Oil prices - fresh bullishness for the long term?

Friday, Mar 25 2011 by
13
Oil prices  fresh bullishness for the long term

The FT publishes today an interesting article that quotes from Barclays research. Paul Horsnell from Barclays appears to be going for an oil price of around $185 by 2020. And to give some credence to that view, the FT quotes (somewhat selectively) some details of his previous forecasts.

I remember commenting previously on Horsnell in 2005 when oil prices hit $60 - which, as I noted at the time, was beyond the expectations of virtually everyone when oil prices had been below $20 some 5 years earlier (myself included - though I had certainly expected oil prices to get into the $45-50 area when I first invested in the sector with oil prices under $12).

I now find it very difficult to think that oil prices won't get somewhere in the area Horsnell suggests by 2020, especially given the geopolitical upheavals of this year and the continued sway that the environmental lobby holds over policy ...for example in the US (offshore drilling bans, new environmental rules etc), UK (this week's Budget moves were supposedly "Green") and underdeveloped parts of Africa (eg SOCO's problems on Block V) .......all of which has been driven by a combination of pandering to popular opinion (post the BP spill) and blatent fund-raising opportunism by the environmental lobby (see the Block V link above!). And the net effect is that marginal production of oil is being ceased prematurely and that exploration is being deferred, disincentivised or cancelled.

Incidentally, IIRC the late Matt Simmons' estimate (5 years or so ago) for the longer-term oil price was also around $185....though I guess he wouldn't have factored in the potential for regime meltdowns in oil-producing states.

I suspect we are heading into a world that will look radically different in terms of the shape of economic and political power structures - and in terms of economic opportunities for the world's population. And it seems to me that this could be a very messy and protracted transition. Perhaps $185 oil may only be a small part of a much bigger and rather worrying picture?

ee


Filed Under: Commodities, Oil,

Disclaimer:  

As per our Terms of Use, Stockopedia is a financial news & data site, discussion forum and content aggregator. Our site should be used for educational & informational purposes only. We do not provide investment advice, recommendations or views as to whether an investment or strategy is suited to the investment needs of a specific individual. You should make your own decisions and seek independent professional advice before doing so. The author may own shares in any companies discussed, all opinions are his/her own & are general/impersonal. Remember: Shares can go down as well as up. Past performance is not a guide to future performance & investors may not get back the amount invested.


Do you like this Post?
Yes
No
14 thumbs up
1 thumb down
Share this post with friends




23 Comments on this Article show/hide all

doverbeach 27th Mar '11 4 of 23
1

In reply to marben100, post #2

Canada and Australia are two jurisdictions that are likely to respect property rights and that have plenty of natural resources themselves.

although Australia has already been flirting with windfall taxes on miners, of course. I suspect we have to view these as par for the course if oil get high and stays high.

But Suncor and the otherCanadian oil sands look as though they should be core holdings going forward.

db

 

| Link | Share | 2 replies
emptyend 27th Mar '11 5 of 23
1

In reply to doverbeach, post #4

although Australia has already been flirting with windfall taxes on miners, of course. I suspect we have to view these as par for the course if oil get high and stays high.

Yes - good point re the windfall tax proposal.

The general point is, I think, that the map of political risks will be changed by a combination of recessionary pressures and high oil prices.  The last week has confirmed that political risk in the UK is greatly more than some have hitherto assumed - and undoubtedly the same will be true of other countries, especially if prices move much higher as per Horsnall's forecast......

....but from an investment perspective the questions are: "where will those pressures be strongest and will any countries be more reluctant to change their tax regime?"

Australia and Canada should (as resource-rich economies) be perfectly placed to be amongst the laggards in raising taxes - so it is a concern that the Aussies have already considered moving!

ee

ps...meanwhile, I see on the BBC that

Radioactivity in water at reactor 2 at the quake-damaged Fukushima nuclear plant has reached 10 million times the usual level, company officials say.

.....which sounds a couple of orders of magnitude more serious than recent reports.... If the environmental lobby was faced with what (in their view) would undoubtedly be an unacceptable/unwelcome straight choice between more nuclear or more fossil fuels, which would they now pick as the "less bad"?

| Link | Share
marben100 27th Mar '11 6 of 23

In reply to doverbeach, post #4

Hi db,

although Australia has already been flirting with windfall taxes on miners

...but the proof of the pudding is that the government couldn't get these proposals through, except in a much watered down and less damaging form. Indeed, the proposals led to the downfall of Kevin Rudd as prime minister. It would appear that enough ordinary Australians appreciate the importance of the mining industry to their economy and don't want to kill the golden goose. And, unlike many of the places one might be concerned about, Australia is a functioning democracy.

 

ee,

Very latest reports indicate that the 10m x reading has been retracted and was found to be erroneous.

 

Best regards,

Mark

| Link | Share
emptyend 4th Apr '11 7 of 23
6

There is a further FT piece today which is well worth some thought.

The article suggests that the markets are beginning to price in the possibility of disruption to supplies from Saudi Arabia and it quotes an oil trader making the astute observation, following the recent Saudi announcements, that

“The king’s largesse tells you the risk is not nil. It is not 0.1 per cent. The king’s largesse tells you the risk is real – probably around five per cent,”
....which is an excellent piece of logical deduction.
Accordingly, the market is adjusting its pricing of way out of the money call options, because sellers are starting to demand a higher price as they start to recognise that the potential for Saudi problems means that the  distribution of potential oil prices is much more leptokurtic (fat-tailed) than their standard models assume.....and because such potentially massive price shifts are inherently difficult to hedge, given that they may literally occur overnight (since they would be politically-driven).
If this process should continue, and the disruption to Saudi production start to be priced in, then the structural argument that I have deployed for the last 12 years of investment in the sector will begin to fall away (I've always thought that the market and analysts have been misvaluing long-dated options, both in respect of the oil price itself and in respect of exploration). If that should happen though, then the price deck that analysts use for valuing E&Ps will need to be substantially raised......
....no longer (IMO) can analysts get away with the idea which is still common today in their models.....ie that long-term oil prices will be around $80 and today's prices represent some sort of spike. More likely I think that they will end up modelling long-term prices at $120 ish, at a point when spot prices are in the $130 range. We've got a way to go before we see that change in thinking......but it might be only months, rather than years?
ee
| Link | Share | 1 reply
uncommon13 5th Apr '11 8 of 23
4

Oil prices reach record sterling high


Another FT article showing oil prices have reached a record sterling high today:

Brent oil prices rose above $121 a barrel on Monday, well below the $147 a barrel record set in June 2008. But the 17 per cent fall of sterling against the dollar over the past two years has raised the sterling price per barrel to £74.6, higher than the record set in 2008.

This follows on to what do people expect this time round with such high oil prices? Do you expect another 2008 recession again with oil prices falling off a cliff as it happened when the banks ran into trouble? Are we expecting the same problems but this time with respect to (European) governments running into issues? On the other hand, the USA seems to be recovering and there are genuine problems in the Middle East which support the high oil prices.

 

Three quarters of my portfolio is in oil/gas but again I'm not sure whether I should sell some holdings to raise more cash and risk losing value of my cash as the Sterling pound falls? However, the elephant in the room is always present with respect to Saudi production as highlighted by ee.

 

I guess the real question is whether economic growth can continue this time round even in the presence of high oil prices?

| Link | Share | 1 reply
emptyend 5th Apr '11 9 of 23
3

In reply to emptyend, post #7

If that should happen though, then the price deck that analysts use for valuing E&Ps will need to be substantially raised......

....no longer (IMO) can analysts get away with the idea which is still common today in their models.....ie that long-term oil prices will be around $80 and today's prices represent some sort of spike.

FWIW RBC have today raised their price deck for oil prices to $102 per bbl (real, long-term Brent price).  That may also prove too cautious over time - but it is a step in the right direction and has raised their NAV estimates for their E&P coverage universe by an average of 15%.

Short term they are now using $106 for 2011 and $112 for 2012...... which seems the wrong way round to me, given Brent is at $120, though the $102 real means the 2013+ prices will be inflation-adjusted.

ee

| Link | Share | 2 replies
djpreston 5th Apr '11 10 of 23
3

In reply to emptyend, post #9

And RBC follow hot on the heels of First Energy who raised their prices yday.

Here's a snippit of what they say. im sure that the full note is knocking around out there somewhere....

World Crude Oil Markets: Crude Oil Price Forecast Update

We have chosen to substantially increase our crude oil price expectations over our entire forecast horizon. Expected prices for WTI and Brent in 2011 have been increased by US $10 and nearly US $20 per barrel, respectively, averaging US $100 per barrel and US $109 per barrel. For 2012, we have increased anticipated prices for WTI and Brent by US $7 and US $11 per barrel, respectively, with a projected average of US $102 per barrel and US $107 per barrel. Our long-term price outlook has been increased by US $10 per barrel, with WTI and Brent expected to average US $130 and US $133 per barrel, respectively.

Fund Management: European Wealth
| Link | Share | 1 reply
djpreston 5th Apr '11 11 of 23
7

In reply to emptyend, post #9

And RBC's snap (from the 28 page note:

In the year-to-date the oil price has risen more sharply than share prices (see exhibit 1); consequently we see the potential for a surge in the oil price leveraged names including Bankers Petroleum, Premier Oil and SOCO International.

(Their bolding not mine).

Fund Management: European Wealth
| Link | Share
emptyend 5th Apr '11 12 of 23

In reply to djpreston, post #10

Our long-term price outlook has been increased by US $10 per barrel, with WTI and Brent expected to average US $130 and US $133 per barrel, respectively.

...thats more like it  ;-)

| Link | Share | 1 reply
emptyend 12th Apr '11 13 of 23
6

In reply to emptyend, post #12

Apparently Goldman has been advising clients who are speculating on oil prices to take profits:

Long-term commodity bull Goldman Sachs (GS.N) warned clients on Monday to lock-in trading profits before oil and other markets reverse, with the bank's estimates suggesting speculators are boosting crude prices as much as $27 a barrel.

Traders said the call from one of the biggest banks in commodities contributed to a near 3 percent slide in U.S. oil futures,

...guess they must want to go long  ;-)

| Link | Share | 1 reply
uncommon13 24th May '11 14 of 23
2

In reply to emptyend, post #13

Two faced Goldman is back saying the commodities correction is over.

FT article: http://www.ft.com/cms/s/0/bbf15300-85e7-11e0-be9b-00144feabdc0.html

On Tuesday, however, Goldman reversed that call. In a note to clients, the bank argued that the correction in prices since the start of the month had created “a good entry point for long positions”.

They raised their forecast for Brent crude oil to $120 a barrel by the end of 2011 and $130 in 12 months, from current levels of $111.

The bullish call brings Goldman in line with other leading commodities banks. Morgan Stanley on Tuesday raised its forecast for the average Brent price to $120 a barrel for this year and $130 for next year. JPMorgan is forecasting an average Brent price of $120 this year while Barclays Capital predicts $112.

 

Also, FT Alphaville article on it: http://ftalphaville.ft.com/blog/2011/05/24/576131/and-now-goldman-says-the-commodities-correction-is-over/

 

| Link | Share
Fangorn 24th May '11 15 of 23

Amazing change of heart at Goldman so soon!!!!!

They must be looking to close all those longs then eh...

| Link | Share
uncommon13 5th Aug '11 16 of 23
1

In reply to uncommon13, post #8

 

Another FT article showing oil prices have reached a record sterling high today:

....

This follows on to what do people expect this time round with such high oil prices? Do you expect another 2008 recession again with oil prices falling off a cliff as it happened when the banks ran into trouble? Are we expecting the same problems but this time with respect to (European) governments running into issues? On the other hand, the USA seems to be recovering and there are genuine problems in the Middle East which support the high oil prices.

 

Three quarters of my portfolio is in oil/gas but again I'm not sure whether I should sell some holdings to raise more cash and risk losing value of my cash as the Sterling pound falls? However, the elephant in the room is always present with respect to Saudi production as highlighted by ee.

I guess the real question is whether economic growth can continue this time round even in the presence of high oil prices?

 

I wish I had gone further into cash a few months back before May and my portfolio was close to an all time high :(

Anyway, I was holding enough cash to top up today on Tullow Oil (LON:TLW) and Tesco (LON:TSCO). SOCO International (LON:SIA) is still my largest holding. 

| Link | Share
emptyend 14th Feb '12 17 of 23

I see in the FT that the IEA has cut ts estimate of Saudi Arabia's production capacity. Whilst the Saudis think they can produce 12.5mn bopd, the IEA has cut its estimate from 12.0mn bopd to only 11.88mn bopd.

Of course that is plenty of spare still for the short term (under normal circumstances), but it adds some credence to the idea that Peak Oil is now in the past.

ee

| Link | Share
MadDutch 15th Feb '12 18 of 23
1

We may have reached peak light oil but I do not think we have reached peak hydrocarbons, or ever will in the next 1000 years.

When the original theory was published by M. King Hubbert in 1956, oil was plentiful stuff that effortlessly came up the pipe, propelled by gas pressure. There were no other viable methods of production.

That source is now facing potential declines but there are newer sources with much larger potentials, starting with the 60+% of the original deposits that cannot come up the pipe. The technology for that may come in the future, but we now have the tar sand deposits, and much more recently the technology to release natural gas and oil from shale. Conventional oil deposits are fairly rare in the Earth’s crust; but shale is a very common rock.

We may not have petrol cars in the future, but we will have cars; I think they will be driven by LNG, Liquefied Natural Gas. IMHO.

On a different but related subject, hydrogen as a fuel. Last week, I was skiing at Font Romeu and visited the incredible solar furnace, a scientific research establishment. The visitor centre was very interesting; the furnace produces up to 3,400 degrees centigrade and 2 hydrogen related experiments are underway, using the heat to crack methane & water to make hydrogen, and into nano tubes for fuel tank storage.

The skiing was good but could have been nicer; the cold plus windchill was -27 degrees; I felt like the proverbial brass monkey!

MadDutch

| Link | Share
emptyend 15th Feb '12 19 of 23

We may not have petrol cars in the future, but we will have cars; I think they will be driven by LNG

I'm not sure about that. I recently had an old Renault serviced and learned that Renault are slashing their petrol-driven range in favour of a big move into electric......though I do notice more stations locally making LNG available. For my lifetime though, I can't see that petrol/diesel will be surpassed as the preferred fuel for cars.

| Link | Share
emptyend 22nd Mar '12 20 of 23
3

Worth listening to what this ex-Shell guy has to say about oil supply and demand and the recent Saudi claims over production raising.

| Link | Share
emptyend 11th Apr '12 21 of 23
2

Interesting article in the Wall Street Journal suggesting that the Chinese are raising their oil stocks fairly aggressively:

Analysts have been watching China's import data climb higher over recent months. The wave of imports, added to domestic production, has exceeded the amount of crude the country's refineries can process, analysts said.

Moreover, China has been increasing its oil purchases even though prices have soared, a rare occurrence for a country that usually steps out of the market when prices are high. The market's conclusion: After a three-year hiatus, China is filling up its strategic petroleum reserves.

Currently they have about 40 days supplies in stock - but they are looking to raise that to 90 days, over time.

ee

| Link | Share
emptyend 13th Apr '12 22 of 23
3

It is perhaps worth noting that oil prices (and indeed US natural gas prices) might be impacted by the latest piece of work by the USGS, reported on Bloomberg:

A spate of earthquakes across the middle of the U.S. is “almost certainly” man-made, and may be caused by wastewater from oil or gas drilling injected into the ground, U.S. government scientists said in a study.....

.....though it is difficult to be sure. It would only take one major quake to be pinned on such activity, though, for the US to copy the reactions seen in the UK to earthquakes in Blackpool.

Meanwhile, Goldman is calling the turn on US natural gas prices, suggesting they will be higher in 2013 even if they stay depressed over summer.

| Link | Share
emptyend 21st Jun '12 23 of 23
8

Just picking up the most recent thread I can find re oil prices [note to Ed.....there ought to be a better way of finding a full list of generic (non stock-specific)  topics that one has contributed to!]......

There is a very good article here in the FT on the topic of oil prices which essentially points to the perception of scarcity as having been responsible for the recent oil price highs.....and in particular the idea that the perception has been misplaced, due to a range of possible supply-side and storage factors. Some of the associated links are also well worth a read, including this one, which raises the point that much of the apparent inventory is actually subject to encumberances. (nb there is also a related and very general piece on the topic of artifical scarcity in the FT here - very thought-provoking on a macro scale!)

I don't think that one can conclude that oil prices are now "too low" or that they were recently "too high".....but I think one CAN fairly conclude that very many market participants don't have the full picture they need in order to make rational investment decisions (not least re the Brent/WTI arb trade that we have discussed previously!) - and that the result of this is markets that trend for long periods in one direction or another....and then quickly reverse when they overshoot.

Debateably it may be that we are close to such an overshoot reversal now (in part because the market seems to be becoming more generally aware of the issues in these article - or, put another way, discussion boards today are the "bell-hop of the 1930s"). My evidence for that is primarily the resilience of oil-related  equities in the face of the recent 30% decline in the spot price.

What isn't a matter of debate is that the oil markets operate with more opacity and uncertainty than many people have thought. Not only do they have to contend with the fact that production, supply and reserves have (at best) extremely dodgy and uncertain methods of quantification - those facts have long been well known - but they now also have to contend with clear evidence that various players (both in the industry and outside it) are playing games with storage and are pursuing strategies that distort the prices of various key elements of benchmark commodity prices. I point to the manipulations involving Cushing (WTI) supply, demand, transport and storage over the last two years - and also the emergence of a Korean tax arb supporting Brent prices (amongst other more long-standing factors!).

How will it all resolve? What does that mean for oil prices?

Perhaps there is a much better and more solid basis for M&A pricing based on oil-in-the-ground 2P than there is for the spot price at any point in time? Perhaps the only market worth watching for trends in oil prices is the price at which future supply capacity changes hands?

ee

 

| Link | Share

What's your view on this article? to Comment Now

 
 
You are feeling neutral

Use the £ sign in front of a ticker to turn £VOD into Vodafone PLC

You can track all @StockoChat comments via Twitter


About emptyend

I spent 20 years working in and around the City, before becoming fully-focused on investment on my own account. I've always paid most attention to "big picture" issues and LTBH investments rather than trading - which is why I am heavily focused on the oil sector (especially stocks which have positions that are attractive for strategically-driven M&A) more »


Stock Picking Tutorial Centre



Stock Picking Simplified

Stockopedia takes your stock picking to the next level with cutting edge Stock Reports & Screening tools.


Get started
or Take a Tour to find out more.
Join us at the London Investor Show next Friday at Olympia