CGES questions beliefs supporting oil price

By OGJ editors
HOUSTON, Sept. 20
-- Investors in oil futures contracts appear to be acting on five beliefs, not all of them sound, and thereby holding oil prices above levels supported by market fundamentals, says the Center for Global Energy Studies (CGES), London.

In the September issue of its Oil Market Prospects report, CGES notes the price of the Organization of Petroleum Exporting Countries reference basket of crudes has remained at $70-80/bbl since the fourth quarter of 2009. With spare capacity throughout the oil-supply chain ample and stocks of crude oil and products abundant, “it is difficult to find support for this level of prices from traditional oil-market fundamentals,” CGES says.

These five beliefs, “for the most part, misguided,” are helping to support prices, CGES says:

A price of $80/bbl is required to cover the cost of oil field development in frontier areas, such as ultradeep water and Canada’s oil sands. This might have been true “when there were too many projects chasing too few resources,” CGES says. But it’s no longer the case.

Oil demand is price-inelastic. “This is only true to the extent that changes in crude oil prices are not reflected in end-user product prices, either as a result of high taxation of oil products or of subsidies,” CGES says.

The global oil industry is not finding sufficient new reserves to offset production. “If we accept published reserves data, this statement is found simply to be untrue,” CGES says. “If we don’t believe the data, we have little ground on which to support any statement.”

China’s oil demand will continue to grow by 10%/year for many years. Continued growth at recent rates is “far from certain,” CGES says.

OPEC wants, and Saudi Arabia is currently able to secure, an oil price above $70/bbl. CGES agrees.

The study group says Saudi Arabia, fearing an imminent weakening of crude oil prices, has raised the price of its exported oil against regional benchmarks in an action that will trim supplies.

“As long as modest changes to its production can lift prices, Saudi Arabia can continue to ensure that the price of oil does not remain below $70/bbl for long,” CGES says.

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