Price of Oil and Investors

Investors that come to this site are always focused on the price of oil, perhaps overly concerned. I know I am.

But for all the volatility in the price of oil, it seems to have found a trading range of $70 to $80. I forget, but I think I opined some months ago that the floor would be $80, maybe I said $70. I forget.

Heading back toward the $60 range this past week, the price of oil seems to have, at least temporarily reversed course, and is now up a bit, back above $75. Good news for oil investors.

But is there really much difference, other than psychological, to an individual investor whether the price of oil is $72 or whether it is $82?  I have said many times that there is much more to the business end of the oil industry than the price of oil. In fact, as long as oil stays in a $10 trading range, I doubt the price of oil has much effect on the bottom line of a well-run oil company.

(Note: the price paid for North Dakota oil is generally significantly less than the benchmark price we see on the television crawler; probably closer to $55.)

To start with, most of these companies hedge. That is, they sell contracts for their oil months in advance. The price at which they will sell their oil is set six months to one year out.

On another note, I think most folks were surprised to see how much the loss of one pipeline affects the bottom line of Bakken oil companies (see recent Enbridge stories). That certainly had a greater effect than the daily volatility of the price of oil. Due to one pipeline being shut down for a few days (weeks?), some Bakken producers are expected to miss their third quarter production estimates. I opine they may miss their annual production estimates.

However, all things being equal, it's NOT about the price of oil within a $10 trading range. Rather, it's about three things: a) how well the oil company runs its business from a financial point of view; b) the company's business model; and, c) the increasing amount, on a daily basis, of the amount of oil a handful of companies are pumping out of the Bakken.  The average amount of oil produced in North Dakota during calendar year 2009 was 6.7 million barrels. In July of this year (2010), North Dakota produced almost 10 million barrels.

Yes, a drop in the price of oil costs "us" a significant amount, but for long-term investors, the increasing production is going to be the bigger story. Again, assuming oil stays above $70.