Commodities Outlook
Comment of the Day

January 14 2010

Commentary by Eoin Treacy

Commodities Outlook

Thanks to a subscriber for this detailed report by a host of authors at Deutsche Bank. The whole report is well worth reading but here is a section on oil supply costs
A key gauge of global oil and gas supply costs is the index (published annually in December by the US Department of Energy) based on detailed financial and operating data and information submitted each year to the US DOE/EIA by the major US-based energy-producing companies. This data is compiled by the EIA under the Financial Reporting System (FRS).

According to the EIA data, worldwide F&D costs averaged over the three-year period 2006-2008 rose 26% from the previous period to USD23.84/boe (barrel of oil equivalent). A large decline in reserve additions combined with higher expenditures were largely responsible. According to the US DOE, the significant downward revisions to reported 2008 reserves were largely driven by the SEC's reserve reporting requirement that used year-end 2008 prices, which reflected a low point of circa USD45/bbl. Under new SEC guidelines, future reserve reporting will be based on prices that are more representative of annual average prices (USD100 in 2008 and USD62 in 2009).

Prior down-cycles in oil prices were generated by a combination of lower oil products demand in reaction to recessions, as well as improvements in seismic and drilling technology, and greater access to reserves. At this time, oil F&D technology is obviously improving, but does not appear to be on the verge of the enormous breakthroughs (3-D seismic, horizontal drilling, and subsea completions) of the prior two decades although the situation for natural gas may be different.

Access to the areas of the highest geologic potential for oil seems to be decreasing as "resource nationalism" moves steadily into the mainstream of geopolitical discourse in many producing nations. Other supply issues, including rising depletion rates in conventional oil production, suggest that oil costs are likely to rise again after 2010.

Eoin Treacy's view The global recession contributed to the cost of oil production falling with wage demands, equipment and other costs being curtailed. However, given the dearth of new, easily accessible reserves, the recovery in energy prices and as the global economy returns to the growth, it appears only a matter of time before the average cost of production begins to rise once more.

The unbridled bullishness that characterized oil's advance to $147 is absent from today's market which has less of an imbalance between supply and demand. The advance since June has been more of a ranging uptrend whose primary consistency characteristic is the progression of higher reaction lows, which currently rest near $68.50. The oil price have been unable to sustain upward breaks for the last six months and it encountered resistance at another incremental new high, near $84, on Monday. It may still move into a more consistent trending phase, but for this to occur it would have to sustain a move to new highs. In the meantime we can probably continue to give the benefit of the doubt to the ranging uptrend which is likely to continue to provide buying opportunities on occasional reversionary pullbacks.

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