Oil - Factors that Affect its Price
The oil price has fluctuated within a very broad range over the years. What are the factors that affect the price of oil and what does the short-term trader examine when considering trading oil stocks.
Rising demand
Oil demand is at an all-time high: currently at 90 Million barrels per day (mbpd). As such, the laws of supply and demand dictate that the price should rise. The growth in demand has been fuelled by the continued economic expansion of the developing world's biggest economies, India and China, supported by large populations (in excess of one billion people each) and sustained annual growth rates of 7% in India and 9% in China. Additionally, industrialised countries are not reducing demand. Some projections suggest that within 25 years demand could reach 140 mbpd.
Supply trends
Recent events in Iraq, Iran and Nigeria have demonstrated that geo-political tensions raise prices due to threats to supply. But more general supply trends play their own part in pushing up prices. To maintain reserves oil companies must explore and drill further afield, in generally more adverse locations therefore raising the costs of production. The result is tightened supply.
A more controversial concern is the so-called "peak oil" theory: the idea that the world has reached the natural limits of oil exploitation, and that there is little more to be found in the ground whatever the price.
Figures and lies
As mentioned earlier, price is affected by supply and demand. The issue is in the accuracy of the figures presented:
Supply is influenced by the amount of reserves available. If there are limitless barrels of oil in the earth then the price will be cheap. In the 1980's OPEC decided to move to a quota production system based on the size of reserves. This meant that an OPEC member could pump more oil, and therefore make more money, if it said it had larger reserves. The effect of this was immediate; Kuwait revised its reserve estimates by 50% overnight, followed by the UAE, Iran, Iraq and Saudi Arabia. Although this may be explained by previous estimates being conservative, what troubles some oil analysts is that twenty years later, these reserve estimates are unchanged and in fact may have increased.
It is not only OPEC figures that are a cause for concern as oil companies have been known to report erroneous figures. Shell has been forced to make four separate downwards revisions of its official reserves since 2002, losing around 4.8bn barrels and damaging its share price.
Demand is also affected by inaccuracies in figures, The USA re-visited its 2004 figures for oil demand growth and raised the figure by over 40%; from 2.4% to 3.5%.
Below are companies listed on the ASX that have oil interests:
Oilsearch (OSH) - With estimated oil reserves in excess of 140 million barrels from its operations in Australia and PNG. OSH continues exploration, development and production of oil and gas prospects in Australia, PNG and Yemen.
Santos (STO) - Dedicated to oil & gas exploration and production in Western, Southern & Central Australia, NT, Timor sea, USA, SE Asia and Egypt. Santos has reserves in excess of 600 mboe (million barrels of oil equivalent).
Tap Oil Limited (TAP) - Predominantly concerned with Oil and GAs exploration and production in WA with some interest in New Zealand.
Woodside Petroleum Limited (WPL) - Woodside has 1.4 billion barrels of oil equivalent reserves throughout its Oil and Gas projects in Australia, West Africa, North Africa, PNG and the USA. A major shareholder is Shell Australia (34%).
Roc Oil Company Limited (ROC) - Roc oil is focused on the production of Gas and petroleum products in the UK. It also has exploration and production facilities in Mauratania, with joint venture interests in Australia, West Africa, China and New Zealand.
BHP Limited (BHP) - Alongside all the other mineral resources BHP also has substantial Petroleum assets producing LNG, LPG, condensate and crude oil. The projects are located in Australia (Bass Strait, North West Shelf), the Americas and the Gulf of Mexico.
