OIL - Bullish FundamentalsOIL - Bullish Fundamentals
True, Oil demand has probably fallen off a cliff, but there are encouraging signs that a bottom is nearing. Most of the Canadian Oil Sands production is exported to the United States, and the best identifiable 'Cash Cost' is $37.00 for Suncor, contained in their 9/30/2008 interim statement. Other estimates range all the way from $45.00 down as low as $25.00 to $28.00 per barrel equivalent. At $30.00 per barrel it appears that most Canadian Oil Sands production will be unprofitable on a 'Cash Cost' basis. Add in depreciation, and most Oil Sand operations are unprofitable at current prices.
Draw any conclusions that seem reasonable, but the point is that most Oil Sands production is poised for shut - in. Most production is shipped to the U.S., further supporting the idea of a price floor perhaps near this area.
You've heard the stories about tankers filled with Oil off the shores of importing countries? Some analysts believe that the storage is held for sale in later months. No matter how you interpret the Oil filled tankers, it can't be bullish because it is supply poised for delivery. What is encouraging is the sharp drop of crude inventories announced 12/24/08 (Down 3.1 Million barrels from the previous week) which is quite bullish by itself. True Gasoline and refined products rose as much portraying weak demand, but the drop in crude inventories may be the start of a trend at least leading to stabilization.
Then consider that the OPEC cuts are due to start in January 2009 and the diminished production of 2.2 Million B.P.D. needs about 2 months to affect the supply chain at the dock. If Oil supply -vs- demand was short 3 Million B.P.D. earlier in the year, (Demand was 87 Million B.P.D. - vs- Supply 84 Million B.P.D.), we may have balance with the 4 Million B.P.D. Opec cuts.
OPEC has a history of 75% compliance with production cuts, and this time it may be higher because of Russian participation and OPEC holding large currency reserves. The point is that if worldwide Oil demand has fallen 10% from 87 Million B.P.D. to 80 M.B.D., we may have balance with production apparently near 80 Million B.P.D.
The bigger picture is supportive to higher prices. The I.E.A. study of the 800 largest Oil fields in the World, released in November shows a depletion rate of 9.1% annually. Late in 2009, depletion of Mexico's Cantrell Oil field will preclude export to the U.S. while no relacement is foreseen any time soon.
After a nearly 20 year Bear Market for Oil from 1980 to 1999, the price fell 75% from increased new supplies, but this time prices fell 75% in merely several months. This cycle there are no new supplies pushing down prices, but rather a drop in demand which may be temporary. Every year, the pool of available Oil is shrinking by 9.1% while higher cost projects such as Canadian Oil Sands and Deep Water Drilling requiring $90 per barrel Oil are shelved. Conventional on shore Oil wells require $65 per barrel. There's no new supply coming on line any time soon except for projects nearing completion.
So it does seem that prospects for price stabilization near these levels is reasonable while the balance between supply and demand is sorted out. A 'Saw Tooth Bottom Pattern' may be probable until the balance between supply and demand is more clearly identified, but the longer term 'Big Picture' is clearly supportive to much higher Oil prices. The 9.1% depletion rate will come through to affect supplies.