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Friday, July 16, 2010

Where Is Price of Oil Headed?

Idle rambling on a quiet Friday night.

From one analyst:
We remain positively biased towards energy supply and demand fundamentals (i.e., oil prices trending higher).

Let me start first with demand side. As you know from our past discussions, our primary focus on the demand side has been growing demand from the developing nations in the world, China and India in particular, as opposed to the developed or OECD nations. In fact, we have predicted for some time now that we would see flat if not declining demand in the OECD nations of the world, certainly Europe and the United States, and that has generally been the case. So, while we have to take concerns about the US economy and now the European economy into consideration, we think global energy demand will continue to grow given the inexorable link between global GDP growth and energy demand growth.

On the supply side, we actually view the supply challenges, and decline rates in particular, as a more compelling factor than the growth in demand. Decline rates in the Gulf of Mexico, especially deepwater, are very high, on the order of 30 to 40% (and even greater in some instances) post peak production. Globally decline rates are in excess of 6% per year, which means the world has to bring online roughly 5 million barrels a day of new production every year simply to keep supply flat. In addition, the recent incident in the Gulf of Mexico is another example of the existing the supply challenges and more evidence that the era of cheap, easy to access oil is truly over.

On a specific note, one of the interesting dynamics at play today is that the deepwater Gulf of Mexico represents a very important part of US domestic production. 
Does the comment on the horrific decline rate remind you of, say, the Bakken?

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