Energy
$100/barrel Crude Good for OPEC, Not So Good for Supermajors (XOM, CVX, COP, TOT, BP, BX)
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At an energy conference in Paris today, the secretary general of OPEC, Abdalla Salem el-Badri, said that the cartel is “not happy” with crude oil prices in the $110-$130/barrel range and that OPEC is trying to bring the price down. OPEC’s target price, according to el-Badri, is $100/barrel, “which is good for producers and consumers.”
But if prices fall that low, the big integrated oil companies like Exxon Mobil Corp. (NYSE: XOM), Chevron Corp. (NYSE: CVX), ConocoPhillips (NYSE: COP), Total SA (NYSE: TOT), and BP plc (NYSE: BP) are going to be pinched. Exxon, for example, has based its 2012 budget on an average Brent crude price of $111/barrel. The company’s average production cost for a barrel of oil in 2011 was just under $101/barrel. Chevron’s average production cost for a barrel of liquids was nearly $103/barrel in 2011.
Bloomberg today cites Byron Wien of The Blackstone Group LP (NYSE: BX) with a forecast that crude prices will drop this year. Production is up in the Russia, Saudi Arabia, and the US, which should lead to lower prices. Bloomberg’s survey of 30 analysts puts a median price of $115.50/barrel on Brent for this quarter, but 6 of the analysts predicted prices at or below $100/barrel.
The fear premium that pushed Brent prices to more than $125/barrel earlier this year is being wrung out of the price now as the possibility recedes of a military confrontation with Iran. Demand in the developed world is falling, and China, the world’s largest consumer of crude after the US, has slowed both its economy and its oil imports.
These two factors are combining to push crude prices down at a pretty good rate. But a price of $100/barrel would mean that Exxon and Chevron would lose money on every barrel they produce. A $100/barrel price would also mean that all the supermajors would very likely have to scale back their plans for capex spending, which would significantly reduce exploration and future supply. That in turn would likely produce a supply shortfall which could easily cause a spike in crude prices if and when demand picks up.
It’s often said that the best cure for high prices is high prices. OPEC may get its target price, but that won’t cure the underlying cause for high crude prices. The stuff is scarce, even when it seems that there’s a lot of it available.
Paul Ausick
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