By Don G. Briggs, President – LOGA (Louisiana Oil & Gas Association)
What a difference a few months can make. In July of 2008 oil prices closed at a record high of $145 a barrel, and all was looking rosy for the oil and gas industry. Predictions were already being made for higher prices in 2009: Goldman Sachs predicted oil prices to climb to $200 a barrel just five months ago. Alexei Miller, the chief executive of Gazprom, the Russian gas monopoly and the world’s largest energy company, predicted prices to climb to $250 a barrel in 2009. Miller and Goldman were somewhat on the high end but not alone, as there were many analysts and big corporations predicting prices to be $150 to $200 a barrel.
This past Friday oil closed at $38.01 per barrel, a 74% crash in six months. “Who would have ever thunk it?” U.S. crude oil stocks are 39.5 million barrels above last year’s level, and well above 5-year levels. The U.S. Energy Information Administration (EIA), reports 339 million barrels of crude are in commercial stocks, which is a 16% percent increase over this time last year and above the U.S. average.
We are definitely afloat in oil. Onshore storage tanks are near full capacity and finding storage space is difficult. Oil players and traders are going to the high sea and storing oil in supertankers. One of the world’s largest crude supertanker fleets, Frontline LTD, estimates there is close to 80 million barrels of oil floating on the high seas looking for a place and time to unload. The world consumes 84 million barrels per day.
There is also another reason for the high seas supertanker storage of crude. The oil markets have gone into a condition called “contango”, which is when the current price of crude is less than contracts for future delivery of oil in months to come. Simply put, oil purchased at $35 a barrel could be sold forward in a September contract for $45 a barrel, a $10 spread over the current price. The storage cost at sea of a 2 million barrel tanker is approximately $60,000 a day. The monthly cost to store a barrel of crude in round numbers is $1 per barrel per month and $6 for six months. Subtract the $6 storage cost from $10 spread would $4 profit for the trader.
There’s certainly risk to the “contango” scenario. Predictions for oil prices are all over the board. On February 3, Goldman Sachs said, “We predict oil will tumble to a low of $25 a barrel in the second quarter of this year from the current level of around $40, and will average $35 a barrel over the course of 2009”, a long way from the $200 predicted a few months ago. The following are additional predictions for 2009 crude prices;
- Bloomberg Consensus: Oil futures may rebound from their worst year to average $60 a barrel.
- Deutsche Ban
- Blog predicts $60 to $70 a barrel by year’s end.
- The Energy Information Administration projects crude oil will trade at an average of $51 a barrel in 2009.
- Moody’s Investors Service says crude will average $50 a barrel in 2009.
- OPEC is pushing for an average of $75/bbl and are prepared to make deeper production cuts to ensure this price.
- k predicts an average of $47.50 a barrel for all of 2009
- Oil Traders There you have it, kind of like a roulette table, what number do you bet on or do you just stand back and watch. Who knows? Looking back at this past year, anything can happen. What is your prediction