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  • "The market can remain irrational longer than you can remain solvent" - John Maynard Keynes

    Sunday, March 14, 2004

    Price of Oil

    There have been three interesting articles on oil this week from the Wall Street Journal (Losing Reserve: At Shell, Strategy And Structure Fueled Troubles), Barron's (Half Empty? World oil supplies, while not running out now) and Financial Sense Online (Energy and the US Dollar). The summary of their consistent main themes are;

  • Oil price futures currently predict a decrease in oil prices
  • A well respected geologist named Colin Campbell, a 72 year old with a doctorate in geology from Oxford and stints at major oil concerns including Texaco, BP and Amoco from 1957 till 1990 and author of The Coming Oil Crisis, believes oil production will peak in 2010
  • OPEC is incented by their internal quote system to misrepresent their total reserves, as quota are based on total reserves
  • OPEC reserves report yearly show the same numbers over and over again even though some of the oil has been drilled, this implies production exactly matches discovery. This pretty much guarantees the OPEC numbers are incorrect.
  • All OPEC countries greatly increased their stated reserves in the mid-80's with no corresponding discoveries, probably to expand their quota
  • Saudi Arabia is further incented to misrepresent reserves to curry favor with the West and to maintain its political stability
  • A coup in Saudia Arabia would have a significant effect on oil prices
  • Oil companies are currently drilling more oil than they are finding; they are not replacing reserves
  • With the increased demand there is only about 1M barrels a day of swing capacity (mostly provided by Saudi Arabia) where there was 6.5M in the past ten years
  • China's oil consumption has doubled since 92 from 2.7M to 6M in January
  • "Demand -- if it continues to rise at about a 1.5% annual rate -- would climb from 77 million barrels a day in 2000 to 80 million barrels in 2005 and 86 million barrels in 2010"
  • With oil prices so high there is a belief that OPEC members will start cheating, there is no evidence that this is starting to happen and the spare capacity may not be there to support cheating this time around
  • The political instability in Venezuela could affect the output from the world's 4th largest oil producer

    The articles make an interesting argument for a coming bull market or at least a sustained $30-$35USD market in oil. Interestingly the contrarian play in oil right now is the bull case. Common perception is a declining price for oil.

    A Free Call Option on Oil
    Canadian Oil Sands ( or COSWF ) essentially provides the unit owner with a free call on the price of oil. In fact the economics are even better than that. You are essentially buying a heavily in the money call with a strike price of oil at $21USD. The investment maintains it's value if oil is at $21USD and increases as oil increases above that amount. And the call has a 35 year life and pays dividends! There are three posts below on Canadian Oil Sands.
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    Disclaimer and Disclosure Analyses are prepared from sources and data believed to be reliable, but no representation is made as to their accuracy or completeness. I am not paid by covered companies. Strategies or ideas are presented for informational purposes and should not be used as a basis for any financial decisions.
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