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Monday, June 18, 2012

Oil Price Likely to Stay High Buoyed By Marginal Costs

This was the argument for shale and natural gas prices as well though......


The price of Brent crude fell to five-month lows last week, as fears rose about the health of the global economy and the world's largest oil exporter, Saudi Arabia, said it would overproduce in order to drive prices lower.
There are solid grounds to believe this trend will continue as the crisis in the euro zone deepens and tensions between Iran and the West ease, particularly after the International Atomic Energy Agency confirmed Tuesday that an accord had been reached over nuclear inspections.
However, many industry observers say the price of oil is unlikely to fall far below current levels for long, because the cost of producing every last barrel of oil needed to meet demand has risen so high.
"Costs are still at a very high level because of the complexity of marginal fields," said Pierre Sigonney, chief economist at French oil company Total SA. "We don't expect oil prices to go much below $100 a barrel."
The marginal cost of oil production, defined as the cost of pumping the last and most expensive barrel required to satisfy demand, is fundamentally linked to long-term oil prices. If the oil price falls below the marginal cost, there is no incentive to produce that last barrel of oil, so demand will remain unsatisfied until consumers are willing to pay more.
The close relationship between the two was demonstrated from 2001 to 2010, when the average annual price of international oil benchmark Brent crude rose 228%, while analysts at Bernstein Research estimate the marginal production cost of the world's 50 largest listed oil companies increased 229%.
In 2011, the marginal cost of oil production was $92.26 a barrel for the 50 largest listed oil and gas companies and will reach $100 a barrel next year if it continues to follow the long-term trend, said Bernstein in a research note.

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