Wednesday, April 23, 2008

US $ 150 Oil

In last December, people were calling for US $ 200 oil. Today, they've compromised a bit, calling for US $ 150, another 28% upside from US $ 117. Part of me being a little bit of a contrarian has turned cautious. There is almost no use of looking for facts in newspapers, government reports or investment research reports, all say the same thing: demand and supply are very tight. The global boom has created endless thirst for oil. I read somewhere saying Russia is running out of oil but no one seems react to news Brazil discovered a large oil field. In the short term, a little bit of hiccup like one Japanese ship being attacked in Nigeria will send price soaring. Overreactions? The latest I read in the Wall Street Journal says this:

"Next year, if all goes well, Saudi Arabia will turn the spigots on the largest oil field to come online anywhere in the world since the late 1970s.

The Khurais complex, sprawling across a swath of red dunes and rocky plains half the size of Connecticut, is expected to add 1.2 million barrels a day to an oil market caught between growing demand and a paucity of significant new discoveries. The twin forces have led to historically high prices for crude oil, which settled at a record $117.48 on Monday.

But the project also illustrates a darker point: Even in Saudi Arabia, home to more than a quarter of the world's known recoverable reserves, the age of cheap and easily pumped oil is over.

To tap Khurais, Saudi Arabian Oil Co., known as Aramco, has embarked on the most complex earth- and water-moving project in its history. It is spending up to $15 billion on a vast network of pipes, oil-treatment facilities, deep horizontal wells and water-injection systems that it calls "one of the largest industrial projects being executed in the world today."

Bottom line, supply will remain tight. It will come on line between 2009 and 2011 from Saudi which supply 6% of the worldwide demand.

Commodities gurus like Jim Rogers and Soros said be careful. "Value" guys like Mark Mobius of Templeton and Buffet own oil stocks now. This oil bull run took off strongly in 2003 but has not pulled back significantly except in Janauary 2007. The only guy that totally missed this bull run is Bill Miller and still refuse to participate, I am not sure why. I agree that oil price will remain high but what is the fair value? US $ 60, US $ 70, US $ 80, US $ 90, US $ 100, US $ 125, US $ 150 or beyond???? How much should we pay for the premium on top of geopolitical risks + US $ depreciation + exploration costs + extraction costs, etc? What is the price level that will eventually hurting the whole world?

BTW, oil hit a new record after I wrote this, US $ 120.

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