Chris Nelder, author of the Profit from the Peak, evaluates the EIA report, not disagreeing with the revised demand outlook, but disagreeing with the price projection. Here is why.
1. EIA has consistently underestimated future oil prices. It even did its own retrospective to check itself out.
2. OPEC is widely expected to cut production. Its target price is $70-$75 range.
3. Oil production costs are above the price of oil. The oldest, largest and cheapest fields are already or soon to be in decline. For more difficult extraction, companies are going to need something like $65 bbl.
4. We are seeing a few more aberrations, i.e. the steep contango in the 12-mo. forward crude futures. Greater now than it has been in a decade.
Says Chris:
We should always bear in mind that oil is priced at the margins. The last, most expensive barrel essentially sets the price of the whole lot. When there is spare production capacity, as there is now, oil prices will eventually be set by the production cost, which we’re already below. When that spare production capacity collapses to nothing again, as it did when oil prices peaked in June, no one can say how high prices might go.
Even with all the arguments above, Nelder says his crystal ball is cloudy. Oil could keep going down until the supply just dries up.
