Wednesday, November 19, 2008

Global National Oil Companies Look for Oil to Drop to $40 a Barrel

National oil companies from around the world said in a recent meeting in Beijing that prices would probably fall to around $40 a barrel, according to Fu Chengyu, chief executive of China National Offshore Oil Corporation.

Fu added that the tone of the meeting was one on the verge of panic, as the reality of what is happening with oil is setting in.

Commenting on the idea of OPEC to cut back more on production, Fu said that it probably won't have any significant impact on the price of oil. The major reason for that is the economic climate around the world, which is making oil nowhere near the priority of consumers, who have cut back on travel and vacationing, and are spending only on necessities.

Another outcome of this is oil companies will cut back on investing in new projects, as the current and eventual price of oil can't sustain them.

Most extraction projects were initiated assuming a minimum price of $60 a barrel to break even, and up to $90 a barrel.

“When most of the oil companies budgeted their projects, they were using $70, $80, even $100 a barrel for their cash flow calculations,” Fu said. “For those projects that have started, certainly they will try to complete them, but for those projects that have not started yet they will delay or cancel. Simply, they don’t have enough cash to do all of those that they budgeted.”

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