19 January 2009

Crude Oil Prices Fall Again

According to Bloomberg, crude oil prices fell again today to below USD$35 per barrel. The reason: Forecasts by industry insiders that global recession will lead to cuts in petrol consumption. The analysts are, however, positive that the second half of the year will see the price of crude oil bouncing up again.

The fall in crude oil prices is despite a production cut by OPEC. An industry insider with Nordea Bank AB in Oslo stated it simply: "Demand is falling faster than oil producers are cutting production. As long as OPEC are one step behind, prices will continue to fall." [Source: Bloomberg.com, 19th January 2009. Crude Falls on Forecasts Global Recession Will Cut Fuel Demand] OPEC produces about 40% of the world's supply of crude oil. [Source: The Edge Daily, 31st December 2008. 31-12-2008: O&G sector to lose a bit of fluidity in 2009]

What would a bearish outlook for the O&G sector mean? Mergers may take place as companies consolidate their resources to face tough times. Large companies may also buy up smaller companies without much cash to cushion against a protracted recession. Exploration and "greenfield" projects may slow down as they attract less funding pending feasibility studies. Marginal fields and oil sands projects may also slow down. [Source: The Edge Daily, ibid.]

How does one explain the recent spike in crude oil prices then? Industry insiders say that any unrest in the Middle East (most recently, the invasion of Gaza by Israeli forces) will cause oil prices to escalate. They expect the prices of petrol (gasoline) to fall again, due to slowing demand, a global recession, and stockpiles of oil and oil based products. [Source: The Republican, 9th January 2009. Gas Prices Like Ride on Roller-Coaster]

Foreign Policy magazine had a run-down on the possible winners and losers in the forecasted economic downturn, in the context of the oil industry. [Source: Foreign Policy, 8th January 2009. Winners and Losers of the Oil Crash] These are, in short:
  • Saudi Arabia - A winner because it will be less affected by the oil crash than other oil producing countries.
  • India - A winner because it will have less need to subsidise petrol prices. Local O&G companies can also compete in international upstream acquisitions.
  • International Oil Companies (IOC's) - Winners because cheaper oil means less research and development (R&D) on alternative fuels. Governments will also be forced to grant access to oil reserves to IOC's. Having lower profits also stalls President Elect Obama's plans to impose windfall taxes on IOC's.
  • Russia - A loser because it is the world's largest oil producer and has invested heavily in production capacity in recent years. Production has slowed down in existing fields and new sites require capital injection.
  • Frontier markets - Losers because junior (minnow) exploration companies that scour for oil reserves in small states with emerging economies, now have less investment.
  • New Energy Technologies - Losers because cheaper oil will discourage research and development into alternative, new energy technologies. These include: "biofuels, coal-to-liquids, oil shale, and many types of oil sands technologies."
Oil sands technologies cost oil production at about Canadian $10 per barrel. This includes Canadian $4 per barrel for electricity costs. [Source: Energyinvestmentstrategies.com, 19th July 2008. New Oil Sands Technologies]