Citigroup’s Morse: Oil Bull Market Nears End, US To Become No. 1 Producer By Decade’s End

August 20, 2012

Citigroup’s head of commodities discusses the outlook for oil prices in the near term and long term, as well as the WTI-Brent spread.


Ed Morse is the head of Global Commodities Research at Citigroup Global Markets. He was an advisor to the U.S. Departments of State, Energy and Defense and to the International Energy Agency on issues related to oil, natural gas and the impact of financial flows on energy prices. A former Princeton professor and author of numerous books and articles on energy, economics and international affairs, Morse was the publisher of Petroleum Intelligence Weekly and other trade periodicals and also worked at Hess Energy Trading Co. HAI’s Sumit Roy recently caught up with Morse in Citi’s New York offices to discuss the outlook for oil.


HardAssetsInvestor: You recently put out some fascinating research on the long-term outlook for oil. You mentioned four methods for determining long-term prices. Can you go over them for us?

Ed Morse: An initial fast way to look at long-term oil prices is to look at the forward curve and see where it tends to mean-revert. We went through a period of great stability starting in the 1980s, where the long-term [deferred] price of oil was reverting to around $21/barrel. Then we went through a period of incredible volatility and inflation in the deferred price. And now we’re back again at a relatively stable level for the deferred price of WTI, as well as Brent.

For WTI, the deferred price has been hovering between $85 and $90/barrel. And for Brent, it’s been hovering between $90 and $95/barrel. That is one estimate on where long-term prices might be.

A second way to look at it is to take a methodology that was invented by Professor Morris Adelman at MIT in the 1940s and to look at average finding-and-development costs for publicly traded companies—which during the 1980s when oil was mean-reverting to $21 was averaging around $7/barrel with great consistency on a three-year, moving-average basis. In fact, it didn’t move very much at all between the early 1980s and the early part of the last decade, 2002.

And look at what kind of stable relationship there was between average finding-and-development costs and oil prices. It was a 3-to-1 ratio, so the $21 mean reversion for crude correlated with the average finding-and-development cost. If we look at average finding-development costs today, they’ve been around $18/barrel globally on a three-year, moving-average basis.

We actually took a look at the Adelman analysis and we redid it and came up with a multiple of four, which gave us a price at $72 a barrel. Between $72 and the low $90s is the band that we are zeroing in on.

A third way to look at long-term prices is to see what the marginal barrel costs are. In terms of current production, it’s about $90 to $92/barrel in terms of all-in development costs. That has been relatively consistent for the last four or five years and would coincide with the high end of the band that we just talked about.

Finally, we developed our own proprietary index, which came in a range of $85 to $90 a barrel.

Those were the four main methods we looked at to zero in on long-term prices through a set of methodologies that are reflecting significantly lower volatility in the marketplace today.


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