Oil prices: Return to sanity, or a collapse?

[YoungTulsan]

As of this post, the oil futures have WTI Crude at $91.15

On July 11th prices reached $147, that is a drop of almost 40% in less than 10 weeks.

The questions I have are:  Do you see this is a return to sanity in the oil market, or do you take it in purely percentage terms and see this as a huge collapse?

What does this mean for Tulsa?  What oil price level will do harm to the recent prosperity in Tulsa oil companies?  Sub-$100?  Sub-$80, or I had heard in the past, Sub-$60 was a support level for much of the recent activity in the Tulsa economy.

At the current state of the market, I see $80 easily breached, because prices right now have actually held higher than they should over concerns of Hurricane's Gustav and Ike.  We already would have been in the $80s or lower by now without the speculation over hurricane damage kept the price propped up.

So while in the past, $60 oil was seen as good enough to sustain Tulsa's recent upturn, do you think the recent $120+ period of oil will have companies so spoiled that they will be disappointed with $80, instead of $60 oil, and scale back operations in our region?

On the bright side, with the current drop in oil prices, gas should be back down in the $2.50 range once all the refinery closures are over with in the Gulf.

[FOTD]

There were times when oilmen went broke watching the price drop from $3 a barrel to $1.60 a barrel.

[TheArtist]

I kept saying it would drop soon, despite the ocean of people saying the end was nigh. It could easily go below 80dollars even 60 dollars. We may see some more spikes in the near term, but a lot more supply and refining capacity is going to come online in the next 10-15 years. 15 years or so after that is when the real trouble begins. But anywhoo, yes, Tulsa and Oklahomas economy are going to suffer. We should still work on becoming more efficient, growing our city in a more eco friendly, energy sensitive manner for many reasons. But cheap oil will just make the incentive harder. Cheap oil will encourage people to continue to sprawl to cheap suburbs, while building in the more expensive core and trying to build alternative transportation/energy infrastructure will be all that more difficult because the economy will be down.

[OUGrad05]

quote:Originally posted by TheArtist

I kept saying it would drop soon, despite the ocean of people saying the end was nigh. It could easily go below 80dollars even 60 dollars. We may see some more spikes in the near term, but a lot more supply and refining capacity is going to come online in the next 10-15 years. 15 years or so after that is when the real trouble begins. But anywhoo, yes, Tulsa and Oklahomas economy are going to suffer. We should still work on becoming more efficient, growing our city in a more eco friendly, energy sensitive manner for many reasons. But cheap oil will just make the incentive harder. Cheap oil will encourage people to continue to sprawl to cheap suburbs, while building in the more expensive core and trying to build alternative transportation/energy infrastructure will be all that more difficult because the economy will be down.

Oil is a world commodity where is all this excess capacity coming from that you speak of?  The only excess capacity I'm aware of is enough to mitigate increased demand through early 2011 muchless 2015 when it looks like the world as a whole will have a shortfall of 6.8 million barrels per day and that includes all planned increases in production/refining.  The market has a unique way of closing these gaps, obviously prices could rise again and increase production while simultaneously decreasing demand creating a new equilibrium...but to say we'll have an oil glut in 15 years seems HIGHLY unlikely.

As for prices, there's no doubt in my mind they were too high at 140 dollars and many in the industry agree.  Most thought it should be between 60 and 80, since then the cost of production in unconventional plays has gone up considerably and some of it will not be profitable below 90 dollars per barrel.  That means if they're already producing they'll continue to produce from those areas but if they're still working on production infrastructure and drilling they may hold up and/or slow down.  

Most oil companies including the super majors (exxon, bp, shell, COP) are very profitible at 80 dollar oil and even 60 dollar oil.  We will see some margin issues if oil drops below 60/bbl but the small independant companies should be ok even if oil falls into the mid 30s.  The small and independant producers are what tulsa thrives on and so I don't see any real issues on the horizon unless we have a true collapse and prices go back to 10 or 15 dollars per barrel.  

Remember the prices were irrationally hight at 147 dollars per barrel, bid up by a perfect storm if you will.  When none of those issues materialized the price has come down some and the demand world wide has shown weakness compared with prior projections.  On top of that the dollar has gained substantially on other world currencies dragging oil down.  I think the fair market for a barrel of oil right now is somewhere in the 70 to 90 dollar range.  I've been saying this for quite sometime...HOWEVER prices could dip lower...much lower just like they went much higher.  If the dollar continues to gain strength and the world economy continues to show weakness and people get scared out of commodities then prices could easily drop into the 50s and God forbid the 40's again.

[Conan71]

quote:Originally posted by YoungTulsan

As of this post, the oil futures have WTI Crude at $91.15

On July 11th prices reached $147, that is a drop of almost 40% in less than 10 weeks.

The questions I have are:  Do you see this is a return to sanity in the oil market, or do you take it in purely percentage terms and see this as a huge collapse?

What does this mean for Tulsa?  What oil price level will do harm to the recent prosperity in Tulsa oil companies?  Sub-$100?  Sub-$80, or I had heard in the past, Sub-$60 was a support level for much of the recent activity in the Tulsa economy.

At the current state of the market, I see $80 easily breached, because prices right now have actually held higher than they should over concerns of Hurricane's Gustav and Ike.  We already would have been in the $80s or lower by now without the speculation over hurricane damage kept the price propped up.

So while in the past, $60 oil was seen as good enough to sustain Tulsa's recent upturn, do you think the recent $120+ period of oil will have companies so spoiled that they will be disappointed with $80, instead of $60 oil, and scale back operations in our region?

On the bright side, with the current drop in oil prices, gas should be back down in the $2.50 range once all the refinery closures are over with in the Gulf.

$60 is the lower threshhold.  At $80, it still makes a lot of sense for expansion and renovation.  At $100, it makes sense to spend money for "black sand" and shale recovery, and re-open marginal strippers.  Actually $60 is good enough reason on marginal strippers if the pump jack and other equipment are still on site.  It costs a lot more doing shale and black sand recovery as it requires temperature and pressure to make it flow.  The equipment isn't cheap and you need to burn a fuel to make it happen.

Around my office, we also keep a close eye on natural gas futures as we work with NG processors on midstream plants and the price of NG affects many of our customer's (who are NG end-users) bottom lines.  Higher fuel prices help our business as people look for ways to cut fuel consumption.

Steel has dropped by 20% this week.  I still don't get all the machinations of the commodities markets, but safe to say, there have been a lot of investors manipulating and profiting in commodities the last two years.

We are in a wait-and-see mode now to see if some of our vendors will start dropping prices on finished equipment we buy.

[YoungTulsan]

Update 9/22/08

Oil shot up the most it ever has in a single day today.  A $16.37 one-day increase eclipsed the previous record of $10.75 on June 6 of this year.  Intraday, it was up over $25.  My assumption that oil was on the decline and sub $3.00 gas was about to return may have been premature.

Story: http://biz.yahoo.com/ap/080922/oil_prices.html

So now I'm left confused.  Now what?  The markets are just going crazy these days.  My initial theory is that the futures markets are betting on the US Dollar losing 25% of its purchasing power thanks to all of the money being printed right now to bail out the financial system.  That is the only thing I can think of, because nothing earth-shattering happened to the supply and demand scheme today to warrant violent increases in price.  I would expect oil to go up $25 if we bomb Iran, Russia blows a pipeline in Georgia, or OPEC announces they are shutting production off.  I don't expect oil to go up $25 on an uneventful day.

[OUGrad05]

quote:Originally posted by YoungTulsan

Update 9/22/08

Oil shot up the most it ever has in a single day today.  A $16.37 one-day increase eclipsed the previous record of $10.75 on June 6 of this year.  Intraday, it was up over $25.  My assumption that oil was on the decline and sub $3.00 gas was about to return may have been premature.

Story: http://biz.yahoo.com/ap/080922/oil_prices.html

So now I'm left confused.  Now what?  The markets are just going crazy these days.  My initial theory is that the futures markets are betting on the US Dollar losing 25% of its purchasing power thanks to all of the money being printed right now to bail out the financial system.  That is the only thing I can think of, because nothing earth-shattering happened to the supply and demand scheme today to warrant violent increases in price.  I would expect oil to go up $25 if we bomb Iran, Russia blows a pipeline in Georgia, or OPEC announces they are shutting production off.  I don't expect oil to go up $25 on an uneventful day.

The dollar lost almost 2% today.  On top of that the spread between contracts is quite large, that spread will start to narrow this week if it doesn't we'll see prices come back down.  Who nkows they may even drop some tomorrow...

[sauerkraut]

Oil's up. Investors are flocking back into oil. The dollar is falling like a rock. Watch those pump prices start to drift upward toward the sky!! [}:)]

[YoungTulsan]

Update 10/16/08

Futures now have WTI Crude at $69.85

This is starting to worry me about the future of Tulsa's economy.  False prosperity on easy borrowing is already coming to an end.  Real economic activity in the Tulsa area based on profitable levels of energy extraction, alternative energy, etc, was a very real benefit to Tulsa's economy.  I was foreseeing a pretty smooth ride for Tulsa through this economic turmoil, but if oil prices continue their downward spiral that could all be over for us.

On the gas price side of things, we're already close to $2.50, I just saw $2.56 this afternoon.  I'm starting to think gas prices could fall under $2.00 now, but that isn't 100% a good thing.

[OUGrad05]

This is starting to look pretty nasty...

[cannon_fodder]

Oil prices are responding to market forces.  Less money around the world means less oil - we are dependent and have a fairly inelastic supply.  Such is not the case the world over.

IMHO, OPEC burned their bridge in the long run.  From the USA to China, we have learned to fear high oil prices and will be more inclined to get away from them.  Of course... we've learned that lesson before.

ANYWAY,  I'd say $65-70 a barrel is the what the market will settle at.  It may dip below, but it will settle around there.

[YoungTulsan]

CF, I see the same, but the drop below could be catastrophic for Tulsa.  Market forces can have a pendulum effect.  Prices were obviously way too high at $147, and perhaps $70 is the real settling point of supply and demand with all the speculation & flocks of investors chasing the next big thing gone from the picture.  But in that pendulum swing, lots of damage can be done from a short term plunge to say, $50.  Less disciplined business models would completely freak out, massive layoffs, and perhaps collapses of corporations could occur during the interim.  Scary times.

Not that Tulsa has never seen this happen before, but we always seem to lose ground when it happens.

[Matthew.Dowty]

Long term back up.  Still all those in China and India who want to live like we do.

[Red Arrow]

quote:Originally posted by Transport_Oklahoma

Long term back up.  Still all those in China and India who want to live like we do.

Who could blame them?  I bet they are smart enough to not cause their big(est?) market to go to economic oblivion.

[OUGrad05]

quote:Originally posted by Transport_Oklahoma

Long term back up.  Still all those in China and India who want to live like we do.

No doubt that market forces will eventually push prices higher.  By 2015 I think we could be back at 150 dollar oil world demand projections are 95 to 100 million barrels a day and thats conservative.  Some think world demand could be between 105 and 115mbpd.