Sunday, November 13, 2005

The Oil Bet update: $100 or bust

Here are a few miscellaneous observations on my bet with Oroborous that crude oil (Light, Sweet) will reach a price of $100/barrel on or before December 31, 2006.

Last week, the Kuwait national oil company announced that the Burgan oil field, the world's second largest, has reached the peak of its production.

The peak output of the Burgan oil field will now be around 1.7 million barrels per day, and not the two million barrels per day forecast for the rest of the field's 30 to 40 years of life, Chairman Farouk Al Zanki told Bloomberg.

He said that engineers had tried to maintain 1.9 million barrels per day but that 1.7 million is the optimum rate. Kuwait will now spend some $3 million a year for the next year to boost output and exports from other fields.

However, it is surely a landmark moment when the world's second largest oil field begins to run dry. For Burgan has been pumping oil for almost 60 years and accounts for more than half of Kuwait's proven oil reserves. This is also not what forecasters are currently assuming.

Forecasts wrong

Last week the International Energy Agency's report said output from the Greater Burgan area will be 1.64 million barrels a day in 2020 and 1.53 million barrels per day in 2030. Is this now a realistic scenario?

The news about the Burgan oil field also lends credence to the controversial opinions of investment banker and geologist Matthew Simmons. His book 'Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy' claims that the ageing Saudi oil filed also face serious production falls.

You may also have heard optimistic news stories about the dropping oil price since a record price of $70/barrel was acheived in late August in response to hurricane Katrina. Some commentators see that the short term trend should bring the price to $50 or below. But if you go by the opinion of the large commercial traders in the crude futures market, you would think otherwise. The commercial traders, aka the "smart money", have built a net long position in oil that is their largest long position in two years. Commercial traders are those businesses that buy or sell oil as a part of their business, aka producers, refiners and distributors. They use the futures market to hedge their risks, and are generally net short as it is their business to sell oil. When the commercials go significantly long, it usually signals that a major upleg in prices will ensue in the very near term. Here is a link to a very informative audio interview with Larry Williams, an accomplished commodities trader, on the use of the Commitment of Trader's Report to forecast commodity prices.

Look for crude oil prices, as well as gasoline and home heating oil, to begin an upward trend within the next two weeks. If it is an unusually cold winter in the Northeast, as has been forecast, oil could take out it's $70 high by the end of January.


Blogger Oroborous said...

As you touch on, the traders are simply betting, (rightly, in my view), that prices are likely to go up during the winter.
They aren't necessarily forecasting $ 100/bbl oil as the new norm.

As for the Burgan oil field, sure, 60 year old fields will start to run dry.
However, we're talking about total global production, when speaking either of $ 100/bbl oil, or of the infamous "Hubbard's peak".

There are many, many reserves of oil that haven't yet been tapped, so although we might find global oil production steadily declining for up to a decade, at some point in the future, as soon as those new fields come online, production will increase again.

Additionally, thermal depolymerization ensures that, over any ten-year span, the average price per barrel of crude oil CANNOT exceed perhaps $ 90/bbl.

So, while there might be temporary price spikes of up to $ 200/bbl, those prices are unsustainable.
If every drop of non-U.S. oil were to be absorbed by the Earth, within ten years we'd be meeting global demand at $ 100/bbl - or less.

November 14, 2005 1:09 AM  
Blogger Oroborous said...


Last week the International Energy Agency's report said output from the Greater Burgan area will be 1.64 million barrels a day in 2020 and 1.53 million barrels per day in 2030. Is this now a realistic scenario ?

Well, we don't know.

Falling output now says NOTHING about what output might be in 25 years, since we have and are continuing to find ways to boost output in aging fields, including ways to get more oil out of fields that were thought to have run dry - that WERE dry, for those using 70s state-of-the-art oil extraction tech.

It's not impossible that the Greater Burgan area will be producing 2 million barrels a day in 2030, although obviously that would mean that the field would be completely stripped sooner.

November 14, 2005 1:30 AM  
Blogger Hey Skipper said...

The problem with $100/bbl oil is that far fewer will be willing/able to pay for it.

If the law of supply & demand is worth a darn, the whole demand end of this thing is going to change.

November 14, 2005 7:24 PM  
Blogger Duck said...

Yes, it would lead to a recession if the price stayed at that level. But demand is not very flexible, people have to drive to work and they have to heat their homes. Another hurricane season like this year might just get us there. Gasoline is the lifeline of our economy, people will pay the higher prices as long as they can.

November 14, 2005 8:31 PM  
Blogger Hey Skipper said...


Another hurricane season would get us there?

That particular conclusion, I can't count how many times I heard it during, and following this years hurricanes, doesn't make any sense with regard to the price of oil.

Let's assume every refinery on the planet was shutdown for six months. What would happen to the price of oil?

Regarding demand inflexibility, I'm thinking globally, not just the US.

There are a lot of countries out there using oil at ~60/bbl that won't be able to afford the stuff at $100/bbl.

November 15, 2005 12:04 PM  
Blogger Bret said...

Not looking so good for the duck at the moment.

December 09, 2005 2:45 PM  

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