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Oil Prices/Oil Costs

Sigma Investment Counselors

June 8, 2016

As we know, the price of oil is generally quoted in dollars, and the most common reference points are Brent and WTI (West Texas Intermediate).  Due, in part, to increased press coverage and continuing consumer interest in the price of gasoline, most investors are generally familiar with current oil prices.

Economists will tell you that price is usually a function of supply and demand.  With current high levels of supply, continuing, relatively modest increases in demand seem to be accommodated without a need for a sharp increase in price.

Investors should probably consider two other factors in determining future prices for oil.  First, many major oil producing countries are desperate for cash.  This suggests that weaker prices may not result in a significant decrease in supply.  The just concluded meeting of oil producing countries seems to support the idea that, despite complaints about oil prices, there is no consensus to reduce output.

The other important issue is oil’s cost.  The cost of oil varies by supplier and some of the differences are significant.  Remember, oil is priced in dollars, but costs are, at least in part, in local currency.

This is not the place for a detailed, country by country analysis of costs.  However, countries with a weak currency, relative to the dollar, and a well developed domestic oil services industry, are likely to have a material cost advantage.

All comments and suggestions are welcome.

Walter Kirchberger, CFA®

 

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