PARIS (ResourceInvestor.com) -- Has “peak oil” been postponed? We have seen a sharp fall in the price of a barrel of crude oil, either Brent or WTI, with Brent falling under $70 per barrel and the WTI doing the same - this after WTI hit a new closing high of $78.21 as little time ago as August 1.
The short answer is “who knows?” But to have a bit of fun for a Friday we will make a few predictions, to test out pricing acumen. If you invest on the back of this column’s ideas, beware.
Of course last year, you may recall, this column called the Christmas Eve crude price on the nose, $61 per barrel, some four months early. We like to hold that prediction high as a banner of respect, mainly as all our other predictions have been wrong.
What makes undertaking predictions even more spicy at the moment is the outstanding volatility in the equity markets, spurred on by the fear of the so-called “debt crunch.” How will this play out? How will it affect the energy markets?
This despite the banks getting a wonderful hand out this week, €94 billion from the European Central Bank and $24 billion from the Fed. These are scroungers extraordinaire, they make the odd benefit cheat look like a speck of dust. It is a “free market” only for the poor - for people like you and me, in relative terms. For the banks, it is payday. So much for liberalised markets, they do not exist, these are paternalised markets, markets for the rich, the strong.
So, first the crunch in debt and financing is going to worry small companies, especially those mid-size units that list on the AIM in London or the Toronto stock exchange in Canada.
Those kinds of companies rely on credit to spur exploration, especially in times of high capital costs, high personnel costs and so on. It will mean that companies who look quite tasty from the outside, ones with lots of licences but no wells for example, are going to drop in price.
This will mean they are available for takeover, the only downside being that bigger companies may find financing these takeovers using debt a little more difficult, again forcing down the cost of these smaller companies on the exchanges. That is prediction number one: little players’ shares can get hit.
But medium sized companies that have stacked up large amounts of debt may also be finding the new economic climate rather worrisome. If interest rates rise again, as seems likely, continuing to finance debt at a higher rate of return for the banks may mean they are forced to delay projects.
Basically the end of cheap credit could hardly have come at a worse time for companies who are already seeing huge cost inflation.
But will this crunch, should it work its way through to the rest of the economy, hit energy prices? In the short term, to the end of the year, that does not seem so likely. A weak dollar means producers will want to maintain prices over $60 per barrel; in fact they would like it even higher. OPEC will not be doing much to help.
A low dollar also means Americans stay at home on their holidays, they drive about, they consume even more. America really is addicted to oil, the populace have nowhere to turn, they have to consume.
Lower non-OPEC output is another factor. There is little sign that new projects coming on stream are making much headway in increasing overall global production. Just this week the Kazak government has threatened to chuck out Italian company Eni [NYSE:E] that is leading the huge Kashagan project as costs spiral and schedules are delayed once again. It is not promising.
There is also the continuing draw down in U.S. stockpiles. Cushing inventories fell again for the 11th week in a row, down to 19.3 million barrels, 8.7 million barrels below their April highs. They will need to be refilled over the rest of the year.
It is why this column sees the December 24 price at $66.60 per barrel. It could well be higher.
Of course if there is a hurricane in the Gulf of Mexico or an attack on Iran, all bets are off. That’s what we call hedging your bets.
