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Gold/Mining/Energy : Strictly: Drilling and oil-field services
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To: Tomas who wrote (47969)7/15/1999 9:48:00 AM
From: Tomas  Read Replies (1) of 95453
 
Financial Times Thursday, Lex column: Supply shocks work. Witness the surge in crude oil prices to a 20-month high, hitting more
than $19 a barrel for August Brent yesterday. Of
course, it did take a $10 barrel last year to spur the
Organisation of Petroleum Exporting Countries into
action. But the production cuts agreed in March
have stuck surprisingly well.

Over 90 per cent complicance by member countries is
testament to how desperate things had got. Further
encouragement lies in OECD stock levels, which are
apparently starting to creep down. Demand is also
looking more robust than it did and forecasts have been
edged up to around 75m barrels a day for this year, a
small increase on 1998.

Of course, every silver lining has its cloud - albeit
potentially modest for some. For the integrated
companies, such as Royal Dutch/Shell or
BP-Amoco-Arco, the issue will be the impact on refining
margins. It remains hard to pass on higher upstream
prices to downstream customers, at least not without a
timelag.

Another issue for investors is the extent to which the
spike in the oil price lures exectives into expanding their
capital expenditure plans. They may be itching to, but
have based much of the logic of recent mergers on the
potential for cost-cutting. They should resist the
temptation to relax on the drive for greater efficiency.
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