Wednesday, June 17, 2009

Oil price will stall on fundamentals

Oil prices are not going back to the levels of last summer. The prices are capped. The latest numbers from Credit Suisse show why. The financial crisis has created permanent destruction of demand growth. The expectation now is 1% growth in demand per year. Two contributors to this are:

1. Faster gasification in Asia (as Asian nations begin to use liquefied natural gas)
2. Greater auto efficiency in the US. Sensitivity to high gas prices is extreme, given all the pain the US consumers have experienced. Fuel efficiency is here to stay.

From Credit Suisse

Given that the demand by 2015 is expected to be 90 million barrels per day (MBD), this new need for oil can be easily met by cheaper forms of production, in effect capping the price.

The graph below from Credit Suisse shows where oil price needs to be to achieve a 16% return on capital investing in new sources of supply, vs. the amount of new supply available from these sources. To get to 90 MBD can be done with the more traditional projects that are profitable even when oil is under $70 per barrel (and certainly under $100).

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