When will we see a bottom for oil?
Although I’ve been asked this question on a daily basis, my answer has remained the same. There’s a very good chance that we’re seeing the bottom right now. Will it dip below $100 per barrel over the next few weeks? Possibly. However, I wouldn’t bet on prices staying low for much longer.
If your email inbox is anything like mine, then you’ve received a barrage of emails screaming that oil prices are headed back to $60 a barrel. But I can’t fathom how that is even possible. While Oil has fallen over 28% from a July record of $147 a barrel, don’t forget that prices are more than 44% higher than a year ago. Back then we were paying a mere $73.98 a barrel.
So why exactly are we expecting oil to stay above the $100/bbl mark?
In the short run, we have Hurricane Ike making cutting its way through Cuba. If the storm remains on its current path toward the Gulf of Mexico, we can expect Ike to re-gain strength as it moves back over water.
Even if Ike turns out as lackluster as Gustav, the threat of a hurricane battering the Gulf of Mexico ensures that production will remain shut-in. Let’s take a closer look at the impact of these two storms… then get into how oil-rich countries are even more aggressively protecting their oil wealth…
Hurricanes’ Impact on Oil
According to the Minerals Management Service update, 202 oil platforms and 10 rigs have been evacuated so far. That comes out to a little over one million barrels per day of production that is shut-in, or about 79.8% of Gulf oil production. Furthermore, approximately 70% of Gulf natural gas production is also shut-in.
On top of the approaching storm, we can also toss OPEC into the mix. Although the chances of OPEC cutting production at tomorrow’s meeting in Vienna are slim, that doesn’t mean they won’t trim production in the future.
OPEC has made it clear they’re willing to defend $100/bbl oil. I remember last year when OPEC said they were "comfortable" with oil at $60 a barrel.
Unfortunately, we’ve already run out of $60/bbl oil.
Let’s face it, the cheap oil we’ve enjoyed in the past is gone.
The reason is simple enough. Producers need to drill further and deeper than ever before. Take U.S. Production, for example. Right now, there’s over 2,000 rotary rigs operating in the U.S. We haven’t had this many rigs operating since 1985. Despite having a record amount of rigs, we’re producing nearly 4 million barrels per day less. That means our production has declined over 43%!
And don’t think for a second that this is strictly a U.S. Problem, either.
Even taking the conservative annual decline rate of 4.5% (some believe the rate is as high as 8%), the world needs to come up with almost 4 million barrels per day of new production every year. Now that production is declining at some of the world’s largest oil fields (namely Ghawar, Burgan and Cantarell), producers must constantly look more to unconventional reserves.
Again, cheap oil’s days are numbered.
How Countries Are Guarding Their Oil Wealth
Within the last few years, countries having been taking control of their oil reserves. And in order to secure a larger amount of their oil revenues, time and again countries have gone to great extent to tighten that grip.
I’m certain most of you remember when Russia pushed Shell out of their controlling stake in the Sakhalin Island. Of course, we can’t forget when Chavez wrested control of Venezuela’s oil projects back in 2007.
After the recent discovery of the Tupi field off the coast of Brazil, the government appears to be looking forward to those revenues. In order to get a larger piece of the revenue pie, Brazil’s government will obviously make a move and grab more shares in the state-controlled company.
If you really want an idea of how serious these countries are to protect their oil wealth just look at the latest deal inked between Iraq and China.
I’ll admit this deal first caught my attention a few days ago. The fact that it was sitting in my junk folder should have given me a reason not to read it. However, after pouring over the facts (many of which were completely wrong) I realized how far off the mark it had been.
Last week, the Iraqi government approved a contract between Iraq’s state-owned oil company and the Chinese National Petroleum Company (CNPC). The deal was to let the Chinese develop the Ahdab oil field. The deal was originally signed back in 1997.
The real blow came when Iraq renegotiated the terms from a production sharing agreement to a set-fee service deal. Now, the CNPC will only get approximately $6 per barrel produced. The fee is cut in half once production hits its target of 115,000 barrels per day. No matter how high oil prices move in the future, the CNPC’s profits are set in stone.
The reason is simple enough. Over the next few years, oil markets will continue to tighten, and you can bet these countries will protect their oil wealth at all costs, right down to the last drop.
Until next time,
P.S. Despite the fact that certain countries are tightening their grip on future oil revenue, I know for a fact that my readers have been securing their own oil wealth right here in the U.S. It wouldn’t be fair if I didn’t at least give my newer readers the chance to join them, so feel free to check out The $20 Trillion Report.