$40-a-barrel oil still a 'possibility'
'Buy on the dips' rule still applies to some oil stocks
By Myra P. Saefong, CBS.MarketWatch.com
Last Update: 3:00 AM ET Sep 23, 2000 NewsWatch
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NEW YORK (CBS.MW) -Despite President Clinton's release of oil from the nation's reserves, analysts believe $40-a-barrel oil is still a possibility.
"Long-term the impact on prices may be more of an upward pressure than a downward pressure," said Jeff Mokychic, head analyst at Lehigh Valley, Penn.-based Bridgeton Global Investor Services.
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Updated:
9/23/2000 3:18:42 PM ET
Late Friday, after the futures market closed, President Clinton authorized the gradual release of 30 million barrels of crude oil from the nation's 570-million-barrel reserve over a period of 30 days. See full story.
Predictions that Clinton would make that move pushed November crude to close below $33 a barrel Friday, it's lowest level in over a week.
The October contract, which expired on Wednesday, had closed at $37.20 a barrel, crude futures' highest close since the September 1990 high of $40.10. See full story.
"This is a temporary injection of fuel to the markets and something that's going to have to be returned by the refineries," said Mokychic, noting that the move could just as easily push prices $6 a barrel higher as $6 lower.
"There's going to be very few opportunities for the refineries to return the fuel to the reserves without affecting supply at that time down the road," he said.
In terms of the overall market, 30 million barrels is not much, Thorsten Fischer, an economist at economic information and analysis services firm Economy.com said -- "it's around two day's worth of U.S. refinery output."
The SPR release "is a temporary injection of fuel ... there's going to be very few opportunities for the refineries to return the fuel to the reserves without affecting supply at that time down the road."
Jeff Mokychic Bridgeton Global
OPEC hike a bust?
Keep in mind that the Organization of Petroleum Exporting Countries' (OPEC) Sept. 10 agreement to raise member production by 800,000 barrels per day starting Oct. 1, has so far failed to have any long-lasting impact on crude's price strength.
"There's a lot of market speculation out there right now that what OPEC has agreed to do so far will not be enough to bring current domestic inventories back to last year's levels," Mokychic said.
"They've said the extra oil will come in from Oct. 1 and I'm sure it'll be leaking in, so by that time we will see the full 800,000 barrels that they've guaranteed," he said.
Mokychic believes OPEC's production hike could "actually be enough" to take prices to the cartel's targeted range of $22 to $28 a barrel crude oil.
"It may just take time to see effects of extra oil hit the weekly inventory reports. So far, we haven't seen that," he said.
Stocks fall despite high oil refinery production
Despite OPEC's efforts to raise its members' quotas, oil inventories have fallen over the last two weeks.
Late Tuesday, the American Petroleum Institute said domestic crude inventories fell more than 2 million barrels to total 286.6 million barrels as of the week ended Sept. 15.
"Refineries are almost producing at full capacity at this time, so there's not much that can be done at that stage."
Thorsten Fischer
Economy.com
A week earlier, the API reported a 1.9 million-barrel decline in crude supplies.
"What we're seeing here is a lack of confidence in the domestic refineries" which may not "be able to keep up with the extra crude oil that's going to be coming onto the markets within the next two weeks," Mokychic said.
The API's latest data pegged last week's refinery production at 94.7 percent of capacity, down from 95.5 percent a week earlier.
"Refineries are almost producing at full capacity at this time, so there's not much that can be done at that stage," Fischer noted.
Analyst advises oil-sector caution
In the meantime, oil investors can still benefit from the strength prices, but should be cautious when making new investments in the sector, according to Tyler Dann, a senior energy analyst at Banc of America Securities.
"I think some of the energy stocks have been trading at towards the high-end of their historical valuation ranges," he said. "The E&P (exploration and production) sector is one that has been trading at high-end levels."
Banc of America Securities currently recommends investment in Chevron, Conoco, Valero, Smith International, BJ Services and Unocal.
Dann pointed out that "a lot of the integrated oils have not been and we also think that there is some value to be found in the refiners."
Over next 12 months, Dann believes there are a select number of oil service stocks that should be bought on pullbacks.
Banc of America Securities currently recommends investment in Chevron (CHV: news, msgs) and Conoco (COCA: news, msgs) among the integrated oils; Valero (VLO: news, msgs) among the refiners; Smith (SII: news, msgs) and BJ Services (BJS: news, msgs) among the oil services; and Unocal (UCL: news, msgs) among the E&Ps.
"Really the stance we're taking on any of these oil companies right now is 'buy on the dips' and we've been seeing the stocks dipping all week," he said.
$40-a-barrel oil
In terms of commodity prices, even with late Friday news of a release of 30 million barrels of oil from U.S. reserves, analysts appear to agree that the $40 a barrel level is not out of the question.
"There are people out there specifically targeting $40 and if that's hit then the $41.15 (all-time high seen in October of 1990) is definitely within range," Mokychic said, emphasizing that prospects of hitting $40 in a short time frame are not as high as they were prior to the SPR news.
"There are people out there specifically targeting $40 and if that's hit then the $41.15 (all-time high seen in October of 1990) is definitely within range."
Jeff Mokychic
Fischer agreed.
"I would say its possible that oil prices could reach $40 a barrel but not much more than that," he told CBS.MarketWatch.com.
"In the short term, (taking into account the SPR news) they will go down by a little bit but eventually they will go up again, Fischer, who believes the oil release from the SPR won't have a lasting effect on oil prices.
The release of the oil "increases the uncertainty in the market and probably increases the price volatility as well," Fischer said.
Oil prices will remain high, except for a temporary drop in the near-term, he said. Fischer sees prices holding above $30 at the end of the year, depending on how OPEC reacts to Clinton's oil release.
Whether the cartel will cut its own production to keep prices from falling too much remains "the big unknown," he added. |
