Friday, 16 January 2015

Oil Discussed Continued

The Long Term View

The very long-term view is similar.  Since 1869, US crude oil prices adjusted for inflation averaged $23.67 per barrel in 2010 dollars compared to $24.58 for world oil prices.

Fifty percent of the time prices U.S. and world prices were below the median oil price of $24.58 per barrel.

If long-term history is a guide, those in the upstream segment of the crude oil industry should structure their business to be able to operate with a profit, below $24.58 per barrel half of the time.  The very long-term data and the post World War II data suggest a "normal" price far below the current price.  However, the rise of OPEC, which replaced the Texas Railroad Commission as the monitor of spare production capacity, together with increased interest in oil futures as an asset class introduced changes that support prices far higher than the historical "norm.”

The results are dramatically different if only post-1970 data are used. In that case, U.S. crude oil had an average price of $34.77 per barrel.  The more relevant world oil price averaged $37.93 per barrel.  The median oil price for that period is $32.50 per barrel. 

If oil prices revert to the mean this period is a little more appropriate for today's analyst.  It follows the peak in U.S. oil production eliminating the effects of the Texas Railroad Commission which effectively controlled oil prices prior to 1970.  It is a period when the Seven Sisters were no longer able to dominate oil production and prices and an era of greater influence for OPEC oil producers. As we will see in the detail below, influence over the price of oil is not equivalent to control. 

Prices in the mid $30s seem exceptionally low by today's standards. However, when the current President of the United States took office the price was $35.00 per barrel. By the end of 2009 prices had doubled bringing the average for 2009 to $56.35 or $57.00 in 2010$.

Crude Oil
                  Prices 1867-2007

$47 was the bottom last time .

For those willing to be patient , one feels there is money to be made even  at $57

   And May

$47 achieved , one surmises $33 to be the lowest OPEC will allow .

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