Exxon Mobil CEO Says Oil Price Should Be $60 to $70 A Barrel

[Parsad]

Something I've said since 2007.  I'm glad the head of one of the largest oil producers agrees, and we both agree on who is responsible for the elevated prices.  Contrary to Wall Street's consensus view, I think alot of the volatility we witness in markets and commodity prices are due to high frequency traders and speculators.  Cheers!

 

http://blogs.forbes.com/robertlenzner/2011/05/14/exxon-mobil-ceo-says-oil-price-should-be-60-70-a-barrel/

[claphands22]

Where's the data that supports the idea, that it's wall street pushing up commodity prices, not global demand?

 

I really have no take on the commodity question, just would like to read more data to support the lower/sustained gas prices. It's easy for a CEO of an O&G to blame high prices on Wall Street when you are testifying before congress. I'm not saying he is wrong, I'm just wondering where the facts are.

[Packer16]

My understanding is that there are new institutional "investors" in the market (college endowments, etf, mutual funds) that are driving the futures up based upon the thesis of peak oil.  In addition, you have a centrally controlled systems as in China "hedging" future needs.  This increased level of futures has driven the prices as well as production up based upon the ability to hedge that higher price today.  What has in essence happened is that the future oil price increase due to future expected supply/demand imbalance which is reflected in today's prices. If the "peak oil" thesis plays out as expected, the returns to oil will be nominal (because it is already reflected in the price).  If peak oil is delayed or does not materailise like what happened in the gas (increased supply) or the investor or China demand declines or doesn't increase as fast, the market price will decline to the average marginal cost to produce $60/$70s level as described by the Exxon CEO.  As a matter of fact if prices start to decline they may overshoot on the downside as in 2008/2009.  The only way for a sustained increase to is for marginal production cost to increase.  The difference between the price and the marginal cost is the "spectulative/hedging" premium.  From what I have seen, the marginal cost may have increased versus historical cost but is declining due to better extraction technologies.  Just my 2c.

 

 

Packer

 

Packer

[onyx1]

"Rex Tillerson, the boss of ExxonMobil admitted last week that  the price of oil–based purely on supply and demand- should be in the $60 to $70 a barrel range. The reason it’s above $100 a barrel, Tillerson  explained, is due to the oil majors using futures contracts to lock in current high prices...."

 

If I we locking in higher prices, I'd sell futures contracts.  How does this in any way drive up oil prices?

[Packer16]

The increase in price comes from investors and China trying to either buy on the peak oil thesis or lock in oil prices for use in the case of China.

 

Packer

[alertmeipp]

What's the "should be" price for house in Vancouver?

What's the "should be" price for MSFT?

What's the "should be" price for BRK?

What's the "should be" salary for you?

 

Seldom driven by pure Demand and Supply...

 

I thought we are all know the should be price mostly likely won't be the price and the should be price is not the price XOM wants. I think he wants to re-direct some heat.

[Guest VAL9000]

Where's the data that supports the idea, that it's wall street pushing up commodity prices, not global demand?

 

In another thread I had mentioned that daily trading activity is 20x daily consumption.  I left the assertion at that, but today I did some digging and came up with this:

 

- In 1990 the NYMEX traded roughly 90,000 contracts (90 million barrels of oil) on a daily basis.  Worldwide consumption of oil in that year was about 67,000,000 barrels of oil per day.  So about 1.5 trades per barrel delivered.

- In 2000 the NYMEX traded roughly 150,000 contracts (150 million barrels) on a daily basis.  WW consumption: ~77,000,000 barrels of oil per day.  So closer to 2x per barrel delivered.

- In February of 2011, the CME (owners of NYMEX) did almost 1,000,000 contracts per day, with WW consumption hitting about 85,000,000 barrels per day.  That's about 11x per barrel delivered.

 

These numbers ignore the ICE exchange which makes up about 2/5ths volume.

 

In 10 years we went from 2x on the NYMEX to 11x..  sometimes hitting as high as 15x on a single day.  I can't think of a reason why the guys who pull the oil out of the ground, or the people who buy the gas from the refineries, or anyone in between, would want to change their position 15 times in a single day.  Can anyone else?

 

The conclusion is that if it's not these guys, then who else is left to participate in this kind of activity?

 

[alertmeipp]

end consumers and speculators

[ERICOPOLY]

I think he wants to re-direct some heat.

 

There are no windfall profits to see here.  Move along.

[Myth465]

I think he wants to re-direct some heat.

 

There are no windfall profits to see here.  Move along.

 

You have to love being a capitalist in America. You cant even get the public to agree to raise taxes on 5-6 of the most profitable companies in the world. Its just UnAmerican.

 

The markets are frothy, but shouldnt they be discounting peak oil? Arent markets forward looking? Its tough though, I believe in peak cheap energy but Val has a point. If I was a producer I would be hedging 2 years out for 80% of my production......

[JAllen]

My understanding is that there are new institutional "investors" in the market (college endowments, etf, mutual funds) that are driving the futures up based upon the thesis of peak oil.  In addition, you have a centrally controlled systems as in China "hedging" future needs.  This increased level of futures has driven the prices as well as production up based upon the ability to hedge that higher price today.  What has in essence happened is that the future oil price increase due to future expected supply/demand imbalance which is reflected in today's prices. If the "peak oil" thesis plays out as expected, the returns to oil will be nominal (because it is already reflected in the price).  If peak oil is delayed or does not materailise like what happened in the gas (increased supply) or the investor or China demand declines or doesn't increase as fast, the market price will decline to the average marginal cost to produce $60/$70s level as described by the Exxon CEO.  As a matter of fact if prices start to decline they may overshoot on the downside as in 2008/2009.  The only way for a sustained increase to is for marginal production cost to increase.  The difference between the price and the marginal cost is the "spectulative/hedging" premium.  From what I have seen, the marginal cost may have increased versus historical cost but is declining due to better extraction technologies.  Just my 2c.

 

 

Packer

 

Thanks for this Packer:  I haven't seen anything about this; how did you reach this conclusion?  I would love to read about this if it's possible.

[goldfinger]

Tillerson always denied any possibility of peak oil before 2007, always.

Since then even the IEA changed its forecasts and thesis and worldwide oil export never crossed the level reached in 2005.

He is right there is a premium and 75/80 or so looks more like the equilibrium price for now. What I notice however is that

he has changed his speech a bit and increased his realistic price range (it used to be much lower when he was denying peak oil, like 30s).

[Packer16]

This storyline was pieced together from various places.  The key in my mind was from Howard Marks new book "The Most Important Thing" were he observes that when prices go up and you buy, the overall expected return is lower.  I think this is also true in the oil market for prices over the marginal production cost as oil is a "commodity".  This premium is reflective of the bullish bias (the expected impact of peak oil and China hedging) of the non-consuming portion of the market as outline by VAL9000.  The real question is do you believe this future consensus that is reflected in prices.  I currently do not and would stay away from O&G until the pricing is closer to the marginal cost of production.

 

Packer

[arbitragr]

Yeah but OPEC thinks the price should be $100+.

 

 

[goldfinger]

Yeah but OPEC thinks the price should be $100+

The biggest oil companies have problems finding new resources at their scale. Some believe they are in slow motion liquidation.

Exxon has plenty of older projects where the cost of production is low: it wants to be able to muddle along like this for as long as possible and

keep low profile. Reality is that most of the new production (unconventional reserves) costs above 70$ to bring to production now and the slack

is in the average at historical lows. Funny how a bit of weakness in the global economy immediately brings the same kinds of debates we were seeing in 2005-2006.

[SharperDingaan]

 

Keep in mind this is oil & gas.

Governments set the global price, not the ‘free’ market.

 

Country A may have the reserve under its land, but it needs Country B to let it buy the expertise/equipment & ongoing maintenance from the citizens of Country B to get the oil out of the ground. Country B obliges – so long as Country A gives it a sweetheart deal on X% of the output, for an extended period. County A agrees & sells the remaining output on the global market at spot.

 

Country B needs to get its money back, & persuade Country A to buy its goods & balance the terms of trade. Country A agrees to buy weapons & development from Country B at cost, less a little something off the top, along with some surety of supply. We keep selling you oil, & you prop us up if ever we have a possible regime change.

 

Time passes by & declining reservoir pressure results in less production per year.  Country B gets fewer sweetheart barrels & makes up its shortfall from the spot market. As Country A has fewer barrels to supply the spot market, price rises.

 

Country  C & D also need oil, & note that the higher spot price makes oil fields in Country G & H viable, & that their viability will increase over time as production declines. Deals get done, even though Country G & H are highly unstable.

 

Country H has a lot of population but little oil. To avoid a regime change they need to spread the wealth, & to get the wealth they need to push the price up. Country C is industrializing & to avoid a regime change it needs more oil to power its growth.  Country C does a deal with Country A on the same terms as Country B to boost its production with new technology. Spot prices stabilize ($60-70/bbl), but the producing regions get more volatile, as new production comes to the market.

 

Inflation happens & Country G has a regime change. Country H will follow, but its leadership chooses to fight – with the weapons coming from Country B & C. Very bad news being broadcast on CNN 24x7. But if Country B & C agree to pay more, via the spot market, Country H can grease the right wheels & the problem goes away. The price rises & calm returns. 

 

SD

 

[Parsad]

Yeah but OPEC thinks the price should be $100+.

 

That's like asking your barber if you need a haircut...to quote Buffett!  Cheers!

[goldfinger]

That's like asking your barber if you need a haircut...to quote Buffett!  Cheers!

 

In this case the same can be said about Tillerson!

[Parsad]

In this case the same can be said about Tillerson!

 

He's saying that oil should be lower, so how is that the same?  He's actually saying something that would reduce his longer term profits.  Cheers!

[goldfinger]

He's saying that oil should be lower, so how is that the same?  He's actually saying something that would reduce his longer term profits.  Cheers!

He wants calm: no windfall tax, no congress grilling him and his colleges about high oil prices, no panic beliefs in peak oil.

I am not saying that speculation is not playing any role (and that oil should not be lower at this precis point in time), but I also believe that peak (cheap) oil is very real and calling an equilibrium price is kind of fake. Even Buffett said in 2007 or so: "I do not know where the equilibrium price is."

Exxon still has lots of low cost oil to exploit even though those big companies are finding it very hard to replace reserves.

[Myth465]

Lets be real. If Peak cheap oil is to be believed to be real by most Americans, Congress, and the President .Oil becomes a strategic national resource and he risks Wind Fall Profits or Nationalization.

 

Its interesting, someone will be right. Buffett said something very simple in his interview in India. Its a finite resource and one day it will run out. We use more each year, and it looks like we will peak at somepoint.

 

When I dont know. But there are more reports from Official (Department of Energy, Defense, Various Governments) sources warning of potential shortages each year. Tillerson, me, and just about everyone else is mostly talking our book. Only time will tell. I didnt expect him to come out and say oil is running out and we are making obscene profits. Best to tax us and reinvest to find the next big thing. Now that would have been crazy talk.

 

http://www.guardian.co.uk/business/2010/apr/11/peak-oil-production-supply    -    The idea that this resource we have been pulling out of the ground and burning up at a breakneck pace for the last 100 years is limitless and will forever be cheap is the one I find foolish. What the price should be, I have no idea. I just know there is less of it available today, then there was yesterday.......

 

With that said, in this weak economy. I do think their is froth.

[Parsad]

I am not saying that speculation is not playing any role (and that oil should not be lower at this precis point in time), but I also believe that peak (cheap) oil is very real and calling an equilibrium price is kind of fake.

 

I don't think it's fake at all.  Perhaps, not completely accurate, but his point was that oil's current price is being driven primarily by speculation, and not supply and demand.  I can tell you for a fact that a strong Canadian dollar is actually detrimental to the Canadian economy.  That the Canadian economy is happiest when the dollar is somewhere between 90 cents and 98 cents or so.  Is that fake, or is that an accurate supposition?  The reason behind my statement is because we have both a resource-heavy/export economy, and a tourism/manufacturing/import economy.  If the dollar becomes too strong, it hurts tourism, manufacturing and import-related businesses.  When the dollar weakens significantly, it hurts our resource, export economy.  So, I can provide some idea of what a happy-medium would be for the Canadian dollar without being exact.  

 

In terms of peak oil:  They were talking about peak oil 30 years ago.  The world got spooked and they became more efficient consuming half as much per capita 30 years later.  The same thing will happen now.  We will consume less oil per capita another 30 years from now, extending the life of oil reserves and oil that can be retrieved.  The free market will force consumers to make hard choices, and governments to enact change.  I'm a firm believer that in that, and that capital will flow to areas of science that will make us more efficient, as well as find alternatives that will become more prevalent.  

 

In the meantime, you have such periods where panic sets in, and the price of a commodity is driven signficantly higher than what actual supply and demand would dictate.  Currently the world believes that China will endlessly consume the world's resources...that prices will rise uncontrollably, and China will continue to consume.  As if rising prices will have no effect on China.  I've seen it and heard it all before.  We've had numerous commodity booms and busts in the last 150 years in North America.  This will be no different.  Cheers!

[goldfinger]

Sanjeev,

 

1. Nobody is saying that you are intrinsically wrong here! Fake in my mind just meant not long term significant and reliable.

2. I was just commenting on the fact that Tillerson is talking is own book. Tillerson denied the existence of peak oil bluntly

when the IEA was doing the same. He cannot do it anymore now that even the IEA is admitting to its existence.

3. Being an engineer myself and having followed the analysis of a few geologists with above 30 years experience in

the oil business for years, I must say that replacing the giant oil fields is going to be quite a challenge. We may get into 7+% depletion rates

on the best oil fields in the average globally not too far from now (this compounds negatively). Given the properties of oil and how much energy

that represents, it is quite a challenge!

4. I hope the word will adapt and yes China will go through tough readjustments (they will have issues with water and other

resources too). But it is possible that road is much more volatile and rocky than we could expect.

[Myth465]

Parsad I agree with just about all of your comments. Though I havent been around as long, and have little faith in our ability to coop and change. What I see is oil goes up, people hem and ha's, and complain. The President makes a speech, oil Barrons go to Congress, Congress hems and ha's, then the price goes down $10 - $20 and everyone moves on.

 

Its been that way from $30 - $100. Almost like a ratchet. There is never a long term solution or plan undertaken by the largest consumer and importer of energy. This has only been cured by a recession. I will say now its all discounting, froth, dollar and supply concerns but inmo this is the trial run. Our 7 lean years will end at some point and my fear is what happens when the World Economy is humming along.

 

We keep failing these dress rehearsals, which inmo will make the Big Show and required adjustment rather painful. The US is well positioned though, because the emerging countries will have to drop their subsidies, and the US consumer of energy will be one of the last standing as prices rise. It will wreck havoc on our economy, but will do worse for third world countries. The world will go on, but it seems like a silly way to deal with a long term problem.

 

----

 

Canada and Australia are in an interesting position. You guys are going to have to be willing to destroy your currencies too, to keep things at a happy range. Call it the genius or foolishness of Bernanke. I am not quite sure which one just yet.

[Alekbaylee]

If the dollar becomes too strong, it hurts tourism, manufacturing and import-related businesses.  When the dollar weakens significantly, it hurts our resource, export economy.

 

Sanj,

Isn't that the other way round? i.e. when the CDN $ is strong, it helps import-related businesses (cost us less to import) and when it's weak, it also help our exports (the demand for our products rise)?