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Oil Prices for Next Decade in the Range $70-100/b According to OPEC Estimates |
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Tuesday, 09 March 2010 |
 The most important lesson for the low oil price environment at the beginning of 2009 for OPEC members and oil producing nations generally is that the fundamentals are not necessarily fully reflected in oil price movements, whether upwards or downwards, and therefore an extrapolation can be misleading.
To some extent,
non-commercial investor activity in oil futures is necessary to provide
liquidity and facilitate market price discovery and risk hedging
functions.
However, when left unchecked and with no cap, their activity tends to
exacerbate price movements and weakens their correlation with
fundamentals, especially when faced with such an uncertain environment
as today. And as mentioned, low prices have historically sown the seeds
of later price rises.
The decision in Oran, Algeria, in December 2008, to further reduce OPEC
supply by a total of 4.2 mb/d against the September 2008 level reflects a
decisive effort by
OPEC Member Countries to restore oil market stability. Similar action
has been seen elsewhere. In the face of falling demand, production has
been cut in other industries to try to avoid a damaging build-up of
inventories. This has occurred, for example, in the steel, lead, zinc,
copper, automotive and electronics industries. In making a long-term oil
price assumption for the WOO’s Reference Case, a key determinant is the
perception of the behaviour of upstream costs and the cost of the
marginal liquids barrel. In last year’s reference case, the long-term
real price assumption reflected the expectation that high costs would
eventually peak and then decline as cyclical elements separate from
structural ones. This has already started to occur. For the next decade,
nominal prices are assumed to be in the range $70–100/b.
These are only assumptions and do not reflect any price path that could
be considered likely or desirable. However, as we move forward, it is
acknowledged in this Reference Case that two structural elements are
likely to play a role in pushing upstream costs higher. On the one hand,
the increasingly harsher conditions in developing and producing the
marginal barrel and, on the other, the likelihood that, in the longer
term, some environmental externalities will be internalized by way of
regulation.
Makis Theodoratos, Hellenic Shipping News Worlwide
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