Oil prices: Where to now?

The latest newsletter from Absolute Return Partners suggests that the fall in oil prices is temporary and oil will soon recover to around $100/barrel:

“All I know is that the price of oil won’t stay below the production cost for a long period of time (as in years). Hence I think we will see the oil price at $100 again, and it won’t take many years, but it could be an extraordinarily bumpy ride.”

The chart below depicts crude oil prices (WTI) from 1987 to 2014, adjusted to current (November 2014) prices.

Nymex WTI Crude adjusted to November 2014 prices

What it shows is that, prior to 2004, crude oil prices seldom exceeded $40/barrel. If, for most of the 17-year period, prices were below $40/barrel and supply continued unabated, then production costs must be even lower. Some of the more accessible oil fields may be nearing the end of their life, but production costs for major producers such as the Saudis could not have changed much (in real terms) over the last 10 years. That means true production costs are a lot lower than ARP’s estimate.

I tend to side with Anatole Kaletsky who views $50/barrel as the likely ceiling for crude oil prices — and not the floor.