phoenixrising said:
Steve Forbes of the CEO Forbes Convention at Syd Opera House says oil at $35 to $40 by this time next year.
Wonder what he knows that we don't?
The maximum supply can not realistically surprise to the upside in a big way in economists' speak since supply is a function of: existing production
less natural production decline
plus new development coming online
plus enhanced output of existing operating fields
less production losses due to breakdowns, natural disasters, wars, quota limits etc.
Alternatively it's A - B + C + D - E = production a year from now.
The existing production is reasonably known. And the decline rates of existing fields are known pretty well too. New development and enhanced production projects not already underway is basically too late to affect production in 12 months time so the score is known there too. That leaves production losses due to breakdowns, natural disasters, wars, quota limits etc. as the only significant unknown over the short term (and 12 months is most certainly short term in this oil supply forecasting game).
There are various models of world oil production based on three fundamental approaches. These are:
(A) Resources assuming unconstrained development apart from Antarctica being off limits (assumes unlimited foreign investment in OPEC countries etc.).
(B) Actual planned production from operating and planned fields with or without assumed development of known and probable reserves over the longer term.
(C) Demand forecast which assumes that supply will rise to meet demand as a general economic principle and that sustained price increases (in anything) do not occur in practice.
I use method B in my own model since it suits my purposes for doing forecasts. That said I acknowledge the usefulness of method A. Method C has about as much credibility as a political promise during an election campaign IMO (remember that bull markets and bear markets in anything (including stocks) are impossible according to this model and that there's no such thing as under or over valuation in markets)...
So, what does Smurf's model say? In short production up just on 2% over the next 12 months globally. But this was before the storm in the Gulf of Mexico so it might be somewhat optimistic now. Various other models show pretty similar results.
(For those interested, the major production increases are deepwater fields in Angola and Brazil, heavy oil in Canada and NGL's (natural gas liquids) globally excluding North America. Smaller production increases are expected in some other locations but the majority of existing producers are expected to decline naturally over the period.)
With the probability that US refinery production is affected for some time yet due to the storm, the crude supply globally exceeds refinery capacity. An excess of crude oil no matter what the final products demand is seems likely. So it stands to reason that
crude oil prices ought to fall whilst refined product prices could go the other way (unless final demand stabilises or falls).
The North American gas situation needs watching very closely since that could potentially add very substantial oil demand (fuel oil and mid distillates) via fuel switching if Gulf of Mexico production is severely affected for much longer. I suspect that many "experts" are assuming a best case here (they could be right but there's no firm basis for the assumption at this stage).
Starting to look interesting...