The OPEC deal may have stopped the rise in crude, but oil stocks will continue to soar
By Jeffrey Rubin,
chief economist and managing director of CIBC (Canadian Imperial Bank of Commerce) World Markets
From The Globe & Mail, April 8
...
At first glance, falling crude prices and rising oil shares is a rather odd juxtaposition of events. Until, of course, you look at the price assumptions embedded in market valuations of oil stocks.
The OPEC agreement effectively establishes a supply floor from which crude prices will not fall and, with growth in global demand, will likely rise over time. And the current price for crude supported by OPEC's supply floor is a good 25 per cent higher than the oil price assumptions that were previously embedded in this year's oil stock valuations.
That means the oil companies will be getting substantially more cash flow than the market had expected. For example, with oil now staying above $25 a barrel, Canadian oil producers are now expected to reap an additional $8-billion (Canadian) in cash flow this year, compared with 1999.
Still to be reconciled with market valuations is the assumption of $20 (U.S.)-a-barrel oil embedded in next year's cash flow projections. Only oil stock analysts know why oil prices are expected to sink back to this level in 2001 when the OPEC announcement provides little opportunity for any significant rebuilding of global crude inventories.
For the rest of us, there is every reason to believe that the stock market has significantly underestimated not only the oil sector's cash flow this year, but also its earnings next year. Until those cash flow projections come into line with the reality of today's oil market, the value of oil shares will continue to soar.
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