Bank of America and Barclays Capital have told clients to brace for crude prices above $100 a barrel by next year and even higher prices over the rest of the decade. It seems everyone is jumping on the rising oil bandwagon long before the actual fundamentals reach that price point.
Barclays analyst said, "Oil has the potential to flirt with $100 this year. We forecast an average price of $137 by 2015." Nice to see the big guys boarding the peak oil train but they way off on the price curve.
According to Barclays "The groundwork for the next sustained setup in oil prices is now almost complete. Global spare capacity is likely to be reduced to low levels within a relatively short time. The global economic crisis has postponed, but not cancelled, a crunch which would otherwise be starting to bite now."
The analyst at Bank America Merrill Lynch said crude may touch $105 next year with $150 in sight by 2014. Again, they are way off on the price curve. The analyst said, "Approximately 1.7 billion consumers in emerging markets with a pre capita income of $5K to $20K are eagerly waiting to buy cars, air conditioning units or white goods."
Barclays repeated the claim made by Richard Branson two weeks ago that the world faces peak oil within five years.
Francisco Blanch, the analyst at Bank America ML, said output from non-OPEC states is falling by 4.9% per year. Saudi Arabia and the UAE can only make up 25% of that gap. Global spare capacity will fall to minimum levels soon and prices are likely to spike higher than in 2008.
Iraq is going to be the key to pushing peak oil farther into the future. Iraq is trying to increase production from 2.5 mbpd to 10 mbpd over the next 5-7 years. Most analysts feel this is overly optimistic since the infrastructure is in ruins, existing wells are falling apart from lack of maintenance and security is very weak. They may get to their 10 mbpd number but probably not for 7-10 years.
Remember the depletion monster never sleeps. Depending on who you believe the annual depletion rate is between 3.5% and 7.5%. The IEA just ramped up their estimates to the high end of that range. With current global production around 86 mbpd that means we lose roughly 5 mbpd in production every year to declines due to depletion. You can take 3.14 billion barrels of oil out of roughly 700 major fields every year without seeing the remaining levels drop and the production decline.
It will take higher prices to stimulate new production outside of OPEC. In the U.S. the marginal cost of new production is between $40 and $65 per barrel because of the increased expense of drilling in deep water and the lower volume of new wells drilled onshore. New wells onshore in places like the Bakken cost millions to drill and produce 250 bpd or less with 50% depletion in the first five years. As of August 2005 there were 433 new wells less than five years old in the Bakken and the average production from each well was 116 bpd.
These new calls for rising oil prices over the last several weeks could be the motive power behind the current rally to $80. We had the UK Peak Oil study group with big names like Branson making headlines two weeks ago and now Bank America and Barclays are joining the chorus. These entities are not alone but their names have clout and are attracting attention.
This newsletter is only one of the newsletters produced by OilSlick each day. The investment newsletter is also produced daily and contains the current play recommendations in the energy sector. Stocks, options and futures are featured. If you are not receiving the "Play Newsletter" please visit the subscribe link below to register.
Subscribe to Energy Play Newsletter