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201 comments on DrumBeat: September 2, 2008

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westexas on September 2, 2008 - 9:35am Permalink | Subthread | Parent | Comments top

The $147 was an important benchmark for traders, but it was pretty much irrelevant to producers and consumers (probably almost no one paid $147 and almost no producers received $147). The monthly average WTI high price was $134 in June, basically flat in July (down 50¢). It looks like August will average about $117, down about 13% from the June/July peak.

Meanwhile, on the export front:

From the Bloomberg article on Russia linked uptop:

Production in Russia's oil heartland of western Siberia is flagging as older fields mature, and companies are investing in harder-to-reach regions in search of growth. . .

It ``is becoming increasingly more expensive and burdensome for the oil companies to maintain output growth,'' Citigroup analysts Alexander Korneev and Ildar Khaziev said in a note to investors, cutting their price estimates for companies including the country's two biggest producers, OAO Rosneft and OAO Lukoil.

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Nawaralsaadi on September 2, 2008 - 9:37am Permalink | Subthread | Parent | Comments top

I agree west, the average is more relevant, but even if we take the average as our measure, current prices are close to 25% lower, this is a massive decline in revenues for the producers in a very short period of time, I believe such volatility is detrimental to the steady development of unconventional oil.

However, it would be very interesting to see how prices will move during this winter, considering the steady decline in net exports; as you have mentioned in a prior post, there seems to be a race between the decline in net exports, and demand moderation.

Regards,
Nawar

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westexas on September 2, 2008 - 9:47am Permalink | Subthread | Parent | Comments top

Also, we saw an August decline last year, down 2.4% from July, followed by more than a 10% increase in September. This was in the context of an average monthly increase of 6% per month from 5/07 to 6/08.

In any case, the monthly average price is a far better indicator of what is going on regarding fundamental supply/demand issues, and the August, 2008 average price was down around 13% from June/July. I wouldn't predict the September average price, based on early September trading, but I think that the average September/October prices will tell us a lot about the horse race between the long term overall decline in net oil exports and an overall forced reduction in the demand for oil imports (plus the effect on demand from the slowing economy).

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Dragonfly41 on September 2, 2008 - 9:57am Permalink | Subthread | Parent | Comments top

One must ask, "Who does this price deflation hurt the most?". Those selling the oil, of course. Who is the West currently at odds with? That would be Russia, mostly. Could be coincidence?

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londanium on September 2, 2008 - 11:32am Permalink | Subthread | Parent | Comments top

I find that very doubtful - a year ago, oil was trading at around $70 per barrel, and no one was suggesting that this was in any way painful to major producers.

The pain is being experienced on the consumption side of the equation, and the idea that $100 per barrel oil is a "relief" just demonstrates how many frogs are being slowly boiled with smiles on their faces. Whilst prices above $120 per barrel were a nice windfall whilst they lasted, I doubt that any oil execs in Russia/OPEC will start fretting until oil hits $60 per barrel.

In 2003 the OPEC target price band was $22-28. In 2004 it was $30-35. In 2005 Chavez suggested that $50 was more than acceptable as a guaranteed price. Only $110 per barrel and "oh, noes, we're gonna go bankrupt!" Nah.

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shargash on September 2, 2008 - 12:57pm Permalink | Subthread | Parent | Comments top

A few months ago someone on TOD did a superficial analysis of Saudi Arabia's budget and concluded that, given the size of their social welfare program, they would need about $90/bbl to balance their budget. Yes, the KSA could run a deficit (I think it is less likely they would scale back their welfare program because of concerns about social unrest), but I think it is more likely that they would try to defend $100/bbl.

The problem with easy money is that you get used to spending it, and sometimes it's hard to cut back to previous levels.

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Apuleius on September 2, 2008 - 1:06pm Permalink | Subthread | Parent | Comments top

However, Saudi's budget requires dollars, not dollars-per-barrel.

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Nawaralsaadi on September 2, 2008 - 1:19pm Permalink | Subthread | Parent | Comments top

I agree that OPEC as well as other oil producers have gotten used to higher prices, and this is exactly why their price target kept moving higher year after year, until they finally abandoned a price target and let the market run to the upside.

I don’t believe that any OPEC member or oil producer expected oil to trade in the $130/$140 range without a major supply shock (such as the Arab embargo or Iranian revolution), the fact that oil climbed to such levels on its own has probably given the producers a lot of confidence that oil may sustain much higher levels on regular market fundamentals then they thought was possible.

It is also worth noting that oil prices have risen by a hundred folds since the $1960s, and they never dipped to such levels after crossing the double digits in first oil shock in the $70s; and I do suspect that they will never trade for any sustainable period under triple digits in the future.

Regards,
Nawar

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ROCKMAN on September 2, 2008 - 3:06pm Permalink | Subthread | Parent | Comments top

Come on londanium, we have decided today would be one of national morning in the oil patch. How are we to survive on this mere pittance? I’m sure some of the traders are panicked but at the well head you couldn’t knock the smiles of our faces with a baseball bat. I doubt $100 oil will take much shine off either the unconventional or conventional oils. Even when oil hit $147 most companies were still using $60 - $80 oil in their economics along with some other fudge factors. Based upon the 12 month running average I would expect oil to be bouncing around $110/bbl. As WT pointed out, Aug was the first drop in monthly avg in 7 or 8 months. And it’s easily to write that off to the high July avg. I can’t see any factors down the road that will permanently shift the trend downward but who knows: demand destruction may be sneaking up some out there along with a little bump on the production capacity side. On the other hand, if OPEC is finally on the verge of becoming a functional cartel, even DD might not bring a long term downward price trend with it.

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201 comments on DrumBeat: September 2, 2008

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