At a recent gathering, I had the pleasure of meeting a true Fool: an avid investor with some big positions, an appetite for Motley materials, and an opinion that crude is headed for $50 a barrel.
Fat chance on the last one. While there's little fundamentally in the short term to justify Tuesday's icebreaking $100 close, and while prices could shrink on softer demand in the U.S., my contention is that $75 will be our approximate floor. A ceiling is as yet difficult to predict, but it's likely to be well more than $100.
Let's randomly look at some of the key reasons why prices must almost certainly rise in the long run:
- Nigeria is the largest producer in Africa, and the fifth-largest supplier of crude to the U.S., and the situation there is a mess. Tribal violence has led to cuts in production by the likes of Royal Dutch Shell (NYSE: RDS-A) (NYSE: RDS-B) and Chevron (NYSE: CVX) that have chopped the country's output by more than 500,000 barrels a day ... perhaps lots more.
- Our fourth-largest supplier, Venezuela, is making noises about derailing crude shipment to the U.S. following ExxonMobil (NYSE: XOM)-induced court injunctions that have frozen roughly $12 billion in assets of PDVSA, the state oil company. However, these threats are somewhat difficult to take seriously, since few places other than the U.S. are able to refine the country's thick, gooey crude.
- There has been chatter about OPEC trimming production to prevent prices from sliding. Those notions are all very nice, but I remain convinced that most OPEC nations, especially Iran and Venezuela, need to produce all-out to maximize their cash flows. And only Saudi Arabia has any real ability to expand upon its output.
- Concerns continue to proliferate about declining production in a variety of locations -- the latest being Russia -- at precisely the time that global demand is expected to grow by as much as 40% by 2030. In that connection, it's noteworthy that Exxon, Shell, ConocoPhillips (NYSE: COP), and Chevron all saw their liquids production drop amid rapidly rising crude prices in the December quarter.
I could go on, but I suspect my Foolish friends get the picture: While crude prices could slide in the short term, they'll almost certainly continue to ascend farther out. Therefore, Fools would be well advised to monitor the companies mentioned above, perhaps along with deepwater driller Transocean (NYSE: RIG) or oilfield service provider Baker Hughes (NYSE: BHI).
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