Wednesday, November 7, 2007

Oil price at $98 is actually CHEAP!

Oil jumped to a new record above $98 a barrel late Tuesday (Nov. 6).

Oil inventories likely fell due to a suspension of output at Mexico's state oil company Petroleos Mexicanos, a major crude exporter to the United States, which temporarily shut its ports last week due to severe weather.

"A new petrol price record doesn't mean the end of the world for drivers, but they will have to start adopting more fuel-saving driving techniques to get more miles out of their tanks."
In California it's at $3.508/gallon or $0.927/litre (RM 3.10)

Opec, in its monthly report, predicted strong demand for fuel and heating oil in the fourth quarter to December due to the winter months while world oil needs for the last three months of 2007 were estimated at 1.8 million barrels per day. The cartel has maintained global average demand for 2007 at 1.3 million barrels per day or 1.5% growth (from last year) and projected that demand would be maintained at the same level next year.

Harga minyak mentah global hari ini meningkat semula melepasi AS$98 setong berikutan spekulasi penyusutan simpanan minyak Amerika Syarikat untuk tiga minggu berturut-turut.

High crude oil prices is indeed good news for Malaysia, a net oil exporter, given that the government revenue would rise in tandem with the spiralling fuel price. Malaysia (a non-Opec member) produces over 600,000 barrels per day .State-owned Petronas operates in partnership with various international oil companies (IOCs) under a production sharing system that will result in oil production of around 700,000b/d by 2011.

The Federal Government expects its revenue to increase nearly 15% to RM141.8bil this year or 22.7% of the country's gross domestic products (GDP). About 38% of the total government revenue comes from oil earnings. Petroleum income tax is anticipated to hit RM22.6bil this year. Also, the RM24bil dividend income from Petronas contributes a large bulk of non-tax revenue.

Note ; It is estimated Malaysia exports almost 100% of her high-grade crude oil production and buys 400,000 bpd of cheaper-grade oil for local consumption. But about 70% of the crude oil for local consumption are processed/refined outside Malaysia i.e. in Singapore.

Comments:- Is it cheaper to process oil outside the country?

If we can do the processing ourself, it will be more beneficial - need to set-up a new refinery complex with a minimum production capacity of 250,000 bpd.

Read this article:-
Why i think oil is actually cheap at $98!

One might wonder why oil is at $98 and what are the global events that effect oil price.

1) Demand from China and India does not seem to slow. Add demand from Indonesia, Australia and Eastern Europe, and oil never seemed so scarce.

2) Supply is short. Resources are getting dried up . Pair that with declining levels of reserve in the US, and an uncertainty over OPEC's reserves, and the outlook seems bleak. To give you an idea, OPEC's capacity has been reduced by over 15% in the last 25 years.

3) Governments of oil producing nations in South America are increasingly weary of big oil companies drilling on their land, polluting their environment and using their resources to fatten their own wallets. Bolivia, Peru, Venezuela and Ecuador are now looking to increase taxes on these companies, along with nationalizing the industry, which means that public oil companies like Chevron and ExxonMobil will be sharing their projects and profits with government owned oil companies. For instance, 85% of the worldwide known reserves were open to international oil companies back in the 1960's. Now, less than 20% is open to them.

4) Production and Refining is running at full capacity. Any breakdown in production would send prices soaring higher. Refining is currently running at an unsustainable 92% capacity.

5) Higher cost of drilling, producing and refining will keep putting a cap on the profits that oil companies make. Add the chance of facing big profit taxes at home and tax threats from other governments abroad and there is little incentive for companies not to hold on to their cash. Drilling oil wells now costs 5 times as much as it did just 10 years ago.

6) Global warming, which results in stronger hurricanes, higher tides and climatic changes, will eventually hinder off-shore and deep-sea drilling, raising costs and increasing operational risk.

While alternative forms of energy might keep oil prices in check, I believe they will only prolong the inevitable - even higher oil prices.

Note:-The Paraguaná Refining Complex (CRP) in Venezuela, is the largest refining complex in the world. It has an installed capacity of 955 thousand barrels per day,

Question & Answers

Is demand for oil continuing to soar?

Yes. The biggest catalyst for oil's seemingly remorseless rise has been the simplest economic driver there is: the balance between demand and supply. Demand is at an all-time high, fuelled by the continued breakneck economic expansion of the Indian and Chinese economies. With more than a billion people in each country, and both economies growing fast, manufacturers and consumers are sucking in energy at an ever-increasing rate.

China overtook Japan as the world's second-largest consumer of oil in 2003 and is closing in on the US, with demand for oil growing at about 15% a year. Analysts worry global demand for oil is so intense that supplies may not keep pace. Demand will rise by an average of 2.2 million barrels a day next year, the International Energy Agency says, compared with the 1.5 million-barrel rise seen in 2007.

It says annual demand will rise 2% up to 2012, while other projections suggest demand could soar from about 90 million barrels a day to as much as 140 million over 25 years.

What is Opec doing about the situation?

As the leading oil supplier in the world, producers' cartel Opec is under constant pressure to do something about the price bubble. It recently bowed to pressure to pump more oil, agreeing to raise its production quotas by 500,000 barrels a day from 1 November. Reports suggest the move was forced through by Saudi Arabia and that few other Opec members either have much stomach for increasing output or much capacity to spare.

Opec has said the market is "very well supplied" with crude and will continue to be so in the immediate future. It has blamed speculation by market traders - who can make money by betting on the future direction of prices - for the continuing price rises.

Who are the winners and losers from costly oil?

Taking inflation into account, prices are still below levels seen in late 1980, when a barrel of oil - in today's prices - was worth more than $101. Back then, costly oil helped contribute to a recession in the US and similar fears are resurfacing now. The Bush administration has said it is "very concerned" about current price levels, at a time when the economy is already expected to slow significantly next year.

High energy prices make life more expensive for consumers and businesses, having an knock-on effect on their spending in other areas. Gasoline prices are hovering not far below the $3-a-gallon mark in the US, while UK petrol retailers have warned prices could soon rise above £1 a litre. But on the other side of the fence, oil giants such as ExxonMobil and BP are having a wonderful time, while oil-rich countries are also smiling.

Oil wealth has underpinned President Hugo Chavez's efforts to reshape Venezuela, allowing him to fund extensive social programmes and reject US criticism of his policies. Russia's oil and gas bonanza has underwritten efforts by President Vladimir Putin to exert state control over the country's energy sector.

Where will prices head next?

Many people scoffed when analysts from investment bank Goldman Sachs said in 2005 that prices could eventually top $100 a barrel. This now seems a real possibility, although analysts caution that the market remains volatile.

Estmates of where oil is headed from here range from $50 a barrel to $120. Some analysts believe supplies will get tighter as the year wears on, supporting prices. Others argue that prices have been driven artificially higher by speculative investing.

Crude prices are within the range of inflation-adjusted highs set in early 1980. Depending on the how the adjustment is calculated, $38 a barrel then would be worth $96 to $103 or more today.

Let's recall this report back on Aug.31, 2007

KUALA LUMPUR, Aug 31 (Bernama) -- The current higher oil price environment would affect the low-end segment of tourists, namely households with income of less than US$4,000 per annum, says MasterCard International.

"That segment will be affected because they are so price conscious. The slightest increase in price may deter them to buy the package," said its economic advisor, Asia/Pacific Region, Dr Yuwa Hedrick-Wong.

"But the high-end segment or above US$30,000 is a none issue," he said at the MasterCard Forum on "The Future of Travel and Tourism in Asia Pacific" held in Singapore recently.

This week, global oil price hit an all time high of US$70 per barrel.

"If we were to adjust the current world price of oil in due terms to 1978, the price is about US$98 per barrel. Oil is very cheap in that regard."

Note:- With the weakening of US Dollar , the oil price is actually cheaper than what we have to pay in, oil price at $98 today is actually CHEAP! Some estimates says it's heading for $120!