The only certainty about the oil price has been the inability of forecasters to accurately predict it. So what is the correct long-term crude price?
Ask a New York futures trader and the answer is currently $54 a barrel for 2011. Analysis by Goldman Sachs suggests that European oil sector equity valuations discount a 5-10 year forward Brent crude price of $30. Meanwhile, integrated oil companies are still using prices of $20-$25 to assess investment projects.
Faced with such confusion, investors are taking a very short-term view. Citigroup highlights the close correlation this year between European sector performance and daily movements in one-month forward Brent crude prices. With the industry focused on returning cash, it is understandable that investors are concentrating on near-term cash flows. The macroeconomic picture for the oil market looks bullish for the latter half of the year. On recent trends, this suggests further sector upside.
But a short-term investor focus also means less pressure from the market for oil companies to address whether their price assumptions are too low. Sustained high prices, however, are filtering through to oil company logic. Last week Lord Browne, BP chief executive, said prices could remain above $40 for three to four years. On Monday, Jeroen van der Veer, Royal Dutch/Shell's chief executive, said that sustained heavy investment in increasingly difficult and capital intensive projects would require higher long-term prices than in recent years. As the oil majors accept a "stronger for longer" view, it can only be a matter of time before, implicitly or explicitly, they use higher prices for investment decisions.
(FT.com)