Oil Prices: Get Ready for the Rebound
Oil bears claimed victory Friday, pushing crude down as much as 6% before finishing down about 2% as grim employment data underscored the dismal shape of the U.S. economy.
But not everybody’s an oil bear. Fadel Gheit, top oil analyst at Oppenheimer & Co., is part of a group of supply-siders who worry that OPEC’s drastic steps to halt the oil-price slide are going to combine with an economic recovery to create a big rebound in oil prices. An outspoken critic of the role speculators played in driving up oil prices last year, Mr. Gheit sees fundamentals playing a bigger part this year.
We asked Mr. Gheit how he sees the oil market evolving.
WSJ: Like many analysts, you’ve often warned of a looming supply crunch that could send oil prices back up. How does that square with recession in the U.S. and signs of weakening demand?
Fadel Gheit: The market has been looking at OPEC as a savior. But as OPEC cuts, demand continues to slide—OPEC is just playing catch-up right now with falling demand. Once that stabilizes, prices will rise.
I call it ‘the second oil bubble.’ The longer oil prices remain low—and low in my book is below $50 a barrel—the more violent the rebound is going to be. It’s not a question of if, but when.
WSJ: Because lower prices mean less upstream investment?
Gheit: Look, oil companies are going to lose 40% of their cash flow this year, and capital expenditures will be cut sharply […] If you thought the fourth-quarter numbers [for oil companies] were bad, wait until you see the first-quarter numbers. Oil prices are now about where they were five or six years ago, but the cost of extracting oil has doubled in that time…
At the larger oil companies, 80-90% of spending is on new projects to offset decline [at existing fields]. Most companies are indicating that the rate of decline will increase because the capital expenditures just can’t keep pace.
[Older fields] are like aging athletes…you don’t want to spend the money, sign them to a long-term contract. So all the bets are on the rising stars, but those are projects that won’t have an impact for maybe five years.
WSJ: What will send prices higher?
Gheit: The spike will be the product of several factors…demand has to stabilize, and that won’t happen next week. And the production cuts from OPEC are coming slowly, you can’t just shut off the wells.
But non-OPEC production is also in decline…Russia, Mexico…Candian oil sands are underwater at these prices…Once you have stabilized demand and the supply crunch comes, prices will go up—it’s going to look like a hockey stick. And hurricanes could really accelerate this whole process…you could conceivably see 6 million additional barrels come off the market [this year], and I don’t see demand falling that much.
WSJ: Put a pricetag on that hockey stick.
Gheit: I can see a 40-50% increase, easily into the low $60s. [Unlike the 2008 spike that drove oil over $100] this spike is going to be driven by supply and demand, and not so much from speculation, so it will be more moderated. Another [moderating factor] which will put a cap on prices is that, unless demand recovery is robust, you are going to have a big spare capacity overhang. You could have 5-6 million barrels of spare capacity.
Now oil demand will come back, but it will be significantly below prior forecasts [because consumers showed signs of changing behavior]. If we wait until another bubble to really change demand habits, we deserve $10 gasoline.
Let’s just hope OPEC turns back on the spigot when demand comes back. They could have the whole world over a barrell if they restrict production with growing demand.
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Also, good point about major oil companies having declining production for 2008. Exxon, BP, Russia, and Mexico all will have significant declines this year.
Im worried since congress has not made any laws against speculators, we will go further than 60 a barrel. They are waiting to pounce, and when they do we will see prices of 140 a barrel. Congress Needs to go ahead and pass the speculation bill!!!
Speculation bill?
What are you, a communist?
I WANT oil at $100.00 a barrel - it will make me a millionaire with the positions I have!
Capitalism rules!
the day of oil is over
electricity rules
goodbye oil and speculators
i will never use oil again for anything in my life
The situation seems to me to be very different than Gheit describe (Google my latest article “Confusion in the Oil Patch”) — first, we’re closer to the beginning than the end of the global economic recession. So available supply will easily meet demand for the next 3-4 years. Second, the IOCs (e.g. Chevron, ExxonMobil) are going forward with projects in the hopper, meaning that they are producing oil during a glut. Thus they will probably drive the price down further (as demand continues to fall). Yes, all the emphasis is on the “rising stars” and these will make an impact this year and next, not in 5 years as Gheit says (e.g. Thunder Horse, Tahiti, Blind Faith, Agbami, Akpo … I could go on and on). Why are the oil companies engaging in this self-defeating behavior? Because they need immediate returns for stakeholders. Gheit was wrong about speculation in the market and he is wrong again in the current environment.
“i will never use oil again for anything in my life”
You’re using a computer, and electricity is not an energy source.
Without speculations oil would be at 10$/bbl. Without speculation nobody would care about storing all that oil in tankers arround the globe. The surplus of supply vs demand would be even bigger, this would lead to a much sharper drop in supply leading to a much higher price spike.
The government should do some “speculation” as well. Store huge quantities of oil at current pices and sell it when oil goes above 100$/bbl again.
Gheit is right it’s not if it is when will oil rise . Opec will not lose money for long. I wish they would but it will not happen .
Energy investment banker Matthew Simmons, like ASPO-Ireland, notes that today’s low oil prices and credit shortage will reduce investments needed for oil production, resulting in lower oil production in the future, followed by increasing oil prices as demand out strips supply, which will then cause another economic downturn in the future. Simmons also notes that the aging oil infrastructure of drilling rigs, rusting platforms, pipelines, and refineries must be renovated, requiring trillions of dollars in investments at a time when credit is tight.
For the full article, google: peak oil and the global economy.
i will never use oil again for anything in my life
Comment by STANLEY DUYCK - February 7, 2009 at 6:56 am
You use it every time you consume a commodity that was delivered by a train or a truck, or use a product made from or with petrochemicals. That is to say, you use it constantly.
wrt. the comment that the Government should become a short term speculator: NO! The Government needs to think much longer term towards a time when the supply of Liquid Fossil Fuels is decreasing and prepare us for it. Depending on who you talk to this is a few years to a few decades, IMO its the former…
I agree that we’ve got to change our demand habits. Concerning the idea that we deserve $10 gas if we fail to change our habits — well, yes and no. I see the constraints of the natural world as the real, core reason we have to change our demand habits. But most people can only relate to financial constraints — and I think $10 gas (give or take a dollar) is the only thing that will get people to cut their gas consumption in accordance with the actual constraints of the planet.
on e way to become the next best analyst.
so remember …
tuesday is for soylent green .
One of the funfamentals that Mr Gheit has missed is the affect of inflation during a recession. The policies of the Obama Administration are leading us toward a 20/20/20 solution. 20% unemployment with 20% inflation and a 20 dollar premium on the price of crude. The miss guided steps being taken are precisly what led to hyperinflation in South america. As we enter the second quarter of 2009,increasingly crude will be seen as a hedge. At the same time the administration’s hapless energy policy, guarantees more dependence on foreign oil. The Obama equation, leads naturally to a 20/20/20 solution.The price of crude will be closer to $80.00 come December 2009.
Oil and gas should be taken out of the commodities market. It’s only been there since the early 80’s, when we really started having problems. everything is based on oil…it’s our lifeblood. Most idiots still blame the oil companies for jacking the price up to $147 a bbl last year because the press knows nothing about the industry. The speculators had nothing else to hedge against the falling dollar, so they made fortunes doing option trading on oil. Even Exxon had to buy the oil at that price. They got hit hard by that. When the tide turned in July of 07, I bought all the airline stock I could find at pennies on the dollar, and now I’m retired at 49 years old. By the way, Obama will be far worse than Jimmy Carter ever was because he doesn’t understand the principle of the oil business abd how it affects the entire world. Without the tax burden paid by just Exxon to the government, we would have been in a complete economic collapse months ago. So just get ready for the new Jimmuh Carter to screw this country into the ground for good.
Dave, Exxon doesn’t “produce” oil that matters. They buy 97% of it and transport it and refine it. Only 3% of Exxon’s projects are production, if that much. Wanna retire like KAB did above? Buy airline stock now and wait about a year when oil does hit 80 a bbl again…that’s when their own fuel hedges will bring them the money to be profitable again. they hedged at the wrong time when oil was going over $120. they listened to the “experts” in the financials, and JP Morgan and Chase who kept pounding out the BS that oil would hit $300 a bbl, scaring the hell out of everyone. Of course JPM and Chase and all the East Coast banks wanted oil to go to $300 a bbl…they lined up all their speculator investors to make fortunes on call options on and gas prices…it wasn’t illegal to say it…but they LIED, and the suckers bought it hook line and sinker until the dollar got stronger and the hedge broke, and it fell three straight days after it hit $147 bbl and the momentum never stopped…they ran. They took the money and ran. Smoke and mirrors. And everyone in the country cought the LIE that the oil companies were screwing the American people by jacking up prices. Oil companies DON’T SET the prices of oil…the free market does. In July of 2007, after the 3 day drop in oil, I bought stock in Continental, Air Tran, Delta, United, Mesa (lots and lots of MESA airlines) Jet Blue, Frontier, for under $5 a share and loaded up for 2010. I expect most of them to be back in the $16 to $40 a share range bye then. Use their own BS against them. Rockefeller bought when everybody else sold. Go for it. Don’t buy the promo BS from any bank, either. They don’t talk in the press for fun…they’re contrarian againt YOU to make money.
Peaking oil production, fresh water shortages, declining agricultural lands, imploding financial markets, depleted fisheries, etc., etc. Each of these is a piece of a much larger jigsaw puzzle. When placed together they show a picture of a collapsing world economy. The failure is systemic. Gyrations in the price of energy and other commodities are simply ripples radiating from bubbles bursting on the surface of a sea of troubles. Government bailout programs will prove to be largely ineffective in arresting a long and accelerating slide.
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