Many pundits believe that we have reached peak production of oil. Basically, wells are being depleted faster than new reserves of oil are being found. These fears have been amplified by the difficulty many oil companies are having maintaining recoverable reserves. Large oil fields such as those in Mexico and in the Alaskan North Slope are in decline and nearing depletion. New finds have been increasingly difficult to come by.
The dire forecasts are not without their critics. For now it appears we will not run out of oil and that world oil production will be generally steady due to the following:
- Improvements in recovery technologies
- Further oil discoveries, particularly in areas where technology and infrastructure had not been well developed in the past, such as Russia and China
- Improved field management
In addition, rising prices have had an impact on competing renewable energy products, such as ethanol and biodiesel, as their development has been spurred to compete with petroleum. In addition, new technologies have been employed not only to slow the decline of existing fields but also to develop what were seen as uneconomical oil sources in the past, such as tar sands and shale.
Ultimately, the ability to maintain adequate oil production levels will be closely tied to fresh investment and free market pricing. Prices force adjustments on both the supply and demand side just as they did during the oil embargo and the Iranian crisis of 1979. However, these forces need to be allowed to work.
Currently, 70 percent of the world’s reserves are controlled by government entities, where political considerations can override price as a key consideration. Examples include social restructuring in Venezuela and the attainment of strategic interests in Russia and Iran, which have taken precedent over efficient production or pricing goals. These entities are testing the limits with respect to the international oil companies, and the repatriation of profits is posing a disincentive to these firms, as they balk at providing the technical expertise necessary to access harder to reach reserves due to the uncertainty.
World Oil Supply
World Oil supply during the first quarter is expected to reach 87.35 mb/d compared to 85.3 mb/d in the year ago period. The growth in oil supply is traced to:
- The increase in production by OPEC, which since the September meeting has increased by 2 mb/d from year ago levels. With the exception of UAE, Saudi Arabia, Iraq and Nigeria most members are producing at their capacity. The UAE and Saudi Arabia are the only ones that have the ability to ramp up production fairly easily if desired. However, spare capacity on a sustainable basis is only 2.3 mb/d.
- OECD production continues to stagnate. Total production for 2008 is expected at 19.5 mb/d compared to 20.2 mb/d a year ago. Ongoing declines in production rates for the North Slope, North Sea and the Cantarell field in Mexico continue to account for the declines.
- Non OECD supply is estimated in 2008 at 28.3 mb/d. The FSU is expected to account for 13.2 mb/d compared to 12.8 a year ago. Further expansion in the FSU is likely as additional investment is made but recent nationalistic moves have tended to dull outside investment interest and uncertainty does exist as to whether the higher levels will be attained.
Although there are some bright spots on the production front, there is currently little room for much further expansion. The major variable in this forecast is OPEC levels. Provided WTI crude prices remain above 85-90 dollar range, we anticipate production levels will be rather flat. This direction appears likely given recent comments suggesting Saudi Arabia is content with current quotas.
Only OPEC and Saudi Arabia currently have the ability to satisfy anticipated demand growth, which is forecast to reach 87.3 mb/d in 2008. The uncertain supply outlook suggests that the ability of any one country to control prices by increasing production is rather limited and that on a global basis a tight situation will persist. The new nationalism is gaining momentum, posing an uncertain environment for international oil companies and raising the risk of developing new fields. All this will restrain supply growth and maintain a tight situation that will be increasingly sensitive to any unexpected shocks. A high price level will need to be maintained to encourage marginal production and also to restrain demand growth.
Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. The views and opinions expressed in this letter are those of the author and do not reflect the views of ADM Investor Services, Inc. or its staff. The information provided is designed to assist in your analysis and evaluation of the futures and options markets. However, any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to ADMIS. Copyright © ADM Investor Services, Inc.
Steve Platt
Archer Financial Services
Senior Account executive and Futures Strategist
Steve.platt@archerfinancials.com
The information and comments contained herein are provided as general commentary of market conditions and are not and should not be interpreted as trading advice or recommendation. The information and comments contained herein are not and should not be interpreted to be predictive of any future market event or condition. The information and comments contained herein is provided by ADM Investor Services, Inc. and not Archer Daniels Midland Company. Copyright © ADM Investor Services, Inc.
