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Is there a potential floor for oil prices? Reuters report

November 30, 2011

From "Reuters Breaking Views" in today's New York Times:

According to the report, most OPEC countries now need relatively high oil prices compared to just a few years ago to generate the revenues that they need to balance their government budgets: "So the number of OPEC members able to tolerate low oil prices is shrinking."

Nigeria $80 (up from $20 six years ago)

Saudi Arabia $80 (up from $50 in 2008)

United Arab Emirates $80 (up from $20 in 2008)

Iran $80

Venezuela about $80


Rating: 3.5/5 (2 votes)

Comments

gurufocus
Gurufocus premium member - 2 years ago
Thank you for the information! Any idea on the implication on future oil prices?
LwC
LwC - 2 years ago
Well, the report notes the ongoing fractious dynamic between the OPEC oil price "hawks" (eg. Iran and Venezuela) that have needed higher prices to meet their budgetary needs, and the oil price "doves" (principally Saudi Arabia and its allies) who have been able to live with lower prices and therefore have been more considerate of the effect of oil prices on the global economies. Also, the doves have occasionally been desirous of driving the oil price down in order to purposely cause Iran budgetary problems.

The doves have been sensitive to the fact that high oil prices can choke off economic growth and cause a dramatic fall in oil demand, and a resultant fall in the oil price which of course leads to lower revenue for the OPEC members. They have generally sought to try to achieve some sort of balance to try to dampen wide swings in the oil price, sometimes successfully and sometimes not. The hawks just need the revenue and don't care about the effects of higher oil price on the world economies, and in fact are happy to see the USA in particular hurting from high oil prices.

The Reuters report suggests that while that fractious dynamic is still in play at today's oil prices, the interests of the hawks and doves may now be in more alignment if the oil price falls below about $80 or so given the assumed budgetary requirements presented in the report. The implication of course is that oil prices are unlikely to fall far below that price level for a sustained period because of that.

However, IMO the dynamic between supply and demand, and its effect on oil prices has not been repealed. If there is widespread economic slowdown, such as is predicted for Europe and now even in China, I don't see how OPEC can support the oil price. They haven't been able to do that in the past under such conditions. IMO it remains to be seen if the long term average oil price will turn out to be around $80 as implied in the report, or continue to be around $50 - $60 as is generally assumed nowadays. And that doesn't take into account other events that can affect the oil price such as war in the middle east or whatever.

I hope that provides some perspective about my opinion FWIW. Frankly, even after more than 25 years working in O&G business I don't think that I can predict the commodity market price. For our oil investments I look to be able to make an adequate return on invested capital at an assumed long term average oil price of about $45.

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