Oil Price Estimates Rising Quickly

Jim Brown
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Analysts are lining up to raise their estimates for oil prices and triple digit prices in 2011 appear to be assured.

JP Morgan issued another update on price expectations on Friday that sees the dollar declining another 4% to 5% over the next six months. They said the biggest risk to their forecast is that they are being too cautious.

JPM said there is a growing supply deficit in oil products for the fourth quarter. The resulting increase in refinery runs will lead to a draw in global crude inventories through February. They expect the drop in crude inventories at Cushing to be quickly reversed and widen the WTI contango.

China continues to grow at a 10% rate and their use of oil is growing faster than their GDP, which is normal for an emerging economy. India and the rest of Asia are growing only slightly slower than China and demand from those countries is mostly ignored but it still exists.

The JPM analyst said the threat of $100 oil in 2011 is real and they now believe it will arrive much earlier than their last forecast for Q4-2011. It will be driven by that Asian demand and the rebuilding of French inventories.

Lind -Waldock believes crude prices will rise to $90 by mid December based on technical analysis of the December contract, which has a strong pattern of higher lows.

JP Morgan believes any decline in oil prices should be seen as an opportunity to buy because the next major move is likely to be a rally. "The signal that the next leg higher is imminent will be tighter Dubai forward spreads and a narrower Brent-Dubai spread," Lawrence Eagles, head of commodity strategy in New York, said in a monthly oil market report. "A narrowing spread, when Dubai oil rises closer to North Sea Brent, typically shows increasing Asian demand."

Petrobras believes Tupi field will be commercially viable.

That title should go into the "you better hope it is after taking $70 billion in investor money" category. Petrobras plans to say by Dec-31st if they believe the Tupi field can be commercially viable. They completed another exploratory well last week and found light oil and gas in the southern part of Tupi. This "reduces uncertainties" about the amount of recoverable oil in the Tupi field, according to Petrobras. They believe there could be 8 billion barrels in the field.

Petrobras plans to start production at an offshore platform next week. The platform has the capacity to process 100,000 bpd. Petrobras plans to complete two more wells in Tupi before advising on the final decision to develop the field.

For their sake there is only one answer they can give. The have to claim it is viable even if it isn't. Otherwise there would be a shareholder revolt and the capital markets would dry up for Petrobras.

No Gulf Permits Yet

No new deepwater permits have been issued and no applications received since the moratorium was lifted. However, Chevron is planning on submitting a test case application in two weeks.

The problem holding back the applications is two-fold. The first is a new rule that requires companies to certify under penalty of law that they can quickly contain blown-out offshore wells before regulators will approve any new permits.

Nobody in the business has the capability to contain a blowout at the present time. If the blowout preventer fails there is no backup. Exxon, Conoco, Shell, Total, ENI, BHP and Petrobras are building a containment system but it will not be available until early next year. They are spending $1 billion on the one of a kind specially designed system.

With no containment system companies can't comply with the new rules. Secondly, the blowout preventers used on new wells have to be of a certain size and feature set in order to qualify under the new rules. Those BOPs have to be independently certified by a third party as to specifications and functionality. There are existing configurations that fit the requirements but I suspect they are having difficulty getting any third party to certify them since that puts the company that certified them at the top of the list for liability if another disaster occurs.

Say a company like Schlumberger charges a rig $100,000 to certify their equipment and a blowout occurs on that rig with damages in the billions. That is not a risk you would want to take because equipment breaks all the time. It may work today but before the well is completed it could fail and cost you billions.

It may be a long time before any new permits are issued and that is going to delay any new wells and new production from the gulf for years to come.

Richard on the way!

Hurricane Richard, the 19th Atlantic storm and the 17th named storm was upgraded to a hurricane status with winds of 90 mph as it stormed ashore on the Yucatan peninsula on Sunday. The hurricane could be the last of the season and it may be the only one that actually makes it to the oil patch. Richard is expected to turn north to northeast into the Gulf once it crosses the Yucatan and gain strength once again. If it tracks as expected it would head directly for the oil patch.

Jim Brown

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