The key to the mid term oil price is the amount of pain high cost producers will bear. As many oil producers like Venezuela, Mexico and Indonesia rely on oil exports to fund the schools, hospitals and infrastructure oil prices that stay too low create  political problems or even raise the risk of social upheaval. Where those producers are also past peak production as all three are, there is a further risk of selling oil too cheaply in the near term when production cuts could extend the life of decling oil fields. For example, Canterall, Mexico's super giant field in the Gulf of Mexico, is now in its second decline after gas injection restored high output during the late nineties. Mexico's politicians are alarmed that on current trends it will be unable to export oil after 2012 to 2015. The same applies to the UK and Norway, both well past peak output.  

Cheap oil does offer some minor relief to countries where oil is subsidised, but generally both the poor and rich OPEC nations require oil to be in the $60-70 range either to boost declining production, support basic infrastructure or to provide the one source of reliable export income they have. Saudi Arabia, the Emirates, Kuwait, Algeria, and Libya are examples of these mono-income states.  For Japan, Korea etc which have no oil, low crude prices are all gain and increasingly low oil is a plus for the USA, as it now imports 62%. China be in a similar position in 10-15 years. It can now outbid the US for African oil as it barter with railways and hospitals, but this is a treeadmill as even some of the prolific off-shore fields of Angola are already in decline. China's giant, Diaqing in the far north, is also in decline after 35 years of high production. It exploring in the far west where China mergers into the Gobi desert, but there and the south China sea discoveries have been relatively small.  

Certainly demand has weakened in the US. A fall of some 4-5% for a nation that consumes 25% of the world's oil makes a big impact on the mercurial oil markets where production from the prolific and giant Middle Eastern fields remains static as great effort is put into water injection to keep the flow at current levels. The question of course is how long this "artificial lift" can be sustained. Broadly it comes down to very simple physics: forcing a field with advanced recovery techniques can sustain a steady rate of production for considerable periods, but the result is usually a sudden precipitous decline rather than a long slow one.  This applies to dozens of large and moderately large fields in the Middle East, Russia, Siberia and Alaska where the reservoirs have been often "over produced". 

So will oil jump immediately? No. Oil futures are only indicating $60 by the end of the year. Our hunch is that this $60 could be blown away quickly as demand in the US slowly picks up and as geo-political flare ups occur. The tortured Nigerian situation is still unresolved and may worsen as the generals pocket an even greater share of a diminished pie. 

The one warning though is that the same applies to companies as countries. Oil is getting hard to either find,get at or make profiable as poor oil states now have to feed and protect millions who are now much worse off than they were a year ago. Food costs are up and life for many has become very hard.  Investors best stick to companies with production or near production and geologies that have real promise. If they have the stuff they will be rewarded' the big oil companies will come hunting very quickly as soon as oil is back to $50 again. Some of our best portfolio gains this year will come from over-sold producers or better still "about to" producers.