During 2015, Oil Prices Simply Began Returning To Normal #commodityprices #petroleum

By 10th December 2015 Industry News No Comments

One might look at the current price change as a “return toward normal” not a “dip from normal.” In the context of history, today’s oil price is still on the high side, not the low side.

And for those who think otherwise, OPEC is not “dead”. It is as alive as it ever was. It is an organization for talking, not doing, and it still talks.

More and more market participants are espousing the following logic:

1) low cost producers are gaining market share;
2) they will lead the market until their supply drops;
3) at which point prices rise;
4) allowing the next highest cost supplier to enter the market.

In essence, this is the theory that the cost of the marginal barrel of production sets the price. In theory, this sounds good. But in practice, the futures market sets the price.

The North American industry should be most appreciative of the fact that futures have set the price, since for the past thirty or forty years the marginal barrel has come from Saudi Arabia, who has a cost of, maybe, $10/B. Just hope that they never get really competitive in their activities.

Now turning to the reality that, at some point, the price of oil must sustain the cost of the last, highest cost, increment of production. (That is different from the marginal barrel of sales). The data that I accept as valid for cost of production from the various reserve sources tell me that a supply of 100 MMB/D can be achieved at a cost below $60/B. So when I look to the future to assess energy cost, that is my idea for oil. Coal is a fraction of that. And natural gas seems to be in abundance at the equivalent of $15/B. So fossil fuels look like a long-term, low cost source to me.