The oil market scenario played out much as we anticipated in last month’s letter. As prices rose in the early part of the month, so did the market. The market decreased in the second half as supplies came on the market, largely from the Permian Basin.
OPEC will meet next month and decide whether or not to extend production cuts. It appears that the recent price decline will make it easier for OPEC to maintain cuts a little longer in order to keep prices higher. It is actually a good plan for OPEC. After all, Saudi Arabia is thought to require $80 oil (vs. $70 today) to balance their budget needs. So far, few areas outside the Permian Basin are actively seeking or producing new supplies. Worldwide demand continues to rise steadily so we continue to anticipate that prices will stay firm until large volumes come online later this year from the Permian. Thereafter, prices should moderate. We expect prices to be low enough in the Middle East to cause unease for the Saudis. Meanwhile, WTI (West Texas Intermediate) should be set high enough for Permian producers to supply almost all the marginal supply needed for many years.