The Oil Price: Noone Really Knows What's Going On; Russia economic growth usa oil oversupply opec report

Just two months ago, the World Bank estimated in its commodity forecast report that the price of crude oil will average $51.4 per barrel in 2016, virtually unchanged from the average price last year ($52.5), but since then oil has fallen all the way down to $30 with no bottom in sight.

Just this month the price reached an 11 year low for the third session in a row ($36), despite positive news regarding US supply (stockpile down -5.8m barrels vs +1.1m estimate). The price was as high as $110 as recently as 2014 but $30 oil was not uncommon in the 1990's and early 2000's.

Now Opec which represents a third of the world's oil output, is coming out and saying that improved overall demand will lead to a recovery in the price ($70 by 2020).

And Russia - the world's second largest producer - is saying it doesn't expect oil prices to recover beyond $30 in 2016 which says a lot coming from a nation that loses $2 billion in revenues for every dollar decline.

My opinion - Oil prices will swing wildly in both directions in the upcoming years so prepare accordingly.  However peak oil is not the issue.

this opinion is based on

• The USA oil oversupply cannot continue especially at current prices - most oil production increases in the US are attributable to North Dakota shale exploration the pace of which cannot continue at current prices.
• New Canadian pipelines (Energy East Pipeline will allow Canada to fully utilize refinery capacity in New Brunswick / Northern Gateway Pipeline / others) will permanently lower glut of supply in US North Western PADD regions).
• Higher oil exploration costs in general as tradition sources dwindle (shifts from light crude -> heavy oil which requires more expensive processing).
• However
• in much of the world the infrastructure and technology to utilize renewable sources of energy is not yet in place or too expensive to implement.  Furthermore, it is those parts of the world where most of the population and economic growth is happening (Africa, India, Economy of the Arab League).

What CNOOC (CEO) Nexen (NXY) Acquisition Means For Oil Sands (China oil companies production reserves offshore)

After months of waiting for the Canadian government to approve it, on December 8, 2012 China's national offshore oil corporation (nyse:ceo) completed a $15.1 billion all cash takeover of Canada's tenth largest oil company Nexen (tsx:nxy).  The deal is the largest foreign investment by any Chinese company ever and will undoubtedly be a confidence booster to Chinese firms looking to buy companies abroad after having been spurned by Unocal Corp in 2005 ($18.5 billion offer rejected) .  In order to get the Canadian government to approve the deal, CNOOC had to make a few concessions:  It agreed to an annual review of its operations, that Nexen Canadian operations employ more Canadian workers than Chinese, CNOOC has also said that it will consider listing on the Toronto Stock Exchange.  The stipulations are not new, the Canadian government has a similar arrangement with Rio Tinto Alcan.

Don't be fooled !  Chinese investment in Nexen doesn't necessarily indicate their interest in the oil sands.  Nexen only accounts for about 6% of oil sands production (including shale, Nexen produces 52 thousand bpd in Canada), in fact the majority of Nexen's production comes from outside of Canada in regions such as the North Sea, the Gulf of Mexico and offshore West Africa (African production down from 18th boe/d last quarter to nothing this quarter). 

Europe's Five Largest Utility Companies & Changes To Their Generation Capacity by fuel, Revenue, Profit (2009-2011) (EDF, EON, RWE, GDF Suez, Iberdrola), Profits Down Due to Low Electricity Prices

For the largest utility company in Europe (2nd largest in the world) (CNBC) Électricité de France (EDF), 55.5% of 2010 sales came from France compared to 57.7% the year before. EDF leads the electricity market in both France and the UK (33.2 million customers between them). Though large EDF's generating capacity relies more heavily on one fuel type (nuclear) than any of its competitors; It gets 75% of its generating capacity from nuclear energy (90% of its nuclear capacity is in France (France is the world's largest net exporter of electricity). Also of note, EDF is the world's leading operator of nuclear power and Europe's leading hydro electricity producer.

European utility stocks have been hammered lately, a direct result of earnings losses (hindering profits in Europe are low electricity prices which are expected to decrease even further in the near future (down to as low as €50 by 2015); Europe has contemplated electricity price fixing, in terms of industrial demand European countries already keep prices low so as to help their companies stay competitive, for households though it's a relatively new thing (Europe could be concerned that households can't afford further increases). Also affecting results: a warmer winter in France (GDF Suez said in its 2011 2Q report that the winter was 30.5% warmer than it was in 2010 and that was the main reason sales there dropped 8.5%/demand for gas 24% lower to 131 TWh, electricity 3% lower to 18.3 TWh). EON's stock fell 35% between January 1 and September 1, 2011 while the stock price of RWE AG (second largest German utility) fell 49%. However, revenue stream continues to be strong for most utilities but that's mostly because a number of them including GDF Suez (International Power) and Iberdrola (Elektro in Brazil (distributor) for $2.4 billion) have made significant acquisitions (also, a greater focus on renewables will benefit the companies in the long run as it makes them less dependent on natural gas imports while also removing them from carbon penalties). GDF Suez's organic ebitda growth in the first half of 2011 was -1.1% but new addition International Power was up 27% (business in America) and that boosted GDF's overall ebitda by over 8% (671m euro). According to broker data, in Germany baseload power for 2012 is at €58.95 ($84.16) per megawatt-hour. (RWE, EON May Be Long-Term Underperformers, Barclays Says)

EDF and GDF Suez also differ in terms of their international business. Most of EDF's generation capacity comes from domestic operations within France while GDF Suez receives less than 10% from France (the rest comes from places abroad like Africa/Asia and America (Canada is a significant source of wind power; about 182 MW worth in the first half of 2011). On August 9, 2011 it was announced that China Investment Corp paid €2.3 billion for a 30% interest in GDF Suez's exploration and production business. GDF Suez also produces oil, over 50M barrels in 2010. GDF Suez recently acquired 70% of International Power giving French companies a lot of control over power production in Great Britain (the other French company EDF has close to 8 million customers in the UK).