Friday, March 13, 2009

The Future of Oil Prices

This weekend's OPEC meeting should give us an idea where we're at demand wise. Demand for oil and oil products has been slashed in the past six months, and OPEC has been trying to keep up by cutting their production. It hasn't pushed oil prices as high as I'm sure they'd like to see. It also puts companies like Petrobras (PBR) who have major exploration budgets in a tougher spot. To sign drilling contracts at massive dayrates, these companies need something closer to $75/barrel to come out ahead.

Oil prices this low also put pressure on non-OPEC oil producing economies, which have put major investments into new projects in the past couple of years. Think of the Canadian Oil Sands, for example. There is a lot of production cost to extract that oil. Here's some commentary on the subject via WSJ's Environmental Capital Blog:

On Friday, the Paris-based International Energy Agency, the energy-adviser to the world’s rich industrialized economies, radically revised its outlook for non-OPEC oil production this year from growth of about 380,000 barrels a day to zero growth. That’s only a fraction of the size of the output cuts that OPEC has voluntarily committed to already. But unlike OPEC’s deliberations, production declines in non-OPEC countries are generally due to naturally declining fields, not decisions made in Vienna.

The interesting thing about OPEC’s outlook is that the bad news is so evenly spread: Estimates for Canada, Mexico, Norway, Russia, Kazakhstan, and Azerbaijan were all revised downward since last month. In the case of Canada, that’s due to lousy economics: Oil sands aren’t attractive with oil below $50. In other cases, especially Mexico, the revisions are due to rapidly-increasing declines at big fields that just can’t be offset elsewhere.

We might be able to trade a bounce in oil stocks if OPEC cuts much more than expected, but as of right now, its looking doubtful.

There is likely pressure from world leaders not to do anything which will cause oil prices to spike. Not sure how much influence that may have as OPEC countries' economies have been hurt largely because of dropping oil prices.

The takeaway here? It appears OPEC might not have as much power as previously thought. The last time they cut production, many (including this blogger) thought that oil prices would rise more than they did. Maybe demand destruction is too strong for them to counteract, at least at this point.

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