More Missing Barrel hype..
With More OPEC Oil On The Way, How Much Is Too Much?
By CHRISTINA CHEDDAR
Of DOW JONES NEWSWIRES
NEW YORK -- With the ministers of the Organization of Petroleum Exporting Countries expected to raise oil production at their meeting this weekend in Vienna, there is growing controversy over what effect the increase will have on prices.
On one side, industry watchers say the expected OPEC production increase of 700,000 to 500,000 barrels a day isn't enough to take the momentum out of the current rally in oil prices. An increase of at least 800,000 to 1.2 million barrels a day would be needed to cool prices off, they say.
On the other side, concerns about the discrepancies between industry supply and demand data are being raised. By some estimates, the different portraits painted by the conflicting data reports indicate that millions of barrels of oil are unaccounted for by the recent industry data.
As the murmurs about missing barrels grow from a rumble to a roar, investors may be taking notice, and profits, as Friday's sell-off among oil stocks may indicate.
Bear Stearns analyst Frederick Leuffer is among those concerned that OPEC's expected increase will bring about drop in oil prices and increased volatility among oil stocks.
Leuffer believes the missing barrels are a sign that errors and lags in weekly inventory data are creating a precarious situation for oil prices. With OPEC poised to raise production for the third time this year, Leuffer believes it could be "deja vu in reverse." He recalled that OPEC cut production three times in 1998 and 1999 in order to create the supply conditions that led to current high oil prices.
Economist Edgard Habib, also believes there are missing barrels of oil that are not reflected in the inventory data. To backup his belief, Habib noted that there currently aren't any available oil tankers.
Habib, who once worked for the International Energy Agency (one of the groups that supplies weekly storage data), admitted the agency's statistics are not entirely reliable. There is no attempt to record the oil in certain developing countries, and oil being shipped to shore or oil with distributors or consumers isn't reported, he said. Only oil in storage with either companies or governments is reported.
In fact, Habib believes the U.S. is the only country that produces industry-supplied data that is even remotely accurate, and still, that data is far from precise.
"A thinking contrarian may see these events as an opportunity to sell short oil and oil sensitive assets," said Leuffer. "Although it is difficult to time the reversal of a commodity's price, we believe that when oil prices start down, the correction will be anything but mild," he continued.
Although Saudi Arabia talks about wanting oil price stability, it really prefers the benefits it gains from price volatility, Leuffer argues.
On the other side of the argument is John Kilduff, senior vice president of at Fimat USA. Despite the $1 slide in crude prices Friday, Kilduff believes the 700,000 barrel-a-day production increase will only lower oil prices to the low $30s.
Kilduff doesn't expect oil prices to drop in the next few months. However, prices could ease by December or January, if the the winter is mild, he said.
Much of the debate, analysts said, points to the fact that there are simply many logistical difficulties that come with trying to manage the price of oil.
Although OPEC has said they would monitor a basket of crude oil prices, and raise and lower oil production if the basket trades above or below set price collars for 20 consecutive trading days, the cartel has yet to act on the initiative.
Thursday was the 19th day straight day the basket price was over $28 a barrel, and if prices do not decline dramatically, the 20-day market will be hit Friday.
In looking ahead to where oil prices are heading, Bob Christensen, senior energy analyst at First Albany Corp.'s FAC/Equities unit, said he will be watching the rates oil producers are paying for oil tankers. If the rates rise substantially, it is a good sign more supply is on the way, he said.
He also believes BP Amoco PLC's (BP) decision to increase its capital budget, which will result in additional production in 2002 and 2003, was a signal that the company believes the industry will remain healthy in the coming years.
Either way, there is one thing everyone seems to agree on: oil prices above $30 are not a good thing.
At an energy conference this week sponsored by Lehman Brothers Inc., oil industry executives kept repeating their desire to see oil prices drop back into the $20-range.
"High oil prices are as big an enemy as low oil prices," said Global Marine Inc. (GLM) Chief Executive Bob Rose. He explained that there are two things that keep him laying awake at night: high oil prices and high interest rates. Both, he explained, have a slowing effect on the economy. And that would spell bad news for oilfield-services companies such as Global Marine.
Still, Rose was optimistic about the current industry upturn. He has been observing a new discipline among oil exploration companies that he believes will lessen the threat of overproduction. |
