"Supply Destruction" to boost Commodity Prices ?

1echidna

wombat42 wrote: »

Thats right. Extraction costs are continually on the increase as more dificult sources are used. For gold, extracting currently costs around $600 per ounce and oil is around $55 per barrell.

The extraction costs you quote, certainly for oil, must include capital repayments. Capital costs in oil are very high, the actual cost of production is low even for offshore projects rarely rises to double figures in dollars per barrel. If it weren't for OPEC production could continue, largely at present levels, with prices falling below $20 per barrel. I believe blaming the high prices earlier this year on speculators is incorrect, supply was very tightly stretched and as the economic boom has ended demand has fallen.

tradetime

1echidna wrote: »

The extraction costs you quote, certainly for oil, must include capital repayments. Capital costs in oil are very high, the actual cost of production is low even for offshore projects rarely rises to double figures in dollars per barrel. If it weren't for OPEC production could continue, largely at present levels, with prices falling below $20 per barrel. I believe blaming the high prices earlier this year on speculators is incorrect, supply was very tightly stretched and as the economic boom has ended demand has fallen.

Imho supply/demand as you say is quite tightly balanced, but that is a ripe market for speculation to drive the price through the roof, the price of Nymex futures has dropped about 50% in the last 12 weeks, also the rise was sharp, though obviously not as sharp as the decline, that is classic speculation behavoir, it will be interesting to see how low it can go.
My understanding is that the "average" cost to produce a barrel of oil is $30, but until I can find a link to substantiate that it should be viewed as what it is BB gossip

1echidna

With regard to actual costs of production I have found a reference from the EIA

In 2006, average production costs (or “lifting” costs, the cost to bring a barrel of oil to the surface) ranged from about $4 per barrel (excluding taxes) in Africa to about $8.30 per barrel in Canada; the average for the U.S. was $6.83/barrel (an increase of 23% over the $5.56/barrel cost in 2005).

http://www.eia.doe.gov/neic/infosheets/crudeproduction.html

tradetime

Thanx for that, must be getting senile never thought of the EIA

wombat42_2

1echidna wrote: »

With regard to actual costs of production I have found a reference from the EIA

In 2006, average production costs (or “lifting” costs, the cost to bring a barrel of oil to the surface) ranged from about $4 per barrel (excluding taxes) in Africa to about $8.30 per barrel in Canada; the average for the U.S. was $6.83/barrel (an increase of 23% over the $5.56/barrel cost in 2005).

http://www.eia.doe.gov/neic/infosheets/crudeproduction.html

Cant find my link offlaand but saw one a few days ago quating miniumum prices that individual countries would accept such as Iran and Venezuala. It was around $50 to $60.

tradetime

wombat42 wrote: »

Cant find my link offlaand but saw one a few days ago quating miniumum prices that individual countries would accept such as Iran and Venezuala. It was around $50 to $60.

Ah yes, that was on Bloomberg discussion last night as well, the figure which was quoted was what was required based on the amount they produced to balance their budget.

1echidna

tradetime wrote: »

Imho supply/demand as you say is quite tightly balanced, but that is a ripe market for speculation to drive the price through the roof, the price of Nymex futures has dropped about 50% in the last 12 weeks, also the rise was sharp, though obviously not as sharp as the decline, that is classic speculation behavoir, it will be interesting to see how low it can go.
My understanding is that the "average" cost to produce a barrel of oil is $30, but until I can find a link to substantiate that it should be viewed as what it is BB gossip

One thing about the oil market which makes for volatility, speculators or not, is the inelastic nature of the market. When supply is tight users are often not able to or inclined to cut back significantly and when prices are low people do not use that much more, hence large fluctuations in price as economic activity varies, given that, in the short term at least, production remains fairly constant because of low actual costs of production. Clearly also an economic downturn may inhibit investment meaning when an upturn arrives supply may be even tighter. A recipe for roller coaster prices also in other commodity markets I would suggest.

Coolfonz

sorry wombat 42, oil is my business and you're way off the mark.
extraction costs vary widely, as low as $2/bl in Saudi for example. new oil sands projects may require $50-60 oil (even higher in fact).
but it was energy that sparked the run up in commodities prices, as commodities are very energy intensive in the main.
so costs already look like they will fall/are falling. especially in 2009 and 2010.
projects will be delayed, labour costs will fall etc etc...until the next cycle...

wombat42_2

Coolfonz wrote: »

sorry wombat 42, oil is my business and you're way off the mark.
extraction costs vary widely, as low as $2/bl in Saudi for example. new oil sands projects may require $50-60 oil (even higher in fact).
but it was energy that sparked the run up in commodities prices, as commodities are very energy intensive in the main.
so costs already look like they will fall/are falling. especially in 2009 and 2010.
projects will be delayed, labour costs will fall etc etc...until the next cycle...

I wasnt expecting commodities to shoot up any time soon. More like 2 or 3 years time.

purch

This is from a Citigroup report on Russian Oil Company's by Alexander Korneev and Ildar Khaziez


Below US$90/bbl Brent price, Russian oils should start cutting capex - Our analysis shows that Russian oil companies would have to tap into the debt market in order to sustain upstream capex developments below a US$90/bbl long-term Brent price. We believe only government intervention via oil MET rate cuts would be able to sustain upstream capex targets and subsequently prevent oil output decline in the country. Our analysis presented in Russian Oils: Plenty of room for further MET rate cuts, 7 September 08, shows that the 2009-11 forecasted budget surplus should allow the government to lower MET starting as early as 2009.
$70/bbl Brent price is critical - At $70/bbl we estimate operating cash flow of Russian oil companies would not cover the necessary capex to develop new reserves, making the oil business economically unviable. Our DCF values for most Russian oil names falls to zero at this price level.
Even the Russian government would likely not be able to support the sector via lower taxes as 2010-11 budgets are balanced at cUS$70/bbl oil price.
US$86/bbl long-term Brent price is currently priced in - Russian oil companies are highly sensitive to oil price due to: 1) ongoing shift to green field from brown field, and 2) high tax burden.

As such, we estimate that the current market prices of Russian oil companies are pricing in around an US$86/bbl long-term Brent price.