FERGUSON'S FORECAST: Commodity Profits

The front page of my newspaper this morning had mug shots of the five oil company chief executive officers called on the carpet by Congress. Displayed above each photo were the billions of dollars the companies reported as third-quarter profits, totaling $32.8 billion. The CEOs' message was simple enough - messing with our profits will reduce investment and make matters worse. And get rid of those darned environmental regulations. Congress doesn't seem to understand that most of this money was made on commodity prices, not on refining margins. The price of gasoline may be a problem for politicians, but the real problem is the price of crude oil. On Monday, the International Energy Agency issued its annual energy outlook, providing us with a sanitized view of the energy world. IEA continues to project that crude oil supplies will grow by 50 percent in the next 25 years, but a caveat was added - $17 trillion must be invested in order for this to happen. The report summary admits that conventional oil resources are seriously depleted. In addition to further development of ultra-deep offshore fields and arctic resources, expansion of tertiary recovery techniques, and so forth, IEA says that unconventional sources such as the Alberta tar sands will be required. Expensive stuff. To be politically correct, IEA projects that oil prices will remain at about current levels or lower for the next two decades. IEA may be right, but I doubt it. I ask myself why the global oil industry would spend nearly a trillion dollars every year in order to keep the price of oil low. Surely some producing countries would rather forgo massive investments and let prices (and revenues) rise. Meanwhile in the U.S., the realization is growing that the hurricanes have not hurt national oil and gas supplies. Recent warm weather has weakened demand and driven natural gas spot prices down to $8/MMBtu this week. It appears that gas storage levels may increase in November, rather than beginning to decrease as usual. A November storage build has occurred only twice in the last 30 years. Recent gasoline and gas prices have the politicians in a tizzy, but the focus should be on crude oil supplies and prices. Crude oil prices have softened since the storms, but the fundamentals are unchanged. Conventional sweet light crude is getting harder to find. In the future, liquid fuels increasingly will come from heavy crude and unconventional sources of petroleum. Perhaps $17 trillion will be invested, and perhaps that will be enough to keep prices from continuing to rise. Or perhaps not. The politicians should keep their eyes on the price of crude oil.

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FERGUSON’S FORECAST: Commodity Profits

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