining is a swimming pool without water
Supply of refining capacity is 2nd-level effect most
miss
US refining at capacity; no new refineries





NIMBY, long payback, regulatory step function changes
Debottlenecking secret
Port Arthur Motiva (Shell-Aramco), 275 to 600 KBPD
Change in crude quality
Increasing imports of gasoline, other petroleum
products
Demand







Forecast reduced, 86.6 MMBPD
Level of effect from US economic weakness
*Price signals in US are key
Increasing fuel efficiency (rolling stock
turnover)
Story is China, India, Middle East
*No price signals, Middle East and Asia
Western consumption a target
Increasing Asian Car Demand
Asian Demand Potential
India at US levels
China at US levels
India (2003)
China (2005)
Japan (2006)
US (2005)
0
100
200
300
400
Number of Cars
500
600
Alternatives







Ethanol: hero to zero
Food prices up 83%; law of unintended
consequences
BP’s prescience
Ethanol mandate
Higher CAFÉ standards
Biofuels not from foodstocks (no drinkable jet
fuel)
Hybrids & Electric
Factors That Could Bring
Down Oil Prices (Short Term)




Change in Fed monetary direction (stop rate drop)
Move of speculative/investment funds away from
commodities
Corn-derived ethanol
Price signals are powerful; invisible hand (millions)


US conservation, consumer and industrial
Transport substitutes: videoconferencing, carpooling, mass
transit
Factors That Could Bring
Down Oil Prices (Long Term)







Short-term factors plus capital investment
Drop levy on imported ethanol
Non-food biofuels
Other non-petroleum transport fuel and cars
that can use it
US fleet meeting higher CAFÉ standards
Meaningful number of hybrids and electric
Other countries reduce subsidies
Oil Price Predictions




$50-$80
If dollar strengthens to level of euro, $70/bbl
Rubin’s estimate of $120/bbl
Traders betting own money; NYMEX
collected wisdom
NYMEX Forward Price Curve
NYMEX Crude Oil Futures, 4-29-08
100.00
50.00
0.00
08 -08 -08 r-09 -09 -09 -09 r-10 -10 -10 -10 r-11 -11 -11 -11
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Ju Se De M Ju Se De M Ju Se De M Ju Se De
Jun- Jul-
Aug- Sep- Oct- Nov- Dec- Dec- Dec- Dec-
$/BBL 115.6 114.7 114.0 113.4 112.8 112.2 111.6 107.5 106.0 105.5
$/BBL