PARIS (ResourceInvestor.com) -- The crude oil market has started the year by vigorously testing recent lows. By recent we mean Christmas, that is Christmas 2005. Those lows, the ones we have talked of so many times, of around $54.50 are being tested again as we start trading in 2007.
There is a chance - this time - that those lows are going to be breached. The unfortunate fact for the executives of our international oil companies is that any price fall could not come at a worse time for the oil industry.
Because the recent run up in prices have meant that companies have been falling over themselves to put on extra barrels of production. Of course this cannot be done overnight so we are now seeing the first wave of new output about to hit the market. Fields like Dalia in Angola, operated by the French company Total [NYSE:TOT] and of course, later in the year, its huge gas project Dolphin from the UAE.
Throw in oil sands from Athabasca, BP’s [NYSE:BP] delayed Atlantis project and a multitude of others and we are starting to wonder if a glut is in the offing. Of course there are going to be problems along the way, but in a market that is already satisfactorily supplied we could find ourselves beyond satisfactory and into, well, oil gluttony.
It is fascinating for market watchers to see the possibility that 2007 could be defined within the first few weeks. If the Nymex and Intercontinental Exchange (ICE) can push down below $54 then the rest of the year may well follow suit. Money has started pouring in on the short side of the market and the bets are on that oil is only going one way, down.
But then there are some disruptions along the way. Firstly maintenance. As everyone and their dog have been pumping flat out over the past few years, desperate to make as much money as they can from $70-plus crude the knackered bits of the oil complex are just that: knackered. Bits are going to drop off, like they did in Prudhoe Bay.
We are also looking at some areas of the world that are, in the words of the trade “inflecting” or “maturing”. Basically they have peaked, but you cannot say “peaked” as that means you believe in UFO’s, black helicopters and that Guinness really is good for you, rather than just good.
The North Sea is a prime example of a region that has peaked. The merger of Statoil [NYSE:STO] and Norsk Hydro [NYSE:NHY] is a great sign of that. Because so much of their traditional production has been in the Norwegian Continental Shelf they have run into a brick wall. Basically there is nothing left to find beyond the scraps. This means that the two companies, who have been pioneering in the U.S. Gulf, have merged to create an offshore demon.
The new company is going to be the biggest offshore producer in the world. This is a great move because all the onshore oil has been used up. Now we humans are looking for our hydrocarbons at greater and greater depth and Statdro, or Hyrdoil, or whatever they will be called, will be in a great position to exploit that.
But to come full circle if we have a year of oil in the $50-$55 range then all of a sudden the oil companies are going to find themselves paring back. They have been hit by huge increases in costs, raw materials, personnel, rig rates and so on. They have entered into new contracts which have tied in those costs. But all of a sudden they might not like those super expensive technological breakthroughs they have been talking of.
So, after complaining so much about how high prices are unwanted, like OPEC, what the IOCs really meant was ‘high prices are great.’ And if 2007 does not produce some wars, giant storms or major Al Quaida attacks then they will really be annoyed.
